Crescent Banking Company Reports Operating Results (10-Q)
Highlight of Business Operations:
As of March 31, 2010, the Company had total consolidated assets of approximately $1.0 billion, total deposits of approximately $964.2 million, total consolidated liabilities, including deposits, of $1.0 billion and consolidated stockholders’ deficit of approximately $(12.8) million. The Company’s operations are discussed below under the section captioned “Results of Operations.”
Through the Bank, the Company provides a broad range of banking and financial services to those areas surrounding Jasper, Georgia. As its primary market area, the Bank focuses on Pickens, Bartow, Forsyth, Cherokee and north Fulton Counties, Georgia and nearby Dawson, Cobb, Walton and Gilmer Counties, Georgia, which are situated to the north of Atlanta, Georgia. The Bank’s commercial banking operations are primarily retail-oriented and focused on individuals and small- to medium-sized businesses located within its primary market area. While the Bank provides most traditional banking services, its principal activities as a community bank are the taking of demand and time deposits and the making of secured and unsecured consumer loans and commercial loans to its target customers. The retail nature of the Bank’s commercial banking operations allows for diversification of depositors and borrowers. As a result, the Bank’s management does not believe that it is dependent upon a single or a few customers. The Bank does not have a significant portion of commercial banking loans concentrated within a single industry or group of related industries. However, approximately 94% of the Bank’s loan portfolio is secured by commercial and residential real estate in its primary market area. The real estate markets in our market area have experienced significant weakening during 2008 and 2009, in particular with respect to real estate related to acquisition, development and construction, and we anticipate that such markets will continue to weaken in 2010. Acquisition, development and construction loans, or “ADC” loans, are cyclical and pose risks of possible loss due to concentration levels and other similar risks. As of March 31, 2010, we had approximately $258.0 million in ADC loans, or approximately 36% of our loan portfolio. The Bank limited ADC loan originations in 2008 and 2009 due to the declining real estate market. As a result, the Bank’s ADC loans declined approximately 38% since December 31, 2007. The Bank’s criticized loans (excluding non-performing loans), non-performing loans and foreclosed properties related to its ADC loan portfolio increased $66.7 million from December 31, 2007, or 1347%, to $71.7 million at March 31, 2010, increased $76.1 million, or 2344% from December 31, 2007, to $79.4 million at March 31, 2010 and increased $35.9 million, or 11318% from December 31, 2007, to $36.2 million at March 31, 2010. The deterioration in our ADC loan portfolio is due to the unprecedented slowing of home and land sales, and subsequent decline in the prices of homes and land in our market area beginning in the last quarter of 2007. This decline in home and land prices prohibits many of our borrowers who develop and construct real estate properties from servicing their loans because they are unable to generate sufficient revenue.
assets, such as investment securities and loans, and the interest expense paid on our interest-bearing liabilities, such as deposits and borrowings. The greatest risk to our net interest margin is interest rate risk from interest rate fluctuation, which, if not anticipated and managed, can result in a decrease in earnings or earnings volatility. The Company manages interest rate risk by maintaining what it believes to be the proper balance of rate sensitive assets and rate sensitive liabilities. Rate sensitive assets and rate sensitive liabilities are those that can be repriced to current rates within a relatively short time period. The Federal Reserve decreased interest rates 500 basis points from September 2007 through the first quarter of 2009. Our net interest margin declined from 3.68% for 2007 to 1.85% during 2008, mainly as a result of the decreases in interest rates. Our net interest margin additionally declined to 1.19% during 2009. The further decline in our net interest margin during 2009 was due to the increase in non-performing assets and the subsequent write-off of approximately $3.0 million in accrued interest on these assets and the Company’s strategic decision to increase its liquidity by increasing its short-term liquid assets that have lower yields. Our net interest margin actually increased to 1.71% for the first quarter of 2010. However, this increase was mainly due to loan accretion income of approximately $1.6 million that was recognized during the first quarter of 2010 from a loan purchased at a discount during the fourth quarter of 2009. If this accretion income was not included in our calculation, then our net interest margin would have actually declined to 1.01% for the quarter ended March 31, 2010. This further decline in our net interest margin during the first quarter of 2010 was due to additional increases of approximately $37.2 million in non-performing assets from December 31, 2009 to March 31, 2010 and the subsequent write-off of approximately $1.2 million in accrued interest on these assets and the Company’s strategic decision to increase its liquidity by approximately $41.5 million during the first quarter 2010 by increasing its short-term liquid assets that have lower yields.
