0
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-23605
CAVALRY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1721072
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 893-1234
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendments to
this Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sales price of the Registrant's Common Stock as
quoted on the NASDAQ National Market System under the symbol "CAVB" on March 26,
2000, was $83,481,412 (7,104,801 shares at $11.75 per share). It is assumed for
purposes of this calculation that none of the Registrant's officers, directors
and 5% stockholders (including the Cavalry Banking Employee Stock Ownership
Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2000 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders (Part III).
PART I
ITEM 1. BUSINESS
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GENERAL
Cavalry Bancorp, Inc. ("Company"), a Tennessee corporation, was organized on
November 5, 1997 for the purpose of becoming the holding company for Cavalry
Banking ("Bank") upon the Bank's conversion from a federally-chartered mutual to
a federally-chartered stock savings bank ("Conversion"). The Conversion was
completed on March 16, 1998. At December 31, 2000, the Company had total assets
of $384.3 million, total deposits of $336.5 million and shareholders' equity of
$44.0 million. The Company has not engaged in any significant activity other
than holding the stock of the Bank. Accordingly, the information set forth in
this report, including financial statement and related data, relates primarily
to the Bank.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits and the Securities and Exchange Commission ("SEC"). The
Bank's deposits have been federally insured since 1936 and are currently insured
by the FDIC under the Savings Association Insurance Fund ("SAIF"). The Bank has
been a member of the Federal Home Loan Bank ("FHLB") System since 1936.
The Bank is a community-oriented financial institution whose primary business is
attracting deposits from the general public and using those funds to originate a
variety of loans to individuals residing within its primary market area, and to
businesses owned and operated by such individuals. The Bank originates both
adjustable rate mortgage ("ARM") loans and fixed-rate mortgage loans.
Generally, ARM loans are retained in the Bank's portfolio and long-term
fixed-rate mortgage loans are originated for sale in the secondary market. In
addition, the Bank actively originates construction and acquisition and
development loans. The Bank also originates commercial real estate, commercial
business, and consumer and other non-real estate loans.
MARKET AREA
The Bank considers Rutherford, Bedford and Williamson Counties in Central
Tennessee to be its primary market area. A large number of the Bank's
depositors reside, and a substantial portion of its loan portfolio is secured by
properties located, in Rutherford and Bedford Counties.
The economy of Rutherford and Bedford Counties are diverse and generally stable.
According to the Rutherford and Bedford Area Chambers of Commerce, major
employers include Nissan Motor Manufacturing Corp. USA, Rutherford County
Government, Whirlpool Corp., Bridgestone/Firestone Inc., Middle Tennessee State
University, Alvin C. York Veterans Administration Medical Center and Ingram Book
Co., among others.
SELECTED FINANCIAL DATA
This information is incorporated by reference from pages 13 and 14 of the 2000
Annual Report to Stockholders ("Annual Report") included herein as Exhibit 13.
LENDING ACTIVITIES
GENERAL. At December 31, 2000, the Bank's total loans receivable portfolio
amounted to $283.7 million, or 73.82% of total assets at that date. The Bank
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by one-to-four family properties, with such loans
amounting to $64.8 million, or 20.6% of total loans at December 31, 2000. In
addition, the Bank originates construction loans, commercial real estate loans,
land loans, consumer loans and commercial business loans. A substantial portion
of the Bank's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area.
1
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the
Bank's loan portfolio by type of loan as of the dates indicated.
At December 31,
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2000 1999 1998 1997 1996
----------------- ----------------- --------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
(Dollars in thousands)
Mortgage Loans:
One-to-four
family(1). . . . $ 64,776 20.6% $ 60,261 18.1% $ 75,554 24.8% $ 82,930 32.9% $ 81,279 33.1%
Multi-family. . . 2,519 0.8 780 0.2 1,125 0.4 1,338 0.5 2,847 1.2
Commercial. . . . 80,029 25.4 71,419 21.4 52,516 17.2 39,690 15.8 30,099 12.3
Construction. . . 56,015 17.8 69,421 20.9 84,900 27.9 54,666 21.7 61,032 24.9
Land acquisition
and development. 21,498 6.8 40,645 12.2 15,367 5.1 17,011 6.8 18,799 7.7
-------- --------- -------- --------- -------- ------ -------- ------ -------- ------
Total mortgage
loans . . . . . 224,837 71.4 242,526 72.8 229,462 75.4 195,635 77.7 194,056 79.2
-------- -------- -------- -------- --------
Consumer Loans:
Home equity
lines of credit 5,322 1.7 4,788 1.4 3,790 1.2 2,783 1.1 1,964 0.8
Automobile. . . . 8,609 2.7 8,632 2.6 6,788 2.2 5,028 2.0 3,716 1.5
Unsecured . . . . 1,884 0.6 1,649 0.5 1,527 0.5 1,684 0.7 1,779 0.7
Other secured . . 36,280 11.5 38,809 11.7 32,792 10.8 23,852 9.5 23,037 9.4
-------- --------- -------- --------- -------- ------ -------- ------ -------- ------
Total consumer
loans . . . . . 52,095 16.5 53,878 16.2 44,897 14.7 33,347 13.3 30,496 12.4
-------- --------- -------- --------- -------- ------ -------- ------ -------- ------
Commercial
business loans. . 38,177 12.1 36,456 11.0 30,213 9.9 22,544 9.0 20,698 8.4
-------- --------- -------- --------- -------- ------ -------- ------ -------- ------
Total loans . . . 315,109 100.0% 332,860 100.0% 304,572 100.0% 251,526 100.0% 245,250 100.0%
========= ========= ====== ====== ======
Less:
Undisbursed
portion of loans
in process. . . 26,471 51,243 52,098 30,178 36,573
Net deferred
loan fees . . . 742 785 773 710 701
Allowance for
loan losses . . 4,235 4,136 3,231 2,804 2,123
-------- --------- -------- --------- --------
Total loans
receivable,
net . . . . . . $283,661 $276,696 $248,470 $217,834 $205,853
======== ========= ======== ======== ========
<FN>
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(1) Includes loans held-for-sale.
ONE-TO-FOUR FAMILY REAL ESTATE LENDING. Historically, the Bank has concentrated
its lending activities on the origination of loans secured by first mortgage
loans on existing one-to-four family residences located in its primary market
area. At December 31, 2000, $64.8 million, or 20.6% of the Bank's total loan
portfolio, consisted of such loans. The Bank originated $103.2 million, $121.2
million and $159.3 million of one-to-four family residential mortgage loans
during the years ended December 31, 2000, 1999, and 1998, respectively.
Generally, the Bank's fixed-rate one-to-four family mortgage loans have
maturities ranging from 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions
and documentation which permit them to be sold to U.S. Government sponsored
agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC"). The
Bank's fixed-rate loans customarily include "due on sale" clauses, which give
the Bank the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
2
The Bank also originates ARM loans at rates and terms competitive with market
conditions. At December 31, 2000, $54.9 million, or 17.4% of the Bank's gross
loan portfolio, were subject to periodic interest rate adjustments. The Bank
originates for its portfolio ARM loans which provide for an interest rate which
adjusts every year or which is fixed for one, three or five years and then
adjusts every year after the initial period. Most of the Bank's one-year,
three-year and five-year ARMs adjust every year after the initial fixed rate
period based on the one year Treasury constant maturity index. The Bank's ARMs
are typically based on a 30-year amortization schedule. The Bank qualifies the
borrowers on its nonconforming ARM loans (i.e., loans not originated in
conformity with standards that would permit the loans to be sold in the
secondary market) based on the initial rate. The Bank qualifies the borrowers
on its conforming ARM loans based on the maximum note interest rate during the
second year of the loan. A one-year ARM loan that is originated according to
FHLMC secondary market standards may be converted to a fixed-rate loan within
five years of the origination date. ARM loans that are not saleable to the
FHLMC are not permitted to be converted to fixed rate loans. The Bank does not
offer deep discount or "teaser" rates. The Bank's current ARM loans do not
provide for negative amortization. The Bank's ARM loans generally provide for
annual and lifetime interest rate adjustment limits of 2% and 5% to 6%,
respectively.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of
the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed-rate mortgage loans
and ARM loans that can be originated at any time is largely determined by the
demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the Bank's
exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs due to changed
rates to be paid by the customer. It is possible that during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased payments required by the borrower. In addition,
although ARM loans allow the Bank to increase the sensitivity of its asset base
to changes in the interest rates, the extent of this interest sensitivity is
limited by the annual and lifetime interest rate adjustment limits. Because of
these considerations, the Bank has no assurance that yields on ARM loans will be
sufficient to offset increases in the Bank's cost of funds. The Bank believes
these risks, which have not had a material adverse effect on the Bank to date,
generally are less than the risks associated with holding fixed-rate loans in
the portfolio during a rising interest rate environment.
The Bank also originates one-to-four family mortgage loans under Federal Housing
Administration ("FHA") and Veterans Administration ("VA") programs and the
Tennessee Housing and Development Agency ("THDA"), an affordable housing
program. FHA, VA and THDA loans are generally sold to private investors with
servicing released (i.e., the right to collect principal and interest payments
and forward it to the purchaser of the loan, maintain escrow accounts for
payment of taxes and insurance and perform other loan administration functions
is sold with the loan). See "-- Loan Originations, Sales and Purchases."
The Bank generally requires title insurance insuring the status of its lien or
an acceptable attorney's opinion on all loans where real estate is the primary
source of security. The Bank also requires that fire and casualty insurance
(and, if appropriate, flood insurance) be maintained in an amount at least equal
to the outstanding loan balance.
The Bank's one-to-four family residential mortgage loans typically do not exceed
80% of the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Bank's Board of Directors, the Bank can lend up to 95%
of the appraised value of the property securing a one-to-four family residential
loan; however, the Bank generally obtains private mortgage insurance on the
portion of the principal amount that exceeds 80% to 95% of the appraised value
of the security property.
CONSTRUCTION LENDING. The Bank actively originates three types of residential
construction loans: (i) speculative construction loans, (ii) pre-sold
construction loans and (iii) construction/permanent loans. To a substantially
lesser extent, the Bank also originates construction loans for the development
of multi-family and commercial properties.
3
At December 31, 2000, the composition of the Bank's construction loan portfolio
was as follows:
Outstanding Percent of
Balance(1) Total
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(In thousands)
Residential:
Speculative construction $30,270 54.04%
Pre-sold construction 13,168 23.51
Construction/permanent 7,209 12.87
Commercial and multi-family 5,368 9.58
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Total $56,015 100.00%
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(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home. The home buyer may be identified either during or after the construction
period, with the risk that the builder will have to pay debt service on the
speculative construction loan and finance real estate taxes and other carrying
costs of the completed home for a significant time after the completion of
construction until the home buyer is identified. The Bank lends to
approximately 115 local builders, many of whom may have only one or two
speculative loans outstanding from the Bank. The Bank considers approximately 30
builders as core borrowers with several speculative loans outstanding at any one
time. Rather than originating lines of credit to homebuilders to construct
several homes at once, the Bank originates and underwrites a separate loan for
each home. Speculative construction loans are originated for a term of 12
months, with interest rates ranging from 0.5% to 2.0% above the prime lending
rate, and with a loan-to-value ratio of no more than 80% of the appraised
estimated value of the completed property. At December 31, 2000, the Bank had 8
borrowers each with aggregate outstanding speculative loan balances of more than
$500,000, all of which were performing according to their respective terms and
the largest of which amounted to $1.4 million.
Unlike speculative construction loans, pre-sold construction loans are made to
home builders who, at the time of construction, have a signed contract with a
home buyer who has a commitment for permanent financing for the finished home
with the Bank or another lender. Pre-sold construction loans are generally
originated for a term of 12 months, with adjustable interest rates ranging from
0.5% to 1.0% above the prime lending rate, and with loan-to-value ratios of 80%
of the appraised estimated value of the completed property or cost, whichever is
less. At December 31, 2000, the largest outstanding pre-sold construction loan
had an outstanding balance of $270,000 and was performing according to its
terms.
4
Construction/permanent loans are originated to the homeowner rather than the
homebuilder. The construction phase of a construction/permanent loan generally
lasts 12 months and the interest rate charged is generally 7.25% to 8.50%,
fixed, and with loan-to-value ratios of 80% (or up to 95% with private mortgage
insurance) of the appraised estimated value of the completed property or cost,
whichever is less. At the completion of construction, the Bank may either
originate a fixed-rate mortgage loan or an ARM loan. See "-- Lending Activities
- -- One- to- Four Family Real Estate Lending." At December 31, 2000, the largest
outstanding construction/permanent loan had an outstanding balance of $348,000
and was performing according to its terms.
The Bank also provides construction financing for non-residential properties
(i.e., multi-family and commercial properties). At December 31, 2000, such
construction loans amounted to $5.4 million.
Construction loans up to $1,000,000 may be approved by combining the lending
authority of loan officers up to the required level. The maximum lending
authority for any one loan officer is $500,000. The level of each individual
loan officer's lending authority is reviewed and approved annually. All
construction loans over $1,000,000 must be approved by the Board of Directors.
See "-- Loan Solicitation and Processing." Prior to preliminary approval of any
construction loan application, an appraiser approved by the Board of Directors
inspects the site and the Bank reviews the existing or proposed improvements,
identifies the market for the proposed project, analyzes the pro forma data and
assumptions on the project. In the case of a speculative or pre-sold
construction loan, the Bank reviews the experience and expertise of the builder.
After preliminary approval has been given, the application is processed, which
includes obtaining credit reports, financial statements and tax returns on the
borrowers and guarantors, an independent appraisal of the project, and any other
expert reports necessary to evaluate the proposed project. In the event of cost
overruns, the Bank requires that the borrower use its own funds to maintain the
original loan-to-value ratio.
The construction loan documents require that construction loan proceeds be
disbursed in increments as construction progresses. Disbursements are based on
periodic on-site inspections by an appraiser and/or Bank personnel approved by
the Board of Directors. The Bank regularly monitors the construction loan
portfolio and the economic conditions and housing inventory. Property
inspections are performed by the Bank's property inspector. The Bank believes
that the internal monitoring system helps reduce many of the risks inherent in
its construction lending.
Construction lending affords the Bank the opportunity to achieve higher interest
rates and fees with shorter terms to maturity than does its single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due. The Bank has sought to address these
risks by adhering to strict underwriting policies, disbursement procedures, and
monitoring practices. In addition, because the Bank's construction lending is
in its primary market area, changes in the local economy and real estate market
could adversely affect the Bank's construction loan portfolio.
5
ACQUISITION AND DEVELOPMENT LENDING. The Bank originates acquisition and
development loans for the purpose of developing the land (i.e., installing
roads, sewers, water and other utilities) for sale for residential housing
construction. At December 31, 2000, the Bank had land A&D loans with aggregate
approved commitments of $21.5million, of which an aggregate of $19.5 million was
outstanding. At December 31, 2000, the largest land A&D loan had an outstanding
balance of $1.2 million and was performing according to its terms. All of the
land A&D loans are secured by properties located in the Bank's primary market
area.
Land A&D loans are usually repaid through the sale of the developed land.
However, the Bank believes that its land A&D loans are made to individuals with,
or to corporations the principals of which possess, sufficient personal
financial resources out of which the loans could be repaid, if necessary.
Land A&D loans are secured by a lien on the property, made for a two year term,
and with an interest rate that adjusts with the prime rate. The Bank requires
monthly interest payments during the term of the land A&D loan. After the
expiration of the two year term, the loan is reevaluated, adjusted and/or
extended as a fixed or adjustable rate loan. In addition, the Bank generally
obtains personal guarantees from the principals of its corporate borrowers. At
December 31, 2000, the Bank did not have any nonaccruing land A&D loans.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to- four family residential mortgage loans because such loans are more
difficult to monitor and foreclose as the Bank may be confronted with a property
the value of which is insufficient to assure full repayment. Furthermore, if
the borrower defaults the Bank may have to expend its own funds to complete
development and also incur costs associated with marketing and holding the
building lots pending sale. Land A&D loans are generally considered to involve
a higher degree of risk than single-family permanent mortgage loans because of
the concentration of principal among relatively few borrowers and development
projects, the increased difficulty at the time the loan is originated of
estimating the development building costs, the increased difficulty and costs of
monitoring the loan, the higher degree of sensitivity to increases in market
rates of interest, and the increased difficulty of working out problem loans. A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses. The Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on acquisition
and development loans to 75%, although the Board of Directors has the authority
to approve acquisition and development loans with loan-to-value ratios of up to
80%.
COMMERCIAL REAL ESTATE LENDING. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At December
31, 2000, $80.0 million, or 25.4% of the Bank's total loan portfolio, consisted
of loans secured by existing commercial real estate properties. The majority of
the Bank's commercial real estate properties are secured by small businesses,
retail properties and churches located in the Bank's primary market area.
Narrative appraisals are required for all properties securing commercial real
estate loans in excess of $250,000. On loans of $250,000 or less, a short form
or drive-by appraisals is acceptable. Narrative appraisals over $250,000 must
be completed by a state certified appraiser with a "general" certification.
Appraisals or drive-by on loans of $250,000 or under may be performed by any
state certified or in-house appraiser. All appraisals go through final review
by bank management. The Bank considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property.
6
The average size of a commercial real estate loan in the Bank's portfolio is
approximately $100,000 to $200,000. Commercial real estate loans are generally
structured with fixed rates of interest and terms of three to five years based
on amortization schedules of 15 to 20 years. At December 31, 2000, the largest
commercial real estate loan had an outstanding balance of $3.8 million.
Loan-to-value ratios on the Bank's commercial real estate loans are generally
limited to 80%. As part of the criteria for underwriting commercial real estate
loans, the Bank generally imposes a debt coverage ratio (the ratio of net cash
from operations before payment of debt service to debt service) of not less than
1.2 times. Generally, it is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its commercial real
estate loans.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
COMMERCIAL BUSINESS LENDING. The Bank's commercial business lending activities
focus primarily on small to medium size businesses owned by individuals well
known to the Bank and who reside in the Bank's primary market area. At December
31, 2000, commercial business loans amounted to $38.2 million, or 12.1% of total
loans.
Commercial business loans may be unsecured loans, but generally are secured by
various types of business collateral other than real estate (i.e., inventory,
equipment, etc.). In many instances, however, such loans are often also secured
by junior liens on real estate. Commercial business loans are generally made in
amounts between $50,000 to $75,000 and may be either lines of credit or term
loans. Lines of credit are generally renewable and made for a one-year term.
Lines of credit are generally variable rate loans indexed to the prime rate.
Term loans are generally originated with three to five year maturities, with a
maximum of seven years, on a fully amortizing basis. As with commercial real
estate loans, the Bank generally requires annual financial statements from its
commercial business borrowers and, if the borrower is a corporation, personal
guarantees from the principals.
At December 31, 2000, the largest commercial business loan was a $2.0 million
line of credit secured by commercial real estate taken as an abundance of
caution. Such loan was performing according to its terms at December 31, 2000.
Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential, commercial and multi-family real estate lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
7
As part of its commercial business lending activities, the Bank issues standby
letters of credit or performance bonds as an accommodation to its borrowers.
See "-- Loan Commitments and Letters of Credit."
CONSUMER LENDING. The Bank originates a variety of consumer loans that
generally have shorter terms to maturity and higher interest rates than
residential mortgage loans. At December 31, 2000, the Bank's consumer loans
totaled $52.1 million, or 16.5%, of the Bank's loans receivable. The Bank's
consumer loans consist primarily of home equity lines of credit, automobile
loans, and a variety of other secured loans, a substantial portion of which are
secured by junior mortgages on real estate. To a substantially lesser extent,
the Bank also originates unsecured consumer loans.
The Bank anticipates that it will continue to be an active originator of
consumer loans. Factors that may affect the ability of the Bank to increase its
originations in this area include the demand for such loans, interest rates and
the state of the local and national economy. Consumer loans accounted for
11.9%, 12.3% and 12.8% of the Bank's total loan originations in the fiscal years
ended December 31, 2000, 1999 and 1998, respectively.
The Bank offers open-ended home equity lines of credit secured by a second
mortgage on the borrower's primary residence. These lines of credit have an
interest rate that is one to two percentage points above the prime lending rate,
as published in The Wall Street Journal, which adjusts monthly. The majority of
the approved lines of credit at December 31, 2000 were less than $75,000. At
December 31, 2000, approved lines of credit totaled $7.0 million, of which $5.3
million was outstanding.
