UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{ X } Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 2000 or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from___________
To ___________
Commission File Number: 0-23605
CAVALRY BANCORP, INC.
---------------------
(exact name of registrant as specified in its charter)
Tennessee 62-1721072
- -------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
- -------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(615) 893-1234
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Issued and Outstanding: 7,104,801 as of November 6, 2000.
CAVALRY BANCORP, INC.
Table of Contents
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999 1
Consolidated Statements of Income (unaudited) for the
Three Month and Nine Month Periods Ended September 30, 2000 and 1999 2
Consolidated Statements of Comprehensive Income (unaudited) for the
Three and Nine Month Periods Ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows (unaudited) for the
Nine Month Periods Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements (unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12-13
Part II Other Information 14
Signatures 15
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
September 30, December 31,
ASSETS 2000 1999
- -------------------------------------------------------- ---------- ----------
(Unaudited)
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,262 $ 20,043
Interest-bearing deposits with
other financial institutions. . . . . . . . . . . . . . 22,673 74,379
--------- ---------
Cash and cash equivalents . . . . . . . . . . . . . . . . 38,935 94,422
Investment securities available-for-sale
at fair value (amortized cost: . . . . . . . . . . . . . 27,108 6,964
$27,090 and $6,968 at September 30, 2000
and December 31, 1999, respectively)
Mortgage-backed securities held
to maturity - at
amortized cost (fair value:. . . . . . . . . . . . . . . 613 651
$604 and $645 at September 30, 2000
and December 31, 1999, respectively)
Loans held for sale, at estimated fair value. . . . . . . 7,129 4,485
Loans receivable, net . . . . . . . . . . . . . . . . . . 278,794 272,211
Accrued interest receivable . . . . . . . . . . . . . . . 2,348 1,784
Office properties and equipment, net. . . . . . . . . . . 15,188 9,892
Federal Home Loan Bank of Cincinnati
stock - at cost. . . . . . . . . . . . . . . . . . . . . 1,982 1,878
Real estate and other assets acquired
in settlement of loans . . . . . . . . . . . . . . . . . 4 166
Other assets. . . . . . . . . . . . . . . . . . . . . . . 2,834 2,966
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $374,935 $395,419
========= =========
LIABILITIES AND EQUITY
- ---------------------------------------------------------
Liabilities:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . $328,418 $308,929
Borrowings. . . . . . . . . . . . . . . . . . . . . . . . 1,592 45,000
Accounts payable and other liabilities. . . . . . . . . . 2,274 2,725
--------- ---------
Total liabilities. . . . . . . . . . . . . 332,284 356,654
--------- ---------
Shareholders' equity:
Preferred stock, no par value
Authorized- 250,000 shares; none
issued or outstanding at
September 30, 2000 and December 31, 1999 . . . . . . - -
Common stock, no par value
Authorized- 49,750,000 shares; issued
and outstanding 7,104,801 at
September 30, 2000 and December 31, 1999. . . . . . 11,402 10,972
Retained earnings . . . . . . . . . . . . . . . . . . . . 39,235 37,194
Unearned restricted stock . . . . . . . . . . . . . . . . (3,466) (4,380)
Unallocated ESOP Shares . . . . . . . . . . . . . . . . . (4,531) (5,019)
Accumulated other comprehensive gain (loss), net of tax . 11 (2)
--------- ---------
Total equity. . . . . . . . . . . . . . . . . . . . . . . 42,651 38,765
--------- ---------
Total liabilities and equity. . . . . . . . . . . . . . . $374,935 $395,419
========= =========
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to consolidated financial statements.
