<PAGE>
UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(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, 2000
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, 1,785,302 shares issued and outstanding
as of August 8, 2000. 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 Income and
Comprehensive Income 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 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 3,611,985 $ 5,553,931
Interest bearing deposits in other banks 152,896 193,151
Federal funds sold 3,010,000 --
Securities available-for-sale 12,171,216 10,751,741
Securities held-to-maturity, at cost (fair value of
$2,454,650 and $1,000,000, respectively) 2,528,085 1,000,000
Mortgage loans held for sale 77,457,182 87,284,155
Loans 89,032,602 54,077,286
Less allowance for loan losses (1,181,294) (864,689)
------------ ------------
Loans, net 87,851,308 53,212,597
Premises and equipment, net 6,352,815 6,036,385
Other real estate owned 21,940 21,940
Purchased mortgage servicing rights 3,243,604 4,212,261
Cash surrender value of life insurance 3,396,380 2,101,068
Premium on deposits purchased 648,615 704,210
Accounts receivable-brokers and escrow agents 6,733,705 3,107,498
Other assets 2,437,488 1,574,368
------------ ------------
Total Assets $209,617,219 $175,753,305
============ ============
Liabilities
Deposits
Noninterest-bearing demand deposits $ 20,631,683 $ 20,061,680
Interest-bearing demand 29,549,147 29,983,190
Savings 3,778,409 3,301,304
Time, $100,000 and over 13,941,114 17,542,304
Other time 66,675,176 39,418,175
------------ ------------
Total deposits 134,575,529 110,306,653
Drafts payable 11,398,635 2,765,182
Other borrowings 45,962,168 45,676,823
Federal funds purchased -- 110,000
Deferred income taxes 1,182,177 805,711
Accrued interest and other liabilities 1,349,218 1,228,013
------------ ------------
Total liabilities 194,467,727 160,892,382
Shareholders' equity
Common stock, par value $1.00; 10,000,000 shares
authorized;1,785,302 and 1,760,536 issued, respectively 1,785,302 1,760,536
Surplus 8,905,647 8,774,674
Retained earnings 5,276,324 5,260,457
Less cost of 6,668 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive loss (781,690) (898,653)
------------ ------------
Total stockholders' equity 15,149,492 14,860,923
------------ ------------
Total liabilities and stockholders' equity $209,617,219 $175,753,305
============ ============
</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 nine months ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 2,267,050 1,275,867 5,621,244 3,506,541
Interest and fees on mortgage loans held for sale 2,236,841 1,970,807 5,702,075 7,639,932
Interest on securities:
Taxable 286,444 195,593 808,066 372,598
Nontaxable 3,838 34,051 11,514 41,727
Interest on deposits in other banks 4,839 86,098 41,694 182,620
Interest on Federal funds sold 6,238 60,565 39,427 144,202
---------- ---------- ----------- -----------
4,805,250 3,622,981 12,224,020 11,887,620
Interest expense
Interest on deposits 1,536,776 1,417,006 3,856,125 3,525,696
interest on other borrowings 1,017,059 692,188 2,289,081 2,986,449
---------- ---------- ----------- -----------
2,553,835 2,109,194 6,145,206 6,512,145
Net interest income 2,251,415 1,513,787 6,078,814 5,375,475
Provision for loan losses 155,000 30,000 390,000 180,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 2,096,415 1,483,787 5,688,814 5,195,475
Other income
Service charges on deposit accounts 140,377 79,332 337,151 209,137
Mortgage servicing fee income 297,328 323,127 850,205 964,323
Gestation fee income 19,341 752,504 555,578 2,187,556
Gains on sale of mortgage servicing rights 1,875,294 1,392,963 4,077,973 8,757,245
Other 139,043 144,674 350,448 578,902
---------- ---------- ----------- -----------
2,471,383 2,692,600 6,171,355 12,697,163
Other expenses
Salaries and employee benefits 1,996,277 2,221,582 5,650,651 8,289,914
Net occupancy and equipment expense 319,665 357,176 815,172 832,738
Supplies, postage, and telephone 311,099 401,630 860,549 1,259,205