At December 31, 2000, the Bank's automobile loan portfolio amounted to $8.6
million, or 2.7%, of total loans at such date, a substantial portion of which
were secured by used automobiles. The maximum term for the Bank's automobile
loans is 60 months. The Bank generally lends up to 80% to 90% of the purchase
price of the automobile. The Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft, with a maximum allowable
deductible and with the Bank listed as loss payee. The Bank does not engage in
indirect automobile lending.
The Bank's consumer loan portfolio also includes other consumer loans secured by
a variety of collateral, such as recreational vehicles, boats, motorcycles,
deposit accounts and, in many instances, junior mortgages on real estate. Such
other secured consumer loans were $36.3 million, or 11.5% of total loans, at
December 31, 2000.
At December 31, 2000, unsecured consumer loans amounted to $1.9 million, or 0.6%
of total loans. Unsecured loans are made for a term up to 24 months with fixed
rates of interest and are offered primarily to existing customers of the Bank.
Included in the unsecured consumer loan portfolio are credit card loans with an
aggregate outstanding balance of $560,000 at December 31, 2000. Approved credit
card lines totaled $2.1 million at December 31, 2000. The Bank is a VISA and
MASTERCARD card issuer. The Bank does not actively solicit credit card business
beyond its customer base and market area and has not engaged in mailing of
pre-approved credit cards. The rate currently charged by the Bank on its credit
card loans is the prime rate, as published in The Wall Street Journal, plus
6.9%, and the Bank is permitted to change the interest rate monthly.
8
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At December 31, 2000, the Bank had $42,000
of consumer loans accounted for on a nonaccrual basis.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain information
at December 31, 2000 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Loan balances do not include undisbursed
loan proceeds and do not reflect the deduction for unearned discounts, unearned
income and allowance for loan losses.
After After
One Year 3 Years 5 Years
Within Through Through Through After
One Year 3 Years 5 Years 10 Years 10 Years Total
------ ------- ------- ------- ------- -----
(In thousands)
Mortgage loans:
Residential $ 4,995 $ 5,726 $ 7,170 $11,619 $37,785 $ 67,295
Construction 45,090 5,656 217 - 79 51,042
Commercial 19,714 22,653 26,934 3,958 6,770 80,029
Consumer and other loans 14,072 20,982 15,475 1,522 44 52,095
Commercial business loans 23,045 7,849 5,959 674 650 38,177
-------- ------- ------- ------- ------- --------
Total $106,916 $62,866 $55,755 $17,773 $45,328 $288,638
======== ======= ======= ======= ======= ========
9
The following table sets forth the dollar amount of all loans due after December
31, 2001, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed Floating or
Rates Adjustable Rates
------ ----------------
(In thousands)
Mortgage loans:
Residential $ 14,687 $47,613
Construction - 5,952
Commercial 53,547 6,768
Consumer and other loans 32,869 5,154
Commercial business loans 14,412 720
-------- -------
Total $115,515 $66,207
======== =======
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of a loan is substantially less than its
contractual terms because of prepayments. In addition, due-on-sale clauses on
loans generally give the Bank the right to declare loans immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life
of mortgage loans tends to increase, however, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management
believes that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
LOAN SOLICITATION AND PROCESSING. The Bank's lending activities are subject to
the written, non-discriminatory, underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management. Loan
originations come from a number of sources. The customary sources of loan
originations are realtors, walk-in customers, referrals and existing customers.
A business development program has been implemented where loan officers and
sales personnel make sales calls on building contractors and realtors. The Bank
also advertises its loan products.
In marketing its products and services, the Bank emphasizes its community ties,
customized personal service and an efficient underwriting and approval process.
The Bank uses professional fee appraisers for most residential real estate loans
and construction loans and all commercial real estate and land loans. The Bank
requires hazard, title and, to the extent applicable, flood insurance on all
security property.
Loan approval authority varies based on loan type. Construction loans and
acquisition and development loans up to $1,000,000 may be approved by combining
the lending authority of loan officers up to the required level. The maximum
lending authority for any one loan officer is $500,000. The level of each
individual loan officers lending authority is reviewed and approved annually by
the Board of Directors. Loans over $1,000,000 must be approved by the Board of
Directors. One-to-four family residential loans up to $500,000 originated to be
held in portfolio may be approved by any two members of the Loan Committee,
while loans over $1,000,000 must be approved by the Board of Directors.
One-to-four family residential mortgage loans that are originated for sale to
investors and that are underwritten to the investor's specifications may be
approved by any member of the Loan Committee up to FHLMC loan limits. Consumer
and commercial business loans may be approved by loan officers individually or
in combination with other loan officers within dollar limits specified by the
Loan Committee. These dollar limits range from $5,000 to $500,000 for unsecured
loans and from $15,000 to $1,000,000 for secured loans. The maximum approval
authority for an individual loan officer is $250,000 for unsecured loans and
$500,000 for secured loans. All unsecured consumer and commercial business
loans over $500,000, and all secured consumer and commercial business loans over
$1,000,000, must be approved by the Board of Directors. Each approved loan,
regardless of type, is reviewed by the Bank's quality control personnel to
insure that proper approval was received.
10
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans in its primary market area.
The Bank sells most loans originated under FHA and VA programs, including
related servicing rights, including those originated for the THDA. The Bank
periodically sells conventional one-to-four family loans (i.e., non-FHA/VA
loans) with servicing retained and without recourse. These sales generally
involve fixed-rate loans which help to reduce the Bank's exposure to interest
rate risk, and the proceeds of sale are used to fund continuing operations.
However, the Bank occasionally may sell ARM loans to satisfy liquidity needs.
Sellers of loans are exposed to various degrees of "pipeline risk," which is the
risk that the value of the loan will decline during the period between the time
the loan is originated and the time of sale because of changes in market
interest rates. The Bank is exposed to a relatively low degree of pipeline risk
because it generally does not fix the loan interest rate until shortly before or
on the closing date and loans are generally closed against a mandatory purchase
commitment by the FHLMC or other purchaser.
When conventional loans are sold, the Bank may retain the responsibility for
servicing the loans, including collection and remitting mortgage loan payments,
accounting for principal and interest and holding and disbursing escrow or
impound funds for real estate taxes and insurance premiums. The Bank receives a
servicing fee for performing these services for others. The Bank's servicing
portfolio amounted to $111.4 million at December 31, 2000. The Bank is
generally paid a fee equal to 0.25% of the outstanding principal balance for
servicing sold loans. Loan servicing income totaled $129,000, $112,000 and
$264,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Bank earns late charges collected from delinquent customers whose loans are
serviced by the Bank. The Bank is allowed to invest escrow impounds (funds
collected from mortgage customers for the payment of property taxes and
insurance premiums on mortgaged real estate) until they are disbursed on behalf
of mortgage customers, but is not required to pay interest on these funds. At
December 31, 2000, borrowers' escrow funds amounted to $174,000.
Historically, the Bank has not been an active purchaser of loans or
participation interests in loans.
11
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
---------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Loans originated:
Mortgage loans:
One-to-four family $ 103,150 $ 121,159 $ 159,259
Multi-family 2,179 2,350 -
Commercial 16,404 21,403 19,118
Construction 63,066 87,956 80,150
Land 4,814 34,964 11,624
Consumer 31,131 46,043 49,253
Commercial business loans 40,238 59,556 65,046
---------- ---------- ----------
Total loans originated 260,982 373,431 384,450
Loans purchased:
One-to-four family - - -
---------- ---------- ----------
Total loans originated and purchased 260,982 373,431 384,450
Loans sold:
Whole loans sold (104,074) (121,735) (120,761)
---------- ---------- ----------
Total loans sold (104,074) (121,735) (120,761)
Mortgage loan principal repayments (82,909) (84,602) (115,563)
Other loan principal repayments (70,315) (138,930) (95,080)
Increase (decrease) in other items, net 3,281 62 (22,410)
---------- ---------- ----------
Net increase (decrease) in
loans, net $ 6,965 $ 28,226 $ 30,636
========== ========== ==========
LOAN COMMITMENTS AND LETTERS OF CREDIT. The Bank issues commitments for
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 45 days from approval, depending on the type of transaction.
At December 31, 2000, the Bank had no loan commitments (excluding undisbursed
portions of interim construction loans of $26.5 million) and unused lines of
credit of $35.3 million. See Note 18 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit or performance bonds in favor of entities, usually
municipalities, for whom the Bank's borrowers are performing work or other
services. At December 31, 2000, the Bank had outstanding standby letters of
credit of $7.4 million that were issued primarily to municipalities as
performance bonds. See Note 18 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
LOAN FEES. In addition to interest earned on loans, the Bank receives income
from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loan. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage of
the amount borrowed. In accordance with applicable accounting procedures, loan
origination fees and discount points in excess of loan origination costs are
deferred and recognized over the contractual remaining lives of the related
loans on a level yield basis. Discounts and premiums on loans purchased are
accreted and amortized in the same manner. The Bank recognized $837,000, $1.0
million and $1.2 million of deferred loan fees during the years ended December
31, 2000, 1999 and 1998, respectively, in connection with loan refinancings,
payoffs, sales and ongoing amortization of outstanding loans.
12
The Bank also earns fee income on loans serviced for others. Loan servicing
fees for the year ended December 31, 2000 and 1999 amounted to $129,000 and
$112,000, respectively. At December 31, 2000, the Bank serviced loans for
others totaling $111.4 million. See Note 5 of Notes to the Consolidated
Financial Statements contained in the Annual Report.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts are generally made
ten days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means and the Bank will attempt to work out a payment
schedule. While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on non-accrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more. Interest accrued but not collected at the date the loan is placed on
non-accrual status is reversed against income in the current period. Loans may
be reinstated to accrual status when payments are under 90 days past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all loans
delinquent more than 60 days, all loans in foreclosure and all foreclosed and
repossessed property owned by the Bank.
13
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At December 31,
-----------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One- to- four family. . . . . . . . . $ 71 $ 328 $ 74 $ 73 $ 9
Construction. . . . . . . . . . . . . 10 - - 68 -
Commercial. . . . . . . . . . . . . . - - - - -
Consumer loans (automobile). . . . . . . 38 - 32 9 42
Other . . . . . . . . . . . . . . . . 4 5 1 - -
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . 123 333 107 150 51
Accruing loans which are contractually
past due 90 days or more. . . . . . . . - - 66 98 -
------ ------ ------ ------ ------
Total of nonaccrual and 90 days past
due loans . . . . . . . . . . . . . . . 123 333 173 248 51
Real estate owned . . . . . . . . . . . . 64 117 80 - -
Other repossessed assets. . . . . . . . . 22 49 - - -
------ ------ ------ ------ ------
Total nonperforming assets . . . . . $ 209 $ 499 $ 253 $ 248 $ 51
====== ====== ====== ====== ======
Restructured loans. . . . . . . . . . . . $ - $ - $ - $ - $ -
====== ====== ====== ====== ======
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, net . . . . . . . . . . . . 0.04% 0.12% 0.07% 0.11% 0.02%
Non-accrual and 90 days or more past due
loans as a percentage of total assets . 0.03% 0.08% 0.05% 0.09% 0.02%
Non-performing assets as a percentage of
total assets. . . . . . . . . . . . . . 0.05% 0.13% 0.03% 0.09% 0.02%
Interest income that would have been recorded for the year ended December 31,
2000 had non-accruing loans been current in accordance with their original terms
would have amounted to $15,000. No interest was included in interest income on
such loans for the year ended December 31, 2000.
REAL ESTATE OWNED. See Note 1 of Notes to the Consolidated Financial Statements
contained in the Annual Report for a discussion of the accounting treatment of
real estate owned. At December 31, 2000, the Bank had 2 properties in real
estate owned which consisted of one single family residence and one commercial
property.
14
RESTRUCTURED LOANS. Under U.S. GAAP, the Bank is required to account for
certain loan modifications or restructuring as a "troubled debt restructuring."
In general, the modification or restructuring of a debt constitutes a troubled
debt restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that the
Bank would not otherwise consider. Debt restructurings or loan modifications
for a borrower do not necessarily always constitute troubled debt
restructurings, however, and troubled debt restructurings do not necessarily
result in non-accrual loans. The Bank did not have any restructured loans at
December 31, 2000.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding problem
assets of savings institutions. The regulations require that each insured
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank.
The aggregate amounts of the Bank's classified and special mention assets were
as follows:
At December 31,
---------------
2000 1999
---- ----
(In thousands)
Loss $ - $ -
Doubtful 142 74
Substandard assets 3,641 3,553
Special mention 202 162
15
At December 31, 2000, substandard assets consisted of five repossessed assets
totaling $86,000, one construction loan totaling $512,000, nine one-to-four
family mortgage loans totaling $698,000, forty five consumer loans totaling
$703,000 and eighteen commercial loans totaling $1.6 million. Doubtful loans
consisted of two consumer loans totaling $16,000 and eight commercial loans
totaling $126,000. See Note 5 to the Consolidated Financial Statements
contained in the Annual Report for further discussion.
ALLOWANCE FOR LOAN LOSSES. The Bank has established a systematic methodology
for the determination of provisions for loan losses. The methodology is set
forth in a formal policy and takes into consideration the need for an overall
general valuation allowance as well as specific allowances that are tied to
individual loans.
In originating loans, the Bank recognizes that losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in the
loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured. The
amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation. Generally, a
provision for losses is charged against income quarterly to maintain the
allowances.
At December 31, 2000, the Bank had an allowance for loan losses of $4.2 million.
Management believes that the amount maintained in the allowance at December 31,
2000 will be adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with U.S. GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
16
The following table sets forth an analysis of the Bank's gross allowance for
possible loan losses for the periods indicated.
Year Ended December 31,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period. $4,136 $3,231 $2,804 $2,123 $1,997
Provision for loan losses . . . . 306 991 452 700 120
Recoveries:
Mortgage loans:
One- to- four family. . . . . . - - - - 14
Multi-family. . . . . . . . . . - - - - -
Commercial. . . . . . . . . . . - - - - 1
Construction. . . . . . . . . . - - - - -
Consumer loans:
Automobiles . . . . . . . . . . 23 13 8 23 -
Unsecured . . . . . . . . . . . - - - 5 191
Other . . . . . . . . . . . . . - - 21 1 12
Commercial business loans. . . . 6 3 - 1 -
------- ------- ------- ------- ------
Total recoveries . . . . . . . 29 16 29 30 218
Charge-offs:
Mortgage loans:
One- to- four family. . . . . . 48 5 - - 10
Construction. . . . . . . . . . - - - - -
Consumer loans:
Home equity lines of credit . . - - - - -
Automobile. . . . . . . . . . . 52 35 16 40 -
Credit card . . . . . . . . . . 6 3 5 1 -
Unsecured . . . . . . . . . . . 25 9 - - 196
Other . . . . . . . . . . . . . 37 47 33 5 6
Commercial business loans. . . . 68 3 - 3 -
------- ------- ------- ------- ------
Total charge-offs. . . . . . . 236 102 54 49 212
------- ------- ------- ------- ------
Net recoveries (charge-offs) . (207) (86) (25) (19) 6
------- ------- ------- ------- ------
Allowance at end of period. . $4,235 $4,136 $3,231 $2,804 $2,123
======= ======= ======= ======= ======
Allowance for loan losses as a
percentage of total loans out-
standing at the end of the period 1.34% 1.24% 1.06% 1.11% 0.87%
Net (charge-offs) recoveries as a
percentage of average loans
outstanding during the period (0.07)% (0.03)% (0.01)% (0.01)% -%
Allowance for loan losses as
a percentage of nonperforming
loans at end of period 3,443.09% 1,242.04% 3,019.63% 1,130.65% 4,162.75%
17
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any other
category.
At December 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Mortgage loans:
One-to-four family $ 395 20.6% $ 301 18.1% $ 378 24.8% $ 415 32.9% $ 122 33.1%
Multi-family . . . 11 0.8 4 0.2 6 0.4 20 0.5 4 1.2
Commercial . . . . 1,075 25.4 1,101 21.4 788 17.2 595 15.8 301 12.3
Construction . . . 840 17.8 740 20.9 492 27.9 367 21.7 245 24.9
Land . . . . . . . 142 6.8 346 12.2 231 5.1 255 6.8 188 7.7
Consumer loans:
Home equity
lines of credit. 72 1.7 72 1.4 57 1.2 42 1.1 25 0.8
Automobile . . . . 144 2.7 129 2.6 102 2.2 75 2.0 46 1.5
Credit cards . . . 3 0.1 74 0.1 6 0.1 3 0.1 - -
Loans secured by
deposit accounts - - - 0.6 - - - - - -
Unsecured. . . . . 26 0.5 17 0.4 17 0.4 22 0.6 22 0.7
Other secured. . . 532 11.5 582 11.1 453 10.8 358 9.5 288 9.4
Commercial business
loans. . . . . . 807 12.1 547 11.0 338 9.9 338 9.0 259 8.4
Unallocated . . . . 188 N/A 223 N/A 363 N/A 314 N/A 623 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses $4,235 100.0% $4,136 100.0% $3,231 100.0% $2,804 100.0% $2,123 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
18
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies and state and municipal governments, deposits at the FHLB-Cincinnati,
certificates of deposit of federally insured institutions, certain bankers'
acceptances and federal funds. Subject to various restrictions, the Bank may
also invest a portion of its assets in commercial paper and corporate debt
securities. Savings institutions like the Bank are also required to maintain an
investment in FHLB stock. The Bank is required under federal regulations to
maintain a minimum amount of liquid assets. See "Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," contained in the Annual Report.
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's investment securities purchases
generally have been limited to U.S. Government and agency securities with
contractual maturities of between one and five years.
The Bank's investment policies generally limit investments to U.S. Government
and agency securities, municipal bonds, certificates of deposit, marketable
corporate debt obligations, and mortgage-backed securities. The Bank's
investment policy does not permit hedging activities or the purchase of high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the interest
rate, yield, settlement date and maturity of the investment, the Bank's
liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments). The effect that the proposed
investment would have on the Bank's credit and interest rate risk and risk-based
capital is also considered.
The following table sets forth the amortized cost and fair value of the Bank's
debt and mortgage-backed and related securities, by accounting classification
and by type of security, at the dates indicated.
At December 31,
------------------------------------------------------
2000 1999 1998
------------------ --------------- ---------------
Percent Percent Percent
Amortized of Amortized of Amortized of
Cost(1) Total Cost(1) Total Cost(1) Total
------- ------- ------- ------- ------- --------
(In thousands)
Held to Maturity:
Debt Securities:
U.S. Treasury obligations. . . . . . $ - -% $ - -% $ - - %
U.S. Government agency obligation. . - - - - - -
Mortgage-backed securities. . . . . . 594 1.70 651 6.86 959 1.95
FHLB stock. . . . . . . . . . . . . . 2,020 5.80 1,878 19.78 1,751 3.56
------- ------- ------ ------- ------- -------
Total held to maturity securities . . 2,614 7.50 2,529 26.64 2,710 5.51
------- ------- ------ ------- ------- -------
Available for Sale:
Debt Securities:
U.S. Treasury obligations. . . . . . 9,009 25.84 - - - -
U.S. Government agency obligations . 23,238 66.66 6,964 73.36 46,505 94.49
------- ------- ------ ------- ------- -------
Total available for sale securities 32,247 92.50 6,964 73.36 46,505 94.49
------- ------- ------ ------- ------- -------
Total portfolio . . . . . . . . . . . $34,861 100.00% $9,493 100.00% $49,215 100.00%
======= ======= ====== ======= ======= =======
<FN>
- ------------
(1) The market value of the investment portfolio amounted to $34.9 million, $9.5
million and $49.3 million at December 31, 2000, 1999 and 1998, respectively. At December
31, 2000, the market value of the principal components of the Bank's investment securities
portfolio was as follows: U.S. Government securities, $32.2 million; mortgage-backed
securities, $589,000, and FHLB, $2.0 million.
19
The following table sets forth the maturities and weighted average yields of the
debt and mortgage-backed securities in the Bank's investment securities
portfolio at December 31, 2000.
