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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB/A
|X| Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Fiscal Year ended December 31, 1999
|_| Transition report under Section 13 of 15(d) of the Securities Exchange Act
of 1934
Commission File No. 0-20251
CRESCENT BANKING COMPANY
(Name of Small Business Issuer in Its Charter)
Georgia 58-1968323
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
251 Highway 515, Jasper, Georgia 30143
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(Address of Principal Executive Offices) (Zip Code)
(706) 692-2424
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(Issuer's Telephone Number, Including Area Code)
Title of Each Class Securities registered under Section 12(b) of the Exchange
Act: None
Name of Each Exchange on which Registered: None
Title of Each Class Securities registered under Section 12(g) of the Exchange
Act:
Common Stock, $1.00 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or (15) d of the Exchange Act during the past 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 past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
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Crescent Banking Company's revenues for its fiscal year ended December 31,
1999 were $29.7 million.
The aggregate market value of the voting stock of Crescent Banking Company
held by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of March 24, 2000,
was $24.5 million.
The number of shares outstanding of Crescent Banking Company's Common
Stock, par value $1.00 per share, as of March 24, 2000 was 1,764,136.
Portions of Crescent Banking Company's 1999 Annual Report to Shareholders
for the year ended December 31, 1999 are incorporated by reference into Parts I
and II of this Form 10-KSB.
Portions of Crescent Banking Company's definitive Proxy Statement for its
2000 Annual Meeting of Shareholders filed pursuant to Rule 14a-6 of the
Securities Exchange Act of 1934, as amended, are incorporated by reference into
Part III of this Form 10-KSB.
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SPECIAL CAUTIONARY NOTICE
REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements made or incorporated by reference herein
constitute forward-looking statements for purposes of the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the" Exchange Act"), and as such may involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of Crescent Banking Company (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," "continue,"
"intend," "consider," "possible" or other similar words and expressions of the
future. The Company's actual results may differ significantly from the results
we discuss in these forward-looking statements.
These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation: the
effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and other interest-sensitive assets and
liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the Company's
market area and elsewhere, including institutions operating, regionally,
nationally and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and the Internet; 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company is a Georgia corporation that is registered as a bank holding
company with the Board of Governors of the Federal Reserve System (the "Federal
Reserve") under the Federal Bank Holding Company Act of 1956, as amended (the
"BHC Act"), and with the Georgia Department of Banking and Finance (the "Georgia
Department") under the Financial Institutions Code of Georgia. The Company was
incorporated on November 19, 1991, to facilitate a reorganization (the
"Reorganization") pursuant to which the Company became the parent holding
company of Crescent Bank and Trust Company (the "Bank"). The Reorganization was
completed on May 1, 1992. The Company also owns 100% of Crescent Mortgage
Services, Inc. ("CMS," and, together with the Bank, the "Subsidiaries"), which
offers wholesale mortgage banking services in the southeast, northeast and
midwest United States and provides servicing for residential mortgage loans. As
of December 31, 1999, the Company had total consolidated
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assets of approximately $175.8 million, total deposits of approximately $110.3
million and consolidated shareholders' equity of approximately $14.9 million.
The Bank is a Georgia banking corporation that has been engaged in the
general commercial banking business since it opened for business in August 1989.
The Bank began wholesale mortgage banking operations in February 1993. The Bank
is a member of the Federal Deposit Insurance Corporation ("FDIC") and its
deposits are insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is also
a member of the Federal Home Loan Bank of Atlanta ("FHLB-Atlanta"). Through the
Bank, the Company provides a broad range of banking and financial services in
the areas surrounding Jasper, Georgia, and wholesale mortgage banking services
to correspondents located in the Atlanta, Georgia metropolitan area and
throughout the Southeast United States.
CMS was incorporated as a separate subsidiary of the Company on October 11,
1994, to engage in the servicing of mortgage loans. CMS is an approved servicer
of mortgage loans sold to the Federal Home Loan Mortgage Corporation ("Freddie
Mac"), Federal National Mortgage Association ("Fannie Mae") and private
investors. CMS offers wholesale mortgage banking services in southeastern,
northeastern and midwestern states and provides servicing for residential
mortgage loans. As of December 31, 1999, CMS had wholesale mortgage banking
offices located in Atlanta, Georgia, Manchester, New Hampshire, and Chicago,
Illinois.
The principal executive offices of the Company and the Bank are located at
251 Highway 515, Jasper, Georgia 30143 and the principal executive offices of
CMS are located at 115 Perimeter Center, Suite 225, Atlanta, Georgia 30346. The
Company's telephone number is (706) 692-2424.
Business Strategy and Recent Developments
In February 1998, the CMS expanded its mortgage operations by engaging in
Federal Housing Administration ("FHA") and Veterans Administration ("VA")
mortgage lending. CMS opened a wholesale mortgage banking office in Chicago,
Illinois in December 1998.
In March 1998, the Bank expanded its loan production office ("LPO") 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 to serve the needs of many local
residents in Canton who have traditionally banked with larger regional and
national banks that lack a community focus.
Commercial Banking Operations
The Bank's commercial banking operations are primarily retail-oriented and
aimed at individuals and small to medium sized businesses located within its
market area. The Bank considers its primary market area for commercial banking
services to be Pickens County, Bartow, and Cherokee County and nearby areas of
Dawson, and Gilmer Counties, Georgia, which are situated to the north of
Atlanta. While the Bank provides most traditional banking services, its
principal activities are the taking of demand and time deposits and the making
of
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secured and unsecured consumer loans and commercial loans to small and medium
sized businesses.
The retail nature of the Bank's commercial banking operations allows for
diversification of depositors and borrowers, and management believes the Bank is
not dependent upon a single or a few customers. No material portion of the
Bank's commercial banking loans is concentrated within a single industry or
group of related industries.
Mortgage Banking Operations
The Company currently originates, sells and services mortgage loans through
the Bank's Mortgage Division and CMS. The Bank and CMS acquire mortgage loans
from small retail-oriented originators in the Southeast and Northeast United
States. Substantially all of the mortgage loans are currently being resold after
being "warehoused" for 10 to 30 days, with associated servicing rights sold or
retained, in the secondary market to Freddie Mac, Fannie Mae, and private
investors. To the extent that the Company retains the servicing rights on
mortgage loans that it resells, it collects servicing fees. Loans that are
resold with associated servicing rights released include a premium for such
servicing in the sale price paid to the Company.
Mortgage loan purchases are funded through loan sales, warehouse lines of
credit from FHLB-Atlanta and Paine Webber Incorporated, and Bank funds. Prior to
being resold, mortgage loans generally generate net interest income due to the
Company seeking to maintain a positive spread on the rates of interest paid to
the Company on the mortgage loans as compared to the rates of interest paid by
the Company on its funding sources. Pending resale, the Company does incur
interest rate risk that affects the value of such mortgage loans. The Company
also generates ancillary income through late fees, mortgage life insurance
commissions and assumption fees, in addition to servicing fees and gestation fee
income.
The Company attempts to reduce potential interest rate risks that may be
incurred as a result of market movements between the time commitments to
purchase mortgage loans are made and the time the loans are closed, by either
having in place commitments, through the secondary market, to purchase the loans
from the Company, or by purchasing an option to deliver to the secondary market
a mortgage-backed security. Other "hedging" techniques may also be used to
minimize interest rate risk, but speculative secondary market activities are not
engaged in. The success of the Company's mortgage banking operations is highly
dependent on the efforts of Mr. Robert C. KenKnight, the Bank's Executive Vice
President for Mortgage Banking Operations, and President of CMS.
The Company's mortgage banking business is not dependent on any particular
mortgage loan originators or borrowers. Such business does depend upon its
warehouse creditors to fund the origination and holding of mortgage loans
pending securitization.
Seasonality
While the Bank does not consider its commercial banking business to be
seasonal, the Company's mortgage banking business does vary seasonally, with the
volume of home financings, in particular, being generally lower during the
winter months.
Competition
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The Bank's Commercial and Mortgage Divisions operate in highly competitive
markets. The Bank competes directly for deposits in its commercial banking
market with other commercial banks, savings and loan associations, credit
unions, mortgage brokers and mortgage companies, mutual funds, securities
brokers, and insurance companies, locally, regionally and nationally, certain of
which compete with offerings by mail, telephone, computer and/or the Internet.
In its commercial bank lending activities, the Bank competes with other
financial institutions as well as consumer finance companies, mortgage companies
and other lenders engaged in the business of extending credit to customers
located in its market area. Interest rates, both on loans and deposits, and
prices of services are significant competitive factors among financial
institutions generally. Office location, types and quality of services and
products, office hours, customer service, a local presence, community reputation
and continuity of personnel may be other important competitive factors, and are
emphasized by the Bank.
In addition to the Bank, three other commercial banks have offices in the
Jasper area of Pickens County, Georgia, eight commercial banks and one credit
union have offices in Bartow County, Georgia and ten commercial banks and two
credit unions have offices in Cherokee County, Georgia. Many of the largest
banks operating in Georgia, including some of the largest banks in the country,
also have offices within the Bank's market area. Virtually every type of
competitor for business of the type served by the Bank has offices in Atlanta,
approximately 60 miles away from Jasper. These institutions have greater
resources, broader geographic markets and higher lending limits, may offer
various services that the Bank does not offer, and can better afford and make
broader use of media advertising, support services, and electronic technology
than can the Bank. To offset these competitive disadvantages, the Bank depends
on its reputation as an independent and locally-owned community bank, personal
service, greater community involvement and its ability to make credit and other
business decisions quickly and locally.
The wholesale mortgage banking business is also intensely competitive
locally, regionally and nationally. The Company competes with thrifts,
commercial banks, mortgage companies and brokers, insurance companies, and
securities firms having local, regional and national operations with respect to
the purchase, servicing and sale of mortgage loans. Many of such institutions
have substantially greater resources than the Company.
Employees
At December 31, 1999, the Company had 146 full-time and 7 part-time
employees. The Company considers its employee relations to be good, and it has
no collective bargaining agreements with any employees.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion summarizes certain statutes,
rules and regulations affecting the Company and the Bank. This summary is
qualified in its entirety by reference to the statutory and regulatory
provisions referred to below and is not intended to be an exhaustive description
of the statutes or regulations applicable to the Company's and the Bank's
businesses. Any change in applicable laws or regulations, or regulatory policies
and practices, may have a material effect on the business of the Company and the
Bank. Supervision, regulation and
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examination of banks by the bank regulatory agencies are intended primarily for
the protection of depositors rather than holders of Company securities.
Bank Holding Company Regulation
As a bank holding company registered with the Federal Reserve under the BHC
Act, and with the Georgia Department under the Georgia Financial Institutions
Code, the Company is subject to supervision, examination and reporting by the
Federal Reserve and the Georgia Department.
The Company is required to file with the Federal Reserve its periodic
reports and such additional information as the Federal Reserve may require. The
Federal Reserve examines the Company and may examine its subsidiaries. The
Georgia Department also may examine the Company.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. A bank holding company may acquire
direct or indirect ownership or control of voting shares of any company that is
engaged directly or indirectly in banking or managing or controlling banks or
performing services for its authorized subsidiaries. A bank holding company may,
however, engage in or acquire an interest in a company that engages in
activities which the Federal Reserve has determined by regulation or order to be
so closely related to banking as to be a proper incident thereto.
The BHC Act permits the Company and any other bank holding company located
in Georgia to acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any bank based in another
state, regardless of state law to the contrary, in either case subject to
certain deposit-percentage, bank charter requirements, and other restrictions.
After June 1, 1997, national and state-chartered banks generally may branch
interstate following acquisitions of banks in other states, unless prior to that
date, a state has "opted in" and accelerated the date after which interstate
branching is permissible or "opted out" and prohibited interstate branching
altogether. Georgia has "opted in" and permitted such interstate branching
beginning June 1, 1997.
The Company is a legal entity separate and distinct from the Bank and its
other Subsidiaries. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company or its non-bank Subsidiaries, including
CMS. The Company and the Bank are subject to Section 23A of the Federal Reserve
Act. Section 23A defines "covered transactions," which include extensions of
credit, and limits a bank's covered transactions with any affiliate to 10% of
such bank's capital and surplus. All covered and exempt transactions between a
bank and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Finally, Section 23A
requires that all of a bank's extensions of credit to an affiliate be
appropriately secured by acceptable collateral, generally United States
government or agency securities. The Company and the Bank also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and under circumstances, including credit
standards, that are substantially the same or at
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least as favorable to the bank or its subsidiary as prevailing at the time for
transactions with unaffiliated companies.
Federal Reserve policy requires a bank holding company to act as a source
of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, where a bank holding company has more
than one bank or thrift subsidiary, each of the bank holding company's
subsidiary depository institutions are responsible for any losses to the FDIC as
a result of an affiliated depository institution's failure. As a result, a bank
holding company may be required to loan money to its subsidiaries in the form of
capital notes or other instruments which qualify as capital under regulatory
rules. However, any loans from the holding company to such subsidiary banks
likely will be unsecured and subordinated to such bank's depositors and perhaps
to other creditors of the bank.
The Company is also regulated by the Georgia Department. The Financial
Institutions Code requires annual registration with the Georgia Department by
all Georgia bank holding companies. Such registration includes information with
respect to the financial condition, operations and management of intercompany
relationships of the bank holding company and its subsidiaries and related
matters. The Georgia Department may also require such other information as is
necessary to keep itself informed as to compliance with Georgia law and the
regulations and orders issued by the Georgia Department.
In November 1999, Congress enacted the Gramm-Leach-Bliley Act (the "GLB
Act"), which made substantial revisions to the statutory restrictions separating
banking activities from certain other financial activities. Under the GLB Act,
bank holding companies that are well-capitalized, well-managed, have
satisfactory or better CRA ratings, and meet certain other conditions can elect
to become "financial holding companies." As such, they and their subsidiaries
are permitted to acquire or engage in previously impermissible activities such
as insurance underwriting, securities underwriting and distribution, travel
agency activities, broad insurance agency activities, merchant bank, and other
activities that the Federal Reserve determines to be financial in nature or
complementary thereto. Financial holding companies continue to be subject to the
overall insight and supervision of the Federal Reserve, but the GLB Act applies
the concept of functional regulation to the activities conducted by
subsidiaries. For example, insurance activities would be subject to supervisions
and regulation by state insurance authorities. The Company does not currently
intend to become a financial holding company.
