<PAGE>
UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 20
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
The following financial statements, including the financial statements as of and
for the year ending December 31, 1999, have been restated to reflect the effects
of application of EITF 87-6 B and ABP Opinion No. 25, which requires variable
accounting for the Company's stock options. The Company's cash earnings were not
effected by these restatements. See Note 5 to the financial statements.
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 5,661,773 $ 5,553,931
Interest bearing deposits in other banks 76,314 193,151
Securities available-for-sale 11,456,756 10,751,741
Securities held-to-maturity, at cost (fair value of
$2,448,800 and $1,000,000, respectively) 2,497,407 1,000,000
Mortgage loans held for sale 89,074,540 87,284,155
Loans 76,813,571 54,077,286
Less allowance for loan losses (1,087,787) (864,689)
------------------------------
Loans, net 75,725,784 53,212,597
Premises and equipment, net 6,464,052 6,036,385
Other real estate owned 21,940 21,940
Purchased mortgage servicing rights 5,520,514 4,212,261
Cash surrender value of life insurance 3,159,675 2,101,068
Premium on deposits purchased 667,147 704,210
Accounts receivable-brokers and escrow agents 3,736,522 3,107,498
Other assets 2,144,979 1,574,368
------------------------------
Total Assets $206,207,403 $175,753,305
==============================
Liabilities
Deposits
Noninterest -bearing demand deposits $25,565,391 $20,061,680
Interest -bearing demand 31,577,804 29,983,190
Savings 3,549,305 3,301,304
Time, $100,000 and over 13,941,114 17,542,304
Other time 47,632,064 39,418,175
------------------------------
Total deposits 122,265,678 110,306,653
Drafts payable 11,287,982 2,765,182
Accrued interest and other liabilities 2,201,778 2,033,724
Other borrowings 55,592,527 45,786,823
------------------------------
Total liabilities 191,347,965 160,892,382
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 8,980,440 8,774,674
Retained earnings 5,050,102 5,260,457
Less cost of 6,668 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive loss (920,315) (898,653)
------------------------------
Total stockholders' equity 14,859,438 14,860,923
------------------------------
Total liabilities and stockholders' equity $206,207,403 $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 six months ended
June 30, June 30,
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 1,834,251 1,142,989 3,354,194 2,230,674
Interest and fees on mortgage loans held for sale 2,022,973 2,596,696 3,465,234 5,669,125
Interest on securities:
Taxable 268,267 108,461 521,622 177,005
Nontaxable 3,838 3,838 7,676 7,676
Interest on deposits in other banks 6,395 60,505 36,855 96,522
Interest on Federal funds sold 5,468 43,742 33,189 83,637
--------------------------- ---------------------------
4,141,192 3,956,231 7,418,770 8,264,639
Interest expense
Interest on deposits 1,201,208 998,519 2,319,349 2,108,690
interest on other borrowings 723,372 1,197,951 1,272,022 2,294,261
--------------------------- ---------------------------
1,924,580 2,196,470 3,591,371 4,402,951
Net interest income 2,216,612 1,759,761 3,827,399 3,861,688
Provision for loan losses 140,000 90,000 235,000 150,000
--------------------------- ---------------------------
Net interest income after provision for loan losses 2,076,612 1,669,761 3,592,399 3,711,688
Other income
Service charges on deposit accounts 101,828 65,047 196,774 129,805
Mortgage servicing fee income 282,568 387,665 552,877 641,196
Gestation fee income 190,641 836,612 536,237 1,435,052
Gains on sale of mortgage servicing rights 1,315,185 3,113,554 2,202,679 7,364,282
Other 101,792 272,294 211,405 434,228
--------------------------- ---------------------------
1,992,014 4,675,172 3,699,972 10,004,563
Other expenses
Salaries and employee benefits 1,915,886 2,841,033 3,654,374 6,068,332
Net occupancy and equipment expense 256,627 239,426 495,507 475,562
Supplies, postage, and telephone 296,945 415,276 549,450 857,575
Advertising 112,929 146,224 262,123 250,298
Insurance expense 45,877 37,295 87,652 76,725
Depreciation and amortization 389,433 353,889 810,245 749,066
Legal, professional, outside services 87,818 1,066,086 235,377 1,657,997
Director fees 44,075 35,825 79,400 78,350
Mortgage subservicing expense 90,677 121,236 175,468 216,089
Other 568,804 237,648 877,561 607,773
--------------------------- ---------------------------
3,809,071 5,493,938 7,227,157 11,037,767
Income before income taxes 259,555 850,995 65,214 2,678,484
Applicable income taxes 89,321 251,400 19,356 987,166
--------------------------- ---------------------------
Net income $ 170,234 $ 599,595 $ 45,858 $ 1,691,318
--------------------------- ---------------------------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period 36,413 8,667 (21,662) (5,942)