Advertising 130,981 104,873 393,104 355,171
Insurance expense 42,543 11,353 130,195 88,078
Depreciation and amortization 452,712 402,438 1,262,957 1,151,504
Legal, professional, outside services 154,528 511,282 389,905 2,169,279
Director fees 44,700 21,225 124,100 99,575
Mortgage subservicing expense 101,848 81,195 277,316 297,284
Other 443,288 278,473 1,320,849 886,246
---------- ---------- ----------- -----------
3,997,641 4,391,227 11,224,798 15,428,994
Income before income taxes 570,157 (214,840) 635,371 2,463,644
Applicable income taxes 206,091 (107,277) 225,447 879,889
---------- ---------- ----------- -----------
Net income 364,066 (107,563) 409,924 1,583,755
---------- ---------- ----------- -----------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period 138,625 (762,532) 116,963 (768,474)
---------- ---------- ----------- -----------
Comprehensive income 502,691 (870,095) 526,887 815,281
========== ========== =========== ===========
Basic earnings per common share $ 0.20 $ (0.06) $ 0.23 $ 0.93
Diluted earnings per common share $ 0.20 $ (0.06) $ 0.22 $ 0.87
Cash dividends per share of common stock $ 0.0775 $ 0.060 $ 0.223 $ 0.165
</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,
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities
Net Income 409,924 1,583,755
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Accretion of discount on securities (565,823) (336,509)
Amortization of deposit intangible 55,595 18,532
Amortization of purchased mortgage servicing rights 537,700 579,100
Provision for loan loss 390,000 180,000
Depreciation 725,257 553,872
Gains on sales of mortgage servicing rights (4,077,973) (8,757,245)
Increase in stock options outstanding (38,844) 447,122
Decrease in mortgage loans held for sale 9,826,973 59,496,684
Increase in interest receivable (474,875) (595,617)
Increase in accounts receivable (3,626,207) (2,271,089)
Increase in drafts payable 8,633,453 664,475
Increase (decrease) in interest payable (111,393) (43,227)
(Increase) decrease in other assets and liabilities, net 220,819 (5,640,077)
------------ ------------
Net cash provided by (used in) operating activities 11,904,606 45,879,776
Investing Activities
Net (increase) decrease in interest-bearing deposits in other banks 40,255 (7,170,688)
Acquisition of securities held-to-maturity (1,528,085) --
Acquisition of securities available for sale (736,689) (7,684,711)
Purchase of life insurance policies (1,295,312) --
Acquisition of purchased mortgage servicing rights (10,292,865) (19,200,877)
Proceeds from sales of purchased mortgage
servicing rights 14,801,795 27,755,307
Increase in Federal funds sold, net (3,010,000) (4,380,000)
Net increase in loans (35,028,711) (10,549,381)
Purchase of premises and equipment (1,041,687) (3,267,942)
------------ ------------
Net cash used in investing activities (38,091,299) (24,498,292)
Financing Activities
Net increase in deposits 24,268,876 17,782,346
Net increase (decrease) in other borrowings 175,345 (38,870,737)
Proceeds from exercise of stock options 194,583 183,270
Dividends paid (394,057) (286,305)
------------ ------------
Net cash provided by financing activities 24,244,747 (21,191,426)
Net increase (decrease) in cash and cash equivalents (1,941,946) 190,058
Cash and cash equivalents at beginning of year 5,553,931 4,382,047
------------ ------------
Cash and cash equivalents at end of year $ 3,611,985 $ 4,572,105
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 6,256,599 6,555,372
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
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-Q 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 and nine months ended
September 30, 2000 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.
NOTE 3 --- SERVICING PORTFOLIO
The Company services residential loans for various investors under contract for
a fee. As of September 30, 2000, the Company had purchased loans for which it
provides servicing with principal balances totaling $309.1 million.