Bank Regulation
As a Georgia bank, whose deposits are insured by the FDIC as provided by
law, the Bank is subject to regulation and examination by the Georgia Department
and the FDIC. The Georgia Department and the FDIC regulate and monitor all of
the Bank's operations, including reserves, loans, mortgages, payments of
dividends, interest rates and the establishment of branches. Interest and
certain other charges collected or contracted for by the Bank are subject to
state usury laws and certain federal laws concerning interest rates.
Various statutes and contracts limit the Bank's ability to pay dividends,
extend credit or otherwise supply funds to the Company and its subsidiaries.
Dividends from the Bank are expected to constitute the Company's major source of
funds for servicing Company debt and paying cash dividends on the Company's
stock. Under Georgia law, the Georgia Department's
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approval of a dividend by the Bank generally is required if: (1) total
classified assets at the most recent examination of the Bank exceed 80% of
equity capital as reflected at such examination; (2) the aggregate amount of
dividends to be paid in the calendar year exceeds 50% of the Bank's net profits,
after taxes but before dividends, for the previous year; and (3) the ratio of
the Bank's equity capital to its adjusted total assets is less than 6%.
The FDIC has the general authority to limit the dividends paid by insured
banks if such payment is deemed an unsafe and unsound practice. The FDIC has
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsound and unsafe banking practice. The FDIC
regularly examines the Bank and has the authority to approve or disapprove the
establishment of branches, mergers, consolidations and other similar corporate
actions. Furthermore, the FDIC has the right to prevent or remedy unsafe or
unsound banking practices or other violations of law.
Mortgage Banking Regulation
CMS is licensed and regulated as a "mortgage banker" by the Georgia
Department. It is also qualified as a Freddie Mac seller/servicer and CMS must
meet the requirements of such corporations and various private parties with
which it conducts business, including warehouse lenders and those private
entities to which it sells mortgage loans.
Capital Requirements
The Federal Reserve and the FDIC have adopted risk-based capital guidelines
for bank holding companies and national banks, respectively. The guideline for a
minimum ratio of capital to risk-weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) is 8%. At least
half of the total capital must consist of Tier 1 Capital, which includes common
equity, retained earnings and a limited amount of qualifying preferred stock,
less goodwill. The remainder may consist of non-qualifying preferred stock,
qualifying subordinated, perpetual, and/or mandatory convertible debt, term
subordinated debt and intermediate term preferred stock and up to 45% of the
pretax unrealized holding gains on available-for-sale equity securities with
readily determinable market values that are prudently valued, and a limited
amount of any loan loss allowance ("Tier 2 Capital" and, together with Tier 1
Capital, "Total Capital").
In addition, the federal agencies have established minimum leverage ratio
guidelines for bank holding companies, national banks, and state member banks,
which provide for a minimum leverage ratio of Tier 1 Capital to adjusted average
quarterly assets ("leverage ratio") equal to 3%, plus an additional cushion of
1.0% to 2.0%, if the institution has less than the highest regulatory rating.
The guidelines also provide that institutions experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Higher capital may be required in individual cases,
depending upon a bank holding company's risk profile. All bank holding companies
and banks are expected to hold capital commensurate with the level and nature of
their risks, including the volume and severity of their problem loans. Lastly,
the Federal Reserve's guidelines indicate that the Federal Reserve will continue
to consider a "Tangible Tier 1 Leverage Ratio" (deducting all intangibles) in
evaluating proposals for expansion or new activity. The Federal Reserve and the
FDIC have not advised the Company or
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the Bank of any specific minimum leverage ratio or Tangible Tier 1 Leverage
Ratio applicable to them.
The Federal Deposit Insurance Corporation Improvement Act of 1992
("FDICIA") requires the federal banking agencies to take "prompt corrective
action" in respect of depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized."
The capital measures used by the federal banking regulators are the Total
Capital ratio, Tier 1 Capital ratio, and the leverage ratio. Under the
regulations, a national or state member bank will be (i) well capitalized if it
has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or
greater, and is not subject to any written agreement, order, capital directive,
or prompt corrective action directive by a federal bank regulatory agency to
meet and maintain a specific capital level for any capital measure, (ii)
adequately capitalized if it has a Total Capital ratio of 8% or greater, a Tier
1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater (3% in
certain circumstances) and is not well capitalized, (iii) undercapitalized if it
has a Total Capital ratio of less than 8%, a Tier 1 Capital ratio of less than
4% (3% in certain circumstances), or (iv) critically undercapitalized if its
tangible equity is equal to or less than 2% of average quarterly tangible
assets.
The Federal Reserve has adopted changes to its risk-based and leverage
ratio requirements applicable to bank holding companies and state-chartered
member banks that require that all intangibles, including core deposit
intangibles, purchased mortgage servicing rights ("PMSR's") and purchased credit
card relationships ("PCCR's") be deducted from Tier 1 Capital. The changes,
however, grandfather identifiable assets (other than PMSR's and PCCR's) acquired
on or before February 19, 1992, and permit the inclusion of readily marketable
PMSR's and PCCR's to be included in Tier 1 Capital only up to the lesser of (i)
90% of their fair market value, and (ii) 100% of the remaining unamortized book
value of such assets. The FDIC has adopted substantially similar regulations.
As of December 31, 1999, the Company had Tier 1 Capital and total capital
of approximately 12.88% and 13.62% of risk-weighted assets, and the Bank had
Tier 1 Capital and total capital of approximately 13.89% and 14.80% of
risk-weighted assets. As of December 31, 1999, the Company had a leverage ratio
of Tier 1 Capital to total average assets of approximately 9.10% and the Bank
had a leverage ratio of Tier 1 Capital to total average assets of approximately
9.91%.
The Company has not been informed of a particular leverage capital
requirement applicable to it, however, the Bank has agreed with the Georgia
Department to maintain a leverage ratio of 8%. At December 31, 1999 the Bank's
leverage ratio was 9.91%.
The Georgia Department also expects bank holding companies to maintain
minimum levels of primary capital and adjusted primary capital on a consolidated
basis (generally 5% of total assets). Under Georgia Department policies, the
components of primary capital include common stock, perpetual preferred stock,
surplus, undivided profits, mandatory convertible instruments, allowances for
loan and lease losses, minority interests in consolidated subsidiaries and
certain types of debt for loan and lease losses, minority interests in
consolidated subsidiaries and certain types of debt instruments. While the
Georgia Department's policies do not require
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the risk-weighting of assets, the Georgia Department assumes that moderate
degrees of risk exist. If it discovers high amounts of risk or significant
non-banking activities, the Georgia Department may require higher capital
ratios. Further, the written policies of the Georgia Department require that
Georgia banks generally maintain a minimum ratio of primary capital to total
assets of 6.0%.
The table which follows sets forth certain capital information of the
Company and Bank as of December 31, 1999:
<TABLE>
<CAPTION>
Capital Adequacy
(Dollars in thousands)
Company Bank
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Amount Percentage Amount Percentage
---------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Leverage Ratio:
Actual $15,056 9.10% $13,168 9.91%
Minimum Required (1) 6,620 4.00% 10,636 8.00% (2)
Risk-Based Capital:
Tier 1 Capital
Actual 15,056 12.88% 13,168 13.89%
Minimum Required 4,675 4.00% 3,792 4.00%
Total Capital:
Actual 15,921 13.62% 14,033 14.80%
Minimum Required 9,349 8.00% 7,584 8.00%
</TABLE>
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(1) Represents the highest minimum requirement. Institutions that are
contemplating acquisitions or are anticipating or experiencing significant
growth may be required to maintain a substantially higher leverage ratio.
(2) Results from an agreement with the Georgia Department.
On December 20, 1996, the FDIC adopted the Federal Financial Institutions
Examination Council's ("FFIEC") updated statement of policy entitled "Uniform
Financial Institutions Rating System" ("UFIRS") effective January 1, 1997. UFIRS
is an internal rating system used by the federal and state regulators for
assessing the soundness of financial institutions on a uniform basis and for
identifying those institutions requiring special supervisory attention. Under
the previous UFIRS, each financial institution was assigned a confidential
composite rating based on an evaluation and rating of five essential components
of an institution's financial condition and operations including Capital
adequacy, Asset quality, Management, Earnings, and Liquidity. The major changes
include an increased emphasis on the quality of risk management practices and
the addition of a sixth component of Sensitivity to market risk. For most
institutions, the FDIC has indicated that market risk primarily reflects
exposures to changes in interest rate. When regulators evaluate this component,
consideration is expected to be given to management's ability to identify,
measure, monitor and control market risk; the institution's size; the nature and
complexity of its activities and its risk profile; and the adequacy of its
capital and earnings in relation to its level of market risk exposure. Market
risk
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is rated based upon, but not limited to, an assessment of the sensitivity of the
financial institution's earnings or the economic value of its capital to adverse
changes in interest rates, foreign exchange rates, commodity prices, or equity
prices; management's ability to identify measure, and control exposure to market
risk; and the nature and complexity of interest rate risk exposure arising from
nontrading positions.
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares, and such other standards as the federal
regulatory agencies deem appropriate. These standards are not expected to have
any material effect on the Company and the Bank.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Bank, including new reporting requirements,
regulatory standards for estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch, and a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not well capitalized or are adequately capitalized and
have not received a waiver from the FDIC. Under regulations relating to brokered
deposits, the Bank is well capitalized and not restricted.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan for approval.
For a capital restoration plan to be acceptable, the depository institution's
parent holding company must guarantee that the institution comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of 5% of the depository institution's total assets at
the time it became undercapitalized and the amount necessary to bring the
institution into compliance with applicable capital standards. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. If the controlling holding company fails to
fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third party creditors of the bank
holding company.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
FDIC Insurance Assessments
10
<PAGE>
The Bank is subject to FDIC deposit insurance assessments. The Bank's
deposits are primarily insured by BIF. The FDIC utilizes a risk-based deposit
insurance premium scheme to determine the assessment rates for BIF-insured
depository institutions. Each financial institution is assigned to one of three
capital groups - "well capitalized," "adequately capitalized" or
"undercapitalized" - and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state regulators and other information
relevant to the institution's financial condition and the risk posed to the
applicable insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. During the year ended
December 31, 1999, the Bank paid $12,659 in deposit premiums.
The FDIC's Board of Directors continued the 1998 BIF and Savings
Association Insurance Fund ("SAIF") assessment schedule of zero to 27 basis
points per annum for the first semiannual period of 2000. The Deposit Insurance
Funds Act of 1996 (the "Funds Act") authorized the Financing Corporation
("FICO") to levy assessments through the earlier of December 31, 1999 or the
merger of BIF and SAIF, on BIF-assessable deposits at a rate equal to one-fifth
of the FICO assessment rate applied to SAIF deposits. The FICO assessments are
set quarterly and in 1999 ranged, in the case of BIF, from 1.16 to 1.22 basis
points, and, in the case of SAIF, from 5.80 to 6.10 basis points. The assessment
rates are 2.12 basis points for BIF, and SAIF for the first quarter of 2000.
During 1999, the Bank acquired $12.7 million of SAIF deposits.
Community Reinvestment Act
The Company and the Bank are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the "CRA") and the federal banking
agencies' regulations thereunder. Under the CRA, all banks and thrifts have a
continuing and affirmative obligation, consistent with safe and sound operation
to help meet the credit needs for their entire communities, including low- and
moderate-income neighborhoods. The CRA requires a depository institution's
primary federal regulator, in connection with its examination of the
institution, to assess the institution's record in assessing and meeting the
credit needs of the community served by that institution, including low- and
moderate-income neighborhoods. The regulatory agency's assessment of the
institution's record is made available to the public. Further, such assessment
is required of any institution which has applied to: (i) charter a national
bank; (ii) obtain deposit insurance coverage for a newly-chartered institution;
(iii) establish a new branch office that accepts deposits; (iv) relocate an
office; (v) merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution, or (vi) expand
other activities, including engaging in financial services activities authorized
by the GLB Act. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, or to become a "financial holding
company," the Federal Reserve will assess the records of each subsidiary
depository institution of the applicant bank holding company, and such records
may be the basis for denying the application. Following their most recent CRA
examinations, the Bank received a "satisfactory" CRA rating.
The GLB Act makes various changes to the CRA. Among other changes, CRA
agreements with private parties must be disclosed and annual CRA reports must be
made to a bank's primary federal regulator. A bank holding company will not be
permitted to become a financial holding company and no new activities authorized
under the GLB Act may be
11
<PAGE>
commenced by a holding company or by a bank financial subsidiary if any of its
bank subsidiaries received less than a "satisfactory" CRA rating in its latest
CRA examination.
Legislative and Regulatory Changes
In 1996, the Georgia Department of Insurance and the Georgia Department
adopted regulations permitting the sales of certain other insurance products.
The Bank has not exercised any activities permitted by these new regulations,
but may do so in the future.
The newly-enacted GLB Act requires banks and their affiliated companies to
adopt and disclose policies regarding the sharing of personal information it
obtains from its customers with third parties. The GLB Act also permits banks to
engage in "financial activities" through subsidiaries similar to that permitted
financial holding companies. See the discussion regarding the GLB Act in "Bank
Holding Company Regulation" above.
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, bank holding and other financial institutions and
bank and bank holding company powers are being considered by the Federal
government, Congress and various state governments, including Georgia. The FDIC
changed, effective April 1, 2000, its deposit insurance assessments to more
timely reflect changes in risks, and is engaged in a comprehensive review of its
insurance premiums and how to better measure and price deposit insurance in
light of an insured bank's size and risk. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry. It cannot be predicted whether any of these proposals will be
adopted, and, if adopted, how these proposals will affect the Company and its
subsidiaries. Various federal oversight authorities are also reviewing the
capital adequacy and riskiness of government sponsored enterprises such as
Fannie Mae. Changes from such review could affect the cost and availability of
Fannie Mae services.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company and the Bank will be subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing
of any changes in such policies and their effect on the Bank cannot be
predicted.
ITEM 2. DESCRIPTION OF PROPERTY
During 1999, the Bank conducted its business primarily through its main
offices located on an approximately two-acre site at 251 Highway 515, Jasper,
Pickens County, Georgia. The Bank's main offices are approximately 1.2 miles
west of downtown Jasper and 60 miles north of metropolitan Atlanta. The main
offices are housed in a modern two-story office building owned by the Bank which
contains approximately 14,200 square feet of finished space used for offices,
12
<PAGE>
operations and storage, four teller windows and the Bank lobby. The building
also has three drive-up teller windows and an automated teller machine with a
24-hour-a-day access. The main office facility opened for business on January
29, 1990 with 9,200 square feet of finished space and added an additional 5,000
square feet of administrative office space in 1999. The facility is considered
in good condition. The Bank also owns the full service branch on Towne Lake
Parkway, Woodstock, Georgia. The Towne Lake building contains approximately
3,500 square feet of finished space used for offices and storage, four teller
windows and the Bank lobby. The Towne Lake building has two drive-up teller
windows and an automated teller machine with a 24-hour-a-day access.