1
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Interest and dividend income:
Loans. . . . . . . . . . . . . . . $ 6,651 $ 6,036 $ 19,199 $ 17,468
Investment securities. . . . . . . 446 543 1,142 1,768
Deposits with other
financial institutions . . . . . 431 499 1,345 1,419
Mortgage-backed securities
held to maturity . . . . . . . . 10 9 31 30
----------- ---------- ---------- ----------
Total interest and
dividend income. . . . . 7,538 7,087 21,717 20,685
----------- ---------- ---------- ----------
Interest expense - deposits . . . . 3,248 2,532 9,311 7,231
Interest expense - borrowings . . . 15 - 160 -
----------- ---------- ---------- ----------
Total interest expense. . . . 3,263 2,532 9,471 7,231
----------- ---------- ---------- ----------
Net interest income. . . . . . . . 4,275 4,555 12,246 13,454
Provision for loan losses. . . . . - 132 141 644
----------- ---------- ---------- ----------
Net interest income after
provision for loan losses. . . 4,275 4,423 12,105 12,810
----------- ---------- ---------- ----------
Non-interest income:
Servicing income. . . . . . . . . 60 59 191 198
Gain on sale of loans, net. . . . 419 692 1,175 1,598
Gain (loss) on sale of office
properties and equipment. . . . (16) - 2 -
Deposit servicing fees
and charges . . . . . . . . . . 665 546 1,844 1,451
Trust service fees. . . . . . . . 267 249 801 687
Other operating income. . . . . . 67 61 246 197
----------- ---------- ---------- ----------
Total non-interest income . . . 1,462 1,607 4,259 4,131
----------- ---------- ---------- ----------
Non-interest expenses:
Compensation, payroll taxes
and fringe benefits. . . . . . 2,457 2,381 7,063 6,761
Occupancy expense. . . . . . . . 174 186 523 533
Supplies, communications
and other office expenses . . . 192 204 592 654
Federal insurance premiums . . . 16 37 47 112
Advertising expense. . . . . . . 52 48 204 229
Equipment and service
bureau expense . . . . . . 512 603 1,536 1,776
Other operating expenses . . . . 350 315 1,078 1,038
----------- ---------- ---------- ----------
Total non-interest expenses. . 3,753 3,774 11,043 11,103
----------- ---------- ---------- ----------
Earnings before income
tax expense . . . . . . . . . 1,984 2,256 5,321 5,838
Income tax expense. . . . . . . . 815 918 2,213 2,407
----------- ---------- ---------- ----------
Net income . . . . . . . . . . $ 1,169 $ 1,338 $ 3,108 $ 3,431
=========== ========== ========== ==========
Basic earnings per share. . . . . . $ 0.18 $ 0.20 $ 0.49 $ 0.52
=========== ========== ========== ==========
Weighted average shares outstanding 6,397,364 6,580,643 6,353,054 6,656,391
=========== ========== ========== ==========
Dividends declared $0.05 per share payable October 13, 2000 for shareholders of
record date September 30, 2000.
See accompanying notes to consolidated financial statements.
2
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net income. . . . . . . . . . . . . . . $1,169 $1,338 $3,108 $3,431
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale . . . . . . . . . . 41 14 13 (78)
------ ------ ------ ------
Comprehensive income. . . . . . . . . . $1,210 $1,352 $3,121 $3,353
====== ====== ====== =======
See accompanying notes to consolidated financial statements.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
---- ----
Operating activities:
Net cash provided by operating activities . . . $ 1,224 $ 10,303
--------- ---------
Investing activities:
Increase in loans receivable, net. . . . . . . . . . . (6,468) (34,857)
Principal payments on mortgage
backed securities held to maturity. . . . . . . . 36 237
Proceeds from sales of office properties and equipment. 272 -
Purchase of investment securities
available for sale . . . . . . . . . . . . . . . . . (28,901) (35,965)
Proceeds from maturities of investment securities . . . 9,000 41,500
Purchase of office properties and equipment. . . . . . (6,215) (1,085)
--------- ---------
Net cash used in investing activities . . . . . (32,276) (30,170)
--------- ---------
Financing activities:
Net increase in deposits. . . . . . . . . . . . . . . . 19,489 31,383
Dividends paid. . . . . . . . . . . . . . . . . . . . . (1,065) (714)
Net increase (decrease) in borrowings . . . . . . . . . (43,408) -
Stock repurchase and retirement . . . . . . . . . . . . - (8,865)
Payments by borrowers for
property taxes and insurance. . . . . . . . . . . . . . 549 559
--------- ---------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . (24,435) 22,363
--------- ---------
Increase (decrease) in cash and cash equivalents. . . . . (55,487) 2,496
Cash and equivalents, beginning of period . . . . . . . . 94,422 53,188
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . $ 38,935 $ 55,684
========= =========
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,193 $ 7,201
========= =========
Income taxes. . . . . . . . . . . . . . . . . . . . . . . $ 2,831 $ 3,569
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Interest credited to deposits. . . . . . . . . . . . . . $ 3,381 $ 2,946
========= =========
Increase (decrease) in deferred tax asset related
to unrealized loss on investments. . . . . . . . . . . $ (7) $ 46
========= =========
Net unrealized gain (losses) on investment
securities available for sale . . . . . . . . . . . . $ 20 $ (124)
========= =========
Dividends declared and payable. . . . . . . . . . . . . . $ 355 $ 355
========= =========
See accompanying notes to consolidated financial statements.