NOTE 4 --- 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, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ---------------- ---------
Basic EPS $409,924 1,771,118 $0.23
Effect of Dilutive securities
Stock options ------- 67,597
Diluted EPS $409,924 1,838,717 $0.22
<PAGE>
Nine Months Ended September 30, 1999
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ---------------- ---------
Basic EPS $1,583,755 1,702,376 $0.93
Effect of Dilutive Securities
Stock Options --------- 109,185
Diluted EPS $1,583,755 1,811,561 $0.87
Three Months Ended September 30, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ---------------- ---------
Basic EPS $364,066 1,778,634 $0.20
Effect of Dilutive Securities
Stock options -------- 33,359
Diluted EPS $364,066 1,811,993 $0.20
Three Months Ended September 30, 1999
Net Weighted-Average
Income (loss) Shares Per Share
(Numerator) (Denominator) Amount
------------- ---------------- ---------
Basic EPS $(107,563) 1,708,366 $(0.06)
Effect of Dilutive Securities
Stock Options --------- 127,188
Diluted EPS $(107,563) 1,835,554 $(0.06)
<PAGE>
NOTE 5 --- RESTATEMENT
The Company has restated net income (loss) and earnings (losses) per share for
the three and nine month periods ending September 30, 1999 to properly account
for stock option awards in accordance with EITF 87-6 B ("Stock Option Plan With
Tax-Offset Cash Bonus") and ABP Opinion No. 25 ("Accounting for Stock Issued to
Employees"). The effect of the restatement on net income (loss) and earnings
(losses) per share for each period is as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Net income (loss)
as previously reported (115,476) 1,862,132
(Increase) decrease in stock options
outstanding, net of tax 7,913 (278,377)
_________ __________
Net income (loss) as restated (107,563) 1,583,755
========= ==========
For the three months For the nine months
ended ended
September 30, 1999 September 30, 1999
Basic earnings (losses) per share
as previously reported (0.07) 1.09
(Increase) decrease in stock options
outstanding, net of tax 0.01 (0.16)
_________ __________
Basic EPS/LPS as restated (0.06) 0.93
========= ==========
</TABLE>
<PAGE>
<TABLE>
For the three months For the nine months
ended ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Diluted earnings (losses) per share
as previously reported (0.06) 1.02
(Increase) decrease in stock options
outstanding, net of tax 0.00 (0.15)
_________ __________
Diluted EPS/LPS as restated (0.06) 0.87
========= ==========
</TABLE>
<PAGE>
Item 2) MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
The following discussion and analysis of the consolidated financial
condition and results of operations of Crescent Banking Company and its
subsidiaries (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 Section 27A of the Securities Act of 1933, as
amended, and Section 21E of 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.
The Company's actual results may differ significantly from these forward-
looking statements because forward-looking statements involve risks and
uncertainties, 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,
mortgages, 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; 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 the Company becoming 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. The Company provides a broad range of banking and
financial services in the areas surrounding Jasper, Georgia and has recently
expanded through branches and loan production offices in nearby areas of Bartow,
Cherokee and Forsyth Counties, Georgia. The Company also provides wholesale
residential mortgage banking services to correspondents located in the Atlanta,
Georgia metropolitan area and throughout the Southeast United States. In March
1998, the Bank expanded a loan production office in Bartow County, Georgia to a
full service Bank branch. In February 1999, the Bank opened a loan production
office in Canton, Georgia converting it to a full service branch in September
1999. The Bank purchased a branch on Towne Lake Parkway, Woodstock, Georgia in
September 1999. In February 2000, the Bank opened a loan production office in
Cumming, Georgia. The Bank currently expects the office to become a full service
banking office during the fourth quarter of 2000.
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 the 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. In February 1998, the Company expanded its mortgage
operations by engaging in Federal Housing Administration and Veterans
Administration mortgage lending. CMS opened a wholesale mortgage banking office
in Chicago, Illinois in December 1998. CMS opened a satellite office in
Columbia, Maryland in the August 2000 to serve the Mid-Atlantic region.
<PAGE>
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."
The Company's net income for the nine months ended September 30, 2000 was
$409,924 compared to net income of $1,583,755 for the nine months ended
September 30, 1999. The decrease in net income from the first nine months of
1999 to the first nine months of 2000 was primarily the result of earnings
pressure on the mortgage banking operations, which had achieved record results
in 1998 and the first nine months of 1999. Mortgage banking operations had a
net loss of $9,496 for the first nine months of 2000 compared to net income of
$1,561,166 in the first nine months of 1999. The decrease in mortgage banking
earnings was largely due to the volatility and increases in market interest
rates and expectation of additional rate increases by the Federal Reserve. As a
result, mortgage production in the first nine months of 2000 totaled $860.3
million, a decrease of $764.8 million, or 48%, from the $1.6 billion achieved in
the first nine months of 1999. In addition, the Company's spread on the sale of
purchased mortgage servicing rights decreased 6.4% from 47 basis points in the
first nine months of 1999 to 44 basis points in the first nine months of 2000.