The Bank leases 5,250 square feet on Perimeter Center Circle in Atlanta,
Georgia for its southeast mortgage operations. The lease has an expiration date
of August 31, 2000. In addition, the Bank leases 3,616 square feet on Glenridge
Drive in Atlanta, Georgia for post-closing mortgage operations of the Bank and
of CMS with a lease expiration date of October 31, 2003.
In addition, the Bank leases approximately 268 square feet for its branch
office located in Marble Hill, Georgia with a lease expiration date of August
31, 2001. The Bank leases 2,000 square feet in Cartersville, Georgia for a
full-service branch with a lease expiration date of October 24, 2001, 3,200
square feet in Canton, Georgia for a full-service branch with a lease expiration
date of January 31, 2004 and 3,000 square feet in Cumming, Georgia for its
newly-opened loan production office with a lease expiration date of March 31,
2003.
The Bank also leases a site for an automated teller machine ("ATM") in the
Big Canoe community. The lease agreement expired on October 31, 1999, and was
renewed so that it will not expire until October 31, 2000, at which time the
Bank expects to again renew the lease. The Big Canoe community is located in
eastern Pickens and western Dawson Counties, Georgia, approximately 15 road
miles east of the Bank's main office. The Bank also leases a site for an ATM in
the Bent Tree, Georgia community with a lease expiration date of September 30,
2001, at which time the Bank expects to renew the lease.
CMS conducts its business primarily through its main office in Manchester,
New England, where CMS leases approximately 5,400 square feet of office space.
The lease term for the CMS New Hampshire office expires on March 31, 2004. In
addition, CMS leases 3,500 square feet in Chicago, Illinois for its Chicago
wholesale mortgage banking office, with a lease expiration date of January 11,
2003. CMS leases 4,080 square feet in Atlanta, Georgia for FHA/VA loan office.
In the third quarter 1999, CMS moved its FHA/VA operation to the Perimeter
Office and subleased the office. The lease term for the Atlanta office expires
in December 2002.
The Company presently expects to renew each of its leases upon their
respective expiration dates.
ITEM 3. LEGAL PROCEEDINGS
While the Company, the Bank, and CMS are from time to time parties to
various legal proceedings arising in the ordinary course of their business,
management believes after consultation with legal counsel that there are no
proceedings threatened or pending against the
13
<PAGE>
Company, the Bank, or CMS that will, individually or in the aggregate, have a
material adverse effect on the business or consolidated financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1999 to a vote of shareholders of the Company, through the
solicitation of proxies or otherwise.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On September 30, 1998, the Company completed a two-for-one split of its
Common Stock. On January 12, 1999, the Company's Common Stock began trading on
the Nasdaq SmallCap Market under the symbol "CSNT" at a price of $13.00 per
share. On March 24, 2000, the price of the Company's Common Stock, as quoted on
the Nasdaq SmallCap Market, was $13.88.
Prior to January 12, 1999, there was no active trading market for Company's
Common Stock, and it was not traded on any other organized securities market or
exchange. The last known selling price of the Company's Common Stock during
1998, in what the Company's management believes were arm's-length transactions
and based on information available to the Company's management, was $12.75 per
share in sales made on December 28, 1998. For the period from November 10, 1998
to December 22, 1998, based upon information known to the Company, the price per
share of the Company's Common Stock in other transactions ranged from $12.50 per
share to $13.00 per share, with a weighted average price of $12.72 per share
during such period.
The following table sets forth the high, low and last sales price of the
Company's Common Stock on the Nasdaq SmallCap Market for the indicated periods.
Sales Price per share of the
Company's Common Stock
Period High Low
---------------- -------------- -------------
1999
First Quarter* $22.00 $13.00
Second Quarter $23.00 $18.00
Third Quarter $21.25 $17.75
Fourth Quarter $18.00 $12.25
--------------------------
* Represents the period from January 12, 1999, the date that the Company's
Common Stock began trading on the Nasdaq SmallCap Market, through March 31,
1999.
Holders
As of March 24, 2000, there were approximately 576 holders of record of the
Company's Common Stock.
Dividends
15
<PAGE>
Cash dividends on the Bank's common stock may only be declared and paid out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated retained earnings do not, in
combination, equal at least 20% of its capital stock account. In addition, the
Georgia Department's current rules and regulations require prior approval before
cash dividends may be declared and paid if: (i) the Bank's ratio of equity
capital to adjusted total assets is less than 6%; (ii) the aggregate amount of
dividends declared or anticipated to be declared in that calendar year exceeds
50% of the Bank's net profits, after taxes but before dividends, for the
previous calendar year; or (iii) the percentage of the Bank's loans classified
as adverse as to repayment or recovery by the Georgia Department at the most
recent regulatory examination of the Bank exceeds 80% of the Bank's equity
capital as reflected at such examination.
On January 26, 2000, the Company declared its fourteenth consecutive
quarterly dividend, payable on February 15, 2000 to shareholders of record on
February 8, 2000. This $.07 per share dividend represented an approximately 8%
increase from the previous quarter's dividend of $.065 per share and was the
thirteenth consecutive quarter for which dividends were increased.
16
<PAGE>
The following table sets forth, for the Company's last two fiscal years,
the dividends per share declared and paid by the Company:
Dividend Per
Period Share (1)
--------------- ------------
1999
Fourth Quarter $.065
Third Quarter $.06
Second Quarter $.055
First Quarter $.05
1998
Fourth Quarter $.045
Third Quarter $.0425
Second Quarter $.04
First Quarter $.0375
----------------------------
(1) Adjusted to reflect the effect of the Company's September 30, 1998
two-for-one split of its Common Stock.
Future dividends on the Common Stock will depend upon the earnings of the
Company, its financial condition, the capital adequacy of the Company and its
Subsidiaries, and their need for funds, and other relevant factors, including
applicable restrictions and governmental policies and regulations. The ability
of the Company to pay dividends is subject to statutory restrictions on cash
dividends applicable to Georgia business corporations, in particular the
requirements that, after giving effect to the dividends, the corporation be able
to pay its debts as they become due in the usual course of business and that the
corporation's assets not be less than the sum of its total liabilities.
Unless the Company is successful in its efforts to diversify or acquire
other financial institutions, it will have no substantial sources of income
other than dividends it may receive from the Bank and CMS. The Bank's ability to
pay dividends is subject to statutory and regulatory restrictions on the payment
of cash dividends applicable to banks chartered under the laws of the State of
Georgia. Certain other statutory and regulatory restrictions affect the payment
of dividends by the Bank.
Recent Sales of Unregistered Securities
During the last three years, the Company has not sold any of its securities
without registering them under the Securities Act.
17
<PAGE>
ITEM 6. 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 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; the possible effects of
the Year 2000 problem on the Company, including such problems at the Company's
vendors, counterparties and customers; and the failure of assumptions underlying
the establishment of reserves for possible loan losses. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these Cautionary Statements.
General
-------
The Company is a Georgia corporation that was incorporated on November 19,
1991, to facilitate 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
18
<PAGE>
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.
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.
On September 30, 1998, the Company completed a two-for-one split of its
common stock, par value $1.00 per share (the "Common Stock"), and, on January
12, 1999, the Company's Common Stock began trading on the Nasdaq SmallCap Market
under the symbol "CSNT." All of the information presented in this Annual Report
to Shareholders for the year ended December 31, 1999 reflect the Company's
September 30, 1998 two-for-one stock split.
The Company's net income for the year ended December 31, 1999 was
$1,293,186 compared to net income of $3,086,964 for the year ended December 31,
1998. The 56% decrease in net income from 1998 to 1999 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
earnings for 1999 declined 60% to $1,188,901, compared to 1998 mortgage banking
earnings of $2,962,440. 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 162 basis points since May 1999 to year end. As a result, mortgage
production in the third and fourth quarters totaled $677 million, a decrease of
$551 million or 45% 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 10% from 56 basis points in 1998 to 51 basis points
in 1999. 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 in 1999. The Bank had earnings of $590,004 in
1999, 47% greater than earnings of $400,168 in 1998. The Bank experienced loan
growth of $12.8 million or 31% for 1999. The loan growth occurred while the Bank
continued to decrease its classified and criticized loans from 5.92% of total
loans at December 31,1998 to 2.59% of total loans at December 31, 1999. The
Bank's loan portfolio totaled $54.1 million at December 31, 1999.
Financial Condition
-------------------
The Company's assets decreased 12% during 1999 from $199.2 million as of
December 31, 1998 to $175.8 million as of December 31, 1999. The decrease in
total assets in 1999 was the result of a $41 million decrease in residential
mortgage loans held for sale. The decrease in assets corresponded with a $29
million, or 39%, decrease in other borrowings. All mortgage
19
<PAGE>
production generated by CMS is funded through warehouse lines of credit from the
Home Federal Savings Bank ("Home Federal"), and PaineWebber Incorporated
("PaineWebber"), therefore the decrease in mortgage loans held for sale resulted
in a lower average balance of other borrowings. The decrease in mortgage loans
held for sale from 1998 to 1999 was the result of increases in market interest
rates, that reduced mortgage loan originations.
Interest-earning assets (comprised of commercial banking loans, mortgage
loans held for sale, investment securities, interest-bearing balances in other
banks and temporary investments) totaled $152.4 million, or 86.7%, of total
assets at December 31, 1999. This represents a 16% decrease from December 31,
1998 when earning assets totaled $181.4 million, or 91.1%, of total assets. The
decrease in earning assets resulted primarily from the $29 million decrease of
residential mortgage loans held for sale. Average mortgage loans held for sale
during 1999 of $101.7 million constituted 61.3% of average earning assets and
54.2% of average total assets. Average mortgage loans held for sale during 1998
of $85.6 million constituted 65.8% of average interest-earning assets and 59.8%
of average total assets.
During 1999, average commercial banking loans were $46.8 million. Such
loans constituted 28.2% of average earning assets and 25.0% of average total
assets. For 1998, average commercial banking loans were $38.2 million, or 29.4%
of average earning assets and 26.7% of average total assets. The 22.5% 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
and Cherokee 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.
The following table sets forth a distribution of the assets, liabilities
and shareholders' equity for the periods indicated:
Distribution of Assets, Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
Year ended December 31, 1999 Year ended December 31, 1998
-------------------------------- -------------------------------
Daily Daily
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
------------ ------------ ---------- ------------ ----------- ----------
(In Thousands)
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $46,791 $4,911 10.50% $38,150 $4,153 10.89%
Mortgage loans held for sale 101,672 9,131 8.98% 85,641 8,352 9.75%
Securities, at cost 8,060 608 7.54% 3,024 193 6.38%
Federal funds sold 4,310 220 5.10% 2,557 140 5.48%
Deposit in other banks 4,945 272 5.50% 2,276 128 5.62%
Total interest-earning assets 165,778 15,142 9.13% 131,648 12,966 9.85%
------------------------------------------------------------------------
Other assets 21,782 11,455
</TABLE>
20
<PAGE>
<TABLE>
----------- ----------
<S> <C> <C>
Total assets $187,560 $143,103
=========== ==========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $20,728 $837 4.04% $14,587 $630 4.32%
Savings deposit 8,026 293 3.65% 5,441 199 3.66%
Time deposits 61,301 3,562 5.81% 45,603 2,825 6.19%
Mortgage warehouse line
of credit and other 51,841 3,585 6.92% 32,336 2,425 7.50%
------------ ------------ ---------- ----------- ----------- ----------
Total interest-bearing
Liabilities 141,896 8,277 5.83% 97,967 6,079 6.21%
Noninterest-bearing deposits 13,919 18,762
Other liabilities 16,907 14,446
------------
Shareholders' equity 14,838 11,928
-----------
Total liabilities &
shareholders' equity $187,560 $143,103
============ ===========
Net interest income $6,865 $6,887
============ ===========
Net yield on interest-earning
assets 4.14% 5.23%
========== ==========
</TABLE>
------------------------
(1) For the purpose of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
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 (4.80% as of December 31, 1999). All mortgage
production generated by CMS is funded through warehouse lines of credit from
Home Federal, priced at prime (8.50% at December 31, 1999) and PaineWebber,
price at LIBOR plus 80 basis points (7.837% at December 31, 1999). In December
1999, CMS closed a $35.0 warehouse line of credit with Colonial Bank, priced at
LIBOR plus 90 basis points. CMS began utilizing the Colonial Bank line of credit
in February 2000.
The following table shows the amount of loans outstanding as of December
31, 1999 which, based on remaining scheduled repayments of principal, are due in
the periods indicated. Also provided are the amounts due after one year,
classified according to the sensitivity to changes in interest rates. See Note 3
to the Financial Statements and Supplementary Data for a discussion of
concentrations of credit risk.
<TABLE>
<CAPTION>
LOANS MATURING
-----------------------------------------------------------------------
After One Year
Within One but Within
Year Five Years After Five Years Total
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial $5,466 $4,008 $0 $9,474
Real estate-construction 14,025 1,889 0 15,914
Other 8,298 18,777 1,614 28,689
--------------------------------------------------------------------
Total $27,789 $24,674 $1,614 $54,077
====================================================================
Loans maturing after one year with:
Fixed interest rates $19,599 $1,158
Variable interest rates 5,075 456
------------------------------------
$24,674 $1,614
====================================
</TABLE>
22
<PAGE>
The following table summarizes the Bank's non-accrual, past due and
restructured commercial banking loans:
December 31,
-------------------------
1999 1998
(In Thousands)
Non-accrual loans $ 30 $ 1
========= ========
Accruing loans past due
90 days or more $ 507 $ 457
========= ========
Restructured loans -- --
========= ========
The gross income on non-accrual commercial banking loans noted above that
would have been reported in the year ended December 31, 1999, if the loans had
been current in accordance with their original terms and had been outstanding
throughout the year, or since origination, was $981. The gross income on
non-accrual commercial banking loans noted above that would have been reported
in the year ended December 31, 1998, if the loans had been current in accordance
with their original terms and had been outstanding throughout the year, or since
origination, was $98.