Less Than One to Over Five to Over Ten
One Year Five Years Ten years Years
------------- ------------ ------------ ------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Held to Maturity:
Debt Securities:
U.S. Government
agency obligations. . . $ - -% $ - -% $ - -% $ - -%
Mortgage-backed
securities . . . . . . - - - - - - 594 7.52
FHLB stock. . . . . . . . 2,020 7.50 - - - - - -
------ ---- ------ ---- --- -- ---- ----
Total held to
maturity securities . 2,020 7.50 - - - - 594 7.52
------ ---- ------ ---- --- -- ---- ----
Available for Sale:
Debt Securities:
U.S. Treasury obligations 8,000 6.24 1,009 6.55 - - - -
U.S. Government agency
obligations . . . . . . 13,142 6.36 10,096 6.50 - - - -
------ ---- ------ ---- --- -- ---- ----
Total available-for-sale
securities. . . . . . . 21,142 6.31 11,105 6.50 - - - -
------ ---- ------ ---- --- -- ---- ----
Total portfolio. . . . . .$23,162 6.41% $11,105 6.50% $ - -% $594 7.52%
======= ==== ======= ===== === === ==== =====
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the Bank's lending
and other investment activities. In addition, the Bank also generates funds
internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB-Cincinnati may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. At December 31,
2000, the Bank had no other borrowing arrangements.
20
DEPOSIT ACCOUNTS. Most of the Bank's depositors reside in Tennessee. The
Bank's deposit products include a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts, regular
passbook savings, statement savings accounts and term certificate accounts.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Bank
reviews its deposit mix and pricing weekly. The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
The Bank believes it is competitive in the type of accounts and interest rates
it offers on its deposit products. The Bank does not seek to pay the highest
deposit rates but a competitive rate. The Bank determines the rates paid based
on a number of conditions, including rates paid by competitors, rates on U.S.
Treasury securities, rates offered on various FHLB-Cincinnati lending programs,
and the deposit growth rate the Bank is seeking to achieve.
The following table sets forth information concerning the Bank's time deposits
and other interest-bearing deposits at December 31, 2000.
Weighted
Average Percentage
Interest Original Minimum of Total
Rate Term Category Amount Balance Deposits
- --------- ---------------- --------------------------- --------- -------- ---------
(In thousands)
1.47% - NOW Accounts $ 1,000 $ 52,343 17.57%
1.24 - Savings Accounts 100 13,248 4.45
4.79 - Money Market Accounts 5,000 69,797 23.43
Certificates of Deposit
---------------------------
4.54 32 to 89 Days Fixed-term, Fixed Rate 1,000 300 0.10
4.85 90 to 181 Days Fixed-term, Fixed Rate 1,000 657 0.22
6.25 182 to 364 Days Fixed-term, Fixed Rate 1,000 25,788 8.66
6.83 12 Months Fixed-term, Adjustable Rate 1,000 1,772 0.59
6.00 18 Months Floating Rate IRA 250 338 0.11
6.46 12 to 18 Months Fixed-term, Fixed Rate 1,000 53,312 17.90
6.70 18 to 23 Months Fixed-term, Fixed Rate 1,000 3,219 1.08
5.59 18 Months Fixed Rate IRA 250 7,116 2.39
6.12 24 to 35 Months Fixed-term, Fixed Rate 1,000 13,588 4.56
5.75 36 to 47 Months Fixed-term, Fixed Rate 1,000 1,426 0.48
5.39 48 to 59 Months Fixed-term, Fixed Rate 1,000 43 0.01
5.73 60+ Months Fixed-term, Fixed Rate 1,000 9,472 3.18
5.93 2 Years Fixed-term, Adjustable Rate 1,000 516 0.17
6.76 3 to 60 Months Fixed-term, Fixed Rate 100,000 44,969 15.10
21
The following table indicates the amount of the Bank's jumbo certificates of
deposit by time remaining until maturity as of December 31, 2000. Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.
Maturity Period Amount
- ---------------- ---------
(In thousands)
Three months or less $ 7,571
Over three through six months 8,532
Over six through twelve months 22,169
Over twelve months 6,697
--------
Total $44,969
=======
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the various
types of savings accounts offered by the Bank at the dates indicated.
At December 31,
--------------------------------------------------------------------------
2000 1999 1998
------------------------- -------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ------ ------ ----- -------- ------ -----
(Dollars in thousands)
Non-interest-bearing. . . . . $ 38,630 11.48% $ 3,938 $ 34,692 11.23% ($4,396) $ 39,088 14.69%
NOW checking. . . . . . . . . 52,343 15.55 5,871 46,472 15.04 10,844 35,628 13.39
Passbook savings accounts . . 13,248 3.94 231 13,017 4.21 (574) 13,591 5.11
Money market deposit. . . . . 69,797 20.74 6,001 63,796 20.65 11,330 52,466 19.72
Fixed-rate certificates which
mature in the year ending:
Within 1 year . . . . . . . 133,195 39.58 7,504 125,691 40.69 26,126 99,565 37.43
After 1 year, but within
2 years . . . . . . . 20,097 5.97 5,745 14,352 4.65 (1,123) 15,475 5.82
After 2 years, but within
5 years. . . . . . . . 9,175 2.73 (1,557) 10,732 3.47 513 10,219 3.84
Thereafter. . . . . . . . . 49 0.01 (128) 177 0.06 177 - -
-------- ------- -------- -------- ------- --------- -------- -------
Total. . . . . . . . . . $336,534 100.00% $27,605 $308,929 100.00% $ 42,897 $266,032 100.00%
======== ======= ======== ======== ======= ========= ======== =======
TIME DEPOSITS BY RATES. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.
At December 31,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
0.00 - 1.99% $ 101 $ 400 $ 202
2.00 - 3.99% 190 182 862
4.00 - 4.99% 3,062 24,087 31,101
5.00 - 5.99% 17,893 77,515 71,039
6.00 - 6.99% 107,738 48,657 21,724
7.00% and over 33,532 111 331
-------- -------- --------
Total $162,516 $150,952 $125,259
======== ======== ========
22
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of time
deposits in the Bank categorized by maturities at December 31, 2000.
Amount Due
----------------------------------------------------
After After
One to Two to Three After
Less Than Two Three to Four Four
One Year Years Years Years Years Total
--------- ----- ----- ----- ----- -----
(Dollars in thousands)
0.00 - 1.99%. . $ 101 $ - $ - $ - $ - $ 101
2.00 - 3.99%. . 190 - - - - 190
4.00 - 4.99%. . 2,288 222 229 323 - 3,062
5.00 - 5.99%. . 13,600 1,801 1,548 665 279 17,893
6.00 - 6.99%. . 92,150 10,610 3,049 975 954 107,738
7.00% and over. 24,866 7,464 784 100 318 33,532
-------- ------- ------ ------ ------ --------
Total . . . . . $133,195 $20,097 $5,610 $2,063 $1,551 $162,516
======== ======= ====== ====== ====== ========
DEPOSIT ACTIVITY. The following table set forth the savings activity of the
Bank for the periods indicated.
Year Ended December 31,
----------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Beginning balance $308,929 $266,032 $248,267
-------- -------- --------
Net deposits
before interest credited 23,075 39,070 14,075
Interest credited 4,530 3,827 3,690
-------- -------- --------
Net increase
in deposits 27,605 42,897 17,765
-------- -------- --------
Ending balance $336,534 $308,929 $266,032
======== ======== ========
BORROWINGS. Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has the ability to use advances from the FHLB-Cincinnati to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Cincinnati functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of
the FHLB-Cincinnati, the Bank is required to own capital stock in the
FHLB-Cincinnati and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
that are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At December 31, 2000, the
Bank had two advances outstanding from the FHLB-Cincinnati in the amount of
$1.6 million with a weighted average rate of 3.68%.
At December 31, 2000, the Company did not have any borrowings outstanding.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
23
At or For the
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end $1,614 $45,000 $ -
Approximate average borrowings
outstanding 3,414 2,005 -
Approximate weighted average rate paid
on borrowings 5.10% 7.38% -%
TRUST DEPARTMENT
The OTS granted trust powers to the Bank on December 13, 1991. The Bank is one
of the few banks in the Bank's primary market area providing a broad range of
trust services. These services include acting as trustee under a living trust,
a Standby Trust or Testamentary Trust; acting as personal representative; agency
services, including custody accounts, agent for the trustee, and agent for the
personal representative; and trustee and agent services for accounts subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In addition to providing fiduciary and investment advisory
services, the Bank provides employee benefit services, such as Self-Directed
Individual Retirement Accounts ("IRAs"). At December 31, 2000, trust assets
under management totaled approximately $280.0 million.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by the
OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The
activities of federal savings institutions are governed by the Home Owners' Loan
Act, as amended ("HOLA") and, in certain respects, the Federal Deposit Insurance
Act ("FDIA") and the regulations issued by the OTS and the FDIC to implement
these statutes. These laws and regulations delineate the nature and extent of
the activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on the
Company, the Bank and their operations. The Company, as a savings and loan
holding company, is also required to file certain reports with, and otherwise
comply with the rules and regulations of, the OTS and the SEC.
24
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury. The
OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Cincinnati, is required to acquire and hold shares of capital stock
in the FHLB-Cincinnati in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Cincinnati. The Bank
is in compliance with this requirement with an investment in FHLB-Cincinnati
stock of $2.0 million at December 31, 2000. Among other benefits, the
FHLB-Cincinnati provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Cincinnati.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry. The FDIC maintains two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. The Bank's deposit accounts are insured by
the FDIC under the SAIF to the maximum extent permitted by law. As insurer of
the Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending seven months before the assessment period. The capital
categories are: (i) well-capitalized, (ii) adequately capitalized, or (iii)
undercapitalized. An institution is also placed in one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is assigned
with the most well-capitalized, healthy institutions receiving the lowest rates.
On September 20, 1996, the Deposit Insurance Funds Act ("DIF Act") was enacted,
which, among other things, imposed a special one-time assessment on SAIF member
institutions, including the Bank, to recapitalize the SAIF. As a result of the
DIF Act and the special one-time assessment, the FDIC reduced the assessment
schedule for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%,
with most institutions, including the Bank, paying 0%. This assessment schedule
is the same as that for the BIF, which reached its designated reserve ratio in
1995. In addition, since January 1, 1997, SAIF members are charged an
assessment of 0.065% of SAIF-assessable deposits for the purpose of paying
interests on the obligations issued by the Financing Corporation ("FICO") in the
1980s to help fund the thrift industry cleanup. BIF-assessable deposits are
charged an assessment to help pay interest on the FICO bonds at a rate of
approximately .013%. Since December 31, 1999 FICO payments have been shared pro
rata between BIF and SAIF members.
The FDIC is authorized to raise the assessment rates in certain circumstances.
The FDIC has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. Management of the Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
25
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations, mortgage-backed securities and
certain other investments) equal to a monthly average of not less than a
specified percentage (currently 4.0%) of its net withdrawable accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
liquidity requirements.
PROMPT CORRECTIVE ACTION. The FDIA requires each federal banking agency to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
The FDIA also provides that a federal banking agency may, after notice and an
opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that meets
specified requirements, as well as a performance guaranty by each company that
controls the institution, with the appropriate federal banking agency within 45
days of the date that the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. Immediately upon becoming undercapitalized, an institution
shall become subject to various mandatory and discretionary restrictions on its
operations.
At December 31, 2000, the Bank was categorized as "well capitalized" under the
prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. Management is aware of no conditions relating to these safety and
soundness standards which would require submission of a plan of compliance.
26
QUALIFIED THRIFT LENDER TEST. All savings associations, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio asset (as defined by regulation) in qualified
thrift investments on a monthly average for nine out of every 12 months on a
rolling basis. As an alternative, the savings association may maintain 60% of
its assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At December 31, 2000, the Bank met the
test and its QTL percentage was 69.13%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
Bank is immediately ineligible to receive any new FHLB borrowings and is subject
to national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding companies
including permissible activity restrictions.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must satisfy
three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio (defined
as the ratio of core capital to adjusted total assets). Core capital is defined
to include common stockholders' equity, noncumulative perpetual preferred stock
and any related surplus, and minority interests in equity accounts of
consolidated subsidiaries, less (i) any intangible assets, except for certain
qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii)
equity and debt investments in subsidiaries that are not "includable
subsidiaries," which is defined as subsidiaries engaged solely in activities not
impermissible for a national bank, engaged in activities impermissible for a
national bank but only as an agent for its customers, or engaged solely in
mortgage-banking activities. In calculating adjusted total assets, adjustments
are made to total assets to give effect to the exclusion of certain assets from
capital and to account appropriately for the investments in and assets of both
includable and nonincludable subsidiaries. An institution that fails to meet
the core capital requirement would be required to file with the OTS a capital
plan that details the steps they will take to reach compliance. In addition,
the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
27
As required by federal law, the OTS has proposed a rule revising its minimum
core capital requirement to be no less stringent than that imposed on national
banks. Only those savings associations rated a composite one (the highest
rating) under the CAMEL rating system for savings associations are permitted to
operate at or near the regulatory minimum leverage ratio of 3%. All other
savings associations will be required to maintain a minimum leverage ratio of
4%. OTS may require higher leverage ratios if warranted by the particular
circumstances or risk profile of an association.
Savings associations also must maintain "tangible capital" not less than 1.5% of
the Bank's adjusted total assets. "Tangible capital" is defined, generally, as
core capital minus any "intangible assets" other than purchased mortgage
servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by a
savings institution to one of four risk categories based on the amount of credit
risk associated with that particular class of assets. Assets not included for
purposes of calculating capital are not included in calculating risk-weighted
assets. The categories range from 0% for cash and securities that are backed by
the full faith and credit of the U.S. Government to 100% for repossessed assets
or assets more than 90 days past due. Qualifying residential mortgage loans
(including multi-family mortgage loans) are assigned a 50% risk weight.
Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included in risk-weighted assets.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure.
28
The following table presents the Bank's regulatory capital compliance as of
December 31, 2000.
Percent of
Adjusted Total
Amount Assets(1)
-------- ---------
(Dollars in thousands)
Tangible capital. . . . . . . . . . . . $41,918 10.98%
Minimum required tangible capital . . . 5,725 1.50
------- ------
Excess. . . . . . . . . . . . . . . . . $36,193 9.48%
======= ======
Core capital. . . . . . . . . . . . . . $41,918 10.98%
Minimum required core capital(2). . . . 11,449 3.00
------- ------
Excess. . . . . . . . . . . . . . . . . $30,469 7.98%
======= ======
Risk-based capital(3) . . . . . . . . . $46,153 13.96%
Minimum risk-based capital requirement. 26,442 8.00
------- ------
Excess. . . . . . . . . . . . . . . . . $19,711 5.96%
======= ======
<FN>
- ----------
(1) Based on adjusted total assets of $381.6 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $330.5
million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital requirements that
would require a core capital ratio of 3% of total adjusted assets for thrifts
that receive the highest supervisory rating for safety and soundness and a core
capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. Under currently effective regulations, an application to and the prior
approval of the OTS will be required for any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i. e., generally safety and soundness, compliance and
Community Reinvestment Act examination ratings in the two top categories), if
the total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, if the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to statute, regulation or agreement
with OTS. If an application is not required, the institution must still provide
prior notice to OTS of the capital distribution. In the event the Bank's
capital fell below its regulatory requirements or the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
29
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At December 31, 2000, the Bank's limit on loans to
one borrower was $13.9 million. At December 31, 2000, the Bank's largest
aggregate amount of loans to one borrower was $9.0 million, all of which were
performing according to their terms.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. When a savings association
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings association must
notify the FDIC and the OTS 30 days in advance and provide the information each
agency may, by regulation, require. Savings associations also must conduct the
activities of subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with Sections
23A and 23B of the Federal Reserve Act ("Sections 23A and 23B") relative to
transactions with affiliates in the same manner and to the same extent as if the
savings association were a Federal Reserve member bank. A savings and loan
holding company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Bank to an affiliate must be secured by collateral in
accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings association
may not make any loan or other extension of credit to an affiliate unless that
affiliate is engaged only in activities permissible for bank holding companies;
(ii) a savings association may not purchase or invest in securities issued by an
affiliate (other than securities of a subsidiary); and (iii) the OTS may, for
reasons of safety and soundness, impose more stringent restrictions on savings
associations but may not exempt transactions from or otherwise abridge Section
23A or 23B. Exemptions from Section 23A or 23B may be granted only by the
Federal Reserve Board, as is currently the case with respect to all FDIC-insured
banks. The Bank has not been significantly affected by the rules regarding
transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders, as well as entities controlled by such persons, is governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O
thereunder. Among other things, these regulations generally require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Generally, Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and requires certain board approval procedures to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
30
COMMUNITY REINVESTMENT ACT. Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community. The CRA does not establish specific lending requirements
or programs nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to meet all the credit
needs of its delineated community. The CRA requires the federal banking
agencies, in connection with regulatory examinations, to assess an institution's
record of meeting the credit needs of its delineated community and to take such
record into account in evaluating regulatory applications to establish a new
branch office that will accept deposits, relocate an existing office, or merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution, among others. The CRA requires
public disclosure of an institution's CRA rating. The Bank received a
"satisfactory" rating as a result of its latest evaluation.
REGULATORY AND CRIMINAL ENFORCEMENT PROVISIONS. The OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $27,500 per day, or $1.1 million per
day in especially egregious cases. Under the FDIA, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company, the
Company generally is not subject to activity restrictions under the HOLA. If
the Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
31
RECENT LEGISLATION. On November 12, 1999, President Clinton signed into law
legislation that allows bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Gramm-Leach-Bliley Financial Modernization Act
of 1999 (the "GLBA"), a bank holding company that elects to become a financial
holding company may engage in any activity that the FRB, in consultation with
the Secretary of the Treasury, determines by regulation or order is (1)
financial in nature, (2) incidental to any such financial activity, or (3)
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. The GLBA makes significant changes in U. S. banking law,
principally by repealing the restrictive provisions of the 1933 Glass-Steagall
Act. The GLBA specifies certain activities that are deemed to be financial in
nature, including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
or making a market in, securities; and any activity currently permitted for bank
holding companies by the FRB under section 4(c) (8) of the Bank Holding Company
Act. The GLBA does not authorize banks or their affiliates to engage in
commercial activities that are not financial in nature. A bank holding company
may elect to be treated as a financial holding company only if all depository
institutions subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by GLBA to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (1) insurance underwriting,
(2) real estate development or real estate investment activities (unless
otherwise permitted by law), (3) insurance company portfolio investments and (4)
merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from the bank's outstanding investments in financial subsidiaries).
The GLBA provides that state banks may invest in financial subsidiaries
(assuming they have the requisite investment authority under applicable state
law) subject to the same conditions that apply to national bank investments in
financial subsidiaries.
The GLBA also contains a number of other provisions that affect the Company's
operations and the operations of all financial institutions. One of the new
provisions relates to the financial privacy of consumers, authorizing federal
banking regulators to adopt rules that limit the ability of banks and other
financial entities to disclose non-public information about consumers to
non-affiliated entities. These limitations will likely require consent by the
consumer before information is allowed to be provided to a third party.
The GLBA became effective on March 11, 2000. The FRB and the OCC issued rules
governing the application process for becoming a financial holding company or a
financial subsidiary. At this time, the Company is unable to predict the impact
the GLBA may have upon it's financial condition or results of operations.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank which met
certain definitional tests primarily related to their assets and the nature of
their business ("qualifying thrift") were permitted to establish a reserve for
bad debts and to make annual additions thereto, which may have been deducted in
arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
32
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 12, 1988). The unrecaptured base year reserves will
not be subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt reserves
continue to be subject to provisions of present law referred to below that
require recapture in the case of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend distributions" to
the Company, such distributions will be considered to result in distributions
from the balance of its bad debt reserve as of December 31, 1987 (or a lesser
amount if the Bank's loan portfolio decreased since December 31, 1987) and then
from the supplemental reserve for losses on loans ("Excess Distributions"), and
an amount based on the Excess Distributions will be included in the Bank's
taxable income. Nondividend distributions include distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. The amount of
additional taxable income created from an Excess Distribution is an amount that,
when reduced by the tax attributable to the income, is equal to the amount of
the distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the Excess Distribution would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" for limits on
the payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax is
paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Company and the Bank will not file a consolidated tax return, except that if the
Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
AUDITS. The Company's federal income tax returns have not been audited within
the past five years.