Management, based upon a number of assumptions about future events, does not
anticipate a significant change in mortgage production volume in the next two
quarters.
While the mortgage operations experienced a decline in earnings, the Bank's
earnings have continued to improve recetly. The Bank had earnings of $623,500
in the first nine months of 2000, 39% greater than earnings of $449,150 in the
first nine months of 1999. The Bank experienced loan growth of $34.9 million,
or 65%, in the first nine months of 2000. The Bank's loan portfolio totaled
$87.9 million at September 30, 2000.
The Company has restated net income (loss) and earnings (losses) per share
for the three and nine month periods ending September 30, 1999 to properly
account for stock option awards in accordance with EITF 87-6 B ("Stock Option
Plan With Tax-Offset Cash Bonus") and ABP Opinion No. 25 ("Accounting for Stock
Issued to Employees").
Financial Condition
-------------------
The Company's assets increased 19% during the first nine months of 2000
from $175.8 million as of December 31, 1999 to $209.6 million as of September
30, 2000. The increase in total assets in the first nine months of 2000 was the
result of the $34.9 million, or 65%, increase in commercial banking loans. The
increase in assets corresponded with a $24.3 million, or 22%, increase in
deposits.
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 $183.2 million, or 87.4%, of total
assets at September 30, 2000. This represents a 20% increase from December 31,
1999 when earning assets totaled $152.4 million, or 86.7%, of total assets. The
increase in earning assets resulted primarily from the $34.9 million increase of
commercial banking loans. Average mortgage loans held for sale during the first
nine months of 2000 of $75.3 million constituted 46.7% of average earning assets
and 40.3% of average total assets. Average mortgage loans held for sale during
1999 of $101.7 million constituted 61.3% of average interest-earning assets and
54.2% of average total assets.
During the first nine months of 2000, average commercial banking loans were
$70.6 million. Such loans constituted 43.7% of average earning assets and 37.8%
of average total assets. For 1999, average commercial banking loans were $46.8
million, or 28.2%, of average earning assets and 25.0% of average total assets.
The 39.3% 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's
operations in Bartow, Cherokee, and Forsyth Counties, Georgia.
Commercial banking loans are expected to produce higher yields than
securities and other interest-earning assets. In addition, residential mortgage
loans held for sale generally 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
<PAGE>
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 possible loan losses represents management's assessment
of the risk associated with extending credit and its evaluation of the quality
of the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance for loan losses and the appropriate provision required
to maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
the Bank's loan loss experience, the amount of past due and nonperforming loans,
specific known risk, the status and amount of nonperforming assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors which affect the allowance for potential credit losses. An
analysis of the credit quality of the loan portfolio and the adequacy of the
allowance for loan losses is prepared by the Bank's credit administration area
and presented to the Loan Committee on a regular basis. In addition, the Bank
has engaged an outside loan review consultant, on a semi-annual basis, to
perform an independent review of the quality of the loan portfolio and adequacy
of the allowance. The provision for loan losses is a charge to earnings in the
current period to maintain the allowance at a level that management estimates to
be adequate.
The Bank's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan losses and
the size of the allowance for loan losses in comparison to a group of peer banks
identified by the regulators. During their routine examinations of banks, the
Federal Reserve and the Georgia Department of Banking and Finance may require a
bank to make additional provisions to its allowance for loan losses when, in the
opinion of the regulators, credit evaluations and allowance for loan loss
methodology differ materially from those of management.