23
<PAGE>
The following table summarizes activity in the allowance for commercial
banking loan losses for the dates indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
-------------------------------------
<S> <C> <C>
Balance, beginning of period $699,020 $514,634
Loans charged off:
Commercial -- (21,984)
Real estate-construction -- --
Real estate-mortgage -- --
Installment and other consumer (26,103) (10,184)
-------------------------------------
Total loans charged off (26,103) (32,168)
Recoveries:
Installment and other consumer 1,772 62,612
Commercial -- 942
-------------------------------------
Total loans recovered 1,772 63,554
Net loans recovered (charged off) (24,331) 31,386
Provision for loan losses 190,000 153,000
-------------------------------------
Balance, end of period $864,689 $699,020
=====================================
(Dollars in Thousands)
Loans outstanding at end of period,
excluding loans held for sale $54,077 $41,328
Ratio of allowance to loans
outstanding at end of period,
excluding loans held for sale 1.60% 1.69%
Average loans outstanding during
the period, excluding loans held
for sale $46,791 $38,753
Ratio of net charge offs during the
period to average loans outstanding 0.05% 0.08%
</TABLE>
24
<PAGE>
The allocation of the allowance for possible loan losses by loan category
at the dates indicated is presented below. The Bank does not maintain a reserve
with respect to mortgage loans held for sale due to the 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 percentages
represent banking loans in each category to total loans outstanding at the end
of each respective period.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
-------------------------------------------------------------------
Amt % Amt %
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $331 22.9% $253 15.9%
Real estate-mortgage (1) 146 38.5% 124 45.9%
Real estate-construction
and land development 165 51.6% 153 24.3%
Consumer 168 17.9% 120 13.9%
Unallocated 55 49
-------------------------------------------------------------------
$865 100.0% $699 100.0%
===================================================================
</TABLE>
-------------------------
(1) Includes any loans secured in whole or in part by real estate.
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 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.
25
<PAGE>
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 $864,689 or 1.60% of total commercial
banking loans at December 31, 1999, and $699,020 or 1.69% of total loans at
December 31, 1998. The increase in the allowance for loan losses from 1998 to
1999 was primarily the result of the provision for loan loss of $190,000 in
1999. The increase in the allowance for loan loss corresponds to the 30.8%
increase in the commercial banking loans in 1999. 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 December 31, 1999 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'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 December 31, 1999, the Bank had $507,531 of loans 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. As of
December 31, 1998, the Bank had $457,120 contractually past due more than 90
days, $772 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 $52,133 at December 31,
1999. This compares to non-performing assets of $264,021 at December 31,1998.
The 80% reduction of non-performing assets from 1998 to 1999 was the result of
the sale of foreclosed properties of $241,309. The Bank is currently holding the
foreclosed properties for sale.
26
<PAGE>
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 December 31, 1999, a 42%
decrease from December 31, 1998 when potential problem loans totaled $2.4
million. The decrease in potential problem loans was primarily the result of the
Bank being paid out from one creditor representing $1.2 million in potential
problem loans.
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------------------------------------
<S> <C> <C>
Non-performing loans (1) $30,193 $772
Foreclosed properties 21,940 263,249
------ -------
Total non-performing assets 52,133 264,021
====== =======
Loans 90 days or more past due on accrual status $507,532 $457,120
Potential problem loans (2) 1,399,926 2,445,317
Potential problem loans/total loans 2.59% 5.92%
Non-performing assets/total loans
and foreclosed properties 0.10% 0.63%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 1.03% 1.74%
</TABLE>
-------------------------
(1) Defined as non-accrual loans and renegotiated loans.
(2) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
The information on non-accrual and restructured loans in the above table is
presented in the same manner as management categorizes its loan portfolio is not
comparable with the information on impaired loans, as defined by SFAS no 114
"Accounting by Creditors for Impairment of a Loan", as disclosed in Note 3 of
the Financial Statements and Supplementary Data.
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 $11.9 million at December 31,
1999 compared to $4.8 million at December 31, 1998. Unrealized losses on
securities amounted to $1.5 million at December 31, 1999. 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 December 31, 1999 compared to $7,510,000 at December 31,
1998. The decrease in federal funds sold corresponded to the increase in
investment securities.
The following table sets forth the maturities of securities, held by the
Bank as of December 31, 1999 and the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security). Equity
27
<PAGE>
securities, consisting of shares held in the FHLB-Atlanta in the amount of
$624,500, and shares held in The Bankers Bank in the amount of $165,975,
collectively totaling approximately $790,475, are not presented in the table
below as they lack a contractual maturity. See Note 2 to the Financial
Statements and Supplementary Data, which provides details regarding the Bank's
investment portfolio as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------------
After One But After Five but
Within One Within Five Within Ten After Ten
Year Years Years Years
---------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond -- -- $345 4.45% -- -- -- --
U. S. government securities -- -- 2,492 6.84% $1,000 7.50% $8,622 7.39%
---------------------------------------------------------------------------------
Total -- -- $2,837 6.55% $1,000 7.50% $8,622 7.39%
=================================================================================
</TABLE>
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. 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, a $7.0 million
line of credit from Home Federal, 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.
28
<PAGE>
The following table presents the outstanding balances of the Company's
borrowings under its warehouse line of credits and the weighted average interest
rates thereon for the last two years. Draws on such line of credit have a 30-day
maturity.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
-------------------------------------------
<S> <C> <C>
Balance at period end $45,676,823 $74,756,311
Weighted average interest rate at period end 7.39% 7.23%
Maximum amount outstanding at any month's end $82,272,689 $74,756,311
Average amount outstanding $51,840,917 $32,266,747
Weighted average interest rate 6.75% 7.50%
</TABLE>
During 1999, the Mortgage Division acquired $1.9 billion of mortgage loans,
of which $1.8 billion were resold in the secondary market with servicing rights
retained by the Company. This was a slight decline of $0.1 billion from the
amount acquired in 1998. At December 31, 1999, $87.3 million of mortgage loans
were carried as mortgage loans held for sale on the balance sheet pending sale
of such loans, compared to $128.4 million at the end of 1998.
At December 31, 1999, $4.2 million of purchased mortgage servicing rights
were carried on the balance sheet. At December 31, 1998, the Company carried
$4.0 million of purchased mortgage servicing rights on its balance sheet. The
Company is amortizing the purchased mortgage servicing rights over an
accelerated period. At December 31, 1999, the Company held servicing rights with
respect to loans with unpaid principal balances totaling $420.8 million compared
to $486.0 at December 31, 1998. 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. During 1998, the Company sold
servicing rights with respect to $1.6 billion of mortgage loans carried on its
balance sheet at costs of $15.1 million for a gain of $10.2 million. The market
value of the servicing portfolio is contingent upon many factors, including,
without limitation, the interest rate environment and changes in such rates, the
estimated life of the servicing portfolio, the loan quality of the servicing
portfolio and the coupon rate of the loan portfolio. There can be no assurance
that the Company will continue to experience a market value of the servicing
portfolio in excess of the cost to acquire the servicing rights, nor can there
be any assurance as to the expected life of the servicing portfolio.
The Company had fixed assets, consisting of land, building and
improvements, and furniture and equipment of $6.0 million at December 31,1999
compared to fixed assets of $3.4 million at December 31, 1998. The increase in
fixed assets resulted primarily from the Towne Lake branch purchase of $1.7
million and the 5,000 square foot addition to its main office in Jasper, Georgia
which began in 1998 and was completed in 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.
The Bank's deposits totaled $110.3 million and $100.6 million at December
31, 1999 and 1998, respectively, an increase of 9.6%. Deposits averaged $94.5
million and $84.4 million during the years ended December 31, 1999 and 1998,
respectively. Interest-bearing deposits increased from 77% of total deposits at
December 31, 1998 to 82% of total deposits at December 31, 1999. The increase of
interest bearing deposits as a percent of total deposits was the result of
29
<PAGE>
growth in certificates of deposits, which reflects, in part, increases in
interest rates. Certificates of deposit composed 63% of total interest-bearing
deposits for December 31, 1999 compared to 70% at December 31, 1998. The
decrease of certificates of deposits as a percentage of total interest-bearing
deposits was the result of the $9.1 million or 43.7% increase in
interest-bearing demand deposits. 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.
The following table summarizes average daily balances of deposits and rates
paid on such deposits for the periods indicated:
<TABLE>
<CAPTION>
Years ended
December 31, 1999 December 31, 1998
-------------------------------------------------------------------
Amount Rate Amount Rate
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $13,919 -- $18,762 --
Interest-bearing
demand deposits 20,728 4.04% 14,587 4.32%
Savings deposits 8,026 3.65% 5,441 3.66%
Time deposits 51,841 5.81% 45,603 6.19%
--------------------- -----------------
Total $94,514 $84,393
===================== =================
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1999 are summarized as follows (in thousands):
Under 3 months $4,603
3 to 6 months 3,415
6 to 12 months 5,358
Over 12 months 4,166
-----------
$17,542
===========
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
30
<PAGE>
"Banking Department") to maintain a leverage ratio of 8.0%. At December 31, 1999
the Bank's leverage ratio was 9.91%.
At December 31, 1999 the Company's total shareholders' equity was $14.9
million or 8.46% of total assets, compared to $14.3 million or 7.20% of total
assets at December 31, 1998. The increase in shareholders' equity to total asset
ratio in 1999 was the result of a 12% decrease in total assets, primarily as a
result of decreased mortgage loan production in 1999, which was only partially
offset by increases in commercial banking loans. At December 31, 1999, total
capital to risk-adjusted assets was 13.62%, with 12.88% consisting of tangible
common shareholders' equity. The Company paid $400,473 of dividends during 1999
or $.23 per share compared to $273,267 or $.165 per share during 1998. A
quarterly dividend of $.07 was paid in February 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 (8.00%) 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.
The following table shows operating and capital ratios for each of the last
two years:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
----------------------------------------------
<S> <C> <C>
Percentage of net income to:
Average shareholders' equity 8.72% 25.88%
Average total assets 0.69% 2.16%
Percentage of average
shareholders' equity to
average total assets 7.91% 8.33%
Percentage of dividends paid
to net income 30.97% 8.85%
</TABLE>
During 1999, 30,800 shares of Common Stock were issued pursuant to employee
stock option exercises for an aggregate of $183,270. In addition, during 1999,
3,028 shares of restricted common shares were issued pursuant to the employment
agreement with Mr. Bob KenKnight. 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.
31
<PAGE>
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 $56.6 million and $52.2 million during 1999 and 1998, representing
55% and 62% of average deposits for those years, respectively. The decrease in
average liquid assets as a percentage of average deposits was the result of the
decrease in mortgage loans held for sale as well as the increase in fixed assets
in 1999. Average non-mortgage loans were 45% and 46% of average deposits for
1999 and 1998, respectively. Average deposits were 63% and 64% of average
interest-earning assets for 1999 and 1998, 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 $4.1 million. The Bank's
liquidity position has also been enhanced by the operations of the Mortgage
Division due to the investment of funds in short-term assets in the form of
mortgages held for sale. Once funded, mortgages will generally be held by the
Bank for a period of 10 to 30 days. Management believes its liquidity sources
are adequate to meet its operating needs.
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 and $6.2 million at December 31, 1998. 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 February
28, 2000, the Bank no longer held any brokered deposits.
32
<PAGE>
The following table shows the interest sensitivity gaps for four different
time intervals as of December 31, 1999.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of December 31, 1999
Amounts Repricing In
-------------------------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
-------------- -------------- ------------- ----------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Interest-earning
assets $111.8 $10.0 $21.6 $9.9
Interest-bearing
liabilities 89.8 27.1 16.7 2.3
-------------------------------------------------------------------
Interest sensitivity
gap $22.0 $(17.1) $4.9 $7.6
===================================================================
</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. The Company's net interest margin for 1999 was 4.20% compared to
5.23% for 1998. This is indicative of the historical low mortgage rates during
the first six months of 1999. At December 31, 1999, the Company was within its
policy guidelines of rate-sensitive assets to rate-sensitive liabilities of 80 -
140% at the one-year interval. Since all interest rates and yields do not adjust
at the same 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 $17.4
million, or 9.9% of total assets.
At December 31, 1999, the Company's commitments to purchase mortgage loans
(the "Pipeline") totaled approximately $254.4 million, down 50% from the $508
million a year earlier. Of the Pipeline, the Company had, as of December 31,
1999, approximately $62.2 million for which the Company had interest rate risk.
The remaining $192.2 million of mortgage loans are not subject to interest rate
risk. The mortgages not subject to interest rate risk are comprised of (i) loans
under contract to be placed with a private investor through a "best efforts"
agreement, whereby the investor purchases the loans from the Company at the
contractual loan rate, (ii) loans with floating interest rates which close at
the current market rate, and (iii) loans where the original fixed interest rate
commitment has expired and will be reprice at the current market rate.
The Mortgage Division has adopted a policy intended to reduce interest rate
risk incurred as a result of market movements between the time commitments to
purchase mortgage loans are made and the time the loans are closed. Accordingly,
commitments to purchase loans will be covered either by a mandatory sale of such
loans into the secondary market or by the purchase of an option to deliver to
the secondary market a mortgage-backed security. The mandatory sale commitment
is fulfilled with loans closed by the Company, through "pairing off" the
commitment, or purchasing loans through the secondary market. Under certain
condition the
33
<PAGE>
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
December 31, 1999, the Bank had in place purchase commitment agreements
terminating between January and March of 2000 with respect to an aggregate of
approximately $44 million to hedge the mortgage pipeline of $62 million for
which the Bank had an interest rate risk, compared to $127 million and $181
million, respectively, one year earlier.
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.
34
<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.
35
<PAGE>
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 experienced significant changes in interest rates and mortgage
production during 1999. The Company achieved record mortgage production with
interest rates at historical low levels in the first six months of 1999. The
Company recognized an increase in average interest-earning assets and
interest-bearing liabilities for the year as a result of the record mortgage
production in the first six months. Rates began increasing mid-second quarter
1999 resulting in an increase in rates on a 30-year mortgage of 162 basis points
during 1999. The Federal Reserve Open Market Committee moved interest rates on
three occasions in 1999 for a total of 75 basis points. As a result, mortgage
production in the third and fourth quarters totaled $677 million, a decrease of
$551 million or 45% from the first and second quarters 1999 production of $1.2
billion. With the increase in interest rates, the Company's net interest margin
was negatively effected during the latter six months due to the asset sensitive
structure of the Company's balance sheet.