Any change in general market interest rates, including changes in the Federal Reserve Board’s fiscal and monetary policies, can have a significant impact on our net interest income. As of March 31, 2010, approximately 20% of our commercial banking loan portfolio has a variable rate without a floor and adjusts with changes in the prime rate, while 80% of our commercial banking loan portfolio has either a fixed rate or a variable rate with a floor, which means that the interest rate associated with such loans will not change until the fixed rate loans mature or until prime rates increase to a rate that is higher than the variable rate loan floors. Most of the floors on our variable rate loans are between 5.00% and 7.50%. In addition, approximately $159.1 million of our deposits are in interest bearing checking accounts that could reprice immediately in the event of any changes in interest rates, while approximately $540.6 million of our certificates of deposit mature and reprice within one year. In total, approximately 75% of our interest-bearing deposits could reprice within one year. More of the Bank’s interest bearing liabilities have the potential to reprice over the next year than the Bank’s interest earning assets, making the Bank liability sensitive. As a result, in the event that interest rates increase, the Bank’s net interest margin could correspondingly decline. Further action by the Federal Reserve with respect to interest rates will depend on many factors that are not known at this time, are beyond our control and could impact our net interest margin.
The fourth challenge for the Company’s commercial banking business is maintaining sound credit quality. During 2008 and 2009, the Bank’s loan portfolio declined 4% and 7%, respectively. However, the Bank’s loan portfolio grew 17% during 2007, 17% during 2006 and 37% during 2005. From 2005 to 2007, the Bank added approximately 26 new loan officers, which were mainly related to the addition of five full service branches and two loan production offices. The weakening of the real estate market had a significant effect on the Bank’s loan portfolio in 2008, 2009 and the first quarter of 2010, which led the Bank to limit loan production in order to focus on asset quality. Approximately 94% of the Bank’s loan portfolio was secured by real estate at March 31, 2010. From December 31, 2007 to March 31, 2010, our non-performing assets increased from $11.0 million to $168.9 million, or 1,435%. From December 31, 2009 to March 31, 2010, our non-performing assets increased from $131.7 million to $168.9 million, or 28%. Of the $168.9 million in non-performing assets at March 31, 2010, $115.5 million, or 68%, was related to ADC loans and $27.5 million, or 16%, was related to residential real estate. Our entire market area has experienced a significant weakening in the real estate markets during 2008 and 2009, in particular with respect to real estate related to ADC. As of March 31, 2010, ADC loans totaled approximately $258.0 million and represented approximately 36% of our loan portfolio. The Bank’s criticized loans (excluding non-performing loans), non-performing loans and foreclosed properties related to its ADC loan portfolio increased $66.7 million from December 31, 2007, or 1347%, to $71.7 million at March 31, 2010, increased $76.1 million, or 2344% from December 31, 2007, to $79.4 million at March 31, 2010 and increased $35.9 million, or 11318% from December 31, 2007, to $36.2 million at March 31, 2010. The deterioration in our ADC loan portfolio is due to an increased inability of some borrowers to make loan payments and the decrease in sales activity and property values within the residential real estate market in our market area during 2008 and 2009. The Bank has adopted and implemented procedures and policies in order to maintain and monitor loan growth, including the quality of the loans and its concentration in real estate secured loans. The Bank limited any new ADC loans in 2008 and 2009 due to the declining real estate market. Our ADC loans have declined by approximately 38% since December 31, 2007. The Bank’s criticized loans (excluding non-performing loans), non-performing loans and foreclosed properties related to its ADC loan portfolio decreased $25.5 million from December 31, 2009, or 2