While it is the Bank's policy to charge off in the current period loans for
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
The allowance for loan losses totaled $1,181,294, or 1.33% of total
commercial banking loans, at September 30, 2000, and $864,689, or 1.60% of total
loans at December 31, 1999. The increase in the allowance for loan losses
during the first nine months of 2000 was primarily the result of the provision
for loan loss of $390,000. The increase in the allowance for loan loss
corresponds to the 65% increase in the commercial banking loans in the first
nine months of 2000. The determination of the reserve level rests upon
management's judgment about factors affecting loan quality, assumptions about
the economy, and historical experience. 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 believes that, based solely upon current
projections, the allowance at September 30, 2000 was 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 be realized. 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 mortgage loans held
for sale due to the anticipated low risk associated with the loans during the
Bank's expected short holding period, and the firm commitment takeouts from
third parties for such production. The Company does have default and
foreclosure risk during the short-term holding period of the mortgages held for
sale, which is inherent to the residential mortgage industry. However, the
Company has not incurred a loss as a result of this risk and therefore does not
maintain a reserve for this purpose.
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 is recognized only when
received. As of September 30, 2000, the Bank had $549,113 of loans contractually
past due more than 90 days, $16,884 of loans accounted for on a non-accrual
basis, and no loans considered to be troubled debt restructurings. As of
December 31, 1999, the Bank had $507,531 contractually past due more than 90
days, $30,193 of loans accounted for on a non-accrual basis, and no loans
considered to be troubled debt restructurings.
<PAGE>
Non-performing loans are defined as non-accrual and renegotiated
loans. Adding real estate acquired by foreclosure and held for sale of $21,940
with non-performing loans results in non-performing assets of $38,824 at
September 30, 2000. This compares to non-performing assets of $52,133 at
December 31,1999. The Bank is currently holding the foreclosed properties for
sale.
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. Potential problem loans totaled $1.4 million at September 30, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Non-performing loans (1) $ 16,884 $ 30,193
Foreclosed properties 21,940 21,940
---------- ----------
Total non-performing assets 38,824 52,133
========== ==========
Loans 90 days or more past due on accrual status $ 549,113 $ 507,532
Potential problem loans (2) 1,428,930 1,399,926
Potential problem loans/total loans 1.60% 2.59%
Non-performing assets/total loans
and foreclosed properties 0.04% 0.10%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 0.66% 1.03%
</TABLE>
--------------------------------
(1) Defined as non-accrual loans and renegotiated loans.
(2) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
The Bank invests its excess funds in U.S. Government agency obligations,
corporate securities, federal funds sold, and interest-bearing deposits with
other banks. The Bank's investments are managed in relation to loan demand and
deposit growth, and are generally used to provide for the investment of funds
not needed to make loans, while providing liquidity to fund increases in loan
demand or to offset fluctuations in deposits. Investment securities and
interest-bearing deposits with other banks totaled $14.9 million at September
30, 2000 compared to $11.9 million at December 31, 1999. Unrealized losses on
securities amounted to $1.3 million and $1.5 million at September 30, 2000 and
December 31, 1999, respectively. Management has not specifically identified any
securities for sale in future periods which, if so designated, would require a
charge to operations if the market value would not be reasonably expected to
recover prior to the time of sale. The Bank had $3.0 of federal funds sold at
September 30, 2000. The Bank had no federal funds sold at December 31, 1999.
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 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 $36 million warehouse line of
<PAGE>
credit from the FHLB-Atlanta and a $45 million repurchase agreement with
PaineWebber. CMS acquires residential mortgage loans from small retail-oriented
originators in the Southeast, Northeast and Midwest United States through
various funding sources, including a $75 million line of credit from
PaineWebber, a $35 million line of credit from Colonial Bank, and a $75 million
repurchase agreement from PaineWebber. Under the repurchase agreements, the
Mortgage Division sells its mortgage loans and simultaneously assigns the
related forward sale commitments to PaineWebber. 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 2000, the Mortgage Division acquired $860.3
million of mortgage loans. The Mortgage Division sold in the secondary market
$870.1 million of mortgage loans. At September 30, 2000, $77.5 million of
mortgage loans were carried as mortgage loans held for sale on the balance sheet
pending sale of such loans, compared to $87.3 million at the end of 1999.