4
CAVALRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the holding
company for Cavalry Banking (the "Bank") which is a federally chartered stock
savings bank.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with Instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the three and nine months ended September 30,
2000, are not necessarily indicative of the results to be expected for the year
ending December 31, 2000. The consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 1999.
2. Earnings Per Share
Earnings per share has been computed for the three and nine months ended
September 30, 2000, based upon weighted average common shares outstanding of
6,397,364 and 6,353,054 respectively. Earnings per share has been computed for
the three and nine months ended September 30, 1999, based upon weighted average
common shares outstanding of 6,580,643 and 6,656,391 respectively. The Company
had no dilutive securities, therefore diluted earnings per share is the same as
basic earnings per share.
3. Business Segments
The Company and its subsidiary provide community oriented banking services to
individuals and businesses primarily within Rutherford, Bedford, and Williamson
counties in Middle Tennessee.
The Company's segments are identified by the products and services offered,
principally distinguished as banking, trust and mortgage banking operations.
Approximately 30% of mortgage banking revenues are derived each year from
transactions with agencies of the U.S. government. In addition, one unrelated
entity purchased approximately 50% of mortgages sold in 1999.
Segment information is derived from the internal reporting system utilized by
management with accounting policies and procedures consistent with those
described in Note 1 of the 1999 Annual Report to Shareholders. Segment
performance is evaluated by the Company based on profit or loss before income
taxes. Revenue, expense, and asset levels reflect those which can be
specifically identified and those assigned based on internally developed
allocation methods. These methods have been consistently applied.
5
Mortgage
For the quarter ended . . . . . Banking Banking Trust Consolidated
September 30, 2000
Interest revenue. . . . . . . . $ 7,538 $ - $ - $ 7,538
Other income-external customers 732 60 267 1,059
Interest expense. . . . . . . . 3,263 - - 3,263
Depreciation and amortization . 161 31 8 200
Other significant items:
Provision for loan losses. - - - -
Gain (loss) on
sales of assets. . . . (16) 419 - 403
Segment profit. . . . . . . . . 1,920 - 64 1,984
Segment assets. . . . . . . . . 369,050 5,703 182 374,935
Mortgage
For the quarter ended . . . . . Banking Banking Trust Consolidated
September 30, 1999
Interest revenue. . . . . . . . $ 7,087 $ - $ - $ 7,087
Other income-external customers 607 59 249 915
Interest expense. . . . . . . . 2,532 - - 2,532
Depreciation and amortization . 200 48 22 270
Other significant items:
Provision for loan losses . 132 - - 132
Gain on sales of assets . . - 692 - 692
Segment profit. . . . . . . . . 2,033 161 62 2,256
Segment assets. . . . . . . . . 384,990 5,703 182 390,875
Mortgage
For the nine months ended . . . Banking Banking Trust Consolidated
September 30, 2000
Interest revenue. . . . . . . . $ 21,717 $ - $ - $ 21,717
Other income-external customers 2,090 191 801 3,082
Interest expense. . . . . . . . 9,471 - - 9,471
Depreciation and amortization . 493 93 24 610
Other significant items:
Provision for loan losses . 141 - - 141
Gain on sales of assets . . 2 1,175 - 1,177
Segment profit (loss) . . . . . 5,126 (5) 200 5,321
Segment assets. . . . . . . . . 367,330 7,162 443 374,935
Mortgage
For the nine months ended . . . Banking Banking Trust Consolidated
September 30, 1999
Interest revenue. . . . . . . . $ 20,685 $ - $ - $ 20,685
Other income-external customers 1,648 198 687 2,533
Interest expense. . . . . . . . 7,231 - - 7,231
Depreciation and amortization . 622 150 43 815
Other significant items:
Provision for loan losses . 644 - - 644
Gain on sales of assets. . . - 1,598 - 1,598
Segment profit. . . . . . . . . 5,413 262 163 5,838
Segment assets. . . . . . . . . 384,990 5,703 182 390,875
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
This Quarterly Report contains forward-looking statements within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on the Company's current expectations regarding
its business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause the Company's actual results,
performance, and achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to these differences include, without limitation, general economic conditions,
including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; and
other factors disclosed periodically in the Company's filings with the
Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them, whether
included in this report or made elsewhere from time to time by the Company or on
its behalf. The Company assumes no obligation to update any forward-looking
statements.