33
STATE TAXATION
Tennessee imposes franchise and excise taxes. The franchise tax ($0.25 per
$100) is applied either to the Company's apportioned net worth or the value of
property owned and used in Tennessee, whichever is greater, as of the close of
the Company's fiscal year. The excise tax (6%) is applied to net earnings
derived from business done in Tennessee. Under Tennessee regulations, bad debt
deductions are deductible from the excise tax. There have not been any audits
of the Company's state tax returns during the past five years.
Any cash dividends, in excess of a certain exempt amount, that are paid with
respect to the Common Stock to a shareholder (including a partnership and
certain other entities) who is a resident of the State of Tennessee will be
subject to the Tennessee income tax which is levied at a rate of six percent.
Any distribution by a corporation from earnings according to percentage
ownership is considered a dividend, and the definition of a dividend for
Tennessee income tax purposes may not be the same as the definition of a
dividend for federal income tax purposes. A corporate distribution may be
treated as a dividend for Tennessee tax purposes if it is made from funds that
exceed the corporation's earned surplus and profits under certain circumstances.
COMPETITION
The Bank faces intense competition in its primary market area for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance companies. As of December 31, 2000, there were 11 commercial banks
and 1 other thrift operating in Rutherford and Bedford Counties, Tennessee.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's
competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the origination
of loans may limit the Bank's growth in the future.
SUBSIDIARY ACTIVITITIES
Under OTS regulations, the Bank generally may invest up to 3% of its assets
in service corporations, provided that any investment in excess of 2% of assets
shall be used primarily for community, inner-city and community development
projects. The Bank's investment in its wholly-owned service corporation,
Cavalry Enterprises, Inc., which was approximately $72,000 at December 31, 2000,
did not exceed these limits.
Cavalry Enterprises, Inc., a Tennessee corporation, was organized on July
26, 2000 for the purpose of providing services, including securities, insurance
and other financial or financially related services. Cavalry Enterprises, Inc.,
began activities in the fourth quarter of 2000 by offering mutual funds, stocks,
bonds, annuities, life insurance, and long-term care insurance. The Bank
recorded a net loss from this investment of $28,000 for the year ended December
31, 2000.
PERSONNEL
As of December 31, 2000, the Bank had 147 full-time employees and 47 part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank believes its relationship with its employees is good.
34
- ------
ITEM 2. PROPERTIES
- --------------------
The following table sets forth certain information regarding the Bank's offices
at December 31, 2000, all of which are owned except as noted.
Approximate
Location Year Opened Square Footage Deposits
- ------------------------------ ----------- -------------- ---------
(In thousands)
Main Office:
114 W. College Street. . . . . 1974 48,632 $ 197,765
Murfreesboro, Tennessee 37130
Branch Offices:
1745 Memorial Boulevard. . . . 1984 1,925 15,200
Murfreesboro, Tennessee 37129
1645 N.W. Broad Street . . . . 1995 1,500 11,082
Murfreesboro, Tennessee 37129
123 Cason Lane . . . . . . . . 1997 2,987 25,168
Murfreesboro, Tennessee 37128
604 N. Main Street . . . . . . 1958 1,500 29,513
Shelbyville, Tennessee 37160
269 S. Lowry Street. . . . . . 1972 3,898 29,525
Smyrna, Tennessee 37167
1300Hazelwood Drive. . . . . . 1997 1,100 1,500
Smyrna, Tennessee 37167
2604 South Church Street . . . 1998 2,470 8,018
Murfreesboro, TN 37129
2035 SE Broad Street . . . . . 1997 2,038 18,763
Murfreesboro, TN 37130
Operations Building:
214 W. College . . . . . . . . 2000 60,000 NA
Murfreesboro, Tennessee 37130
The Bank owns two commercial building lots, both of which are for future branch
office development. One building site is located on Sam Ridley Parkway in
Smyrna, Tennessee and the second is located on the Lascassas Highway in
Murfreesboro, Tennessee.
The Bank uses the services of an outside service bureau for its significant data
processing applications. At December 31, 2000, the Bank had 12 proprietary
automated teller machines. At December 31, 2000, the net book value of the
Bank's office properties and the Bank's fixtures, furniture and equipment was
$15.3 million.
35
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
Periodically, there have been various claims and lawsuits involving the Company,
such as claims to enforce liens, condemnation proceedings on properties in which
the Company holds security interests, claims involving the making and servicing
of real property loans and other issues incident to the Company's business. The
Company is not a party to any pending legal proceedings that it believes would
have a material adverse effect on the financial condition or operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------------
The information contained under the section captioned "Common Stock Information"
is included in the Company's Annual Report and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------
The information contained under the section captioned "Selected Consolidated
Financial Information" is included in the Company's Annual Report and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The information contained under the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" is included in
the Company's Annual Report and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------
The information contained under the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Market Risk and
Asset and Liability Management" is included in the Company's Annual Report and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------------
The information contained under the section captioned "Consolidated Financial
Statements" is included in the Company's Annual Report and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of
Directors" is included in the Company's Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders ("Proxy Statement") and is incorporated herein by
reference.
The following table sets forth certain information with respect to the executive
officers of the Company and the Bank.
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
Age at Position
December -----------------------------------------------------
Name 31, 2000 Company Bank
- ---- --------- ------- ----
Ed C. 58 Chairman of the Board Chairman of the Board
Loughry, Jr. and Chief Executive and Chief Executive
Officer Officer
Gary Brown 58 Vice Chairman of the Vice Chairman of the
Board Board
Ronald F. Knight 50 President and Chief President and Chief
Operating Officer Operating Officer
William S. Jones 41 Executive Vice President Executive Vice President
and Chief Administrative and Chief Administrative
Officer Officer
Hillard C. "Bud" 52 Senior Vice President Senior Vice President and
Gardner Chief Financial Officer Chief Financial Officer
David W. Hopper 57 -- Senior Vice President
and Trust Officer
Ira B. Lewis, Jr. 54 Senior Vice President Senior Vice President/CRA
and Secretary Compliance Officer and
Secretary
R. Dale Floyd 50 -- Senior Vice President
M. Glenn Layne 46 -- Senior Vice President
Joy B. Jobe 56 -- Senior Vice President
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the executive officers of the
Company and the Bank. Unless otherwise stated, each executive officer has held
his current occupation for the last five years. There are no family
relationships among or between the executive officers.
Ed C. Loughry, Jr. joined the Bank in 1968 and currently serves as Chairman of
the Board and Chief Executive Officer. Mr. Loughry has served on the Boards of
Directors of the Rutherford County Chamber of Commerce, United Way, Heart Fund,
Federal Home Loan Bank of Cincinnati, and the Tennessee Bankers Association. He
currently serves on the Healthnet Board and the ABA BankPac Board. He was
selected Business Person of the Year in 1993 by the Chamber of Commerce.
Gary Brown is the owner and manager of Roscoe Brown, Inc., a heating and air
conditioning company, Murfreesboro, Tennessee. Mr. Brown is a member of the
Murfreesboro Water Sewer Department Board, the Electrical Examining Board,
Middle Tennessee State University Foundation Board, and the Rutherford County
Chamber of Commerce.
37
Ronald F. Knight joined the Bank in 1972 and currently serves as President and
Chief Operating Officer. Mr. Knight was the 1999 Chairman of the Board of
Directors of the Rutherford County Chamber of Commerce and serves on the
Rutherford County Economic development Council. He also serves on the Board of
the Tennessee Housing Development Agency, and has been a committee member of the
United Way and is co-founder of a local charity, "Christmas For The Children."
Mr. Knight has also served as a director of the Tennessee Bankers Association.
William S. Jones joined the Bank in 1992 and currently serves as Executive Vice
President and Chief Administrative Officer. Mr. Jones has held the position of
Vice President/Senior Vice President and Trust Officer of the Bank. Mr. Jones
is an executive officer and a member of the Board of Trustees of the Middle
Tennessee State University Foundation and a member of the Board of Trustees of
the Middle Tennessee Medical Center Foundation.
Hillard C. "Bud" Gardner joined the Bank in 1981 and has been Senior Vice
President and Chief Financial Officer since 1982. Mr. Gardner is a member of
the Tennessee Society of Certified Public Accountants, the Security for Public
Deposit Task Force, the American Institute of Certified Public Accountants and
the Optimist International.
David W. Hopper joined the Bank in 1992 and has been Senior Vice President and
Trust Officer since that time. Mr. Hopper is a graduate of the ABA's National
Graduate Trust School and has served as Chairman of the Tennessee Bankers
Association Trust Division. Mr. Hopper has over thirty years experience in the
trust and investment management industry and has successfully started trust
departments at two banks. Mr. Hopper is a member of the Murfreesboro Rotary
Club, the Hospice of Murfreesboro, and Chairman of the Murfreesboro School
Board.
R. Dale Floyd joined the Bank in September 1987 and has been Senior Vice
President since October 1988. As Senior Vice President, he supervises the
Bank's mortgage lending activities, including originations, construction and
land development lending and mortgage loan servicing. Mr. Floyd's civic
activities include participation in Leadership Rutherford, Habitat for Humanity,
Stones River Ducks Unlimited and Kids Castle Volunteers. Mr. Floyd is also a
member of the Affordable Housing Advisory Council of the City of Murfreesboro.
M. Glenn Layne joined the Bank in August 1994 with over 17 years of banking
experience and is currently Senior Vice President and Manager of Commercial and
Consumer Lending. Before joining the Bank Mr. Layne served as Vice President
and Manager of a Commercial Lending Group with SunTrust Bank. Mr. Layne is an
active member of the Murfreesboro Downtown Lions Club and the Belle Aire Baptist
Church.
Joy B. Jobe joined the Bank in May 1995 with over 24 years of banking experience
and serves as Senior Vice President of Retail Banking and Business Development.
Before joining the Bank Ms. Jobe was a Commercial Loan Officer, Relationship
Manager and Assistant Vice President with SunTrust Bank. Ms. Jobe is a member
of the Rotary Club and the American Red Cross. Ms. Jobe also participated in
Leadership Rutherford.
Ira B. Lewis, Jr. joined the Bank in 1993 and has been Vice President/CRA
Compliance Officer. Mr. Lewis became Secretary in January 1996 and Senior Vice
President in January 2000. Before joining the Bank, Mr. Lewis was a Field
Examiner and Field Manager of the OTS's Nashville Area Office, an affiliate
office of the OTS Central Regional Office, Chicago, Illinois.
ITEM 11. EXECUTIVE COMPENSATION
- ------------------------------------
The information contained under the section captioned "Proposal I -- Election of
Directors" is included in the Company's Proxy Statement and is incorporated
herein by reference.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security Ownership of
Certain Beneficial Owners and Management" is included in the Company's Proxy
Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security Ownership of
Certain Beneficial Owners and Management" and "Proposal I -- Election of
Directors" is included in the Company's Proxy Statement and are incorporated
herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any person
of securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of
Directors - Transactions with Management" is included in the Company's Proxy
Statement and is incorporated herein by reference.
39
PART IV
ITEM 14. 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 Cavalry Bancorp, Inc. 1999 Stock Option Plan***
10.13 Cavalry Bancorp, Inc. 1999 Management Recognition Plan***
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Rayburn, Betts & Bates, P.C.
- ------------
* 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
40
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: March 22, 2001 By: /s/Ed C. Loughry, Jr.
------------------------
Ed C. Loughry, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/Ed C. Loughry, Jr. Chief Executive Officer, March 22, 2001
- --------------------------- Chairman of the Board
Ed C. Loughry, Jr.
(Principal Executive Officer)
/s/Hillard C. "Bud" Gardner Senior Vice President and Chief March 22, 2001
- --------------------------- Financial Officer
Hillard C. "Bud" Gardner
(Principal Financial and
Accounting Officer)
/s/Gary Brown Vice Chairman of the Board March 22, 2001
- ---------------------------
Gary Brown
/s/Ronald F. Knight Director, President March 22, 2001
- --------------------------- and Chief Operating Officer
Ronald F. Knight
/s/Tim J. Durham Director March 22, 2001
- ---------------------------
Tim J. Durham
Director March 22, 2001
- ---------------------------
Ed Elam
/s/James C. Cope Director March 22, 2001
- ---------------------------
James C. Cope
/s/Terry G. Haynes Director March 22, 2001
- ---------------------------
Terry G. Haynes
/s/William H. Huddleston, IV Director March 22, 2001
- ----------------------------
William H. Huddleston, IV
/s/William K. Coleman Director March 22, 2001
- -----------------------
William K. Coleman
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
2000
Annual Report to Shareholders
[Cavalry Bancorp, Inc. logo]
Table of Contents
1 Letter to Shareholders
2-8 Operations Review
9 Board of Directors
10 Officers
11 Community Board
12 Corporate Information
13-14 Selected Financial Data
15-25 Financial Review
26 Independent Auditors' Report
27-32 Consolidated Financial Statements
33-52 Notes to Consolidated Financial Statements
[Photo of Frank E. Crosslin, Jr.]
The Board of Directors of Cavalry Bancorp, Inc. has dedicated the 2000 Annual
Report in the memory of Frank E. Crosslin, Jr. for his years of service to
Cavalry Banking and his community. Mr. Crosslin served with distinction for
many years on the Board of Directors of Cavalry Bancorp. He was active in his
community, serving as Vice-Chairman of the Rutherford County Industrial
Development Board, Chairman of the Public Building Authority of Rutherford
County, and as a member of the Board of Directors of the Tennessee Housing
Development Agency. Also, he was a City Commissioner for the Town of Smyrna and
an active member of the Rutherford County Chamber of Commerce where he was
honored in 2000 as 'Business Legend of the Year.' Mr. Crosslin will always be
thoughtfully remembered by those of us who had the privilege and pleasure of
serving with him.
[Cavalry Bancorp, Inc. logo]
To Our Shareholders:
In last year's annual report, we stated that our goals for the future included:
1. To continue to grow in a controlled and financially responsible
manner;
2. To maintain high credit quality through prudent underwriting
standards and an overall conservative approach to business;
3. To expand our financial products and services to meet customer
needs;
4. To utilize technology where feasible to improve service and increase
efficiency; and
5. To reward shareholders on a long-term basis for their investment in
the Company.
We are pleased to report that we achieved important progress toward each of
these goals in the year ended December 31, 2000. The combination of our strong
markets, loyal employees, and dedicated management team helped to make fiscal
2000 another successful year for Cavalry Bancorp, Inc.
Net income for 2000 was $4.1 million, or $0.64 per share, compared with net
income of $3.5 million, or $0.52 per share, earned in 1999. At December 31,
2000, total deposits grew to over $336 million. This represents a growth in
deposits of 8.9% during 2000 and is particularly noteworthy during a time when
many financial institutions have experienced a decline.
Total loans receivable at December 31, 2000, were $279 million compared
with $272 million a year ago. We continue to execute our strategy to achieve
steady loan growth while following rigorous underwriting standards that help
insure soundness and quality. We believe asset quality is a key to our
company's continued long-term success. Our non-performing loans at December 31,
2000, were only 0.04% of total loans outstanding.
During the past year we continued to add products and services to meet the
needs of our customers. Our Cavalier Club Accounts, E-check services, and
PriorityOne Mortgage were introduced last year and have proven to be very
popular. Cavalry Banking added a new division, Cavalry Investment Services in
2000 to enhance the investment options for our customers. We also continued to
expand and upgrade our office locations to better serve our customers. During
2000, we completed the renovation and expansion of our office at Cason Lane.
Many of our local shareholders have watched the progress in the
construction of our new operations building located in downtown Murfreesboro,
across the street from our main office, which was officially opened in
September. The new building is helping to improve our overall productivity and
efficiency by allowing us to consolidate our operations department into one
location.
Consistent with the Board's stated intention to have shareholders directly
participate in the long-term success of the Company, the Board elected to pay
quarterly cash dividends to provide shareholders with a current cash return.
Dividend payments totaling $0.20 per share were paid to shareholders in 2000.
As we look to the future, we see continued opportunity for growth. Our
local markets have some of the most desirable economic characteristics of any
market in Tennessee. We continue to be very appreciative of our employees for
their hard work and our customers for their support. Additionally, we thank
you, our shareholders, for the confidence you have shown over the past year.
Sincerely,
/s/Ed C. Loughry, Jr. /s/Ronald F. Knight /s/William S. Jones
Ed C. Loughry, Jr. Ronald F. Knight William S. Jones
Chairman and President Executive Vice President
Chief Executive Officer
1
[Picture of Ed C. Loughry, Jr.]
Fiscal 2000 represented another year of growth for Cavalry Banking. What were
the major factors that contributed to making the past year a successful one?
Actually the same factors that contributed to the growth of Cavalry Banking this
past year have been in place for a couple of years. The foremost reason for our
success lies with our experienced employees, who know and understand the
personal needs of our customers. Their local knowledge and the dedication they
bring to the job provide customers with the best financial products and
services.
Secondly, local decision-making that emphasizes ease and quick response
time leads to our ability to offer better service than our competitors. Our
convenient offices, Internet banking, extended business hours during the week,
and being open on Saturdays-all provide our customers with increased flexibility
to handle their banking needs.
A third major factor is a very knowledgeable, active and progressive Board
of Directors. Each member of our Board is involved and active in the
communities we serve. This allows them first hand knowledge of factors that
affect our customers and our local economy.
A fourth factor is our ability to offer customers a 'total relationship'
for all their banking needs. Customers don't have to have multiple accounts or
loans with other financial institutions. We can meet all their needs for
financial products and services.
Lastly, we are located in good markets. 2000 was another good year for
Rutherford, Bedford, and surrounding counties in Tennessee. We know our markets
well and have stayed clearly focused on serving customers in these markets. - Ed
Loughry
[Picture of Ronald F. Knight]
Cavalry Banking continued to experience good growth in 2000 in deposits when
many financial institutions in the nation actually experienced a decrease.
Total deposits outstanding at December 31, 2000, were $336 million compared with
$309 million at the end of fiscal 1999. What contributed to this growth?
A couple of things that we are doing are particularly noteworthy.
We offer a variety of choices for both checking accounts and certificates
of deposit. We are very competitive with our deposit rates and have a capable
experienced staff to assist our customers. Being a small community bank allows
us to provide a personal touch to the banking experience that sets us apart from
our competitors. Good people and good products make a great formula. - Ronnie
Knight
[Picture of William S. Jones]
Why build the new Operations Building located across from the main office in
downtown Murfreesboro?
Because of the tremendous growth we have experienced over the last few years and
in order to properly handle future growth, we needed the additional space. The
new building should lead to improved productivity and efficiency by allowing us
to consolidate certain of our departments into a single facility. We now have
all of our information technology support in one location. The new building
also has a state-of-the-art computer lab that we are using for employee training
and educational purposes. We are also very pleased that we could build a
building to accommodate our needs while accentuating the architectural integrity
of the downtown area. - Bill Jones
2
[Generic photo]
"We know our markets well and have stayed clearly focused on serving customers
in these markets."
- - Ed C. Loughry, Jr.
Chairman and Chief Executive Officer
3
[Generic photo]
"Being a small community bank allows us to provide a personal touch
to the banking experience that sets us apart from our competitors."
- Ronald F. Knight
President
4
[Picture of Ed C. Loughry, Jr.]
You mentioned that one of the factors contributing to Cavalry Banking's success
is the ability to provide customers with a "total relationship." What
distinguishes this approach from that of other local financial institutions?
Cavalry Banking offers a very broad array of services and financial products to
its customers, from traditional checking and saving products to innovative
lending and trust services. That means that when a customer walks in the door,
Cavalry Banking is able to meet the needs of that customer right then and there.
Total relationship banking also means that someone is familiar with the
individual customers and can operate more effectively than can bankers whose
headquarters are elsewhere. Our approach emphasizes management and employee
involvement with customers to provide faster decisions and easier interaction
with customers. We have the flexibility to make things happen. - Ed Loughry
[Picture of William S. Jones]
How is Cavalry Banking using technology to better serve its customers?
Cavalry Banking has been an early implementer of new technology. In fact, we
were the first local financial institution to offer a debit card in Rutherford
County. Over the years, we have expanded the use of technology to make dealing
with the Bank easier, quicker and less expensive.
Today, our customers can apply for consumer loans on-line through the
Bank's Internet banking service, access information about many of our services,
find out specific data concerning their accounts, and even make transactions
on-line. Our goal is to provide faster response time, more reliable service,
greater flexibility, and to use technology to make banking more convenient.