The Company had interest income of $15.1 million in 1999, and $13.0 million
in 1998. The 16% increase in interest income is attributable to the increase in
average interest-earning assets which is the result of the higher volume of
average commercial banking loans and average mortgage loans held for sale offset
by a lower yield on interest-earning assets in 1999. Average interest-earning
assets totaled $165.8 million in 1999 compared to $131.6 million in 1998. The
yield on earning assets decreased from 9.85% in 1998 to 9.13% in 1999. The
decrease in the yield on earning assets from 1998 to 1999 was the result of the
historically low mortgage rates in the first six months of 1999. The Company had
closed $1.9 billion of mortgage loans during 1999 compared to $1.8 billion
during 1998.
The Company had interest expense of $8.3 million in 1999 and $6.1 million
in 1998. The increase resulted from a higher level of average other borrowings
as well as a higher volume of average interest-bearing deposits offset by a
lower rate paid on interest-bearing liabilities. Interest-bearing liabilities
averaged $141.9 million in 1999 compared to $97.9 million in 1998. The rates
paid on interest-bearing liabilities was 5.83% in 1999 and 6.21% in 1998,
although at year end 1999, the composite rate paid on interest-bearing
liabilities was 6.25%, reflecting generally increasing rates. In 1999 and 1998,
interest expense accounted for 30% and 26% of total expenses, respectively.
Net interest income for 1999 was $6.9 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 1999 was 4.14%. Interest spread, which represents the difference between
average yields on interest-earning assets and average
36
<PAGE>
rates paid on interest-bearing liabilities, was 3.30%. Net interest income,
interest margin and net interest spread in 1998 were $6.9 million, 5.23%, and
3.6%, respectively. The decrease in net interest margin and interest spread is
indicative of the historically low interest rates in the first six months of
1999 and the Company's having an asset sensitive gap ratio.
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rate:
<TABLE>
<CAPTION>
1999 compared to 1998 1998 compared to 1997
-----------------------------------------------------------------------
Increase (Decrease due to (1))
-----------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $907 $(148) $759 $613 $73 $686
Mortgage loans held for sale 1,438 (659) 779 4,471 68 4,539
Securities, at cost 380 35 415 58 (8) 50
Federal funds sold 90 (10) 80 49 (3) 46
Deposits in other banks 147 (2) 145 49 1 50
-----------------------------------------------------------------------
Total interest income $2,962 $(784) $2,178 $5,240 $131 $5,371
=======================================================================
Interest paid on:
Demand deposits $248 $(41) $207 $231 $17 $248
Savings deposits 95 (1) 94 12 6 18
Time deposits 911 (174) 737 717 (12) 705
Mortgage warehouse
line of credit and other 1,348 (188) 1,160 1,556 299 1,855
-----------------------------------------------------------------------
Total interest expense $2,602 $(404) $2,198 $2,516 $310 $2,826
=======================================================================
</TABLE>
------------------
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
The Bank made provisions for loan losses of $190,000 in 1999, and charged
off $26,103 of loans. The Bank made provisions for loan losses of $153,000 in
1998, and charged off $32,168 of loans. The ratios of net charge offs to average
non-mortgage loans outstanding during the year were 0.05% and 0.08% for 1999 and
1998, respectively.
Other income was $14.6 million in 1999 compared to $15.2 million in 1998.
The Company sold servicing rights with respect to $1.8 billion of mortgage loans
in 1999 for a total net gain of $9.8 million or a spread on the sale of
servicing of 0.54%. This compares to servicing rights sales in 1998 of $1.6
billion for a net gain of $10.2 million or a spread on the sale of servicing of
0.64%. The decrease in the spread on the sale of servicing rights is indicative
of the competitive pricing in the mortgage industry in the last six months of
1999. The Company's spread on the sale of purchased mortgage servicing rights
decreased from 60 basis points in the first and second quarters of 1999 to 36
basis points in the third and fourth quarters 1999, a 40% decline. The decrease
in the spread on the sale of purchased mortgage rights resulted primarily from
the decrease in mortgage production in the third and fourth quarters 1999
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 any gain will be recognized on such sales. Origination
fee income is generated from the sale of mortgage loans to securities brokers
pursuant a repurchase agreement. Under the agreement, the Company sells mortgage
37
<PAGE>
loans and simultaneously assigns the related forward sale commitments to a
securities broker. The Company continues to receive fee income from the
securities broker until the loan is delivered into the forward commitment.
Other operating expenses increased to $19.2 million in 1999 from $17.1
million in 1998. The Company had increased its labor and overhead in late 1998
and early 1999 in order to process the anticipated higher volume, 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 in the
third and fourth quarters 1999. 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. In total, the Company has reduced mortgage
personnel by 26 employees or a 21% reduction. In addition, the mortgage
operation began handling all post closing and quality control reviews in house.
These functions had previously been outsourced.
The Company had net income of $1.3 million in 1999, compared to $3.1
million in 1998. Net income was adversely effected primarily by the decline in
mortgage production and the reduced gain on the sale of mortgage servicing
rights in the last six months of 1999. Income tax as a percentage of pretax net
income was 36% for 1999 and 1998.
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 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.
The Year 2000 Issue and Year 2000 Readiness
-------------------------------------------
The Company did not experience any Year 2000 related problems with the
century date change period. The Company had budgeted and spent approximately
$103,000 in 1999 related to the Year 2000 issues. There remain six dates in
2000, which have been identified as potentially causing system problems. The
Company tested the dates during its testing phase of its Year 2000 plan and
anticipates no problems relating to the dates.
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates that have been
sorted as two digits rather than four (e.g., "99" for 1999). On January 1, 2000,
any clock or date recording mechanism, including
38
<PAGE>
date sensitive software, which uses only two digits to represent the year may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices or perform similar tasks.
The Company has assessed the Year 2000 with respect to the computer
software and hardware operating and data processing systems used by the Company,
the Bank and CMS to provide banking, loan servicing and other services to
customers and to process internal operations. As used in this section entitled
"The Year 2000 Issue," the term "Company" means the Company, the Bank and CMS,
collectively.
In 1997, the Company established a Year 2000 Project Team to address the
Year 2000 compliance and readiness for the Company's computerized systems. The
Year 2000 Project Team has developed a Year 2000 Compliance Plan that consists
of:
(i) the Analysis Phase, during which the Company's Year 2000 Compliance Teams
identify those computerized systems of the Company that have Year 2000
issues and then determines the steps necessary to ensure that such systems
become Year 2000 compliant in a timely manner;
(ii) the Remediation Phase, during which the Company's Year 2000 Compliance Team
modifies, or retires and replaces, as necessary, those computerized systems
of the Company that have a Year 2000 issue;
(iii) the Testing Phase, during which the Company's Year 2000 Compliance Team
performs testing procedures to ensure that the computerized systems of the
Company, including those that have been modified and those that have
replaced retired systems, will properly handle the Year 2000 date change;
and
(iv) the Compliance Phase, during which the Company's Year 2000 Compliance Team
re-assesses all of the computerized systems of the Company to ensure that
all such systems will properly handle the Year 2000 date change and to
develop procedures to regularly monitor the systems' Year 2000 compliance.
In addition to the foregoing, the Company is subject to (i) credit risks to
the event that the Company's borrowers fail to adequately address the Year 2000
issue, (ii) fiduciary risks to the extent that fiduciary assets fail to
adequately address the Year 2000 issues, and (iii) liquidity risks, to the
extent that the Company's customers are unable to complete banking transactions
or are unable to make loan payments in a timely manner due to Year 2000 issues.
The Company designates each of the statements made by it herein as a Year
2000 Readiness Disclosure. Such statements are made pursuant to the Year 2000
Information and Readiness Disclosure Act.
ITEM 7. FINANCIAL STATEMENTS
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
================================================================================
To the Board of Directors
Crescent Banking Company and Subsidiaries
Jasper, Georgia
We have audited the accompanying consolidated balance sheets of the
Crescent Banking Company and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Crescent Banking Company and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the 1999 and 1998
financial statements have been restated for an error in the method of
recognizing compensation expense related to stock options.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 25, 2000, except for Note 2 as to which the date is October 26, 2000
40
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
=================================================================================================================
Assets 1999 1998
------
-------------------- -----------------
<S> <C> <C>
Cash and due from banks $ 5,553,931 $ 4,382,047
Interest-bearing deposits in banks 193,151 733,183
Federal fund sold - 7,510,000
Securities available-for-sale 10,751,741 4,104,772
Securities held-to-maturity, at cost (fair value $1,000,000) 1,000,000 -
Mortgage loans held for sale 87,284,155 128,409,669
Loans 54,077,286 41,328,423
Less allowance for loan losses 864,689 699,020
------------------- -----------------
Loans, net 53,212,597 40,629,403
Purchased mortgage servicing rights 4,212,261 4,004,146
Accounts receivable-brokers and escrow agents 3,107,498 4,804,208
Premises and equipment 6,036,385 3,369,209
Other real estate owned 21,940 263,249
Cash surrender value of life insurance 2,101,068 -
Deposit intangible 704,210 -
Other assets 1,574,368 1,034,575
------------------- -----------------
Total assets $ 175,753,305 $ 199,244,461
=================== =================
Liabilities and Stockholders' Equity
-------------------------------------
Deposits
Noninterest-bearing demand $ 20,061,680 $ 23,361,371
Interest-bearing demand 29,983,190 20,857,970
Savings 3,301,304 1,861,355
Time, $100,000 and over 17,542,304 16,345,339
Other time 39,418,175 38,175,754
------------------- -----------------
Total deposits 110,306,653 100,601,789
Drafts payable 2,765,182 4,984,145
Other borrowings 45,676,823 74,756,311
Federal funds purchased 110,000 -
Deferred income taxes 805,711 1,354,645
Other liabilities 1,228,013 3,209,123
------------------- -----------------
Total liabilities 160,892,382 184,906,013
------------------- -----------------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, par value $1, 1,000,000 shares authorized,
no shares issued or outstanding
Common stock, par value $1; 10,000,000 shares authorized;
1,760,536 and 1,726,708 issued 1,760,536 1,726,708
Capital surplus 8,774,674 8,287,772
Retained earnings 5,260,457 4,367,744
Treasury stock, 6,668 shares (36,091) (36,091)
Accumulated other comprehensive loss (898,653) (7,685)
------------------- -----------------
Total stockholders' equity 14,860,923 14,338,448
------------------- -----------------
Total liabilities and stockholders' equity $ 175,753,305 $ 199,244,461
=================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
===============================================================================================================
1999 1998
----------------- -----------------
<S> <C> <C>
Interest income
Loans $ 4,911,841 $ 4,153,310
Mortgage loans held for sale 9,131,244 8,351,498
Taxable securities 592,841 177,779
Nontaxable securities 15,353 15,353
Deposits in banks 272,391 127,959
Federal funds sold 220,111 139,614
----------------- -----------------
Total interest income 15,143,781 12,965,513
----------------- -----------------
Interest expense
Deposits 4,692,273 3,653,994
Other borrowings 3,585,181 2,425,164
----------------- -----------------
Total interest expense 8,277,454 6,079,158
----------------- -----------------
Net interest income 6,866,327 6,886,355
Provision for loan losses 190,000 153,000
----------------- -----------------
Net interest income after provision for
loan losses 6,676,327 6,733,355
----------------- -----------------
Other income
Service charges on deposit accounts 298,879 222,684
Gestation fee income 2,529,586 2,123,569
Mortgage loan servicing fees 1,262,767 934,894
Gains on sales of purchased mortgage servicing rights 9,804,994 10,219,326
Gains on sales of mortgage loans held for sale 501,270 1,669,511
Net realized gains (losses) on sales of securities (2,527) 2,850
Other operating income 185,441 50,729
----------------- -----------------
Total other income 14,580,410 15,223,563
----------------- -----------------
Other expenses
Salaries and employee benefits 9,510,943 8,803,460
Equipment and occupancy expenses 1,936,297 1,230,088
Other operating expenses 7,796,570 7,095,945
----------------- -----------------
Total other expenses 19,243,810 17,129,493
----------------- -----------------
Income before income taxes 2,012,927 4,827,425
Income tax expense 719,741 1,740,461
----------------- -----------------
Net income $ 1,293,186 $ 3,086,964
================= =================
Basic earnings per common share $ 0.76 $ 1.85
================= =================
Diluted earnings per common share $ 0.71 $ 1.80
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Net income $ 1,293,186 $ 3,086,964
--------------- ----------------
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized holding losses arising during period, net of
tax (benefits) of $(594,990) and $(2,301), respectively (892,484) (3,231)
Reclassification adjustment for gains (losses) realized
in net income, net of tax (benefit) of $(1,011) and $1,140
respectively 1,516 (1,710)
--------------- ----------------
Other comprehensive loss (890,968) (4,941)
--------------- ----------------
Comprehensive income $ 402,218 $ 3,082,023
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
Common Stock Capital Retained
------------------------
Shares Par Value Surplus Earnings
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997, as previously reported 726,354 $ 726,354 $ 6,549,186 $ 1,693,113
Correction of prior period accounting
error (Note 2) - - 218,817 (139,066)
--------- ---------- ------------ -----------
Balance, December 31, 1997, as restated 726,354 726,354 6,768,003 1,554,047
Net income - - - 3,086,964
Issuance of common stock 135,000 135,000 2,004,762 -
Common stock split 862,754 862,754 (862,754) -
Cash dividends declared, $.165 per share - - - (273,267)
Increase in outstanding stock options - - 344,731 -
Exercise of stock options 2,600 2,600 33,030 -
Other comprehensive loss - - - -
--------- ---------- ------------ -----------
Balance, December 31, 1998 1,726,708 1,726,708 8,287,772 4,367,744
Net income - - - 1,293,186
Cash dividends declared, $.23 per share - - - (400,473)
Increase in outstanding stock options - - 262,721 -
Exercise of stock options 30,800 30,800 152,470 -
Restricted stock awards 3,028 3,028 48,340 -
Tax benefit from exercise of stock options - - 23,371 -
Other comprehensive loss - - - -
--------- ---------- ------------ -----------
Balance, December 31, 1999 1,760,536 $1,760,536 $ 8,774,674 $ 5,260,457
========= ========== ============ ===========
<CAPTION>
Accumulated
Other Total
Treasury Stock Comprehensive Stockholders'
-----------------------
Shares Cost Loss Equity
------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997, as previously reported 3,334 $ (36,091) $ (2,744) $ 8,929,818
Correction of prior period accounting
error (Note 2) - - - 79,751
-------- --------- ------------- -------------
Balance, December 31, 1997, as restated 3,334 (36,091) (2,744) 9,009,569
Net income - - - 3,086,964
Issuance of common stock - - - 2,139,762
Common stock split 3,334 - - -
Cash dividends declared, $.165 per share - - - (273,267)
Increase in outstanding stock options - - - 344,731
Exercise of stock options - - - 35,630
Other comprehensive loss - - (4,941) (4,941)
-------- --------- ------------- -------------
Balance, December 31, 1998 6,668 (36,091) (7,685) 14,338,448
Net income - - - 1,293,186
Cash dividends declared, $.23 per share - - - (400,473)
Increase in outstanding stock options - - - 262,721
Exercise of stock options - - - 183,270
Restricted stock awards - - - 51,368
Tax benefit from exercise of stock options - - - 23,371
Other comprehensive loss - - (890,968) (890,968)
-------- --------- ------------- -------------
Balance, December 31, 1999 6,668 $ (36,091) $ (898,653) $ 14,860,923
======== ========= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,293,186 $ 3,086,964
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discount on securities (434,888) (120,968)
Depreciation 808,579 475,814
Amortization of purchased mortgage servicing rights 967,172 1,216,200
Amortization of deposit intangible 37,064 -
Provision for loan losses 190,000 153,000
Increase in outstanding stock options 262,721 344,731
Loss on sale of other real estate owned 6,417 3,333
Income on life insurance policies (49,068) -