--------------------------- ---------------------------
Comprehensive income 206,647 608,262 24,196 1,685,376
=========================== ===========================
Basic earnings per common share $ 0.10 $ 0.35 $ 0.03 $ 0.99
Diluted earnings per common share $ 0.09 $ 0.33 $ 0.03 $ 0.93
Cash dividends per share of common stock $ 0.075 $ 0.055 $ 0.145 $ 0.105
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the six months ended
June 30,
2000 1999
-------------------------------
<S> <C> <C>
Operating Activities
Net Income 45,858 1,691,318
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Accretion of discount on securities (496,004) (160,622)
Amortization of deposit intangible 37,063 --
Amortization of purchased mortgage servicing rights 330,600 127,529
Provision for loan loss 235,000 150,000
Depreciation 479,645 621,537
Gains on sales of mortgage servicing rights (2,202,679) (7,364,282)
Increase in stock options outstanding 35,949 459,831
(Increase) decrease in mortgage loans held for sale (1,790,385) 1,500,395
(Increase) decrease in interest receivable (276,890) 39,714
Increase in accounts receivable (629,024) (1,664,089)
Increase in drafts payable 8,522,800 457,158
Increase (decrease) in interest payable (178,407) 98,185
(Increase) decrease in other assets and liabilities, net 52,740 (5,133,118)
-------------------------------
Net cash provided by (used in) operating activities 4,166,266 (9,176,444)
Investing Activities
Net decrease in interest-bearing deposits in other banks 116,837 408,614
Acquisition of securities held-to-maturity (1,467,580) --
Acquisition of securities available for sale (260,500) (2,891,781)
Purchase of life insurance policies (1,058,607)
Acquisition of purchased mortgage servicing rights (6,623,831) (13,007,049)
Proceeds from sales of purchased mortgage
servicing rights 7,187,657 19,097,930
Decrease in Federal funds sold, net -- (6,340,000)
Net increase in loans (22,748,187) (5,803,018)
Purchase of premises and equipment (907,312) (2,988,275)
-------------------------------
Net cash used in investing activities (25,761,523) (11,523,579)
Financing Activities
Net increase in deposits 11,959,025 16,620,208
Net increase in other borrowings 9,805,704 3,499,121
Proceeds from exercise of stock options 194,583 97,270
Dividends paid (256,213) (181,374)
-------------------------------
Net cash provided by financing activities 21,703,099 20,035,225
Net increase (decrease) in cash and cash equivalents 107,842 (664,798)
Cash and cash equivalents at beginning of year 5,553,931 4,382,047
-------------------------------
Cash and cash equivalents at end of year $5,661,773 $3,717,249
===============================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 3,769,778 4,304,766
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June
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 purposes 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 June 30, 2000, the Company had purchased loans for which it
provides servicing with principal balances totaling $515.2 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):
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $45,858 1,774,028 $0.03
Effect of Dilutive securities
Stock options --- 76,808
Diluted EPS $45,858 1,850,836 $0.03
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $1,691,318 1,702,376 $0.99
Effect of Dilutive Securities
Stock Options --- 109,185
Diluted EPS $1,691,318 1,811,561 $0.93
<CAPTION>
Three Months Ended June 30, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $170,234 1,782,005 $0.10
Effect of Dilutive securities
Stock options --- 57,878
Diluted EPS $170,234 1,839,883 $0.09
<CAPTION>
Three Months Ended June 30, 2000
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
Basic EPS $599,595 1,708,366 $0.35
Effect of Dilutive Securities
Stock Options --- 127,188
Diluted EPS $599,595 1,835,554 $0.33
</TABLE>
<PAGE>
NOTE 5 --- RESTATEMENT
The Company has restated net income and earnings per share for the three and six
month periods ending June 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 and earnings per share for each period is as
follows:
<TABLE>
<CAPTION>
For the three months For the three months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Net income
as previously reported 162,814 693,108
(Increase) decrease in stock options 7,420 (93,513)
outstanding, net of tax --------- ---------
Net income as restated 170,234 599,595
========= =========
</TABLE>
<TABLE>
<CAPTION>
For the three months For the three months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Basic earnings per share
as previously reported 0.09 0.41
(Increase) decrease in stock options 0.01 (0.06)
outstanding, net of tax --------- ---------
Basic EPS as restated 0.10 0.35
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three months For the three months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Diluted earnings per share