- - Bill Jones
[Picture of Ronald F. Knight]
Are there any immediate plans to open additional offices?
During the past year, we completed the renovation and expansion of our Cason
Lane office. This added space for more consumer and mortgage lenders. We
currently own sites on Sam Ridley Parkway in northern Rutherford County and
Lascassas Highway 96 East for potential office locations. I foresee utilizing
those sites in the near future and will consider other sites based on the growth
and demands of our customers. - Ronnie Knight
[Picture of William S. Jones]
What are some of the other new or expanded services Cavalry Banking has
introduced?
One of our most successful products has been our Cavalier Club Accounts.
Customers can choose from options such as Cavalier Club Checking, Cavalier
Club-50, or Cavalier e-Banking Club and receive benefits that help save money
and time from eye care, prescription drugs, and vacation packages to everyday
purchases.
Another success has been PriorityOne Mortgage. This popular product allows
customers to concentrate on the more important issues involved with finding a
new home. PriorityOne Mortgage allows for approval and closing in 5 days so you
basically go straight from the mortgage originator to closing. Plus, the
super-simplified documentation process almost eliminates paperwork. Realtors
love the Cavalry Banking PriorityOne Mortgage because of the significantly
reduced processing time that insures a quicker closing for their sellers.
- - Bill Jones
5
[Picture of Ed C. Loughry, Jr.]
What is driving the growth in Cavalry Banking's mortgage lending?
Our primary markets are located in some of Tennessee's fastest growing and most
desirable counties. We are the largest real estate lender in Rutherford County
and have a very strong presence in Bedford and surrounding counties, as well.
Through the Bank's 9 offices, our experienced mortgage lenders get to know our
customers. Additionally, the Bank offers a comprehensive range of products,
which includes a variety of fixed and adjustable mortgage loans at rates and
terms that are competitive with market conditions. We are also very active with
our local builders and developers as they prepare subdivisions and homes for the
homebuyer.
- - Ed Loughry
[Picture of Ronald F. Knight]
What is Cavalry Banking doing in the area of business services?
Cavalry Banking's business services provide a full range of solutions to help
businesses get started and grow. We focus on small- to medium-size businesses
owned by local individuals. Because most of our relationships are within our
primary markets, we are able to respond with fast, reliable assistance when the
need for service arises.
From credit card processing services and sweep accounts to lock box and
electronic account management services, we are there to serve customers. Not
only do our commercial services save time, but they also can enhance the profit
potential of our commercial customers. We are using technology to better allow
our business customers to handle much of their banking without leaving the
office.
During the past year, Cavalry Banking introduced E-check, the next step in
payment processing for business customers. E-check, also known as Point-of-Sale
check conversion and Check to ACH Conversion, is a term that describes the
conversion of a paper check to an electronic transaction that is processed
through the Nation's Automated Clearing House system.
Merchants who offer E-check are able to process paper check transactions
much like today's credit card transactions. We are very excited to offer this
next step in payments processing. E-check is a great example of our commitment
to provide the latest in banking technologies to our business community.
We continue to be active in commercial lending and have customized our
services to provide for such needs as inventory purchases, equipment financing,
real estate, or additional working capital. Commercial loans, while they may be
unsecured, are generally secured by specific business collateral and are offered
at competitive rates and flexible terms.
- - Ronnie Knight
[Picture of William S. Jones]
Asset Management and Trust Services have grown steadily over the past few years.
What factors have contributed to this growth and what are the plans for this
area in the future?
We continue to be pleased with the success of Cavalry Banking's Asset Management
and Trust Services. Trust assets grew in 2000 to over $280 million as of
December 31, 2000. I believe the high caliber of our employees and their
resourcefulness to find ways that make good things happen for our customers are
the keys to our success. Also, we are one of the few banks in Rutherford County
that provides a broad range of services, which encompass specialized services in
the areas of lifetime asset management, estate planning, trust administration,
and retirement planning. Our plans for the future are to continue to focus on
achieving steady growth by delivering personalized service that is very
responsive to clients' needs.
- - Bill Jones
6
[Generic photo]
"I believe the high caliber of our employees and their resourcefulness to find
ways that make good things happen for our customers are the keys to our
success."
- - William S. Jones
Executive Vice President
7
[Picture of Ronald F. Knight]
In addition, Cavalry Banking added a new division in 2000, Cavalry Investment
Services, a division of Cavalry Enterprises, Inc. The division is enhancing the
investment options for customers. From our normal bank investment options to
our Trust Department's expertise, to opportunities through financial planning,
investments such as stocks, mutual funds, annuities, and life insurance are all
now available. Today's investor needs two things: an understanding of which
investment products are most appropriate for their situation and a relationship
with a trustworthy advisor who has a clear understanding of the client's needs
that combines professional guidance with objective advice. - Ronnie Knight
[Picture of Ed C. Loughry, Jr.]
What is management's vision for Cavalry Banking in the years ahead?
In looking to the future, we see much opportunity for our community-oriented,
total relationship approach to banking. Our plan is to continue to grow in a
controlled and financially responsible manner. We will do so by maintaining
high credit quality through prudent underwriting standards, following a
conservative approach to business, and expanding our financial products and
services to meet the changing needs of our customers.
Our local markets have some of the most desirable economic characteristics
of any market in the state of Tennessee. Therefore, we should continue to
experience growth from the same economic factors benefiting our markets. We
also plan to continue to utilize technology where feasible to improve service
and increase efficiency in the areas of e-commerce and Internet banking
as well as to continue to expand and upgrade our branch locations to even better
serve our customers. - Ed Loughry
8
BOARD OF DIRECTORS
[Photo]
Left to right: James C. Cope; Ed C. Loughry, Jr.; Terry G. Haynes
[Photo]
Left to right: Kent Coleman; Tim Durham; Ronald F. Knight
[Photo]
Left to right: Gary Brown; W. H. Huddleston, IV; Ed Elam
Ed C. Loughry, Jr.
Chairman and
Chief Executive Officer
Cavalry Banking
Ronald F. Knight
President
Cavalry Banking
Gary Brown
Vice-Chairman of the Board
Roscoe Brown, Inc.
Kent Coleman
Rucker, Rucker & Coleman
James C. Cope
Murfree, Cope, Hudson & Scarlett
Tim Durham
Durham Realty & Auction, Inc.
Ed Elam
Rutherford County Clerk
Terry G. Haynes
Haynes Bros. Lumber Co.
W. H. Huddleston, IV
Huddleston-Steele Engineering, Inc.
9
CAVALRY BANKING CORPORATE OFFICERS
Ed C. Loughry, Jr.
Chairman &
Chief Executive Officer
Ronald F. (Ronnie) Knight
President &
Chief Operating Officer
William S. (Bill) Jones
Executive Vice President &
Chief Administrative Officer
Hillard C. Gardner
Senior Vice President &
Chief Financial Officer
R. Dale Floyd
Senior Vice President
David W. Hopper
Senior Vice President &
Trust Officer
M. Glenn Layne
Senior Vice President
Joy B. Jobe
Senior Vice President
Ira B. Lewis, Jr.
Senior Vice President
Joe W. Townsend
Vice President
Libby L. Green
Vice President
Christopher L. Kelly
Vice President & Trust Officer
James O. (Jamie) Sweeney, III
Vice President
Suzanne S. McClaran
Assistant Vice President
Peggy A. Hollandsworth
Assistant Vice President
Roger D. White
Assistant Vice President
Linda F. Eakes
Assistant Vice President
James V. (Jim) Gregory
Assistant Vice President
Mary W. Schneider
Assistant Vice President
Gary E. Green
Assistant Vice President
Rhonda P. Smith
Assistant Vice President
Joe G. Sadler
Assistant Vice President
David K. Bailiff
Assistant Vice President
E. Cannon Loughry, III
Assistant Vice President
Donna K. Davis
Assistant Vice President
Jane H. Lester
Assistant Vice President
P. David Edwards
Assistant Vice President
JoAnn Fann
Assistant Vice President
W. Alan Ricketts
Assistant Vice President
CAVALRY BANKING OFFICERS
Cynthia J. Gregory
Peggy F. Gilbert
Carrolyn A. Gilley
Lisa R. Knight
Jane K. Lewellen
Linda Bucy
Travis Stalsworth
Elizabeth Bazzell
Wendy Tompkins
10
COMMUNITY BOARD
[Photo]
Cavalry Banking's Community Board includes (from left) Ken Halliburton, Sandra
Parks, Chuck Farrer, Phyllis Washington, Greg Waldron, Bud Mitchell, John
Goodman, Melanie Davenport, Ben Jamison, Dow Smith, Tina Patel, Rick Sain,
Gloria Bonner, Miles Lane and Robbie Cleveland.
Gloria Bonner, Ed.D.
Middle Tennessee State University
Robbie Cleveland, M.D.
Murfreesboro Medical Clinic
Melanie Davenport
Cellular Concepts, Inc.
Chuck Farrer
Farrer Construction Company
John Goodman
Bob Parks Realty
Ken Halliburton
Miller & Loughry Insurance and Services, Inc.
Ben Jamison, D.D.S.
Private Dental Practice
Miles Lane, D.V.M.
Brogli Lane Weaver Animal Hospital
Bud Mitchell
Bud's Tire
Sandra Parks
Mitchell-Neilson Primary School
Tina Patel
Merck & Co.
Rick Sain
Reeves-Sain Drug Store, Inc.
Dow Smith
Dow Smith Contracting Company, Inc.
Greg Waldron
Waldron Enterprises, LLC
Phyllis Washington, Ph.D.
Rutherford County Board of Education
11
CORPORATE INFORMATION
Corporate Address
114 West College Street
Murfreesboro, Tennessee 37130
(615) 893-1234
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, New Jersey 07660
Independent Auditors
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
Market Price of the Company's Common Stock and Related Security Matters
The common stock of Cavalry Bancorp, Inc. is listed on the Nasdaq National
Market System under the symbol "CAVB." The following table discloses on a
quarterly basis the high, low and closing price and dividends declared for the
stock for the years ended December 31, 2000 and 1999.
2000
- --------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Market Price:
High $12.13 $12.25 $13.00 $16.44
Low 10.50 11.13 10.63 11.88
Close 10.63 12.00 11.56 12.63
Dividends Declared $0.05 $0.05 $0.05 $0.05
1999
- --------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Market Price:
High $17.25 $15.75 $18.63 $16.50
Low 16.25 11.06 14.25 12.38
Close 16.50 11.38 15.25 16.25
Dividends Declared $0.05 $0.05 $0.05 $0.05
The Company may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Company's regulatory capital to be reduced below
the amount required for the liquidation account established in connection with
the mutual to stock conversion. The approximate number of shareholders of the
Company's common stock as of March 1, 2001, was 2,500.
Annual Meeting
The Annual Meeting of Shareholders of Cavalry Bancorp, Inc. will be held at
10:00 a.m. Central Daylight Time, April 26, 2001, in the Fifth Floor Auditorium
of the main office of Cavalry Banking, 114 West College Street, Murfreesboro,
Tennessee.
A COPY OF THE FORM 10-K, INCLUDING CONSOLIDATED FINANCIAL STATEMENTS, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING OF
SHARE-HOLDERS UPON WRITTEN REQUEST TO IRA B. LEWIS, JR., SECRETARY, CAVALRY
BANCORP, INC., 114 WEST COLLEGE STREET, MURFREESBORO, TENNESSEE 37130.
Locations
114 West College Street
Murfreesboro, TN 37130
893-1234
2035 Southeast Broad Street
Murfreesboro, TN 37130
895-0905
1745 Memorial Boulevard
Murfreesboro, TN 37129
890-2919
123 Cason Lane
Murfreesboro, TN 37129
893-1812
1645 Northwest Broad Street
Murfreesboro, TN 37129
895-3380
2604 South Church Street
Murfreesboro, TN 37128
848-1966
604 North Main Street
Shelbyville, TN 37160
684-6166
269 South Lowry Street
Smyrna, TN 37167
459-2535
1300 Hazelwood Drive
Smyrna, TN 37167
459-6828
12
Cavalry Bancorp, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
(Dollars in thousands)
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the periods indicated.
At December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
FINANCIAL CONDITION DATA:
Total assets . . . . . . . $384,285 $395,419 $364,892 $282,129 $244,964
Loans receivable, net. . . 279,478 272,211 237,547 212,979 200,600
Loans held-for-sale. . . . 4,183 4,485 10,923 4,855 5,253
Investment securities
held-to-maturity. . . . . - - - 1,700 7,705
Investment securities
available-for-sale. . . . 32,247 6,964 46,505 10,077 -
Mortgage-backed securities
held-to-maturity. . . . . 594 651 959 1,301 1,419
Cash, federal funds sold
and overnight
interest-bearing deposits 45,025 94,422 53,188 37,658 19,519
Deposit accounts . . . . . 336,534 308,929 266,032 248,267 214,533
Borrowings . . . . . . . . 1,578 45,000 - - -
Total equity . . . . . . . 43,971 38,765 95,181 30,447 27,250
For the Year Ended December 31,
---------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
OPERATING DATA:
Interest income . . . . . . . . . $29,436 $28,008 $26,596 $21,939 $19,584
Interest expense. . . . . . . . . 13,070 10,130 9,594 9,289 8,268
-------------------------------------------
Net interest income . . . . . . . 16,366 17,878 17,002 12,650 11,316
Provision for loan losses . . . . 306 991 452 700 120
---------------------------------------------
Net interest income after
provision for loan losses. . . . 16,060 16,887 16,550 11,950 11,196
---------------------------------------------
Gains from sale of loans. . . . . 1,548 2,245 2,266 1,126 890
Other income. . . . . . . . . . . 4,147 3,403 2,960 2,535 2,268
Other expenses. . . . . . . . . . 14,700 16,385 12,481 10,498 9,786
---------------------------------------------
Income before income taxes. . . . 7,055 6,150 9,295 5,113 4,568
Provision for income taxes. . . . 3,003 2,681 3,598 1,911 1,754
---------------------------------------------
Net income. . . . . . . . . . . . $ 4,052 $ 3,469 $ 5,697 $ 3,202 $ 2,814
=============================================
At December 31,
---------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
OTHER DATA:
Number of:
Real estate loans outstanding 5,377 5,128 5,126 4,833 4,693
Deposit accounts. . . . . . . 29,429 27,878 24,828 23,054 20,687
Full-service offices. . . . . 9 9 10 9 7
13
Cavalry Bancorp, Inc. and Subsidiaries
SELECTED FINANCIAL DATA (Continued)
KEY FINANCIAL RATIOS:
For the Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Performance Ratios:
Return on average assets (1) . . . . 1.11% 0.92% 1.66% 1.22% 1.20%
Return on average equity (2) . . . . 9.90 4.05 6.63 11.09 10.94
Interest rate spread (4) . . . . . . 4.22 3.92 4.01 4.55 4.48
Net interest margin (5). . . . . . . 4.89 5.10 5.29 5.21 5.15
Average interest-earning
assets to average
interest-bearing liabilities . . . 117.19 140.48 142.81 117.16 117.96
Non-interest expense as a
percent of average total assets. . 4.02 4.35 3.63 4.01 4.17
Efficiency ratio (6) . . . . . . . . 66.63 69.65 56.15 64.36 67.61
Dividend payout ratio (7). . . . . . 31.25 38.46 18.07 N/A N/A
Asset Quality Ratios:
Non-accrual and 90 days or
more past due loans as a
percent of total loans, net. . . . 0.04 0.12 0.07 0.11 0.02
Non-performing assets as a percent
of total assets. . . . . . . . . . 0.05 0.13 0.03 0.09 0.02
Allowance for loan losses as a
percent of total
loans receivable . . . . . . . . . 1.34 1.24 1.06 1.11 0.87
Allowance for loan losses as a
percent of non-performing loans. . 3,443.09 1,242.04 3,019.63 1,130.65 4,162.75
Net charge-offs to average
outstanding loans . . . . . . . . . 0.07 0.03 0.01 0.01 -
Capital Ratios:
Total equity-to-assets ratio . . . . 11.44 9.80 26.08 10.79 11.12
Average equity to average assets (3) 11.19 22.75 25.01 11.04 10.97
<FN>
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average total equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and weighted
average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses divided by the sum of net interest income and other income.
(7) Dividends per share divided by net income per share.
14
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes contained in this Annual Report.
Private Securities Litigation Reform Act Safe Harbor Statement
This Annual 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 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 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.
The Company's Business and Strategy
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the
holding company for Cavalry Banking (the "Bank"), a federal savings bank with
its main office located in Murfreesboro, Tennessee.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
originates one-to-four family mortgage loans, construction loans, commercial
real estate loans, consumer loans, commercial business loans, and land
acquisition and development loans. In addition, the Bank invests in U.S.
Government and federal agency obligations. The Bank continues to fund its
assets primarily with retail deposits, although FHLB-Cincinnati advances can be
used as an additional source of funds. The Bank also offers investment
management and trust services.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and other borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The level of
other income and expenses also affects the Bank's profitability. Other income,
net, includes income associated with the origination and sale of mortgage loans,
loan servicing fees, deposit-related fees and trust fees. Other expenses
include compensation and benefits, occupancy and equipment expenses, deposit
premiums, data servicing expenses and other operating costs. The Bank's results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation, and monetary and fiscal policies.
Management of the Company views its operation as three distinct operating
segments. These three segments are the banking, mortgage banking and trust
services. The banking segment's profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolios and its cost of funds, which consists of interest
paid on deposits and other borrowings. The banking segment also depends on
deposit and other fee income. The mortgage banking segment originates loans for
sale in the secondary market and services residential mortgage loans for other
investors. These loans are sold either with or without the rights to service
these loans. The mortgage banking segment relies on the net gains on the sale
of these loans for its profitability. Other fees related to secondary marketing
activities also include any pricing concessions that may be offered, as well as
mortgage servicing rights. Servicing rights permit the collection of fees for
gathering and processing monthly payments for the owner of the mortgage loans.
The trust segment relies on the fees collected for services related to a line of
investments and trust products. These products include a line of investment
management accounts, personal trusts, employee benefits, custodial and corporate
trust services.
The consolidated financial statements and financial data include the
accounts of the Company and the Bank and its wholly owned subsidiary, Calvary
Enterprises, Inc. Since the Company was inactive from incorporation through
March 16, 1998, the information contained in the financial statements and
financial data prior to that date relates to the Bank and its subsidiaries.
Comparison of Financial Condition at December 31, 2000 and December 31, 1999
Consolidated total assets were $384.3 million at December 31, 2000 and
$395.4 million at December 31, 1999, a decrease of $11.1 million or 2.81%. This
decrease was primarily a result of repayment of a substantial portion of
borrowings outstanding.
Loans receivable net, increased to $279.5 million at December 31, 2000,
from $272.2 million at December 31, 1999, a 2.68% increase. A substantial
portion of the loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its
15
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
primary market areas. In addition, the Bank continued to originate consumer
and commercial loans with shorter maturities for asset and liability
management purposes.
Loans held-for-sale were $4.2 million at December 31, 2000, compared to
$4.5 million at December 31, 1999. The decrease resulted primarily from
decreased lending activity and timing differences in the funding of loan sales.
Cash and cash equivalents decreased $49.4 million or 52.33% from $94.4
million at December 31, 1999, to $45.0 million at December 31, 2000. The
decrease was a result of reducing debt and increasing investment securities
available-for-sale. In addition, funds were used to construct a new operations
building located at 214 W. College Street in Murfreesboro, Tennessee.
Investment securities available-for-sale increased from $7.0 million at
December 31, 1999, to $32.2 million at December 31, 2000. This increase was a
result of reallocating funds from cash and cash equivalents to investment
securities available-for-sale.
Office properties and equipment, net, were $15.3 million at December 31,
2000, compared to $9.9 million at December 31, 1999. This increase was
primarily the result of the construction of a new operations building located on
214 W. College Street in Murfreesboro, Tennessee. Construction was completed
during the fourth quarter of 2000.
Deposit accounts totaled $336.5 million and $308.9 million at December 31,
2000, and December 31, 1999, respectively. The increase was a result of a
continuing effort to aggressively solicit and promote deposit growth.
Total borrowings decreased from $45.0 million at December 31, 1999, to $1.6
million at December 31, 2000. The $45.0 million loan to the company was a
short-term borrowing and was repaid January 19, 2000. The current borrowings
are advances from the Federal Home Loan Bank of Cincinnati.