Deferred income taxes (97,991) (94,368)
(Gain) loss on sale of securities available-for-sale 2,527 (2,850)
Gains on sales of purchased mortgage servicing rights (9,804,994) (10,219,326)
Restricted stock awards 45,079 6,289
Net (increase) decrease in mortgage loans held for sale 41,125,514 (79,010,798)
(Increase) decrease in accounts receivable -
brokers and escrow agents 1,696,710 (1,508,746)
Increase (decrease) in drafts payable (2,218,963) 1,820,796
(Increase) decrease in interest receivable 109,829 (350,886)
Increase (decrease) in interest payable (135,831) 98,822
Other operating activities (2,351,458) 2,136,869
------------------ -----------------
Net cash provided by (used in) operating activities 31,451,605 (81,965,124)
------------------ -----------------
INVESTING ACTIVITIES
Purchase of securities available-for-sale (9,520,805) (1,706,364)
Proceeds from sales of securities available-for-sale 1,321,250 501,094
Proceeds from maturities of securities available-for-sale 500,000 -
Purchase of securities held-to-maturity (1,000,000) -
Net (increase) decrease in Federal funds sold 7,510,000 (6,200,000)
Net decrease in interest-bearing deposits
in banks 540,032 347,286
Net increase in loans (12,860,192) (4,911,493)
Proceeds from sale of other real estate owned 321,890 149,989
Purchase of premises and equipment (1,824,016) (1,565,629)
Acquisition of purchased mortgage servicing rights (22,374,576) (16,142,685)
Proceeds from sales of purchased mortgage
servicing rights 31,004,283 25,285,228
Purchase of life insurance policies (2,052,000) -
------------------ -----------------
Net cash used in investing activities (8,434,134) (4,242,574)
------------------ -----------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (2,960,056) 24,920,905
Net increase (decrease) in other borrowings (29,079,488) 60,447,661
Net increase in Federal funds purchased 110,000 -
Dividends paid (400,473) (273,267)
Net proceeds from sale of common stock - 2,139,762
Proceeds from exercise of stock options 183,270 35,630
Net cash received in branch acquisition 10,301,160 -
------------------ -----------------
Net cash provided by (used in) financing activities (21,845,587) 87,270,691
------------------ -----------------
</TABLE>
45
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net increase in cash and due from banks $ 1,171,884 $ 1,062,993
Cash and due from banks at beginning of year 4,382,047 3,319,054
----------------- -----------------
Cash and due from banks at end of year $ 5,553,931 $ 4,382,047
================= =================
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 8,413,285 $ 5,980,336
Income taxes $ 1,691,701 $ 1,347,197
NONCASH TRANSACTIONS
Unrealized losses on securities available-for-sale $ 1,484,947 $ 8,382
Principal balances of loans transferred to other real estate $ 86,998 $ 264,662
BRANCH ACQUISITION
Premises and equipment $ (1,651,739) $ -
Other assets (5,864) -
Deposit intangible (741,274) -
Deposits 12,664,920 -
Other liabilities 35,117 -
----------------- -----------------
Net cash received $ 10,301,160 $ -
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Crescent Banking Company (the "Company") provides a full range of
banking services to individual and corporate customers through its
subsidiary, Crescent Bank and Trust Company (the "Bank") in Jasper,
Pickens County, Georgia and the surrounding areas. The Bank also
provides mortgage loan origination and servicing to customers
throughout the southeastern United States. The Company also offers
mortgage banking services through its subsidiary, Crescent Mortgage
Services, Inc. ("CMS"). CMS, located in Atlanta, Georgia,
Manchester, New Hampshire, and Chicago, Illinois provides mortgage
loan servicing to customers throughout the southeastern,
northeastern, and midwestern United States.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of
purchased mortgage servicing rights, the valuation of foreclosed
real estate, and deferred tax assets.
Cash and Due from Banks
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention on the
date of purchase. Securities which management has the intent and
ability to hold to maturity are classified as held-to-maturity and
recorded at amortized cost. All other debt securities are classified
as available-for-sale and recorded at fair value with net unrealized
gains and losses reported in other comprehensive income, net of tax.
Equity securities without a readily determinable fair value are
classified as available-for-sale and are recorded at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sales of securities are
determined using the specific identification method.
Mortgage Loans Held for Sale
The Company originates first mortgage loans with the intention to
sell the loans in the secondary market and are carried at the lower
of cost or fair value. Interest collected on these loans during the
period they are held in inventory is included in interest income.
Income from the sale of these loans is recognized at the time of
sale and is determined by the difference between net sales proceeds
and the book value of the loans.
Loans
Loans are reported at their outstanding principal balances less the
allowance for loan losses. Interest income on loans is accrued based
on the principal balance outstanding.
Loan origination fees and certain direct costs of loans are
recognized at the time the loan is recorded. Because net loan
origination fees and costs are not material, the results of
operations are not materially different than the results which would
be obtained by accounting for loan fees and costs in accordance with
generally accepted accounting principles.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan is confirmed.
Subsequent recoveries are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth, composition of the loan
portfolio, and other risks inherent in the portfolio. This
evaluation is inherently subjective as it requires material
estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on
impaired loans. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses, and may require the Company to record
additions to the allowance based on their judgment about information
available to them at the time of their examinations.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Individually identified
impaired loans are measured based on the present value of payments
expected to be received, using the contractual loan rate as the
discount rate. Alternatively, measurement may be based on observable
market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value
of the collateral. If the recorded investment in the impaired loan
exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the
provision for loan losses.
Purchased Mortgage Servicing Rights
Purchased mortgage servicing rights represent the cost of acquiring
the rights to service mortgage loans. Those rights are being
amortized in proportion to, and over the period of, estimated future
net servicing income. Gains related to the sales of purchased
mortgage servicing rights represent the difference between the sales
proceeds and the related capitalized purchased mortgage servicing
rights.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable-Brokers and Escrow Agents
Accounts receivable-brokers and escrow agents represent amounts due
from mortgage loan servicers in settlement of mortgage loan
servicing fees and mortgage loan servicing rights sold. These are
noninterest-bearing receivables and are generally collected within
thirty days.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the
assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair
value at the time of transfer to other real estate owned is charged
to the allowance for loan losses. Subsequent gains or losses on sale
and any subsequent adjustment to the value are recorded as other
expenses.
Drafts Payable
Drafts payable represent the amount of mortgage loans held for sale
that have been closed by the Company, but for which the cash has not
yet been disbursed. The Company disburses the cash funds when the
loan proceeds checks are presented for payment.
Gestation Fee Income
The Company uses gestation repurchase agreements to facilitate the
sales of mortgage loans to security brokers. Gestation fee income,
which is recognized as earned, represents the spread between the
gestation fee (which is based on the loan's coupon rate) received on
the mortgage loan and the fee charged by the security broker during
the gestation period.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Fees and Expenses
Mortgage servicing fees are based on a contractual percentage of the
unpaid principal balance of the loans serviced and are recorded as
income when received. Mortgage servicing costs are charged to
expense when incurred.
Income Taxes
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be
realized. A valuation allowance would be recorded for those deferred
tax items for which it is more likely than not that realization
would not occur.
The Company and its subsidiaries file a consolidated income tax
return. Each entity provides for income taxes based on its
contribution to income taxes (benefits) of the consolidated group.
Derivatives
The Company incurs interest rate risk as a result of market
movements between the time commitments to purchase mortgage loans
are made and the time the loans are closed. Accordingly, commitments
to purchase loans will be covered either by a mandatory sale into
the secondary market or by the purchase of an option to deliver to
the secondary market a mortgage-backed security. The mandatory sale
commitment is fulfilled with loans closed by the Company or through
"pairing off" the commitment. Under certain conditions the Company
achieves best execution by pairing off the commitment to sell closed
loans and fulfilling that commitment with loans purchased by the
Company through a 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 decreases or increases, as appropriate, the cost basis
of the servicing portfolio.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share
Basic earnings per common share are computed by dividing net income
by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share are computed by dividing net
income by the sum of the weighted-average number of shares of common
stock outstanding and potential common shares. Potential common
shares consist of stock options. In 1998, the Company declared a
one-for-one common stock split. Earnings and dividends per common
share, weighted-average shares outstanding, and related stock
information have been restated to reflect the common stock split.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130
("Reporting Comprehensive Income") describes comprehensive income as
the total of all components of comprehensive income, including net
income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles
are included in comprehensive income but excluded from net income.
Currently, the Company's other comprehensive income consists of
unrealized gains and losses on available-for-sale securities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either 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. As of December 31,
1999, unrealized gains, net of tax, associated with the Company's
$44 million of mandatory future commitments that would be reported
in other comprehensive income under SFAS No. 133 was approximately
$120,000.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
There are no other recent accounting pronouncements that have had,
or are expected to have, a material effect on the Company's
financial statements.
NOTE 2. PRIOR PERIOD ADJUSTMENT
The Company's financial statements have been restated for the
correction of an error to properly account for stock option awards in
accordance with EITF 87-6 B ("Stock Option Plan with Tax-Offset Cash
Bonus") and APB Opinion No. 25 ("Accounting for Stock Issued to
Employees"). The effect of this restatement for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance Sheet
Retained earnings $ 5,777,722 $ 5,260,457 $ 4,721,440 $ 4,367,744
Capital surplus 8,091,441 8,774,674 7,724,224 8,287,772
Total stockholders' equity 14,694,955 14,860,923 14,128,956 14,338,448
Statements of Income
Net income 1,456,755 1,293,186 3,301,594 3,086,964
Basic earnings per
common share 0.85 0.76 1.98 1.85
Diluted earnings per
common share 0.80 0.71 1.92 1.80
</TABLE>
Retained earnings as of December 31, 1997 has been decreased by
$139,066 with a net increase of $79,751 in total stockholders' equity
for the effects of the restatement of prior years.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
December 31, 1999:
U.S. Government and
agency securities $ 11,114,021 $ - $ (1,498,038) $ 9,615,983
State and municipal securities 345,000 283 - 345,283
Equity securities 790,475 - - 790,475
---------------- --------------- ---------------- ----------------
$ 12,249,496 $ 283 $ (1,498,038) $ 10,751,741
================ =============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and
agency securities $ 2,656,605 $ 28,634 $ (52,190) $ 2,633,049
State and municipal securities 345,000 10,748 - 355,748
Equity securities 1,115,975 - - 1,115,975
---------------- --------------- ---------------- ----------------
$ 4,117,580 $ 39,382 $ (52,190) $ 4,104,772
================ =============== ================ ================
Securities Held-to-Maturity
December 31, 1999:
U.S. Government and
agency securities $ 1,000,000 $ - $ - $ 1,000,000
================ =============== ================ ================
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1999 by contractual maturity are shown below.
<TABLE>
<CAPTION>
Securities Available-for-Sale Securities Held-to-Maturity
------------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due from one year to five years $ 2,837,421 $ 2,814,701 $ - $ -
Due from five years to ten years - - 1,000,000 1,000,000
Due after ten years 8,621,600 7,146,565 - -
Equity securities 790,475 790,475 - -
---------------- ---------------- ---------------- ----------------
$ 12,249,496 $ 10,751,741 $ 1,000,000 $ 1,000,000
================ ================ ================ ================
</TABLE>
Securities with a carrying value of $2,833,959 and $1,558,338 at
December 31, 1999 and 1998, respectively, were pledged to secure
public deposits and for other purposes.
Gross gains and losses on sales of securities available-for-sale
consist of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Gross gains $ - $ 2,850
Gross losses (2,527) -
--------------- ---------------
Net realized gains (losses) $ (2,527) $ 2,850
=============== ===============
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Commercial $ 9,474,000 $ 6,585,000
Real estate - construction and land development 15,914,000 10,027,000
Real estate - mortgage 21,311,000 18,942,000
Consumer instalment and other 7,378,286 5,774,423
----------------- -----------------
54,077,286 41,328,423
Allowance for loan losses (864,689) (699,020)
----------------- -----------------
Loans, net $ 53,212,597 $ 40,629,403
================= =================
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Balance, beginning of year $ 699,020 $ 514,634
Provision for loan losses 190,000 153,000
Loans charged off (26,103) (32,168)
Recoveries of loans previously charged off 1,772 63,554
----------------- -----------------
Balance, end of year $ 864,689 $ 699,020
================= =================
</TABLE>
The total recorded investment in impaired loans was $36,316 and $772
at December 31, 1999 and 1998, respectively. There were no loans that
had related allowances for loan losses determined in accordance with
SFAS No. 114 ("Accounting by Creditors for Impairment of a Loan") at
December 31, 1999 and 1998, respectively. The average recorded
investment in impaired loans for 1999 and 1998 was $38,258 and
$34,486, respectively. Interest income on impaired loans recognized
for cash payments received was not material for the years ended 1999
and 1998, respectively.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Company has granted loans to certain directors, executive
officers, and their related entities. The interest rates on these
loans were substantially the same as rates prevailing at the time of
the transaction and repayment terms are customary for the type of loan
involved. Changes in related party loans for the year ended December
31, 1999 are as follows:
Balance, beginning of year $ 1,857,170
Advances 2,210,519
Repayments (1,117,499)
-----------------
Balance, end of year $ 2,950,190
=================
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Land $ 687,726 $ 263,978
Buildings and improvements 3,346,498 1,209,219
Equipment 4,311,990 3,297,762
Construction in progress - 99,500
----------------- -----------------
8,346,214 4,870,459
Accumulated depreciation (2,309,829) (1,501,250)
----------------- -----------------
$ 6,036,385 $ 3,369,209
================= =================
</TABLE>
NOTE 6. DEPOSIT INTANGIBLE
In 1999, the Company acquired certain assets and all deposits of
another financial institution's branch operations in Woodstock,
Georgia. The premium paid for the deposits is reported in the balance
sheet, net of amortization as a deposit intangible. The deposit
intangible is being amortized over a period of ten years. The balance
at December 31, 1999 was $704,210. The amount amortized for the year
ended December 31, 1999 was $37,064.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. DEPOSITS
The scheduled maturities of time deposits at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 42,081,381
2001 5,489,032
2002 3,326,574
2003 4,842,201
2004 1,221,291
------------------
$ 56,960,479
==================
</TABLE>
At December 31, 1999 and 1998, brokered deposits amounted to
$1,386,000 and $6,216,000, respectively, and are included in time
deposits as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Time, $100,000 and over $ 100,000 $ 900,000
Other time 1,286,000 5,316,000
--------------- ---------------
$ 1,386,000 $ 6,216,000
=============== ===============
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
$75,000,000 line of credit with interest at the one $ 34,176,823 $ 73,807,415
month LIBOR plus .80% (7.8367% at December 31, 1999)
due on demand, collateralized by first mortgage loans.