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets were $374.9 million at September 30, 2000, compared to $395.4
million at December 31, 1999, a decrease of $20.5 million or 5.18%. This
decrease was a result of cash being used to reduce borrowings from $45.0 million
to $1.6 million. This decrease was partially offset by an increase in
investments from increased deposits. Cash and cash equivalents decreased from
$94.4 million at December 31, 1999, to $38.9 million at September 30, 2000.
This decrease was primarily a result of cash used to retire $45.0 million in
borrowings. Investments available for sale increased from $7.0 million at
December 31, 1999, to $27.1 million at September 30, 2000, as a result of
increased deposits. Loans receivable net increased $6.6 million from $272.2
million at December 31, 1999, to $278.8 million at September 30, 2000. Office
properties and equipment increased from $9.9 million at December 31, 1999 to
$15.2 million at September 30, 2000. This increase was primarily a result of
the construction of a new operations building that was completed in late
September. The construction of this building will allow additional growth in
the downtown main office and the consolidation of support operations. The Bank
continues to try to serve the needs of the community by increasing deposits and
using those funds to make loans in the surrounding community.
7
Deposit accounts increased $19.5 million from $308.9 million at December 31,
1999, to $328.4 million at September 30, 2000. Certificates of deposit
increased $5.4 million from $151.0 million at December 31, 1999 to $156.4
million at September 30, 2000. Savings deposits increased $425,000 from $13.0
million at December 31, 1999 to $13.4 million at September 30, 2000. Money
market accounts increased $4.2 million from $63.8 million at December 31, 1999
to $68.0 million at September 30, 2000. Transaction accounts increased $7.5
million from $34.7 million at December 31, 1999 to $42.2 million at September
30, 2000. These increases were primarily a result of an ongoing effort to raise
the deposit base for the Bank.
Stockholders' equity increased by $3.9 million from $38.8 million at December
31, 1999, to $42.7 million at September 30, 2000, as a result of net income of
$3.1 million for the nine months ended September 30, 2000, release of ESOP
shares of $918,000 and release of Management Recognition Plan (MRP) shares of
$914,000 and an unrealized gain on available for sale securities of $13,000 net
of taxes. These increases were offset by dividends declared of $1.1 million.
Nonperforming assets were $499,000 at December 31, 1999 and $589,000 at
September 30, 2000.
Comparison of Operating Results for the Three Months Ended September 30, 2000
and September 30, 1999.
Net Income. Net income was $1.2 million for the three months ended September
30, 2000 compared to $1.3 million for the three months ended September 30, 1999.
This decline was primarily a result of higher interest expense and lower non
interest income. These factors were offset by lower non interest expense,
higher interest income and a lower provision for loan losses. The decline in
net interest income was primarily a result of the impact of the decline in cash
equivalents used to fund the special cash distribution of $53.3 million, which
was paid in December 1999.
Net Interest Income. Net interest income decreased $300,000 from $4.6 million
for the three months ended September 30, 1999, to $4.3 million for the three
months ended September 30, 2000. This decline was a result of earning assets
being utilized to fund the special cash distribution paid in December 1999.
This distribution resulted in a decline in the ratio of average interest-earning
assets to average interest-bearing liabilities from 140.85% for the three months
ended September 30, 1999, to 117.37% for the three months ended September 30,
2000.