Total stockholders' equity was $44.0 million at December 31, 2000, and
$38.8 million at December 31, 1999. This increase was the result of earnings of
$4.1 million, the allocation of shares under the Bank's Employee Stock Ownership
Plan ("ESOP") and the Management Recognition Plan ("MRP") that totaled $2.3
million, and increases in the valuation allowance for available-for-sale
securities of $97,000. These increases were offset by dividends of $1.3 million
for the year ended December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
Net Income. Net income was $4.1 million or $0.64 per basic share for the
year ended December 31, 2000, compared to $3.5 million or $0.52 per basic share
for the year ended December 31, 1999, an increase of 17.14%. This increase was
a result of increases in interest income, a smaller provision for loan losses,
lower operating expenses and increased non-interest income. These earnings
improvements were partially offset by increased interest expense.
Net Interest Income. Net interest income decreased 8.38% from $17.9
million for the year ended December 31, 1999, to $16.4 million for the same
period in 2000. Total interest income increased 5.00% from $28.0 million for
fiscal 1999 to $29.4 million for fiscal 2000. This increase was a result of an
increase in average yield on earning assets from 7.98% for fiscal 1999 to 8.80%
for fiscal 2000. This increase in rate was offset by a decrease in average
earning assets from $350.8 million for fiscal 1999 to $334.4 million for fiscal
2000 as a result of funds being used to reduce borrowings. Average loans
receivable increased from $267.2 million for fiscal 1999 to $280.1 million for
fiscal 2000. This increase in volume was accompanied by an increase in average
yield from 8.87% for fiscal 1999 to 9.26% for fiscal 2000. Average
mortgage-backed securities declined from $775,000 for fiscal 1999 to $624,000
for fiscal 2000. The average yield increased from 5.03% for fiscal 1999 to
6.73% for fiscal 2000. Average investment securities decreased from $39.6
million for fiscal 1999 to $23.3 million for fiscal 2000. This decrease in
volume was offset by an increase in average yield from 5.26% for fiscal 1999 to
6.44% for fiscal 2000. Federal funds sold and other interest-bearing deposits
decreased from $41.4 million for fiscal 1999 to $28.4 million for fiscal 2000.
The average yield increased from 4.99% for fiscal 1999 to 6.34% for fiscal 2000.
Interest expense increased 29.70% from $10.1 million for fiscal 1999 to $13.1
million for fiscal 2000. This increase was a result of increases in average
deposits and borrowings from $249.7 million for fiscal 1999 to $285.3 million
for fiscal 2000. The average cost of funds increased from 4.06% for fiscal 1999
to 4.58% for fiscal 2000. The increase was primarily a result of higher costs
for NOW accounts and money market accounts. The cost of certificates also
increased from 5.21% for fiscal 1999 to 5.85% for fiscal 2000. The interest
rate spread increased from 3.92% for fiscal 1999 to 4.22% for fiscal 2000. The
increase in yields and cost were attributable to increasing rates for fiscal
2000 as compared to fiscal 1999.
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 losses based on concentrations,
trends in historical loss experience, specific impaired loans and economic
conditions. In determining the adequacy of the allowance for loan losses,
management periodically reviews the loan portfolio and considers such factors as
delinquency status, past performance problems, historical loss experience,
adverse situations that may affect the ability of the borrowers to repay, known
and inherent risks in the portfolio, assessments of economic conditions,
regulatory policies, and the estimated value of underlying collateral. The
Bank's credit management systems have resulted in low loss experience; however,
there can be no assurances that such experience will continue. The allowance
for loan losses is based principally on the risks associated with the type of
loans in the portfolio with greater emphasis placed on higher risk assets. This
requires a heavier weight being assigned to internally identified problem
assets, repossessed assets, and non-performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses. The required level of
allowance is then calculated based upon the outstanding balances in each loan
category and the risk weight assigned to each category.
16
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The provision for loan losses was $306,000, charge-offs were $236,000 and
recoveries were $29,000 for the year ended December 31, 2000, compared with a
provision of $991,000, charge-offs of $102,000 and recoveries of $16,000 for the
year ended December 31, 1999. The allowance for loan losses increased from $4.1
million at December 31, 1999, to $4.2 million at December 31, 2000. The
allowance for loan losses as a percentage of loans outstanding increased from
1.24% at December 31, 1999, to 1.34% at December 31, 2000. Non-accrual loans
decreased from $333,000 at December 31, 1999, to $123,000 at December 31, 2000.
Total non-performing assets decreased from $499,000 at December 31, 1999, to
$209,000 at December 31, 2000.
During the year ended December 31, 2000, commercial real estate and
commercial loans continued to increase as well as the percentages of these loans
to the total portfolio. Although these types of loans are normally of shorter
maturity, management feels that there is greater risk inherent in these loans
than the typical 1-to-4 family home loans. Therefore management assigns these
types of loans a higher risk weighting in the analysis of the loan loss reserve.
Commercial loans are loans made to businesses to either manufacture a product,
sell a product, or provide a service. These loans are also influenced by
economic factors. Some of these factors include the economic environment, the
ability of the business to compete and generate a profit and other similar types
of risks. Since it is the intention of the Bank to continue with this strategy,
the provision will continue to reflect the added risk factors associated with
this type of lending.
At December 31, 2000, and December 31, 1999, management believed the
provision and allowance for loan losses was adequate.
Non-interest Income. Non-interest income increased 1.79% from $5.6 million
for the year ended December 31, 1999, to $5.7 million for the year ended
December 31, 2000.
Mortgage Banking. In the mortgage banking segment, gain on sale of loans
decreased from $2.2 million for fiscal 1999 to $1.5 million for fiscal 2000.
This decrease in gain on sale of loans was a result of decreased volume of loan
sales during the year ended December 31, 2000, compared to the year ended
December 31, 1999. Loan servicing income increased from $219,000 for fiscal
1999 to $256,000 for fiscal 2000. This increase was primarily a result of
increased late fee payments.
Banking. In the banking segment, deposit servicing fees and charges
increased from $2.0 million for fiscal 1999 to $2.5 million for fiscal 2000.
This increase was a result of increased transaction account volume and increased
deposit fees charged for services.
Trust. In the trust segment, trust fees increased from $936,000 for fiscal
1999 to $1.1 million for fiscal 2000. This increase was a result of increased
assets under management.
Non-interest Expense. Non-interest expense decreased 10.37% from $16.4
million for the year ended December 31, 1999, to $14.7 million for the year
ended December 31, 2000. The decrease was primarily a result of decreased
employee compensation and benefits, which decreased to $9.3 million for the year
ended December 31, 2000, from $10.5 million for the year ended December 31,
1999. Total compensation expense recognized for the MRP for fiscal 1999 was
$2.4 million, comprised of a one-time non-recurring charge for the special cash
distribution and normal vesting of shares as compared to $1.2 million of MRP
compensation expense recognized for fiscal 2000. The increase in occupancy
expense was a result of increased cost associated with the operation of the new
operations building. The increase in other operating expenses was primarily
a result of increases in professional fees paid. Declines in other expenses
were a result of increased efforts to control expenses.
Income Tax Expense. Income tax expense was $3.0 million for the year ended
December 31, 2000, compared to $2.7 million for the year ended December 31,
1999. This increase was a result of higher income before income taxes for
fiscal 2000. The effective tax rate for fiscal 2000 was 42.6% compared to 43.6
% for fiscal 1999.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income was $3.5 million or $0.52 per basic share for the
year ended December 31, 1999, compared to $5.7 million or $0.83 per basic share
for the year ended December 31, 1998, a decrease of 38.60%. This decrease was a
result of increases in interest expense, provision for loan losses, and
increased employee expenses. These increased expenses were partially offset by
increased interest income and other non-interest income.
Net Interest Income. Net interest income increased 5.29% from $17.0
million for the year ended December 31, 1998, to $17.9 million for the same
period in 1999. Total interest income increased 5.26% from $26.6 million for
fiscal 1998 to $28.0 million for fiscal 1999. This increase was a result of an
increase in average earning assets from $321.5 million for fiscal 1998 to $350.8
million for fiscal 1999. This increase in volume was offset by a decrease in
average yield from 8.27% for fiscal 1998 to 7.98% for fiscal 1999. Average
loans receivable increased from $232.7 million for fiscal 1998 to $267.2 million
for fiscal 1999. This increase in volume was offset by a decline in average
yield from 9.37% for fiscal 1998 to 8.87% for fiscal 1999. Average
mortgage-backed securities declined from $1.1 million for fiscal 1998 to
$775,000 for fiscal 1999. The average yield also declined from 6.21% for fiscal
1998 to 5.03% for fiscal 1999. Average investment securities increased from
$33.6 million for fiscal 1998 to $39.6 million for fiscal 1999. This increase
in volume was offset by a decline in average yield from 5.41% for the fiscal
1998 to 5.26% for fiscal 1999. Federal funds sold and other interest-bearing
deposits decreased from $52.4 million for fiscal 1998 to $41.4 million for
fiscal 1999. The average yield declined from 5.33% for fiscal 1998 to 4.99% for
fiscal 1999. Interest expense increased 5.21% from $9.6 million for fiscal 1998
to $10.1 million for fiscal 1999. This increase was a result of increases in
average deposits and borrowings from $225.1 million for fiscal 1998 to $249.7
million for fiscal 1999. The average cost of funds declined from 4.26% for
fiscal 1998 to 4.06% for fiscal 1999. The decrease was primarily a result of
lower costs for
17
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
passbook accounts, NOW accounts, and money market accounts. The
cost of certificates also declined from 5.47% for fiscal 1998 to 5.21% for
fiscal 1999. The interest rate spread decreased from 4.01% for fiscal 1998 to
3.92% for fiscal 1999. The decline in yields and cost were attributable to
lower rates on average for fiscal 1999 as compared to fiscal 1998.
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 losses based on concentrations,
trends in historical loss experience, specific impaired loans and economic
conditions. In determining the adequacy of the allowance for loan losses,
management periodically reviews the loan portfolio and considers such factors as
delinquency status, past performance problems, historical loss experience,
adverse situations that may affect the ability of the borrowers
to repay, known and inherent risks in the portfolio, assessments of economic
conditions, regulatory policies, and the estimated value of underlying
collateral. The Bank's credit management systems have resulted in low loss
experience; however, there can be no assurances that such experience will
continue. The allowance for loan losses is based principally on the risks
associated with the type of loans in the portfolio with greater emphasis placed
on higher risk assets. This requires a heavier weight being assigned to
internally identified problem assets, repossessed assets, and non-performing
assets that otherwise exhibit, in management's judgement, potential credit
weaknesses. The required level of allowance is then calculated based upon the
outstanding balances in each loan category and the risk weight assigned to each
category.
The provision for loan losses was $991,000, charge-offs were $102,000 and
recoveries were $16,000 for the year ended December 31, 1999, compared with a
provision of $452,000, charge-offs of $54,000 and recoveries of $29,000 for the
year ended December 31, 1998. The allowance for loan losses increased from $3.2
million at December 31, 1998, to $4.1 million at December 31, 1999. The
allowance for loan losses as a percentage of loans outstanding increased from
1.06% at December 31, 1998 to 1.24% at December 31, 1999. Non-accrual loans
increased from $107,000 at December 31, 1998, to $333,000 at December 31, 1999.
Total non-accrual loans and loans 90 days or more past due increased from
$173,000 at December 31, 1998, to $333,000 at December 31, 1999. Total
non-performing assets increased from $253,000 at December 31, 1998 to $499,000
at December 31, 1999, as a result of $166,000 in repossessed assets and other
real estate owned at December 31,1999.
During the year ended December 31, 1999, commercial real estate, land,
consumer and commercial loans continued to increase as well as the percentages
of these loans to the total portfolio. Although these types of loans are
normally of shorter maturity, management feels that there is greater risk
inherent in these loans than the typical 1-to-4 family home loans. Therefore
management assigns these types of loans a higher risk weighting in the analysis
of the loan loss reserve. Land loans carry the risk of the developer being able
to complete the development within budget and on a timely basis. There is
market risk associated with speculative construction and development loans that
the project will sell to the public. Consumer loans by nature are dependent on
the ability and willingness of the borrower to pay the loan. These credits are
greatly influenced by the unemployment rate in an area, bankruptcy and other
changes in life status. Commercial loans are loans made to businesses to either
manufacture a product, sell a product, or provide a service. These loans are
also influenced by economic factors. Some of these factors include the economic
environment, the ability of the business to compete and generate a profit and
other similar types of risks. Since it is the intention of the Bank to continue
with this strategy, the provision will continue to reflect the added risk
factors associated with this type of lending.
At December 31, 1999, and December 31, 1998, management believed the
provision and allowance for loan losses was adequate.
Non-interest Income. Non-interest income increased 7.69% from $5.2 million
for the year ended December 31, 1998, to $5.6 million for the year ended
December 31, 1999.
Mortgage Banking. In the mortgage banking segment, gain on sale of loans
decreased from $2.3 million for fiscal 1998 to $2.2 million for fiscal 1999.
This decrease was a result of decreased volume of loan sales for the year ended
December 31, 1999, compared to the year ended December 31, 1998. Loan servicing
income declined from $374,000 for fiscal 1998 to $219,000 for fiscal 1999. This
decline was primarily a result of increased amortization of the originated
servicing asset.
Banking. In the banking segment, deposit servicing fees and charges
increased from $1.5 million for fiscal 1998 to $2.0 million for fiscal 1999.
This increase was a result of increased transaction account volume and increased
deposit fees charged for services.
Trust. In the trust segment, trust fees increased from $795,000 for fiscal
1998 to $936,000 for fiscal 1999. This increase was a result of increased
assets under management due to market appreciation and new business being
generated.
Non-interest Expense. Non-interest expense increased 31.20% from $12.5
million for the year ended December 31, 1998, to $16.4 million for the year
ended December 31, 1999. The increase was primarily a result of increased
employee compensation and benefits, which increased to $10.5 million for the
year ended December 31, 1999, from $7.1 million for the year ended December 31,
1998. The increase in compensation expense was primarily a result of the
adoption of the Management Recognition Plan (MRP) in the year ended December 31,
1999. Total compensation expense recognized for the MRP for fiscal 1999 was
$2.4 million, comprised of a one-time non-recurring charge for the special cash
distribution and normal vesting of shares. In addition the cost of the ESOP
increased as a result of the program being in effect for a full year in 1999.
The increase in other categories of other operating expenses generally are
attributable to the growth of the Company and to the increased cost of being a
public company.
Income Tax Expense. Income tax expense was $2.7 million for the year ended
December 31, 1999, compared to $3.6 million for the year ended December 31,
1998. This decrease was a result of lower income before income taxes for fiscal
1999. The effective tax rate for fiscal 1999 was 43.6% compared to 38.7% for
fiscal 1998.
18
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
daily balances for the years ended.
Years Ended December 31,
------------------------------------------------------------------------------------
(Dollars in thousands)
2000 1999 1998
---------------------------- ------------------------ --------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
- ----------------------------------------------------------------------------------------------------------
Interest-earning
assets:
Loans receivable,
net (1). . . . . . $280,066 $ 25,947 9.26% $267,176 $23,691 8.87% $232,715 $21,801 9.37%
Mortgage-backed
securities . . . . 624 42 6.73 775 39 5.03 1,111 69 6.21
Investment
securities . . . . 23,341 1,503 6.44 39,592 2,083 5.26 33,590 1,816 5.41
FHLB stock. . . . . 1,929 142 7.36 1,797 127 7.07 1,675 120 7.16
Federal funds sold
and overnight
interest-bearing
deposits . . . . . 28,426 1,802 6.34 41,431 2,068 4.99 52,378 2,790 5.33
-----------------------------------------------------------------------------------
Total interest-
earning assets. . . 334,386 29,436 8.80 350,771 28,008 7.98 321,469 26,596 8.27
Non-interest-
earning assets. . . 31,424 26,169 22,209
--------- --------- ---------
Total assets. . . . 365,810 376,940 343,678
--------- --------- ---------
Interest-bearing
liabilities:
Passbook
accounts . . . . . 13,636 169 1.24 13,913 184 1.32 22,067 423 1.92
Money Market
accounts . . . . . 66,852 3,056 4.57 59,090 2,382 4.03 46,377 1,924 4.15
NOW accounts. . . . 46,589 604 1.30 41,887 503 1.20 32,276 440 1.36
Certificates
of Deposit . . . . 154,855 9,067 5.85 132,801 6,913 5.21 124,386 6,807 5.47
-----------------------------------------------------------------------------------
Total deposits. . . 281,932 12,896 4.57 247,691 9,982 4.03 225,106 9,594 4.26
-----------------------------------------------------------------------------------
Borrowings. . . . . 3,414 174 5.10 2,005 148 7.38 - - -
-----------------------------------------------------------------------------------
Total interest-
bearing
liabilities. . . . 285,346 13,070 4.58 249,696 10,130 4.06 225,106 9,594 4.26
--------- ------- -------
Non-interest-
bearing
liabilities (2). . 39,533 41,489 32,607
--------- --------- ---------
Total
liabilities. . . . 324,879 291,185 257,713
Equity. . . . . . . 40,931 85,755 85,965
--------- --------- ---------
Total liabilities
and equity . . . . $365,810 $376,940 $343,678
--------- --------- ---------
Net interest
income . . . . . . $ 16,366 $ 17,878 $ 17,002
--------- --------- ---------
Interest rate
spread . . . . . . 4.22% 3.92% 4.01%
--------- --------- ---------
Net interest
margin . . . . . . 4.89% 5.10% 5.29%
--------- --------- ---------
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities. . . . 117.19% 140.48% 142.81%
--------- --------- ---------
<FN>
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for
sale.
(2) Includes non-interest-bearing deposits of $36.9 million, $33.5 million, and $27.2 million for
the years ended December 31, 2000, 1999, and 1998, respectively.
19
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates indicated
the weighted average yields earned on the Company's assets and the weighted
average interest rates paid on the Company's liabilities, together with the
interest rate spread and net interest margin on interest-earning assets.
At Year Ended December 31,
December 31, -----------------------
2000 2000 1999 1998
- ------------------------------------------------------------------------------
Weighted average yield on:
Loans receivable . . . . . . . . . . . . . . 9.13% 9.26% 8.87% 9.37%
Mortgage-backed securities . . . . . . . . . 7.52 6.73 5.03 6.21
Investment securities. . . . . . . . . . . . 6.38 6.44 5.26 5.41
FHLB stock . . . . . . . . . . . . . . . . . 7.50 7.36 7.07 7.16
Federal funds sold and overnight
interest-bearing deposits. . . . . . . . . 6.39 6.34 4.99 5.33
All interest-earning assets. . . . . . . . . 8.65 8.80 7.98 8.27
Weighted average rate paid on:
Passbook savings accounts. . . . . . . . . . 1.24 1.24 1.32 1.92
NOW accounts . . . . . . . . . . . . . . . . 1.47 1.30 1.20 1.36
Money market accounts. . . . . . . . . . . . 4.79 4.57 4.03 4.15
Certificates of Deposit. . . . . . . . . . . 6.37 5.85 5.21 5.47
Borrowings . . . . . . . . . . . . . . . . . 3.68 5.10 7.38 -
All interest-bearing liabilities . . . . . . 4.93 4.58 4.06 4.26
Interest rate spread (spread between weighted
average rate on all
interest-earning assets and all
interest-bearing liabilities). . . . . . . . 3.72 4.22 3.92 4.01
Net interest margin (net interest income
(expense) as a percentage
of average interest-earning assets). . . . . N/A 4.89 5.10 5.29
20
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate): and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2000 Compared 1999 Compared 1998 Compared
to Year Ended to Year Ended to Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate Volume Total Rate Volume Total Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) . . . . . $1,113 $ 1,143 $ 2,256 $(1,339) $3,229 $1,890 $(261) $1,772 $1,511
Mortgage-backed
securities . . . . . . . . . 10 (7) 3 (9) (21) (30) (6) (18) (24)
Investments. . . . . . . . . . 275 (855) (580) (58) 325 267 (162) 1,486 1,324
FHLB stock . . . . . . . . . . 6 9 15 (2) 9 7 - 8 8
Federal funds sold
and overnight
interest-bearing
deposits . . . . . . . . . . 383 (649) (266) (139) (583) (722) (27) 1,865 1,838
---------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets . . . . . . . 1,787 (359) 1,428 (1,547) 2,959 1,412 (456) 5,113 4,657
Interest-bearing liabilities:
Passbook accounts. . . . . . . (11) (4) (15) (82) (157) (239) (13) 134 121
NOW accounts . . . . . . . . . 45 56 101 (68) 131 63 (102) 62 (40)
Money market
accounts . . . . . . . . . . 361 313 674 (70) 528 458 (15) 465 450
Certificates of
Deposit. . . . . . . . . . . 1,005 1,149 2,154 (354) 460 106 (10) (216) (226)
Borrowings . . . . . . . . . . (78) 104 26 - 148 148 - - -
---------------------------------------------------------------------------------
Total net change
in expense on
interest-bearing
liabilities. . . . . . . . . 1,322 1,618 2,940 (574) 1,110 536 (140) 445 305
---------------------------------------------------------------------------------
Net change in
net interest income. . . . . $ 465 $(1,977) $(1,512) $ (973) $1,849 $ 876 $(316) $4,668 $4,352
=================================================================================
<FN>
(1) Does not include interest on 90 days or more past due. Includes loans originated for sale.