as previously reported 0.09 0.38
(Increase) decrease in stock options 0.00 (0.05)
outstanding, net of tax --------- --------
Diluted EPS as restated 0.09 0.33
========= ========
</TABLE>
<TABLE>
<CAPTION>
For the six months For the six months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Net income
as previously reported 68,241 1,977,608
(Increase) decrease in stock options (22,383) (286,290)
outstanding, net of tax --------- ----------
Net income as restated 45,858 1,691,318
========= ==========
</TABLE>
<TABLE>
<CAPTION>
For the six months For the six months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Basic earnings per share
as previously reported 0.04 1.16
(Increase) decrease in stock options (0.01) (0.17)
outstanding, net of tax ------- -------
Basic EPS as restated 0.03 0.99
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the six months For the six months
ended ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Diluted earnings per share
as previously reported 0.04 1.09
(Increase) decrease in stock options (0.01) (0.16)
outstanding, net of tax ------- -------
Diluted EPS as restated 0.03 0.93
======= =======
</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
June 1999. In February 2000, the Bank opened a loan production office in
Cumming, Georgia, with expectations of this office converting to a full service
branch in the fourth quarter 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 will open a satellite office in
Maryland in the 4/th/ quarter 2000 to serve the Mid-Atlantic region. The office
will be staffed with three account executives, two underwriters and two customer
service representatives.
<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 six months ended June 30, 2000 was $45,858
compared to net income of $1,691,318 for the six months ended June 30, 1999.
The decrease in net income from the first six months of 1999 to the first six
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 six
months of 1999. Mortgage banking operation had a net loss of $130,390 for the
first six months of 2000 compared to net income of $1,819,474 in the first six
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. Rates on 30-year mortgages increased
over 150 basis points since May 1999. As a result, mortgage production in the
first six months 2000 totaled $541.2 million, a decrease of $659 million or 55%
from the $1.2 billion achieved in the first six months of 1999. In addition,
the Company's spread on the sale of purchased mortgage servicing rights
decreased 21% from 67 basis points in the first six months of 1999 to 53 basis
points in the first six 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 operation experienced a decline in earnings, the Bank's
earnings continued to improve. The Bank had earnings of $390,142 in the first
six months of 2000, 14% greater than earnings of $342,605 in the first six
months of 1999. The Bank experienced loan growth of $22.7 million or 42% in the
first six months of 2000. The Bank's loan portfolio totaled $76.8 million at
June 30, 2000.
Financial Condition
-------------------
The Company's assets increased 17% during the first six months of 2000 from
$175.8 million as of December 31, 1999 to $206.2 million as of June 30, 2000.
The increase in total assets in the first six months of 2000 was the result of
the $22.7 million or 42% increase in commercial banking loans. The increase in
assets corresponded with a $12 million, or 11%, increase in deposits and a $9.8
million, or 21% in other borrowings
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 $178.8 million, or 86.7%, of total
assets at June 30, 2000. This represents a 17% 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 $22.7 million increase of
commercial banking loans. Average mortgage loans held for sale during the first
six months of 2000 of $70.4 million constituted 46.6% of average earning assets
and 40.1% 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 six months of 2000, average commercial banking loans were
$65.2 million. Such loans constituted 43.2% of average earning assets and 37.3%
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
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 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 $1,087,787 or 1.42% of total
commercial banking loans at June 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 six months of 2000 was primarily the result of the provision for loan loss
of $235,000. The increase in the allowance for loan loss corresponds to the 42%
increase in the commercial banking loans in the first six 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 June 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 June 30, 2000, the Bank had $802,784 of loans contractually past
due more than 90 days, $40,826 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.