Interest income increased 5.63% to $7.5 million for the three months ended
September 30, 2000, from $7.1 million for the same period in 1999. Interest on
loans increased from $6.0 million for the three months ended September 30, 1999,
to $6.7 million for the same period in 2000. This was a result of average loans
outstanding increasing from $274.6 million for the three months ended September
30, 1999, to $281.1 million for the same period in 2000. The average yield
increased from 8.79% for the three months ended September 30, 1999, to 9.47% for
the same period in 2000. This increase in yield was a result of increased
lending rates. Income on all other investments consisting of mortgage backed
securities, investments, FHLB stock, bank deposits and federal funds declined
from $1.1 million for the three months ended September 30, 1999, to $887,000 for
the same period in 2000. Average investments decreased from $82.1 million for
the three months ended September 30, 1999, to $52.3 million for the same period
in 2000. The average yield increased from 5.01% for the three months ended
September 30, 1999, to 6.73% for the same period in 2000. This increase in rate
was a result of rising rates while the decline in volume was a result of funds
used to pay the special cash distribution in December 1999.
8
Interest expense increased from $2.5 million for the three months ended
September 30, 1999, to $3.3 million for the same period in 2000. Average
deposits increased from $253.2 million for the three months ended September 30,
1999, to $282.4 million for the same period in 2000. This increase was a result
of continuing efforts to increase market share of deposits. The average cost of
deposits increased from 3.97% for the three months ended September 30, 1999, to
4.56% for the same period in 2000. Average borrowings were $1.6 million at an
average cost of 3.73% for the three months ended September 30, 2000. There were
no borrowings outstanding during the three months ended September 30, 1999. The
total cost of funds increased from 3.97% for the three months ended September
30, 1999, to 4.56% for the three months ended September 30, 2000. This increase
in cost was a result of higher interest rates during the quarter ended September
30, 2000. Average interest-bearing liabilities increased from $253.2 million
for the three months ended September 30, 1999, to $284.0 million for the same
period in 2000. Interest rate spread increased from 3.98% for the three months
ended September 30 1999, to 4.48% for the same period in 2000. This increase in
spread was a result of yields on earning assets increasing faster than the cost
of funds. Net interest margin increased from 5.11 % for the three months ended
September 30, 1999, to 5.13% for the same period in 2000.
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets, giving greater weight to the level of classified assets than to
the level of nonperforming assets because classified assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgement, potential credit weaknesses.
There was no provision for loan losses for the three months ended September 30,
2000, compared to $132,000 for the same period in 1999. The decrease in the
provision was a result of a smaller increase in total loans outstanding between
the two periods. Management deemed the allowance for loan losses adequate at
September 30, 2000.
Noninterest Income. Noninterest income decreased from $1.6 million for the
three months ended September 30, 1999, to $1.5 million for the same period in
2000. In the mortgage banking segment, net gain on sale of loans decreased from
$692,000 for the three months ended September 30, 1999, to $419,000 for the same
period in 2000. The higher gain in 1999 was a result of a non recurring bulk
sale of a portion of the servicing portfolio in the amount of $199,000.
Discounting the one time transaction, the gain for the three months ended
September 30, 1999, would have been $493,000. The decline in net gain on sale
of loans was a result of narrower margins due to market competition and lower
volumes. Loan servicing fees increased slightly from $59,000 for the three
months ended September 30, 1999, to $60,000 for the same period in 2000. In the
banking segment, deposit fees and other operating incomes increased from
$607,000 for the three months ended September 30, 1999, to $732,000 for the same
period in 2000. This increase was a result of growth in the number of
transaction accounts and increased charges. In the trust segment, trust fees
increased from $249,000 for the three months ended September 30, 1999, to
$267,000 for the same period in 2000 as a result of increased fees and more
trust assets under management.
Noninterest Expense. Noninterest expense was $3.8 million for the three months
ended September 30, 2000, and 1999. Compensation and other employee benefits
increased from $2.4 million for the three months ended September 30, 1999, to
$2.5 million for the three months ended September 30, 2000. This increase was a
result of vesting of a deceased director's MRP shares. The increase in other
operating expense was primarily a result of increased professional fees. The
decreases in other expenses were primarily due to a general slowing of the
economy and an effort to reduce overhead. The company expects occupancy expense
to increase beginning in the fourth quarter of 2000 as a result of occupying the
new operations building.
Income taxes. The provision for income taxes was $815,000 for the three months
ended September 30, 2000, compared to $918,000 for the same period in 1999.