21
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Asset and Liability Management
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the OTS, the Bank receives a
report, which measures interest rate risk by modeling the changes in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. The assets
and liabilities at the parent company level are not considered in the analysis.
The exclusion of parent company assets and liabilities does not have a
significant effect on the analysis of NPV sensitivity. This procedure for
measuring interest rate risk was developed by the OTS to replace the "gap"
analysis (the difference between interest-earning assets and interest-bearing
liabilities that mature within a specific time period). NPV is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The calculation is intended to illustrate the change in NPV that
will occur in the event of an immediate change in interest rates of at least 200
basis points with no effect given to any steps that management might take to
counter the effect of that interest rate movement.
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 2000, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
Changes (in Basis Estimated Change Estimated Change Board
Points) in in Net in Net Approved
Interest Rates Portfolio Value Portfolio Value Limits
- -----------------------------------------------------------------------------
(Dollars in Thousands) (Percentage) (Percent)
300 bp 1,877 4 (30)
200 bp 1,650 3 (20)
100 bp 996 2 (10)
0 bp 0 0 0
-100 bp (851) (2) (10)
-200 bp (1,477) (3) (20)
-300 bp (903) (2) (30)
The above table illustrates, for example, that an instantaneous 200 basis
point decrease in market interest rates at December 31, 2000, would reduce the
Bank's NPV by approximately $1.5 million, or 3.0%.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features, which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
22
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the Company's interest sensitivity gap at
December 31, 2000.
Six After One After Three
Within Six Months to to Three to Five Over
Months One Year Years Years Five Years Total
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net . . . . . . $ 60,024 $ 46,389 $ 61,860 $ 54,751 $ 60,637 $283,661
Mortgage-backed securities. . . . 9 9 40 46 490 594
FHLB Stock. . . . . . . . . . . . 2,020 - - - - 2,020
Investment securities . . . . . . 12,067 9,075 11,105 - - 32,247
Federal funds sold
overnight and other
interest-bearing deposits. . . . 27,000 - - - - 27,000
-----------------------------------------------------------------
Total rate sensitive assets . . . $101,120 $ 55,473 $ 73,005 $ 54,797 $ 61,127 $345,522
=================================================================
Interest-bearing liabilities:
Deposits:
NOW accounts. . . . . . . . . . . $ 5,234 $ 5,234 $ 20,937 $ 20,938 $ - $ 52,343
Passbook savings accounts . . . . 1,325 1,325 5,299 5,299 - 13,248
Money market accounts . . . . . . 6,980 6,980 27,919 27,918 - 69,797
Certificates of Deposit . . . . . 63,319 69,876 25,707 3,565 49 162,516
Borrowings. . . . . . . . . . . . 553 27 108 108 782 1,578
-----------------------------------------------------------------
Total rate sensitive
liabilities. . . . . . . . . $ 77,411 $ 83,442 $ 79,970 $ 57,828 $ 831 $299,482
=================================================================
Excess (deficiency) of
interest sensitive
assets over interest sensitive
liabilities . . . . . . . . . . . 23,709 (27,969) (6,965) (3,031) 60,296 46,040
Cumulative excess(deficiency) of
interest sensitive assets . . . . 23,709 (4,260) (11,225) (14,256) 46,040 46,040
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities . . . . . . . 130.63% 97.35% 95.34% 95.23% 115.37% 115.37%
Interest sensitive gap
to total assets. . . . . . . . . 6.86% (8.09)% (2.02)% (0.88)% 17.45% 13.32%
Ratio of interest-earning assets to
interest-bearing liabilities. . . 130.63% 66.48% 91.29% 94.76% 7,355.84% 115.37%
Ratio of cumulative gap
to total assets . . . . . . . . . 6.86% (1.23)% (3.25)% (4.13)% 13.32% 13.32%
Liquidity and Capital Resources
The Company's primary source of funds is customer deposits, proceeds from
loan principal and interest payments, sale of loans, maturing securities and
FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient liquidity to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2000, cash and cash equivalents totaled $45.0 million or 11.71% of total assets.
At December 31, 2000, the Bank also maintained an available line of credit of
$10.0 million with the FHLB-Cincinnati that may be used as an additional source
of liquidity.
At December 31, 2000, the Bank's commitments to extend funds consisted of
unused lines of credit of $35.3 million, outstanding letters of credit of $7.4
million issued primarily to municipalities as performance bonds, and commitments
to originate loans of $26.5 million. The commitments to originate loans at
December 31, 2000 consisted of commitments to originate variable rate loans of
$20.8 million, and commitments to originate fixed rate loans of $5.7 million at
interest rates ranging from 6.25% to 9.63%.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 4.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. The Bank's liquidity ratio at December 31, 2000 was 19.43%.
The Bank to a large extent originates real estate mortgage loans for sale
in the secondary market. During the years ended December 31, 2000, 1999, and
1998, the Bank originated $102.2 million, $113.1 million, and $124.6 million of
such loans, respectively. During the years ended December 31, 2000, 1999, 1998,
the Bank sold in the secondary market $104.1 million, $121.7 million, and $120.8
million of these loans, respectively. At December 31, 2000, the Bank had loan
commitments totaling $26.5 million that were made up
23
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
completely of undisbursed loans in process. The Bank anticipates that it
will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year from
December 31, 2000 totaled $133.2 million. Historically, the Bank has been able
to retain a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of December 31, 2000, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 11.00%, 10.98% and 13.96%, respectively.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Derivative Instruments and Hedging Activities. SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," and SFAS 138,"
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment of FASB Statement No. 133," establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 138
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and requires those instruments to be measured at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative. SFAS 138 is effective for all fiscal quarters
and fiscal years beginning after June 15, 2000. The adoption of the provisions
of this statement is not expected to have a material impact on the Company.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125. SFAS
140, "Accounting for Transfers of Financial Assets and Extinguishments of
Liabilities, a replacement of Statement No. 125," revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral. This statement requires certain disclosures, but it carries over
most of the provisions of SFAS 125. The statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 5, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This statement is to be
applied prospectively with certain exceptions. Other than those exceptions,
earlier or retroactive applications of its accounting provisions are not
permitted. The adoption of the provisions of this statement is not expected to
have a material impact on the Company.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
have been prepared in accordance with U.S. GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. 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 a financial institution's performance than do 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.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative Aspects of Market Risk. The principal market risk affecting
the Company is risk associated with interest rate volatility ("interest rate
risk"). The Company does not maintain a trading account for any class of
financial instrument nor does it engage in hedging activities or purchase
high-risk derivative instruments. Furthermore, the Company is not subject to
foreign currency exchange rate risk or commodity price risk. Substantially all
of the Company's interest rate risk is derived from the Bank's lending and
deposit taking activities. This risk could result in reduced net income, loss
in fair values of assets and/or increases in fair values of liabilities due to
upward changes in interest rates.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The company has sought to reduce the
exposure of its earnings to changes in market interest rates by attempting to
manage the mismatch between assets and liability maturities and interest rates.
The principal element in achieving this objective is to increase the interest
rate sensitivity of the Company's interest-earning assets by retaining for its
portfolio loans with interest rates subject to periodic adjustment to market
conditions and the selling of fixed-rate one-to-four family mortgage loans. In
addition the Company maintains an investment portfolio of U.S. Government and
agency securities with contractual maturities of between zero and two years.
The Company relies on retail deposits as its primary source of funds.
Management believes retail deposits, compared to brokered deposits, reduce the
effects of its interest rate fluctuations because they generally represent a
more stable source of funds. As part of its interest rate risk management
strategy, the Bank promotes transaction accounts and certificates of deposit
with primarily terms of up to four years.
Interest Rate Sensitivity. The table below provides information about the
Company's financial instruments at December 31, 2000 that are sensitive to
changes in interest rates including off-balance sheet items. For financial
instruments the table presents principle cash flows and related average interest
rates by expected maturity dates with estimated fair values.
Since this presentation is a snapshot of the financial instruments as of
December 31, 2000, there are material limitations in not fully reflecting market
risk exposures. The table does not consider the effects of interest rate
changes on the embedded options on loans and deposit liabilities. Changes in
interest rates may cause borrowers to exercise the option to prepay loans before
the scheduled maturity. Depositors have the option to withdraw deposits before
maturity, which is the case with certificate accounts or to withdraw funds any
time from accounts with no stated maturity such as savings accounts. This table
also does not take into consideration the effects on reinvestment of maturing
financial instruments. This presentation does not consider that all rate
changes do not affect assets or liabilities
24
Cavalry Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
in the same maturity range by equal amounts. When interest rates change, all
rates do not change in equal amounts nor do they change at the same time. Some
financial instruments have indefinite maturities. That is to say that some
assets and some significant liabilities do not have clear maturities.
As of December 31, 2000, the Company's greatest exposure would be to rising
rates. The Company has more liabilities maturing than assets during the one
year time frame which can increase the cost of deposits faster than yields on
assets would increase.
After 3 After
Within One Years 5 Years Beyond
One Year To To 5 To 10 Fair
Year 3 Years Years 10 Years Years Total Value
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-sensitive assets:
Fixed rate loans . . . . . . $ 58,458 $50,526 $48,778 $ 6,164 $ 5,573 $169,499
Average rate . . . . . . . . 9.709 8.973 8.564 11.003 7.602 9.138
Adjustable rate loans. . . . 47,955 11,334 5,973 9,145 39,755 114,162
Average rate . . . . . . . . 9.857 9.514 9.363 8.445 8.211 9.111
--------------------------------------------------------------
Total loans. . . . . . . . . 106,413 61,860 54,751 15,309 45,328 283,661 281,580
Adjustable rate
Mortgage-backed securities . 18 40 46 151 339 594 589
Average rate . . . . . . . . 7.467 7.471 7.477 7.484 7.542 7.516
Fixed rate
Investments and other
interest-earning assets. . 21,142 11,105 - - - 32,247 32,247
Average rate . . . . . . . . 6.310 6.498 - - - 6.375
Adjustable rate
Investments and other
interest-earning deposits. 27,000 - - - - 27,000 7,000
Average rate . . . . . . . . 6.385 - - - - 6.385
FHLB stock . . . . . . . . . 2,020 - - - - 2,020 2,020
Average rate . . . . . . . . 7.50 - - - - 7.50
--------------------------------------------------------------
Total interest-sensitive
assets . . . . . . . . . $156,593 $73,005 $54,797 $15,460 $45,667 $345,522
==============================================================
Interest-sensitive
liabilities:
Deposits with no stated
maturity
Now accounts . . . . . . . . $ 10,468 $20,937 $20,938 $ - $ - $ 52,343 52,343
Average rate . . . . . . . . 1.470 1.470 1.470 - - 1.470
Savings accounts . . . . . . 2,650 5,299 5,299 - - 13,248 13,248
Average rate . . . . . . . . 1.235 1.235 1.235 - - 1.235
Money market accounts. . . . 13,960 27,919 27,918 - - 69,797 69,797
Average rate . . . . . . . . 4.790 4.790 4.790 - - 4.790
Fixed rate
Certificate accounts . . . . 131,204 25,588 3,565 - 49 160,406
Average rate . . . . . . . . 6.375 6.364 5.970 - 5.750 6.370
Adjustable rate
Certificate accounts . . . . 1,991 119 - - - 2,110
Average rate . . . . . . . . 6.890 6.000 - - - 6.840
--------------------------------------------------------------
Total certificate accounts . 133,195 25,707 3,565 - 49 162,516 163,279
Fixed rate borrowings. . . . 580 108 108 272 510 1,578 1,453
6.140 2.250 2.250 2.250 2.250 3.680
Total interest-sensitive
liabilities . . . . . . . $160,853 $79,970 $57,828 $ 272 $ 559 $299,482
==============================================================
Off-Balance Sheet Items:
Commitments to extend credit 26,471 26,471
Average rate . . . . . . . . 9.686
Unused lines of credit . . . 35,331 35,331
Average rate . . . . . . . . 9.50
25
[Letterhead of Rayburn, Betts & Bates, P.C.]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cavalry Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the accompanying consolidated balance sheets of Cavalry Bancorp,
Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, changes in
equity and cash flows for each of the three years in the period ended December
31, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
of the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free from 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 the Company at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with generally accepted accounting principles of the United States of America.
/s/Rayburn, Betts, & Bates P.C.
Nashville, Tennessee
January 18, 2001
26
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollars in thousands)
2000 1999
- --------------------------------------------------------------------------------------
Assets
Cash (note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,025 $ 20,043
Interest-bearing deposits with other financial institutions . . . . . . . . . 27,000 74,379
--------------------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 45,025 94,422
Investment securities available-for-sale (note 3) . . . . . . . . . . . . . . 32,247 6,964
Mortgage-backed securities held to maturity (note 4). . . . . . . . . . . . . 594 651
Loans held for sale, at estimated fair value (note 5) . . . . . . . . . . . . 4,183 4,485
Loans receivable, net (notes 5 and 10). . . . . . . . . . . . . . . . . . . . 279,478 272,211
Accrued interest receivable:
Loans, net of allowance for delinquent interest of
$15 and $10 in 2000 and 1999, respectively. . . . . . . . . . . . . . . . 2,005 1,731
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 549 48
Mortgage-backed securities held to maturity . . . . . . . . . . . . . . . . 5 5
Office properties and equipment, net (note 6) . . . . . . . . . . . . . . . . 15,255 9,892
Required investment in stock of Federal Home Loan Bank,
at cost (note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,020 1,878
Deferred tax asset, net (note 12) . . . . . . . . . . . . . . . . . . . . . . 1,280 1,268
Real estate acquired in settlement of loans . . . . . . . . . . . . . . . . . 86 166
Other assets (note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,558 1,698
--------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $384,285 $395,419
====================
Liabilities and Equity
Liabilities:
Deposits (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $336,534 $308,929
Advances from Federal Home Loan Bank of Cincinnati (note 10). . . . . . . . 1,578 -
Other borrowings (note 11). . . . . . . . . . . . . . . . . . . . . . . . . - 45,000
Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . 555 507
Advance payments by borrowers for property taxes and insurance. . . . . . . 174 178
Income taxes payable (note 12). . . . . . . . . . . . . . . . . . . . . . . 207 482
Accrued expenses and other liabilities (note 13). . . . . . . . . . . . . . 1,266 1,558
--------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,314 356,654
--------------------
Equity (notes 13, 14, 15 and 16):
Preferred stock, no par value:
Authorized - 250,000 shares; none issued or outstanding at:
December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, no par value:
Authorized - 49,750,000 shares; issued and outstanding: 7,104,801 shares
at December 31, 2000 and 1999, respectively . . . . . . . . . . . . . . . 11,489 10,972
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,991 37,194
Unearned restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . (3,224) (4,380)
Unallocated ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . (4,380) (5,019)
Accumulated other comprehensive income (loss), net of taxes (note 23) . . . 95 (2)
--------------------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,971 38,765
--------------------
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . . . . . . $384,285 $395,419
====================
Commitments and contingencies (notes 2, 13 and 20)
See accompanying notes to consolidated financial statements.
27
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands, expect per share amounts)
2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Interest and dividend income:
First mortgage loans. . . . . . . . . . . . . . . . . . . . . . . $ 11,634 $ 11,131 $ 11,488
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,313 12,560 10,313
Investment securities . . . . . . . . . . . . . . . . . . . . . . 1,645 2,210 1,936
Deposits with other financial institutions. . . . . . . . . . . . 1,802 2,068 2,790
Mortgage-backed securities held to maturity . . . . . . . . . . . 42 39 69
----------------------------------
Total interest and dividend income. . . . . . . . . . . . . . . 29,436 28,008 26,596
----------------------------------
Interest expense:
Deposits (note 9) . . . . . . . . . . . . . . . . . . . . . . . . 12,896 9,982 9,594
Advances from Federal Home Loan Bank of Cincinnati. . . . . . . . 45 - -
Other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 129 148 -
----------------------------------
Total interest expense. . . . . . . . . . . . . . . . . . . . . 13,070 10,130 9,594
----------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . 16,366 17,878 17,002
Provision for loan losses (note 5). . . . . . . . . . . . . . . . . 306 991 452
----------------------------------
Net interest income after provision for loan losses . . . . . . . . 16,060 16,887 16,550
----------------------------------
Non-interest income:
Servicing income. . . . . . . . . . . . . . . . . . . . . . . . . 256 219 374
Gain on sale of real estate acquired in
settlement of loans . . . . . . . . . . . . . . . . . . . . . . 6 3 2
Gain on sale of loans, net. . . . . . . . . . . . . . . . . . . . 1,548 2,245 2,266
Gain on sale of office properties and equipment . . . . . . . . . 2 - -
Deposit servicing fees and charges. . . . . . . . . . . . . . . . 2,513 2,002 1,512
Trust service fees. . . . . . . . . . . . . . . . . . . . . . . . 1,067 936 795
Other operating income. . . . . . . . . . . . . . . . . . . . . . 303 243 277
----------------------------------
Total non-interest income . . . . . . . . . . . . . . . . . . . 5,695 5,648 5,226
----------------------------------
Non-interest expenses:
Compensation, payroll taxes and fringe benefits (notes 13 and 14) 9,268 10,539 7,094
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . 789 728 759
Supplies, communications and other
office expenses . . . . . . . . . . . . . . . . . . . . . . . . 793 855 823
Federal insurance premiums. . . . . . . . . . . . . . . . . . . . 63 153 146
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . 278 297 229
Equipment and service bureau expense. . . . . . . . . . . . . . . 2,064 2,378 2,301
Loss on sale of office properties
and equipment . . . . . . . . . . . . . . . . . . . . . . . . . - - 21
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 393 350
Other operating expenses. . . . . . . . . . . . . . . . . . . . . 1,146 1,042 758
----------------------------------
Total non-interest expenses . . . . . . . . . . . . . . . . . . 14,700 16,385 12,481
----------------------------------
Income before income tax expense. . . . . . . . . . . . . . . . . . 7,055 6,150 9,295
Income tax expense (note 12). . . . . . . . . . . . . . . . . . . . 3,003 2,681 3,598
----------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,052 $ 3,469 $ 5,697
==================================
Basic earnings per share (note 17). . . . . . . . . . . . . . . . . $ 0.64 $ 0.52 $ 0.83
==================================
Weighted average shares outstanding . . . . . . . . . . . . . . . . 6,370,127 6,641,040 6,908,959
==================================
See accompanying notes to consolidated financial statements.
28
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
-----------------------------------------------------------------------------
Net income $4,052 $3,469 $5,697
Other comprehensive income, net of tax (note 23) -
Unrealized gain (loss) on investment securities
available-for-sale 97 (53) 56
------------------------
Comprehensive income $4,149 $3,416 $5,753
========================
See accompanying notes to consolidated financial statements.