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 $62,766 at June
<PAGE>
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 $1.5 million at June 30, 2000 compared to
December 31, 1999 when potential problem loans totaled $1.4 million.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-----------------------------------
<S> <C> <C>
Non-performing loans (1) $ 40,826 $ 30,193
Foreclosed properties 21,940 21,940
---------- ----------
Total non-performing assets 62,766 52,133
========== ==========
Loans 90 days or more past due on accrual status $ 802,784 $ 507,532
Potential problem loans (2) 1,459,673 1,399,926
Potential problem loans/total loans 1.90% 2.59%
Non-performing assets/total loans
and foreclosed properties 0.08% 0.10%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 1.04% 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 $10.9 million at June 30,
2000 compared to $11.9 million at December 31, 1999. Unrealized losses on
securities amounted to $1.6 million and $1.5 million at June 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 no federal funds sold at June
30, 2000 or 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 $26.5 million warehouse line of
credit from the FHLB-Atlanta and a $45 million repurchase agreement with
PaineWebber. In July 2000, the Bank increase its warehouse line of credit with
the FHLB-Atlanta to $36 million. CMS acquires residential mortgage loans from
small retail-oriented originators in the Southeast, Northeast and Midwest United
States through various funding sources, including a $75.0 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
<PAGE>
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 six months of 2000, the Mortgage Division acquired $541.2
million of mortgage loans. The Mortgage Division sold in the secondary market
$539.4 million of mortgage loans. At June 30, 2000, $89.1 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 June 30, 2000, $5.5 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 June 30, 2000, the Company held servicing rights with
respect to loans with unpaid principal balances totaling $515.2 million compared
to $420.8 at December 31, 1999. During the first two quarters 2000, the Company
sold servicing rights with respect to $419.1 million of mortgage loans carried
on its balance sheet at costs of $5.0 million for a gain of $2.2 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 (7.65% as of June 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 June 30, 2000)
and PaineWebber, priced at Federal Funds rate plus 125 basis points (7.97% at
June 30, 2000).
The Company had fixed assets, consisting of land, building and
improvements, and furniture and equipment of $6.5 million at June 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 $3.2 million of cash value of life
insurance at June 30, 2000.
The Bank's deposits totaled $122.3 million and $110.3 million at June 30,
2000 and December 31, 1999, respectively, an increase of 10.9%. Deposits
averaged $110.2 million and $94.5 million during the periods ended June 30, 2000
and December 31, 1999, respectively. Interest-bearing deposits represented 79%
and 77% of total deposits at June 30, 2000 and December 31, 1999, respectively.
Certificates of deposit composed 64% of total interest-bearing deposits for June
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, generally. There is no assurance that
the Bank can maintain or increase its market share of deposits in its highly
competitive service area.
Capital
-------
<PAGE>
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 June 30 , 2000 the Bank's leverage ratio was
8.97%.
At June 30, 2000 the Company's total shareholders' equity was $14.9 million
or 7.21% of total assets, compared to $14.9 million or 8.46% of total assets at
December 31, 1999. The decrease in shareholders' equity to total asset ratio in
first six months of 2000 was the result of a 17.3% increase in total assets. At
June 30, 2000, total capital to risk-adjusted assets was 12.39%, with 11.45%
consisting of tangible common shareholders' equity. The Company paid $256,213
of dividends during the first six months of 2000 or $0.145 per share. A
quarterly dividend of $0.0775 was declared in July 2000 for payment in August
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.
During the first six 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 $40.8 million and $56.6 million during the periods ending June 30,
2000 and December 31, 1999, representing 37% 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 59% and 45% of
average deposits for during the periods ending June 30, 2000 and December 31,
1999, respectively. Average deposits were 73% and 64% of average interest-
earning assets for during the periods ending June 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
<PAGE>
$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 June 30, 2000, the Bank held $693,000 of
brokered deposits.
The following table shows the interest sensitivity gaps for four different
time intervals as of June 30, 2000.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of June 30, 2000
Amounts Repricing In
--------------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
------------ ------------- ------------ -------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Interest-earning
assets $116.9 $ 18.1 $33.0 $11.9
Interest-bearing
liabilities 78.5 35.8 35.7 2.3
------------------------------------------------------
Interest sensitivity
gap $ 38.4 $(17.7) $(2.7) $ 9.6
======================================================
</TABLE>
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 interest margin will improve.
Conversely, if interest rates decrease over this period, the net interest margin
will decline. At June 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 $27.6 million, or 13%
of total assets.