$26,500,000 line of credit with interest at the Federal 7,000,000 -
Home Loan Daily Rate Credit plus .25% (4.80% at December
31, 1999), due between January 24 and 31, 2000,
collateralized by first mortgage loans.
Note payable from correspondent bank with interest 4,500,000 -
at prime minus .50% (8.00% at December 31, 1999), due in
ten equal annual instalments of $450,000, collateralized
by the common stock of the Bank.
$7,000,000 line of credit with interest at prime (8.50% - 948,896
at December 31, 1998) due May 1, 1999, collateralized
by first mortgage loans.
---------------- ----------------
$ 45,676,823 $ 74,756,311
================ ================
</TABLE>
The advance from correspondent bank has various covenants related to
capital adequacy, allowance for loan losses and profitability of the
Company and its subsidiaries. As of December 31, 1999, the Company
was in compliance with all covenants.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. LEASES
The Bank leases certain of its branch facilities under various
noncancelable operating leases. The initial terms range from one to
seven years.
Crescent Mortgage leases its facilities under various noncancelable
operating leases. The initial lease terms range from three to five
years.
Rental expense under all operating leases amounted to $506,491 and
$334,896 for the years ended December 31, 1999 and 1998, respectively.
Future minimum lease payments on noncancelable operating leases are
summarized as follows:
2000 $ 366,221
2001 380,207
2002 390,862
2003 195,204
2004 41,069
----------------
$ 1,373,563
================
NOTE 10. DEFERRED COMPENSATION PLAN
In 1999, the Company adopted a deferred compensation plan providing
for death and retirement benefits for its directors and executive
officers. The estimated amounts to be paid under the compensation
plan have been funded through the purchase of life insurance policies
on the directors and executive officers. The balance of the policy
cash surrender values included in the balance sheet at December 31,
1999 is $2,101,068. Income recognized on the policies amounted to
$49,068 for the year ended December 31, 1999. The balance of the
deferred compensation included in other liabilities at December 31,
1999 is $16,350. Expense recognized for deferred compensation
amounted to $16,350 for the year ended December 31, 1999.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. STOCK OPTIONS
The Company has a non-qualified stock option plan for key employees
(the "employee plan") and has reserved 78,932 shares of common stock.
Under the terms of the employee plan, cash awards may be paid to
option holders which are designed to compensate the employee for the
difference in the tax treatment between non-qualified options and
incentive stock options. Options under the employee plan are granted
at the estimated fair market value at the date of grant. The Company
also has a non-qualified stock option plan for directors (the
"director plan") and has reserved 88,400 shares of common stock.
Options granted in 1998 under the director plan were granted at 105%
of the estimated fair market value. Options granted in 1999 under the
director plan were granted at $8 per share. All options under these
plans expire ten years from the date of grant. At December 31, 1999,
6,332 and 14,800 options were available to grant under the employee
and director plans, respectively. Other pertinent information related
to the options follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1999 1998
---------------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
----------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Under option, beginning of year 159,200 $ 7.79 115,200 $ 6.48
Granted at market price 13,000 12.46 - -
Granted at below market price 4,800 8.00 - -
Granted at above market price - - 48,000 11.02
Exercised (30,800) 5.95 (4,000) 8.91
----------- -----------
Under option, end of year 146,200 8.60 159,200 7.79
=========== ===========
Exercisable, end of year 117,867 8.44 134,533 8.01
=========== ===========
Weighted-average fair value of
options granted during the year $ 2.48 $ 3.75
=========== ===========
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Remaining
Range of Exercise Contractual
Number Prices Price Life
---------- ------------------- ----------------- -------------
<S> <C> <C> <C> <C>
Under option, end of year 59,600 $ 5.00 - 6.88 $ 6.27 5
73,600 8.00 - 11.02 9.81 8
13,000 12.25 - 15.00 12.46 10
----------
146,200 7
==========
Options exercisable, end of year 44,267 5.00 - 6.88 6.16 3
73,600 8.00 - 11.02 9.81 8
----------
117,867 6
==========
</TABLE>
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company recognizes compensation cost for stock-
based employee compensation awards in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees". The Company has
recognized $214,721 and $344,731 of compensation cost under the
employee plan for the years ended December 31, 1999 and 1998,
respectively. The Company has recognized $48,000 and $ - - of
compensation cost under the director plan for the years ended December
31, 1999 and 1998, respectively. If the Company had recognized
compensation cost in accordance with SFAS No. 123, net income and
earnings per share would have changed as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------------
Basic Diluted
Earnings Earnings
Net Income Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 1,293,186 $ 0.76 $ 0.71
Excess of expense recognized under APB
No. 25 compared to SFAS No. 123 145,950 0.08 0.08
--------------- --------------- ----------------
As adjusted $ 1,439,136 $ 0.84 $ 0.79
=============== =============== ================
</TABLE>
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------
Basic Diluted
Earnings Earnings
Net Income Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 3,086,964 $ 1.85 $ 1.80
Excess of expense recognized under APB
No. 25 compared to SFAS No. 123 87,152 0.06 0.05
--------------- --------------- ----------------
As adjusted $ 3,174,116 $ 1.91 $ 1.85
=============== =============== ================
</TABLE>
The fair value of the options granted during the years were based upon
the discounted value of future cash flows of the options using the
following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Risk-free rate 6.43% 5.12%
Expected life of the options 5 Years 5 Years
Expected dividends (as a percent of the fair value
of the stock) 1.28% 1.36%
Volatility 9.84% 34.14%
</TABLE>
The Company also has restricted stock plans for two of its key
employees. The employees annually may earn shares of stock based on
certain performance goals of the Company's mortgage operations. The
stock grants vest ratably over a five year period after one year from
the date of grant. At December 31, 1999, 30,840 shares of stock had
been awarded under these plans, of which 3,028 have vested. Expense
incurred under these plans amounted to $45,079 and $6,289 for the
years ended December 31, 1999 and 1998, respectively.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Current $ 817,732 $ 1,909,360
Deferred (97,991) (94,368)
Benefit of net operating loss carryforward - (74,531)
----------------- -----------------
Income tax expense $ 719,741 $ 1,740,461
================= =================
</TABLE>
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
Amount Percent Amount Percent
--------------- ------------ --------------- ---------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $ 684,395 34 % $ 1,641,325 34 %
State income tax 16,473 1 79,574 1
Other items, net 18,873 1 19,562 1
--------------- ------------ --------------- ---------
Income tax expense $ 719,741 36 % $ 1,740,461 36 %
=============== ============ =============== =========
</TABLE>
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 260,227 $ 188,529
Accrual to cash adjustment for income tax reporting
purposes - 12,461
Stock options 128,228 172,112
Securities available-for-sale 599,102 5,123
Deferred compensation 6,170 -
----------------- -----------------
993,727 378,225
----------------- -----------------
Deferred tax liabilities:
Purchased mortgage servicing rights 1,589,103 1,510,999
Depreciation 201,909 209,054
Other 8,426 12,817
----------------- -----------------
1,799,438 1,732,870
----------------- -----------------
Net deferred tax liabilities $ (805,711) $ (1,354,645)
================= =================
</TABLE>
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income and weighted-average
shares outstanding used in determining basic and diluted earnings per
common share (EPS):
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------
Net Weighted- Per share
Income Average Shares Amount
--------------- ------------------ ----------------
<S> <C> <C> <C>
Basic EPS $ 1,293,186 1,712,357 $ 0.76
================
Effect of Dilutive Securities
Stock options - 102,171
--------------- ------------------
Diluted EPS $ 1,293,186 1,814,528 $ 0.71
=============== ================== ================
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
Net Weighted- Per share
Income Average Shares Amount
--------------- ------------------ ----------------
<S> <C> <C> <C>
Basic EPS $ 3,086,964 1,665,957 $ 1.85
================
Effect of Dilutive Securities
Stock options - 53,691
--------------- ------------------
Diluted EPS $ 3,086,964 1,719,648 $ 1.80
=============== ================== ================
</TABLE>
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14. MORTGAGE LOAN SERVICING
Mortgage loans serviced for others are not reflected in the financial
statements. The Company is obligated to service the unpaid principal
balances of these loans, which approximated $421 million as of
December 31, 1999. The Company pays a third party subcontractor to
perform servicing and escrow functions with respect to loans sold with
retained servicing. During 1999, substantially all of the Company's
mortgage lending and servicing activity was concentrated within the
southeastern, northeastern, and midwestern United States. Also, the
servicing portfolio was comprised principally of mortgage loans
serviced on behalf of the Federal Home Loan Mortgage Corporation.
At December 31, 1999, the Company had errors and omissions and
fidelity bond insurance coverage in force of $2,000,000.
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
financial instruments with off-balance-sheet risk which are not
reflected in the financial statements. These financial instruments
include commitments to extend credit, standby letters of credit,
mortgage loans in process of origination (the pipeline), mandatory and
optional forward commitments, and other hedging instruments. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same
credit and collateral policies for these off-balance-sheet financial
instruments as it does for on-balance-sheet financial instruments. A
summary of these commitments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Commitments to extend credit $ 11,428,000 $ 9,287,000
Standby letters of credit 691,550 563,783
---------------- ---------------
$ 12,119,550 $ 9,850,783
================ ===============
</TABLE>
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending
loans to customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation of the customer. Collateral
held varies but may include real estate and improvements, marketable
securities, accounts receivable, inventory, equipment and personal
property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to
customers. Collateral held varies as specified above and is required
in instances which the Company deems necessary.
In addition to the mortgage loans held for sale on the balance sheet,
the Company's mortgage loan pipeline at December 31, 1999 totaled
approximately $254 million. The Company's exposure to credit loss in
the event of nonperformance by another party to the mortgage is
represented by the principal balance of loans for which the Company
has offered to extend credit. The pipeline consists of approximately
$62 million in mortgage loans for which the Company has interest rate
risk. The remaining $192 million of mortgage loans are not subject to
interest rate risk. The mortgages not subject to interest rate risk
are comprised of (1) loans under contract to be placed with a private
investor through a "best efforts" agreement, whereby the investor
purchases the loans from the Company at the contractual loan rate, (2)
loans with floating interest rates which close at the current market
rate, and (3) loans where the original fixed interest rate commitment
has expired and will reprice at the current market rate. The Company
funds approximately fifty percent of its mortgage pipeline every
month. At December 31, 1999, the Company had the ability to sell up to
$120 million in mortgage loans to security brokers without recourse
under gestation repurchase agreements. Under these agreements, the
Company sells mortgage loans and simultaneously assigns the related
forward sale commitments to the security broker. The Company continues
to receive fee income from the security broker until the loan is
delivered into the forward commitment.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
At December 31, 1999, the Company had approximately $44 million of
mandatory commitments for the mortgage pipeline. In addition, the
Company had mandatory commitments for all mortgage loans held for sale
at December 31, 1999.
The Company does not anticipate any material losses as a result of the
commitments and contingent liabilities.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material effect on
the Company's financial statements.
Employment contracts
At December 31, 1999, the Company was obligated under an
employment agreement with one of its key officers. The employment
agreement includes provisions for severance pay that would be
paid if certain events occur, including but not limited to, the
termination of the employee due to a change in control of the
Company. The maximum amount the Company would be obligated to pay
under this agreement is approximately $276,000.
NOTE 16. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Pickens County and surrounding areas as well as
mortgage loans in the southeastern, northeastern, and midwestern
United States. The ability of the majority of the Company's customers
to honor their contractual loan obligations is dependent on the
economy in these areas.
Sixty-nine percent of the Company's loan portfolio is concentrated in
loans secured by real estate of which a substantial portion is secured
by real estate in the Company's primary market area. In addition, a
substantial portion of the other real estate owned is located in those
same markets. Accordingly, the ultimate collectibility of the loan
portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in the Company's
primary market area. The other significant concentrations of credit by
type of loan are set forth in Note 3.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 16. CONCENTRATIONS OF CREDIT (Continued)
The Company, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of 25%
of statutory capital, or approximately $3,066,000.
NOTE 17. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December
31, 1999, approximately $766,000 of retained earnings were available
for dividend declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of December
31, 1999, the Company and the Bank met all capital adequacy
requirements to which they are subject.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 17. REGULATORY MATTERS (Continued)
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's
category.