At September 30, 2000, $3.2 million of purchased mortgage servicing rights
were carried on the balance sheet. At December 31, 1999, the Company carried
$4.2 million of purchased mortgage servicing rights on its balance sheet. The
Company is amortizing the purchased mortgage servicing rights over an
accelerated period. At September 30, 2000, the Company held servicing rights
with respect to loans with unpaid principal balances totaling $309.1 million
compared to $420.8 at December 31, 1999. During the first three quarters 2000,
the Company sold servicing rights with respect to $913.1 million of mortgage
loans carried on its balance sheet at costs of $11.1 million for a gain of $4.1
million. During 1999, the Company sold servicing rights with respect to $1.8
billion of mortgage loans carried on its balance sheet at costs of $21.2 million
for a gain of $9.8 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 Bank's other borrowings consist of borrowings from the Federal Home
Loan Bank of Atlanta (the "FHLB-Atlanta"), which is priced at the FHLB-Atlanta
daily rate plus 25 basis points (7.19% as of September 30, 2000). All mortgage
production generated by CMS is funded through warehouse lines of credit from
Colonial Bank, priced at LIBOR plus 90 basis points (7.54% at September 30,
2000), and PaineWebber, priced at Federal Funds rate plus 125 basis points
(8.16% at September 30, 2000).
The Company had fixed assets, consisting of land, building and
improvements, and furniture and equipment of $6.4 million at September 30, 2000
compared to fixed assets of $6.0 million at December 31, 1999. In 1999, the Bank
provided a supplemental retirement plan to its Banking officers funded with life
insurance. At December 31, 1999, the Company had on its balance sheet $2.1
million of cash surrender value of life insurance related to the retirement
plan. In the first quarter 2000, the Company added the Directors to the
supplemental retirement plan, resulting in $3.4 million of cash value of life
insurance at September 30, 2000.
The Bank's deposits totaled $134.6 million and $110.3 million at September
30, 2000 and December 31, 1999, respectively, an increase of 22%. Deposits
averaged $116.8 million and $94.5 million during the periods ended September 30,
2000 and December 31, 1999, respectively. Interest-bearing deposits represented
85% and 82% of total deposits at September 30, 2000 and December 31, 1999,
respectively. Certificates of deposit composed 71% of total interest-bearing
deposits for September 30, 2000 compared to 63% at December 31, 1999. The
composition of these deposits is indicative of the interest rate-conscious
market in which the Bank operates and increases in interest rates,
<PAGE>
generally. 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, and 4.0%
to 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, 2000 the Bank's leverage ratio was
7.96%.
At September 30, 2000 the Company's total shareholders' equity was $15.1
million, or 7.23% of total assets, compared to $14.9 million, or 8.47% of total
assets, at December 31, 1999. The decrease in shareholders' equity to total
asset ratio in first nine months of 2000 was the result of a 19% increase in
total assets. At September 30, 2000, total capital to risk-adjusted assets was
9.64%, with 8.95% consisting of tangible common shareholders' equity. The
Company paid $394,057 of dividends during the first nine months of 2000 or
$0.223 per share. A quarterly dividend of $0.0775 was declared in October 2000
for payment in November 2000.
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 (9.00%) 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. In July 1999, the Company
increased the amount of the promissory note to $4.5 million to facilitate the
purchase of the Towne Lake branch. The Company was not required to provide
additional collateral for the increased borrowings. The Company contributed the
additional $3.0 million borrowings to the Bank as capital. In July 2000, the
Company made a principle reduction of $450,000 to the promissory note.
During the first nine months of 2000, 24,766 shares of Common Stock were
issued pursuant to employee stock option exercises for an aggregate of $194,583.
On March 11, 1998, the Company completed a stock offering for 270,000 shares of
common stock at an issue price of $8.125 per share. 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, and borrowings from
the Federal Home Loan Bank and other lenders.
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 $45.8 million and $56.6 million during the periods ending
September 30, 2000 and December 31,
<PAGE>
1999, representing 39% and 55% of average deposits for those periods,
respectively. The decrease in average liquid assets as a percentage of average
deposits was primarily the result of the growth in commercial banking loans.
Average non-mortgage loans were 61% and 45% of average deposits for during the
periods ending September 30, 2000 and December 31, 1999, respectively. Average
deposits were 72% and 64% of average interest-earning assets for during the
periods ending September 30, 2000 and December 31, 1999, respectively.