At June 30, 2000, the Company's commitments to purchase mortgage loans (the
"Pipeline") totaled approximately $316.9 million, down 28% from the $439.7
million a year earlier. Of the Pipeline, the Company had, as
<PAGE>
of June 30, 2000, approximately $124.5 million for which the Company had
interest rate risk. The remaining $192.4 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
June 30, 2000, the Company had in place purchase commitment agreements
terminating between July and September of 2000 with respect to an aggregate of
approximately $87.9 million to hedge the mortgage pipeline of $124.5 million for
which the Bank 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.
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.
The Company does not anticipate a material effect on its financial statements as
a result of adopting SFAS No. 133.
<PAGE>
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 six months of 1998 and the first six 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 had closed $541.2 million of mortgage loans during the first six months
of 2000 compared to $1.2 billion during the first six months of 1999.
The Company had interest income of $7.4 million for the six months ended
June 30, 2000 compared to $8.3 million six months ended June 30, 1999. The
decrease in interest income is attributable to 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. Fee income associated with mortgage loans
for the first six months of 2000 totaled $1.3 million compared to fee income for
the first six months of 1999 of $2.7 million.
The Company had interest income of $4.1 million for the three months ended
June 30, 2000 compared to $4.0 million three months ended June 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.
The Company had interest expense of $3.6 million for the six months ended
June 30, 2000 and $4.4 million for the six months ended June 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 two quarters 2000 and 1999,
interest expense accounted for 32% and 28% of total expenses, respectively.
The Company had interest expense of $1.9 million for the three months ended
June 30, 2000 and $2.2 million for the three months ended June 30, 1999. The
decrease resulted from a lower level of other borrowings as a result of the
decline in mortgage loan production.
Net interest income for the first six months of 2000 was $3.8 million. The
key performance measure for net interest income is the "net interest margin," or
net interest income divided by average interest-earning assets. The Company's
net interest margin during first six months of 2000 was 5.70%. Interest spread,
which represents the difference between average yields on interest-earning
assets and average rates paid on interest-bearing liabilities, was 4.86%. Net
interest income, interest margin and net interest spread for the first six
months of 1999 were $3.9 million, 4.1%, and 3.5%, respectively. The decrease in
net interest income resulted from a decrease in the fee income related to a
lower volume of mortgage loans closed. Loan fee income, such as processing fees
associated with the purchase of mortgage loans, is included as interest income
as the mortgage loans are sold. The increase in net interest margin and
interest spread is indicative of the Company's balance sheet being asset
sensitive in the short term during a period when rate were increasing.
<PAGE>
The Company made a provision to the allowance for loan losses of $235,000
in the first six months of 2000. During the first six months of 2000, the Bank
charged-off, net of recoveries, $11,902 of loans to the allowance for loan
losses. The Company made provisions to the allowance for loan losses in the
amount of $150,000 in first six months of 1999. During the first six months of
1999, the Bank charged-off, net of recoveries, $13,128 of loans to the allowance
for loan losses. The Company made a provision to the allowance for loan losses
of $140,000 in the second quarter 2000. The Company made provisions to the
allowance for loan losses in the amount of $90,000 in second quarter 1999.
Other income was $3.7 million in the first six months of 2000 compared to
$10.0 million in the first six 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 six months of 2000, the Company sold servicing rights with
respect to $419.1 million of mortgage loans for a gain of $2.2 million or a
spread on the sale of servicing of 0.53%. During the first six months of 1999,
the Company sold servicing rights with respect to $1.1 billion of mortgage loans
for a gain of $7.4 million or a spread on the sale of servicing of 0.67%. The
decrease in the spread on the sale of servicing rights is indicative of the
competitive pricing in the mortgage industry in the first six 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 $2.0 million in the
second quarter of 2000 compared to $4.7 million in the second quarter of 1999.
The decrease in other income during the second quarter was related to the
decrease of gains on the sale of mortgage servicing rights.
Other operating expenses decreased to $7.2 million in the first six months
of 2000 from $11.0 million in the first six 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 $3.8 million in the second quarter 2000 from
$5.5 million in the second quarter 1999.
The Company had net income of $45,858 for the six months ending June 30,
2000, compared to net income of $1.7 million for the six months ending June 30,
1999. The Company had net income of $170,234 for the three months ending June
30, 2000, compared to net income of $599,595 for the six months ending June 30,
1999. Net income 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 33% and 37% for the first six
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 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 the Federal Reserve has increased
interest rates twice since 1999 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: December 13, 2000 /s/ J. Donald Boggus, Jr.
-------------------- -------------------------
J. Donald Boggus, Jr.
President and Chief Executive Officer