This decrease was primarily a result of lower income before taxes.
9
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
September 30, 1999.
Net Income. Net income decreased to $3.1 million for the nine months ended
September 30, 2000, from $3.4 million for the nine months ended September 30,
1999, primarily as a result of a higher interest expense. This increase in
interest expenses was partially offset by an increase in interest and non
interest income and a lower provision for loan losses.
Net Interest Income. Net interest income decreased from $13.5 million for the
nine months ended September 30, 1999, to $12.2 million for the nine months ended
September 30, 2000. This decline was a result of earning assets being utilized
to fund the special cash distribution paid in December 1999. This distribution
resulted in a decline in the ratio of average interest-earning assets to average
interest-bearing liabilities from 144.31% for the nine months ended September
30, 1999, to 116.37% for the nine months ended September 30, 2000.
Interest income increased 4.83% to $21.7 million for the nine months ended
September 30, 2000, from $20.7 million for the same period in 1999. Interest on
loans increased from $17.5 million for the nine months ended September 30, 1999,
to $19.2 million for the same period in 2000. This was a result of average
loans outstanding increasing from $262.9 million for the nine months ended
September 30, 1999, to $278.7 million for the same period in 2000. The average
yield increased from 8.88% for the nine months ended September 30, 1999, to
9.20% for the same period in 2000. This increase in yield was a result of
increased lending rates. Income on all other investments consisting of mortgage
backed securities, investments, FHLB stock, bank deposits and federal funds
declined from $3.2 million for the nine months ended September 30, 1999, to $2.5
million for the same period in 2000. Average investments decreased from $86.4
million for the nine months ended September 30, 1999, to $50.9 million for the
same period in 2000. The average yield increased from 4.97% for the nine months
ended September 30, 1999, to 6.61% for the same period in 2000. This increase
in rate was a result of rising rates while the decline in volume was a result of
funds used to pay the special cash distribution in December 1999.
Interest expense increased from $7.2 million for the nine months ended September
30, 1999, to $9.5 million for the same period in 2000. Average deposits
increased from $242.1 million for the nine months ended September 30, 1999, to
$279.2 million for the same period in 2000. This increase was a result of
continuing efforts to increase market share of deposits. The average cost of
deposits increased from 3.99% for the nine months ended September 30, 1999, to
4.45% for the same period in 2000. Average borrowings were $4.0 million at an
average cost of 5.31% for the nine months ended September 30, 2000. There were
no borrowings outstanding during the nine months ended September 30, 1999. The
total cost of funds increased from 3.99% for the nine months ended September 30,
1999, to 4.47% for the nine months ended September 30, 2000. This increase in
cost was a result of higher interest rates during the nine months ended
September 30, 2000. Average interest-bearing liabilities increased from $242.1
million for the nine months ended September 30, 1999, to $283.2 million for the
same period in 2000. Interest rate spread increased from 3.93% for the nine
months ended September 30, 1999, to 4.33% for the same period in 2000. This
increase in spread was a result of yields on earning assets increasing faster
than the cost of funds. Net interest margin decreased from 5.15% for the nine
months ended September 30, 1999, to 4.96% for the same period in 2000. This
decrease was a result of average earning assets declining and average costing
liabilities increasing.
10
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets giving greater weight to the level of classified assets than to
the level of nonperforming assets because classified assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses.
The provision for loan losses was $141,000 for the nine months ended September
30, 2000, compared to $644,000 for the same period in 1999. The decrease in the
provision was a result of a smaller increase in total loans outstanding between
the two periods. Management deemed the allowance for loan losses adequate at
September 30, 2000.
Noninterest Income. Noninterest income increased from $4.1 million for the nine
months ended September 30, 1999, to $4.3 million for the same period in 2000.
In the mortgage banking segment net gain on sale of loans decreased from $1.6
million for the nine months ended September 30, 1999, to $1.2 million for the
same period in 2000. This decrease was a result of lower sales volume and
declining margins due to market competition. Loan servicing fees also declined
slightly from $198,000 for the nine months ended September 30, 1999, to $191,000
for the same period in 2000. In the banking segment, deposit fees and other
operating incomes increased from $1.6 million for the nine months ended
September 30, 1999, to $2.1 million for the same period in 2000. This increase
was primarily a result of growth in the number of transaction accounts. In the
trust segment, trust fees increased from $687,000 for the nine months ended
September 30, 1999, to $801,000 for the same period in 2000 as a result of
increased fees and more trust assets under management.