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 federal funds lines of credit totaling $6.1 million. In
addition, the Bank has entered into a master securities repurchase agreement,
allowing access to approximately $7.6 million of borrowings. 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.
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
effects 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 $1.4
million at December 31, 1999. The Bank had utilized the brokered deposits to
fund its mortgage loans held for sale and had started to discontinue the use of
the brokered deposits following the purchase of the Towne Lake branch which
provided the Bank with excess liquidity. As of September 30, 2000, the Bank
held $6.5 million of brokered deposits.
The following table shows the interest sensitivity gaps for four different
time intervals as of September 30, 2000.
Interest Rate Sensitivity Gaps
As of September 30, 2000
Amounts Repricing In
---------------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
----------- ------------- ----------- --------------
(Millions of dollars)
Interest-earning
assets $114.8 $ 20.6 $36.8 $12.2
Interest-bearing
liabilities 85.4 48.5 23.7 2.3
------------------------------------------------------
Interest sensitivity
gap $ 29.4 $(27.9) $13.1 $ 9.9
======================================================
The Company was in an asset-sensitive position for the cumulative three-
month, one-to-five year and over 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
<PAGE>
interest margin will improve. Conversely, if interest rates decrease over this
period, the net interest margin will decline. At September 30, 2000, 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 time or rate, 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
$24.5 million, or 11.7% of total assets.
At September 30, 2000, the Company's commitments to purchase mortgage loans
(the "Pipeline") totaled approximately $296.4 million compared to $303.4 million
a year earlier. Of the Pipeline, the Company had, as of September 30, 2000,
approximately $115.9 million for which the Company had interest rate risk. The
remaining $180.5 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 repriced 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
conditions the Company seeks 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, borrowers' failures 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, 2000, the Company had in place purchase commitment agreements
terminating between October and December of 2000 with respect to an aggregate of
approximately $66.4 million to hedge the mortgage pipeline of $115.9 million for
which the Bank had an interest rate risk.
In September 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 September
15, 2000. The Company expects to adopt this statement effective January 1,
2001. SFAS No. 133
<PAGE>
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.
For derivatives that are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be recognized in earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The ineffective portion of a
derivative's change in fair value must be recognized in earnings immediately.
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 Bank's asset/liability
management strategy.
Results of Operations
---------------------
A principal 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 achieved record mortgage production with interest rates at
historical low levels in the last nine months of 1998 and the first nine months
of 1999. Rates began increasing mid-second quarter 1999 resulting in an
increase in rates on a 30-year mortgage of over 150 basis points. As a result
of the increase in interest rates, the Company's mortgage production declined.
The Company closed $860.4 million of mortgage loans during the first nine months
of 2000 compared to $1.6 billion during the first nine months of 1999.
The Company had interest income of $12.2 million for the nine months ended
September 30, 2000 compared to $11.9 million nine months ended September 30,
1999. The increase in interest income is attributable the growth of the Bank's
loan portfolio, partially offset by the lower volume of mortgage loans as well
as a lower volume of fee income associated with mortgage loans, which is
included in interest income. Interest income on commercial bank loans of $5.6
million for the nine months ended September 30, 2000 compared to $3.5 million
nine months ended September 30, 1999.
The Company had interest income of $4.8 million for the three months ended
September 30, 2000 compared to $3.6 million three months ended September 30,
1999. The increase in interest income is attributable to the higher volume of
commercial bank loans partially offset by the lower volume of mortgage loan
production and associated fee income. Interest income on commercial bank loans
of $2.3 million for the three months ended September 30, 2000 compared to $1.3
million nine months ended September 30, 1999.
The Company had interest expense of $6.1 million for the nine months ended
September 30, 2000 and $6.5 million for the nine months ended September 30,
1999. The decrease resulted from a lower level of other borrowings. All
mortgage production through CMS is funded with a warehouse line of credit;
therefore the lower volume in the Northeast and Midwest mortgage operation
resulted in a lower average balance of other borrowings. In the first three
quarters 2000 and 1999, interest expense accounted for 35% and 29% of total
expenses, respectively.
The Company had interest expense of $2.6 million for the three months ended
September 30, 2000 and $2.1 million for the three months ended September 30,
1999. The increase resulted from a higher level of deposits offset partially by
a lower level of other borrowings.