The Company and Bank's actual capital amounts and ratios are presented
in the following table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- -------------- -------- -------------- -------
As of December 31, 1999: (Dollars in Thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets:
Company $ 15,921 13.62% $ 9,349 8% $ N/A N/A
Bank $ 14,033 14.80% $ 7,584 8% $ 9,480 10%
Tier I Capital to Risk
Weighted Assets:
Company $ 15,056 12.88% $ 4,675 4% $ N/A N/A
Bank $ 13,168 13.89% $ 3,792 4% $ 5,688 6%
Tier I Capital to Average
Assets:
Company $ 15,056 9.10% $ 6,620 4% $ N/A N/A
Bank $ 13,168 9.91% $ 5,318 4% $ 6,647 5%
</TABLE>
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 17. REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------------------- -------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- --------- --------------- -------- -------------- -------
As of December 31, 1998: Dollars in Thousands
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets:
Company $ 14,836 12.35% $ 9,615 8% $ N/A N/A
Bank $ 10,216 12.76% $ 6,408 8% $ 8,010 10%
Tier I Capital to Risk
Weighted Assets:
Company $ 14,137 11.76% $ 4,808 4% $ N/A N/A
Bank $ 9,517 11.88% $ 3,204 4% $ 4,806 6%
Tier I Capital to Average
Assets:
Company $ 14,137 7.25% $ 7,800 4% $ N/A N/A
Bank $ 9,517 7.74% $ 4,921 4% $ 6,151 5%
</TABLE>
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models are
significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1999
and 1998. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash, Due From Banks, Interest-Bearing Deposits in Banks, and Federal
Funds Sold:
The carrying amounts of cash, due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
values.
Securities
Fair values for securities are based on available quoted market
prices. The carrying amount of equity securities with no readily
determinable fair value approximate their fair values.
Loans:
For mortgage loans held for sale and variable-rate loans that
reprice frequently and have no significant change in credit risk,
carrying amounts approximate fair values. For other loans, the fair
values are estimated using discounted cash flow models, using
current market interest rates offered for loans with similar terms
to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow models or based on
the fair value of the underlying collateral.
Purchased Mortgage Servicing Rights:
Fair values for purchased mortgage servicing rights are based upon
independent appraisal.
Accounts Receivable - Brokers and Escrow Agents:
The carrying amount of accounts receivable - brokers and escrow
agents approximates its fair value.
Deposits and Drafts Payable:
The carrying amounts of demand deposits, savings deposits,
variable-rate certificates of deposit and drafts payable
approximate their fair values. Fair values for fixed-rate
certificates of deposit are estimated using discounted cash flow
models, using current market interest rates offered on certificates
with similar remaining maturities.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Other Borrowings and Federal Funds Purchased:
The carrying amount of other borrowings and Federal funds purchased
approximates their fair value.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair
values.
Off-Balance Sheet Instruments:
The fair values of the Company's off-balance sheet financial
instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit and standby
letters of credit do not represent a significant value to the
Company until such commitments are funded. The Company has
determined that these instruments do not have a distinguishable fair
value and no fair value has been assigned.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits in
banks and Federal funds sold $ 5,747,082 $ 5,747,082 $ 12,625,230 $ 12,625,230
Securities available-for-sale 10,751,741 10,751,741 4,104,772 4,104,772
Securities held-to-maturity 1,000,000 1,000,000 - -
Mortgage loans held for sale 87,284,155 87,284,155 128,409,669 128,409,669
Loans 53,212,597 53,717,183 40,629,403 42,111,117
Accrued interest receivable 657,288 657,288 767,117 767,117
Purchased mortgage
servicing rights 4,212,261 4,544,739 4,004,146 5,083,365
Accounts receivable-brokers
and escrow agents 3,107,498 3,107,498 4,804,208 4,804,208
Financial liabilities:
Deposits 110,306,653 110,897,296 100,601,789 101,317,890
Drafts payable 2,765,182 2,765,182 4,984,145 4,984,145
Other borrowings 45,786,823 45,786,823 74,756,311 74,756,311
Accrued interest payable 522,138 522,138 622,852 622,852
</TABLE>
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 19. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Outside service fees $ 2,072,028 $ 2,136,555
Subservicing expense 428,771 295,477
Amortization of purchased mortgage servicing rights 967,172 1,216,200
Business development 312,687 564,202
Stationery and printing 438,054 359,343
Telephone 574,780 442,831
Courier service 448,646 339,444
</TABLE>
NOTE 20. SUPPLEMENTAL SEGMENT INFORMATION
The Company has two reportable segments: commercial banking and
mortgage banking. The commercial banking segment provides traditional
banking services offered through the Bank. The mortgage banking
segment provides mortgage loan origination and servicing offered
through the Bank and Crescent Mortgage.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Company evaluates performance based on profit and loss from operations
before income taxes not including nonrecurring gains and losses.
The Company accounts for intersegment revenues and expenses as if the
revenue/expense transactions were to third parties, that is, at
current market prices.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each segment has different types and levels of credit and
interest rate risk.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 20. SUPPLEMENTAL SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS
---------------------------------------------------------------------------
Commercial Mortgage All
For the Year Ended December 31, 1999 Banking Banking Other Total
------------------------------------ ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Interest income $ 6,018,461 $ 9,131,244 $ - $ 15,149,705
Interest expense 1,784,797 6,498,581 - 8,283,378
Intersegment net interest income (expense) 5,924 (5,924) - -
Net interest income 4,233,664 2,632,663 - 6,866,327
Other revenue from external customers 488,308 14,092,102 - 14,580,410
Depreciation and amortization 374,607 1,401,144 - 1,775,751
Provision for loan losses 190,000 - - 190,000
Segment profit 821,961 1,857,221 (666,255) 2,012,927
Segment assets 77,540,477 98,212,828 - 175,753,305
Expenditures for premises and equipment 3,065,215 410,540 - 3,475,755
<CAPTION>
INDUSTRY SEGMENTS
----------------------------------------------------------------------------
Commercial Mortgage All
For the Year Ended December 31, 1998 Banking Banking Other Total
------------------------------------ --------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Interest income $ 4,624,126 $ 8,351,498 $ - $ 12,975,624
Interest expense 1,415,648 4,673,621 - 6,089,269
Intersegment net interest income (expense) 10,111 (10,111) - -
Net interest income 3,208,478 3,677,877 - 6,886,355
Other revenue from external customers 276,263 14,947,300 - 15,223,563
Depreciation and amortization 249,693 1,442,321 - 1,692,014
Provision for loan losses 153,000 - - 153,000
Segment profit 671,184 4,640,413 (484,172) 4,827,425
Segment assets 59,204,350 140,040,111 - 199,244,461
Expenditures for premises and equipment 641,775 923,854 - 1,565,629
</TABLE>
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of income, and cash flows of Crescent Banking Company as of
and for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1999 1998
--------------- -----------------
<S> <C> <C>
Assets
Cash $ 450,783 $ 264,271
Investment in subsidiaries 18,946,373 14,036,312
Other assets 165,968 209,852
--------------- -----------------
Total assets $ 19,563,124 $ 14,510,435
=============== =================
Liabilities
Other borrowings $ 4,500,000 $ -
Other 202,201 171,987
--------------- -----------------
4,702,201 171,987
--------------- -----------------
Stockholders' equity 14,860,923 14,338,448
--------------- -----------------
Total liabilities and stockholders' equity $ 19,563,124 $ 14,510,435
=============== =================
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1999 1998
--------------- ---------------
<S> <C> <C>
Income, dividends from subsidiary $ 568,931 $ 273,267
Expenses, other 666,255 484,172
--------------- ---------------
Loss before income tax benefits and
equity in undistributed
income of subsidiaries (97,324) (210,905)
Income tax benefits (255,608) (179,101)
--------------- ---------------
Income (loss) before equity in undistributed
income of subsidiaries 158,284 (31,804)
Equity in undistributed income of subsidiaries 1,134,902 3,118,768
--------------- ---------------
Net income $ 1,293,186 $ 3,086,964
=============== ===============
</TABLE>
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,293,186 $ 3,086,964
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (1,134,902) (3,118,768)
Restricted stock awards 45,079 6,289
Increase in stock options outstanding 262,721 344,731
Other operating activities (62,369) (34,803)
----------------- -----------------
Net cash provided by operating activities 403,715 284,413
----------------- -----------------
INVESTING ACTIVITIES
Investment in subsidiaries (4,500,000) (2,200,000)
----------------- -----------------
Net cash used in investing activities (4,500,000) (2,200,000)
----------------- -----------------
FINANCING ACTIVITIES
Proceeds from other borrowings 4,500,000 -
Dividends paid (400,473) (273,267)
Net proceeds from sale of common stock - 2,139,762
Proceeds from exercise of stock options 183,270 35,630
----------------- -----------------
Net cash provided by financing activities 4,282,797 1,902,125
----------------- -----------------
Net increase (decrease) in cash 186,512 (13,462)
Cash at beginning of year 264,271 277,733
----------------- -----------------
Cash at end of year $ 450,783 $ 264,271
================= =================
</TABLE>
78
<PAGE>
Supplementary Financial Information
-----------------------------------
In addition, the following supplementary financial information, which is
not a part of the preceding audited financial statements, amends and replaces
that supplementary information that was previously included in the Company's
1999 Annual Report to Shareholders for the year ended December 31, 1999, and
which was incorporated by reference into the Company's previously filed Form 10-
KSB for the year ended December 31, 1999:
1999 1998
--------------------------------------
Year ended December 31:
Interest income (1) $15,143,781 $12,965,513
Interest expense 8,277,454 6,079,158
Net interest income 6,866,327 6,886,355
Provision for loan losses 190,000 153,000
Net interest income after
provision for loan losses 6,676,327 6,733,355
Other operating income 14,580,410 15,223,563
Other operating expenses 19,243,810 17,129,493
Net income before income taxes 2,012,927 4,827,425
applicable income taxes 719,741 1,740,461
Net income 1,293,186 3,086,964
Per share data:
Net income - basic earnings $0.76 $1.85
Net income - diluted earnings $0.71 $1.80
Period-end book value $8.47 $8.34
Cash dividends $0.23 $0.165
Financial ratios:
Return on assets 0.69% 2.16%
Return on shareholders' equity 8.72% 25.88%
Total capital to adjusted assets 13.48% 12.35%
Balances as of December 31:
Loans, net $53,212,597 $40,629,403
Allowance for loan losses 864,689 699,020
Mortgage loans held for sale 87,284,155 128,409,669
Total assets 175,753,305 199,244,461
Total deposits 110,306,653 100,601,789
Shareholders' equity 14,860,923 14,338,448
---------------------
(1) The amount of fee income included in interest income for the years ended
December 31, 1999 and December 31, 1998 was $4,820,648 and $4,822,497,
respectively.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information regarding the Company's directors and executive officers
required by this Item 9 is contained in the Company's definitive Proxy Statement
for its 1999 Annual Meeting of Shareholders filed pursuant to Rule 14a-6 of the
Exchange Act (the "Proxy Statement"), under the captions "Proposal
One--General," "--Recent Changes Affecting the Board of Directors,"
"--Retirement of Certain Directors," "--Election of Directors," "--Information
Relating to Directors, Officers and Nominees," "Additional
Information--Compensation of Directors and Attendance at Meetings,"
"--Committees of the Board of Directors," "--Ownership of Common Stock by
Certain Beneficial Owners and Management," and "--Compensation of Executive
Officers and Directors," and is incorporated herein by reference. Officers of
the Company and the Bank are elected annually by the Company's Board of
Directors. The term "executive officer," as used herein, means any officer who
has major policy-making functions with respect to the Company and/or the Bank.
Information about compliance with Section 16 of the Exchange Act by the
directors and executive officers of the Company is contained in the Proxy
Statement under the caption "Additional Information--Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
79
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Information on compensation of the Company's executive officers is
contained in the Proxy Statement under the captions "Additional
Information--Compensation of Executive Officers and Directors," "--Option/SAR
Grants in Last Fiscal Year," "--Executive Employment Agreement" and "--Certain
Transactions" and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is contained in the Proxy Statement under the caption "Ownership of
Common Stock by Certain Beneficial Owners and Management" and is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions involving the
Company and its management is contained in the Proxy Statement under the caption
"Additional Information--Certain Transactions" and is incorporated herein by
reference.
With the exception of the above disclosures, there were no transactions
during 1999, nor are there any presently proposed transactions, to which the
Company was or is to be a party in which any of the Company's officers or
directors had or have direct or indirect material interest.
80
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits. The following Exhibits are attached hereto or incorporated by
--------
reference herein (numbered to correspond to Item 601(a) of Regulation S-B, as
promulgated by the Securities and Exchange Commission):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
10.1 1991 Substitute Stock Option Plan (Incorporated by reference from
Exhibit 10.2 to the Form S-4).
10.2 1995 Stock Option Plan for Outside Directors (Incorporated by
reference from Exhibit 10.2 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.3 1993 Employee Stock Option Plan (Incorporated by reference from
Exhibit 10.3 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.4 Employment Agreement between the Bank and Mr. Robert C. KenKnight
dated as of May 1, 1997 (Incorporated by reference from Exhibit 10.4
to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
10.5 Loan Agreement, dated as of February 1, 1999, by and between the
Company and The Bankers Bank (includes the related Promissory Note,
dated as of February 1, 1999, by and between the Company and The
Bankers Bank).*
11.1 Statement Regarding Computation of Per Share Earnings.
13.1 Crescent Banking Company 1999 Annual Report to Shareholders. With the
exception of information expressly incorporated herein, the 1999
Annual Report to Shareholders is not deemed filed as part of this
Annual Report on Form 10-KSB.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Mauldin & Jenkins, LLC.
81
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule.
99.1 Crescent Banking Company Proxy Statement for the 2000 Annual Meeting
of Shareholders.*
---------------------
* Previously Filed.
B. Reports on Form 8-K. The Company did not file any Current Reports on
-------------------
Form 8-K during the last quarter of the period covered by this Form 10-KSB.
82
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized as of December 20, 2000.
CRESCENT BANKING COMPANY
By: /s/ J. Donald Boggus, Jr.
------------------------------
J. Donald Boggus, Jr.
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company in the
capacities indicated as of December 20, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ J. Donald Boggus, Jr. President, Chief Executive Officer and Director
------------------------------------ (Principal Executive Officer)
J. Donald Boggus, Jr.
/s/ Bonnie B. Boling Chief Financial Officer
------------------------------------ (Principal Financial and Accounting Officer)
Bonnie B. Boling
/s/ A. James Elliott Chairman of the Board of Directors
------------------------------------
A. James Elliott
/s/ J. Donald Boggus, Sr. Director
------------------------------------
J. Donald Boggus, Sr.
/s/ Charles Fendley Director
------------------------------------
Charles Fendley
/s/ Charles Gehrmann Director
------------------------------------
Charles Gehrmann
/s/ Michael W. Lowe Director
------------------------------------
Michael W. Lowe
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Mauldin & Jenkins, LLC.
27.1 Financial Data Schedule.