Noninterest Expense. Noninterest expense was $11.0 million for the nine months
ended September 30, 2000, compared to $11.1 million for the same period in 1999.
Compensation and other employee benefits increased from $6.8 million for the
nine months ended September 30, 1999 to $7.1 million for the same period in
2000. This increase was primarily a result of the MRP stock incentive plan,
which was approved at the annual meeting in April 1999. Most other expenses
declined for the nine months ended September 30, 2000, compared the same period
in 1999 as a result of slower lending activity and efforts to control expenses.
Income taxes. The provision for income taxes was $2.2 million for the nine
months ended September 30, 2000 compared to $2.4 million for the same period in
1999. This decrease was primarily a result of lower income before taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from loan
principal and interest payments, sale of loans, maturing securities and Federal
Home Loan Bank (FHLB) of Cincinnati advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are influenced greatly by general interest rates, other
economic conditions, and competition. Regulations of the Office of Thrift
Supervision ("OTS"), the Bank's primary regulator, require the Bank to maintain
an adequate level of liquidity to ensure the availability of sufficient
liquidity to fund loan originations, deposit withdrawals and to satisfy other
financial commitments. Currently, the OTS regulatory liquidity for the Bank is
the maintenance of an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4% of the daily balance of net withdrawal
deposits and short-term borrowings. This liquidity requirement is subject to
periodic change. The Company and the Bank generally maintain sufficient cash
and short-term investments to meet short-term liquidity needs. At September 30,
2000, cash and cash equivalents totaled $38.9 million or 10.38% of total assets,
and investments available-for-sale totaling $27.1 million. At September 30,
2000, the Bank also maintained, but did not draw upon, a line of credit with the
FHLB of Cincinnati in the amount of $10.0 million.
11
As of September 30, 2000, The Bank's regulatory capital was in excess of all
applicable regulatory requirements. At September 30, 2000, under regulations of
the OTS, the Bank's actual tangible, core and risk-based capital ratios were
11.09%, 11.09% and 12.30%, respectively, compared to requirements of 1.5%, 3.0%
and 8.0%, respectively.
At September 30, 2000, the Bank had loan commitments of approximately $32.5
million. In addition, at September 30, 2000, the unused portion of lines of
credit extended by the Bank was approximately $9.2 million for consumer loans
and $26.8 million for commercial loans. Standby letters of credit and financial
guarantees are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most guarantees
extend from one to two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. At September 30, 2000, the Bank had $8.4 million of letters of
credit outstanding.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial condition and operating results in terms of
historical dollars without considering the change in relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's interest rate sensitivity is monitored by management through
selected interest rate risk measures produced internally and by the OTS. Based
on internal reviews, management does not believe that there has been a material
change in the Company's interest rate sensitivity from December 31, 1999, to
September 30, 2000. However, the OTS results are not yet available for the
quarter ended September 30, 2000. All methods used to measure interest rate
sensitivity involve the use of assumptions. Management cannot predict what
assumptions are made by the OTS, which can vary from management's assumptions.
Therefore, the results of the OTS calculations can differ from management's
internal calculations. The Company's interest rate sensitivity should be
reviewed in conjunction with the financial statements and notes thereto
contained in the Company's Annual Report for the year ended December 31, 1999.
The following table presents the Company's maturity gap at September 30, 2000
(In thousands).