<PAGE>
Net interest income for the first nine months of 2000 was $6.1 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 first nine months of 2000 was 5.46%.
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
first nine months of 1999 were $5.4 million, 4.1%, and 4.6%, respectively. The
increase in net interest income is attributable to the higher level of interest
income resulting from the growth of the commercial bank loan portfolio. The
increase in net interest margin is indicative of the Company's balance sheet
being asset sensitive in the short term during a period when rate were
increasing.
The Company made a provision to the allowance for loan losses of $390,000
in the first nine months of 2000. During the first nine months of 2000, the Bank
charged-off, net of recoveries, $73,395 of loans to the allowance for loan
losses. The Company made provisions to the allowance for loan losses in the
amount of $180,000 in first nine months of 1999. During the first nine months
of 1999, the Bank charged-off, net of recoveries, $14,450 of loans to the
allowance for loan losses. The Company made a provision to the allowance for
loan losses of $155,000 in the third quarter 2000. The Company made provisions
to the allowance for loan losses in the amount of $30,000 in third quarter 1999.
Other income was $6.1 million in the first nine months of 2000 compared to
$12.7 million in the first nine months of 1999. The decrease in other income
was related to the decrease of gains on the sale of mortgage servicing rights.
During the first nine months of 2000, the Company sold servicing rights with
respect to $913.1 million of mortgage loans for a gain of $4.1 million or a
spread on the sale of servicing of 0.45%. During the first nine months of 1999,
the Company sold servicing rights with respect to $1.5 billion of mortgage loans
for a gain of $8.8 million or a spread on the sale of servicing of 0.60%. The
decrease in the spread on the sale of servicing rights is indicative of the
competitive pricing in the mortgage industry in the first nine months of 2000.
The decrease in the spread on the sale of purchased mortgage rights resulted
primarily from the decrease in mortgage production resulting in greater
competition for the reduced volume of production. The Company currently plans
to sell a portion of the servicing rights retained during 2000, 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. Other income was $2.5 million in the
third quarter of 2000 compared to $2.7 million in the third quarter of 1999. The
decrease in other income during the third quarter was related to the decrease of
gestation fee income relating to the mortgage operation.
Other operating expenses decreased to $11.2 million in the first nine
months of 2000 from $15.4 million in the first nine months of 1999. The
Company had increased its labor and overhead in late 1998 and early 1999 in
order to process the anticipated higher volume of mortgage production, including
opening an office in Chicago during the fourth quarter of 1998. In response to
the decline in mortgage production and spread on the sale of purchased mortgage
servicing rights, the Company has attempted to reduce overhead expenses. CMS
closed its office in Atlanta which primarily processed FHA and VA loans. These
products continue to be offered through the Perimeter Center Circle office.
Other operating expenses decreased to $4.1 million in the third quarter 2000
from $4.4 million in the third quarter 1999.
The Company had net income of $409,924 for the nine months ending September
30, 2000, compared to net income of $1.6 million for the nine months ending
September 30, 1999. The Company had net income of $364,066 for the three months
ending September 30, 2000, compared to net loss of $107,563 for the three months
ending September 30, 1999. Net income for the nine months ended September 30,
2000 was adversely effected primarily by the decline in mortgage production and
the reduced gain on the sale of mortgage servicing rights. Income tax as a
percentage of pretax net income was 35% and 36% for the first nine months of
2000 and 1999, 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
<PAGE>
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, and in 1999
the Federal Reserve increased interest rates in an attempt to prevent inflation.
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.
<PAGE>
Item 3) Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, credit risk and liquidity risk. Interest rate risk is the
exposure of a banking organization's financial condition and earnings ability to
movements in interest rates. Interest rate risk is discussed under "liquidity
and Interest Rate Sensitivity" in Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", of this report, and in the
same sections of the Company's 1999 Annual Report, as well as under "Effects of
Inflation" in the 1999 Annual Report. Interest rate risk especially affects the
Company's mortgage banking operations.
<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, 2000 /s/ J. Donald Boggus, Jr.
----------------- -------------------------------------
J. Donald Boggus, Jr.
President and Chief Executive Officer