12
Six After After
Within Months One to Three Over
Six To One Three to Five Ten
Months Year Years Years Years Total
-------- --------- --------- --------- ---------- ---------
Interest-earning
assets:
Loans receivable, net. . $52,610 $ 50,968 $ 60,352 $ 57,217 $ 64,776 $285,923
Mortgage-backed
securities. . . . . 9 9 41 47 507 613
FHLB Stock . . . . . . . 1,982 - - - - 1,982
Investment securities. . 11,951 5,088 10,069 - - 27,108
Federal funds sold
overnight and other
interest-bearing
deposits. . . . . . . . 22,673 - - - - 22,673
-------- --------- --------- --------- ---------- ---------
Total rate
sensitive assets. $89,225 $ 56,065 $ 70,462 $ 57,264 $ 65,283 $338,299
======= ======== ======== ======== ========= ========
Interest-bearing
liabilities:
Deposits:
NOW accounts . . . . . . $ 4,837 $ 4,837 $ 19,349 $ 19,349 $ - $ 48,372
Passbook savings
accounts. . . . . . . 1,344 1,344 5,377 5,377 - 13,442
Money market
deposit accounts. . . 6,799 6,799 27,197 27,197 - 67,992
Certificates of
deposit . . . . . . . 66,783 57,186 28,340 4,029 49 156,387
Borrowings. . . . . . . . . 543 18 71 71 889 1,592
-------- --------- --------- --------- ---------- --------
Total rate
sensitive liabilities $80,306 $ 70,184 $ 80,334 $ 56,023 $ 938 $287,785
======== ========= ========= ========= ========== ========
Excess (deficiency) of
interest sensitive
assets over interest
sensitive liabilities . . $ 8,919 $(14,119) $ (9,872) $ 1,241 $ 64,345 $ 50,514
Cumulative excess
(deficiency) of
interest sensitive
assets . . . . . . . . . . $ 8,919 $ (5,200) $(15,072) $(13,831) $ 50,514 $ 50,514
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities. . . . 111.11% 96.54% 93.47% 95.18% 117.55% 117.55%
Interest sensitivity
gap to total rate
sensitive assets . . . . . 2.64% (4.17)% (2.92)% 0.37% 19.02% 14.93%
Ratio of interest-
earning assets to
interest-bearing
liabilities. . . . . . . . 111.11% 79.88% 87.71% 102.22% 6,959.81% 117.55%
Ratio of cumulative
gap to total rate
sensitive assets . . . . . 2.64% (1.54)% (4.46)% (4.09)% 14.93% 14.93%
13
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C. Loughry, Jr.**
10.2 Employment Agreement with Ronald F. Knight **
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis **
10.5 Severance Agreement with R. Dale Floyd **
10.6 Severance Agreement with M. Glenn Layne **
10.7 Severance Agreement with Joy B. Jobe**
10.8 Severance Agreement with William S. Jones**
10.9 Severance Agreement with David W. Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
10.12 Management Recognition Plan with William H. Huddleston III ***
10.13 Management Recognition Plan with Gary Brown ***
10.14 Management Recognition Plan with Ed Elam ***
10.15 Management Recognition Plan with Frank E. Crosslin, Jr. ***
10.16 Management Recognition Plan with Tim J. Durham ***
10.17 Management Recognition Plan with James C. Cope ***
10.18 Management Recognition Plan with Terry G. Haynes ***
10.19 Management Recognition Plan with Ed C. Loughry, Jr. ***
10.20 Management Recognition Plan with Ronald F. Knight ***
10.21 Management Recognition Plan with William S. Jones ***
10.22 Management Recognition Plan with Hillard C. Gardner ***
10.23 Management Recognition Plan with R. Dale Floyd ***
10.24 Management Recognition Plan with David W. Hopper ***
10.25 Management Recognition Plan with Joe W. Townsend ***
10.26 Management Recognition Plan with M. Glenn Layne ***
10.27 Management Recognition Plan with Joy B. Jobe ***
10.28 Management Recognition Plan with Ira B. Lewis, Jr. ***
10.29 Management Recognition Plan with Elizabeth L. Green ***
10.30 Management Recognition Plan with James O. Sweeney, III ***
13 Annual Report to Stockholders****
21 Subsidiaries of the Registrant****
27 Financial Data Schedule
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission on March 30, 1998.
*** Incorporated herein by reference to the Registrant's Annual Meeting
Proxy Statement dated March 15, 1999, as filed with the Securities and
Exchange Commission on March 15, 1999.
**** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999, as filed with the
Securities and Exchange Commission on March 27, 2000.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 2000.
14
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: November 6, 2000 by: /s/ Ed C. Loughry, Jr.
-------------------------
Ed C. Loughry, Jr.
Chairman of the Board
of Directors
Chief Executive Officer
Date: November 6, 2000 by: /s/ Hillard C. Gardner
------------------------
Hillard C. Gardner
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15