29
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
Accumulated
Other
Unearned Unal- Compre-
Re- located hensive
Common Common Retained stricted ESOP Income Total
Shares Stock Earnings Stock Shares (Loss) Equity
- ---------------------------------------------------------------------------------------------
Balance, December 31, 1997. - $ - 30,452 - - (5) 30,447
Net income. . . . . . . . . - - 5,697 - - - 5,697
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $30 . . . . . . - - - - - 56 56
Issuance of common
stock. . . . . . . . . . 7,538,250 73,816 - - (6,031) - 67,785
ESOP shares committed for
release (note 13). . . . - 467 - - 419 - 886
Purchase and retirement
of common stock
(note 15). . . . . . . . (376,913) (8,578) - - - - (8,578)
Dividends ($0.15 per share) - - (1,112) - - - (1,112)
-----------------------------------------------------------------
Balance, December 31, 1998. 7,161,337 65,705 35,037 - (5,612) 51 95,181
Net income. . . . . . . . . - - 3,469 - - - 3,469
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $32 . . . . . . - - - - - (53) (53)
Issuance of common stock
for MRP (note 14). . . . 301,530 6,747 - (6,747) - - -
ESOP shares committed
for release (note 13). . - 671 - - 593 - 1,264
Purchase and
retirement of common
stock (note 15). . . . . (358,066) (8,865) - - - - (8,865)
Dividends
($0.20 per share). . . . - - (1,312) - - - (1,312)
Deferred MRP shares
earned (note 14) . . . . - - - 2,367 - - 2,367
Cash distribution
($7.50 per share). . . . - (53,286) - - - - (53,286)
----------------------------------------------------------------
Balance, December 31, 1999. 7,104,801 10,972 37,194 (4,380) (5,019) (2) 38,765
Net income. . . . . . . . . - - 4,052 - - - 4,052
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $58 . . . . . . - - - - - 97 97
ESOP shares committed
for release (note 13). . - 517 - - 639 - 1,156
Dividends
($0.20 per share). . . . - - (1,255) - - - (1,255)
Deferred MRP shares
earned (note 14) . . . . - - - 1,156 - - 1,156
----------------------------------------------------------------
Balance, December 31, 2000. 7,104,801 $ 11,489 39,991 (3,224) (4,380) 95 43,971
================================================================
See accompanying notes to consolidated financial statements.
30
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
- ------------------------------------------------------------------------------------
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . $ 4,052 $ 3,469 $ 5,697
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses. . . . . . . . . . 306 991 452
Gain on sales of real estate acquired
in settlement of loans, net. . . . . . . . . (6) (3) (2)
Gain on sales of loans, net. . . . . . . . . (1,548) (2,245) (2,266)
Loss (gain) on sale of office
properties and equipment . . . . . . . . . (2) - 21
Depreciation and amortization
on office properties and equipment . . . . 928 1,101 1,207
Allocation of ESOP shares at fair value. . . 1,156 1,264 886
Compensation expense recognized
on restricted stock. . . . . . . . . . . . 1,156 2,367 -
Net accretion of investment and
mortgage-backed securities
premiums and discounts . . . . . . . . . . (266) (112) (96)
Accretion of deferred loan origination fees. (837) (1,035) (1,209)
Loan fees collected. . . . . . . . . . . . . 794 1,047 1,272
Deferred income tax (benefit) expense. . . . (12) 133 (233)
Proceeds from sales of loans . . . . . . . . 104,074 121,735 120,761
Origination of loans held for sale . . . . . (102,224) (113,052) (124,563)
Decrease (increase) in accrued
interest receivable. . . . . . . . . . . . (775) 592 (652)
Decrease (increase) in other assets. . . . . 140 (318) (416)
Increase (decrease) in accrued interest
payable . . . . . . . . . . . . . . . . . 48 222 (43)
Stock dividends on Federal Home
Loan Bank stock. . . . . . . . . . . . . . (142) (127) (120)
Decrease in accrued expenses
and other liabilities. . . . . . . . . . . (350) (81) (508)
Increase (decrease) in income taxes payable. (275) (1,002) 485
----------------------------------
Net cash provided by operating activities. . 6,217 14,946 673
----------------------------------
Investing activities:
Increase in loans receivable, net . . . . . . . (7,842) (35,750) (25,195)
Principal payments on mortgage-
backed securities held to maturity . . . . . 55 297 331
Proceeds from the sales of office
properties and equipment . . . . . . . . . . 44 - 203
Purchases of investment securities
available-for-sale. . . . . . . . . . . . . (37,860) (41,920) (70,295)
Purchases of investment securities
held to maturity . . . . . . . . . . . . . . - - (3,940)
Proceeds from maturities of
investment securities. . . . . . . . . . . . 13,000 81,500 39,700
Purchases of office properties and equipment. . (6,333) (2,211) (2,141)
Proceeds from sale of real estate acquired
through foreclosure. . . . . . . . . . . . . 398 - 34
----------------------------------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . (38,538) 1,916 (61,303)
----------------------------------
Financing activities:
Net increase in deposits. . . . . . . . . . . . 27,605 42,897 17,765
Advances from Federal Home Loan Bank
of Cincinnati. . . . . . . . . . . . . . . . 1,614 - -
Repayment of advances from Federal
Home Loan Bank of Cincinnati . . . . . . . . (36) - -
Other borrowings advances (repayments). . . . . (45,000) 45,000 -
Net decrease in advance payments by borrowers
for property taxes and insurance . . . . . . (4) (59) (58)
Issuance of common stock. . . . . . . . . . . . - - 69,352
Cash distribution . . . . . . . . . . . . . . . - (53,286) -
Retirement of common stock. . . . . . . . . . . - (8,865) (8,578)
Stock issuance costs. . . . . . . . . . . . . . - - (1,567)
Dividends paid. . . . . . . . . . . . . . . . . (1,255) (1,315) (754)
----------------------------------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . (17,076) 24,372 76,160
----------------------------------
Increase (decrease) in cash and cash equivalents. (49,397) 41,234 15,530
Cash and cash equivalents, beginning of year. . . 94,422 53,188 37,658
----------------------------------
Cash and cash equivalents, end of year. . . . . . $ 45,025 $ 94,422 $ 53,188
==================================
See accompanying notes to consolidated financial statements.
31
Cavalry Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
- ------------------------------------------------------------------------------------
Supplemental Disclosures of Cash
Flow Information:
Payments during the period for:
Interest. . . . . . . . . . . . . . . . . . . . $ 13,022 $ 9,908 $ 9,637
==================================
Income taxes. . . . . . . . . . . . . . . . . . $ 3,485 $ 3,550 $ 3,608
==================================
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Foreclosures and in substance
foreclosures of loans during year . . . . . . . $ 392 $ 86 $ 112
==================================
Interest credited to deposits . . . . . . . . . . $ 4,530 $ 3,827 $ 3,690
==================================
Net unrealized gains (losses) on investment
securities available-for-sale . . . . . . . . . $ 155 $ (85) $ 86
==================================
Increase in deferred tax asset
(liability) related to unrealized
gain (loss) on investments. . . . . . . . . $ (58) $ 32 $ (30)
==================================
Issue of common stock to ESOP . . . . . . . . . . $ - $ - $ 6,031
==================================
Issue of common stock to MRP. . . . . . . . . . . $ - $ 6,747 $ -
==================================
Dividends declared and payable. . . . . . . . . . $ 355 $ 355 $ 358
==================================
See accompanying notes to consolidated financial statements.
32
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies:
Change in Reporting Entity
On August 7, 1997, the Board of Directors of Cavalry Banking (the Bank)
adopted a Plan of Conversion to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank (the
Conversion). The Conversion was accomplished through the formation of Cavalry
Bancorp, Inc. (the Corporation) on November 5, 1997; the adoption of a federal
stock charter on February 26, 1998; the sale of all of the Bank's stock to the
Corporation on March 16, 1998; and the sale of the Corporation's stock to the
public on March 16, 1998.
A subscription offering (offering) of the shares of common stock of the
Corporation was conducted whereby the shares were offered initially to eligible
account holders, Cavalry Banking Employee Stock Ownership Plan (ESOP),
supplemental eligible account holders and other members of the Bank
(collectively Subscribers). During the offering, subscribers submitted orders
for common stock along with full payment for the order in either cash, by an
authorization to withdraw funds for payment from an existing deposit account at
the Bank upon issuance of stock, or a combination of cash and account
withdrawal. The offering began January 21, 1998 and concluded on February 25,
1998. Subscription funds received in connection with the offering were placed
in special escrow accounts in the Bank. For those orders that were to be funded
through account withdrawals, the Bank placed "holds" on those accounts,
restricting the withdrawal of any amount which would reduce the account balance
below the amount of the order.
On March 16, 1998, the Corporation issued approximately 7,538,000 shares of
common stock for gross proceeds of approximately $75,383,000. The aggregate
purchase price was determined by an independent appraisal. As the Corporation
received subscriptions in excess of shares available, shares were allocated in
accordance with the Plan of Conversion. Sources of gross proceeds were as
follows (in thousands of dollars):
Subscription escrow accounts $36,532
Deposit account withdrawals 32,820
Note receivable from ESOP 6,031
-------
Gross proceeds $75,383
=======
All excess subscription funds were refunded to subscribers, and holds on
deposit accounts were released after the stock was issued.
Conversion expenses totaled approximately $1,567,000 and were deducted from
gross proceeds to result in net proceeds of approximately $73,816,000.
The Bank issued all of its outstanding capital stock to the Corporation in
exchange for one-half of the net proceeds from the sale of the Corporation's
capital stock. The Corporation accounted for the purchase in a manner similar
to a pooling of interests whereby assets and liabilities of the Bank maintain
their historical cost basis in the consolidated financial statements of the
Company.
Nature of Operations and Customer Concentration
The Company's principal business activities are conducted through the Bank,
which is a federally chartered savings bank engaged in the business of accepting
savings and demand deposits and providing mortgage, consumer, construction and
commercial loans to the general public through its retail banking offices. The
Bank's business activities are primarily limited to within Rutherford County and
adjacent counties of Tennessee. The Bank is subject to competition from other
financial institutions. Deposits at the Bank are insured up to the applicable
limits by the Federal Deposit Insurance Corporation (FDIC). The Bank is subject
to comprehensive regulation, examination and supervision by the Office of Thrift
Supervision (OTS) and the FDIC.
A substantial portion of the Company's loans are secured by real estate in
the Middle Tennessee market. In addition, foreclosed real estate is located in
this same market. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate is susceptible to
changes in local market conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Accounting
The accounting and reporting policies of the Company are in accordance with
generally accepted accounting principles of the United States of America and
conform to general practices in the banking industry.
33
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation, the Bank and its wholly-owned subsidiary Cavalry Enterprises, Inc.
(collectively the Company). Since the Corporation was inactive from
incorporation through March 16, 1998, the information contained in the financial
statements prior to that date relates to the Bank. Significant intercompany
balances and transactions have been eliminated in consolidation under the equity
method.
Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and revenues and
expenses for the year. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
Cash Equivalents
Cash equivalents include cash and demand and time deposits at other
financial institutions with remaining maturities of three months
or less.
Investment Securities
In accordance with Statement of Financial Accounting Standards No. (SFAS)
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company is required to report debt, readily-marketable equity, mortgage-backed
and mortgage related securities in one of the following categories: (i)
"held-to-maturity" (management has a positive intent and ability to hold to
maturity) which are to be reported at amortized cost adjusted, in the case of
debt securities, for the amortization of premiums and accretion of discounts;
(ii) "trading" (held for current resale) which are to be reported at fair value,
with unrealized gains and losses included in earnings; and (iii) "available
for-sale" (all other debt, equity, mortgage-backed and mortgage related
securities) which are to be reported at fair value, with unrealized gains and
losses reported net of tax as a separate component of equity. At the time of
new securities purchases, a determination is made as to the appropriate
classification. Realized and unrealized gains and losses on trading securities
are included in net income. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in equity,
net of any tax effect. Cost of securities sold is recognized using the specific
identification method.
Mortgage-backed Securities Held to Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at the unpaid principal
balances, adjusted for unamortized premiums and unearned discounts. Premiums
and discounts are amortized using methods approximating the interest method over
the remaining period to contractual maturity, adjusted for anticipated
prepayments.
Management intends and has the ability to hold such securities to maturity.
The Company has classified all mortgage-backed securities in its portfolio as
held to maturity.
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. Unearned discounts on
installment loans are recognized as income over the term of the loans using the
interest method.
Loan origination and commitment fees, as well as certain origination costs,
are deferred and amortized as a yield adjustment over the lives of the related
loans adjusted for estimated prepayments based on the Company's historical
prepayment experience, using the interest method. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on these loans is reversed from income and an allowance for
accrued interest is recorded.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio. The amount of the allowance is 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. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses.
Loans are considered to be impaired when, in management's judgement,
principal or interest is not collectible according to the contractual terms of
the loan agreement. When conducting loan evaluations, management considers
various factors such as historical loan performance, the financial condition of
the borrower and adequacy of collateral to determine if a loan is impaired.
34
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
The measurement of impaired loans generally is based on the present value
of future cash flows discounted at the historical effective interest rate,
except that collateral-dependent loans generally are measured for impairment
based on the fair value of the collateral. When the measured amount of an
impaired loan is less than the recorded investment in the loan, the impairment
is recorded as a charge to income and a valuation allowance which is included as
a component of the allowance for loan losses.
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate basis.
Net unrealized losses are recognized in a valuation allowance through charges to
income. Gains and losses on the sale of loans held for sale are determined
using the specific identification method.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans includes property acquired
through foreclosure and deeds in lieu of foreclosure. Property acquired by deed
in lieu of foreclosure results when a borrower voluntarily transfers title to
the Company in full settlement of the related debt in an attempt to avoid
foreclosure. Real estate acquired in settlement of loans is valued at the date
of acquisition and thereafter at the lower of fair value less costs to sell or
the Company's net investment in the loan and subsequent improvements to the
property. Certain costs relating to holding the properties, and gains or losses
resulting from the disposition of properties are recognized in the current
period's operations.
Office Properties and Equipment
Depreciation and amortization are provided over the estimated useful lives
of the respective assets which range from 3 to 40 years. All office properties
and equipment are recorded at cost and are depreciated on the straight-line
method.
Advertising
The Company expenses the production cost of advertising as incurred.
Income Taxes
Under the asset and liability method of SFAS 109, Accounting for Income
Taxes, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Corporation and the Bank will file consolidated federal income and
combined state franchise and excise tax returns in 2000. The Corporation and
the Bank filed separate federal income and combined state franchise and excise
tax returns in 1999 and 1998. All taxes are accrued on a separate entity basis.
Fair Values of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the consolidated balance sheets for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate 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 instruments. Fair value estimates are made at a point in
time, based on relevant market information and information about the financial
instrument. Accordingly, such estimates involve uncertainties and matters of
judgment and therefore cannot be determined with precision. SFAS 107 excludes
certain financial instruments and all non-financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following are the more significant methods and assumptions used by the
Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximate those
assets' fair values, because they mature within 90 days or less and do not
present credit risk concerns.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans receivable: The fair values for loans receivable are estimated using
discounted cash flow analysis which considers future repricing dates and
estimated repayment dates, and further using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics.
Loans held for sale: Fair value is based on investor commitments, or in
the absence of such commitments, on current investor yield requirements.
35
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
Accrued interest receivable: Fair value is estimated to approximate the
carrying amount because such amounts are expected to be received within 90 days
or less and any credit concerns have been previously considered in the carrying
value.
Deposits: The fair values disclosed for deposits with no stated maturity
such as demand deposits, interest-bearing checking accounts and passbook savings
accounts are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair values for
certificates of deposit and other fixed maturity time deposits are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on such type accounts to a schedule of aggregated contractual
maturities on such time deposits.
Accrued interest payable: The carrying amount will approximate fair value
as the majority of such interest will be paid within 90 days or less.
Other borrowings: The carrying amount will approximate fair value because
they mature within 90 days.
Advances from the FHLB: The fair value of these advances is estimated by
discounting the future cash flows of these advances using the current rates at
which similar advances could be obtained.
Commitments to extend credit: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates.
Sale and Servicing of Mortgage Loans
The Company sells mortgage loans for cash proceeds equal to the principal
amount of the loans sold but with yield rates which reflect the current market
rate. Gain or loss is recorded at the time of sale in an amount reflecting the
difference between the contractual interest rates of the loans sold and the
current market rate. Certain loans are sold with the servicing retained by the
Company. Servicing income is recognized as collected and is based on the normal
agency servicing fee as defined by GNMA, FNMA, or FHLMC. For mortgage servicing
rights that are created through the origination of mortgage loans, and where the
loans are subsequently sold or securitized with servicing rights retained, the
Company allocates the total cost of the mortgage loans to the mortgage servicing
rights and the loans based on their relative fair values. The Company
periodically makes an assessment of capitalized mortgage servicing rights for
impairment based on the current fair value of those rights.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights (MSRs) are
amortized, as a reduction to loan service fee income, using the interest method
over the estimated remaining life of the underlying mortgage loans. MSR assets
are carried at fair value and impairment, if any, is recognized through a
valuation allowance. The Company primarily sells its mortgage loans on a
non-recourse basis.
Effect of New Accounting Pronouncements
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133, requires that derivative
instruments be carried at fair value on the balance sheet. The statements
continue to allow derivative instruments to be used to hedge various risks and
set forth specific criteria to be used to determine when hedge accounting can be
used. The statements also provide for offsetting changes in fair value or cash
flows of both the derivative and the hedged asset or liability to be recognized
in earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted
for as hedges, changes in fair value are required to be recognized in earnings.
The provisions of these statements, as amended, are effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
anticipate any material impact on the Company's financial position, results of
operations and cash flow subsequent to the effective date of these statements as
no such instruments are used by the Company.
In September 2000, the FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
125 without reconsideration. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 5, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This statement is to be
applied prospectively with certain exceptions. Other than those exceptions,
earlier or retroactive application of its accounting provisions are not
permitted. The Company does not anticipate any material impact on the Company's
financial position, results of operations and cash flow subsequent to the
effective date of this statement.
Reclassification
Certain 1999 and 1998 amounts have been reclassified to conform to the
December 31, 2000 presentation.
36
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
(2) Cash:
The Company is required to maintain cash on hand or in the Federal Reserve
Bank account for various regulatory purposes. During 2000 and 1999, such
required cash averaged approximately $5,345,000 and $4,189,000, respectively.
(3) Investment Securities Available-for-Sale:
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31, 2000 and 1999 are as follows:
December 31, 2000
--------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury securities $ 8,976 $ 33 $- $ 9,009
Obligations of U.S. Government agencies 23,120 126 8 23,238
------------------------------------
$32,096 $159 $8 $32,247
====================================
December 31, 1999
--------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
Obligations of U.S. Government agencies $6,968 $4 $8 $6,964
====================================
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 2000, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $21,096 $21,142
Maturing within one through five years 11,000 11,105
------------------
$32,096 $32,247
===================
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1999, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
Obligations of U.S. Government agencies:
Maturing within one year $6,968 $6,964
-----------------
At December 31, 2000 and 1999, investment securities with amortized cost
values of $10,977,000 and $6,967,000, respectively, were pledged as collateral
as permitted or required by law.
There were no sales of investment securities available-for-sale in the
years ended December 31, 2000, 1999, and 1998.
37
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
(4) Mortgage-backed Securities Held to Maturity:
The amortized cost and estimated fair values of mortgage-backed securities
held to maturity at December 31, 2000 and 1999, are as follows:
December 31, 2000
--------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC $185 $- $3 $182
FNMA 409 1 3 407
------------------------------------
Total mortgage-backed securities
held to maturity $594 $1 $6 $589
====================================
December 31, 1999
--------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC $210 $- $1 $209
FNMA 441 - 5 436
------------------------------------
Total mortgage-backed securities
held to maturity $651 $- $6 $645
====================================
As of December 31, 2000 and 1999, mortgage-backed securities held to
maturity had contractual maturity dates of greater than ten years.
There were no sales of mortgage-backed securities held to maturity in the
years ended December 31, 2000, 1999, and 1998.
(5) Loans Held-for-Sale, Net and Loans Receivable, Net:
Loans held for sale, net are summarized as follows:
2000 1999
- -------------------------------------------------------------------------------
One-to-four family loans $4,183 $4,485
-----------------
Total loans held for sale, net $4,183 $4,485
=================
38
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
The Company originates most fixed rate loans for immediate sale to the
Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally,
the sale of such loans is arranged at the time the loan application is received
through commitments.
Loans receivable, net at December 31, 2000 and 1999, consisted of the
following:
2000 1999
- -----------------------------------------------------
Real estate mortgage loans:
One-to-four family . . . . . . $ 64,776 $ 60,261
Multi-family . . . . . . . . . 2,519 780
Land . . . . . . . . . . . . . 21,498 40,645
Commercial real estate . . . . 80,029 71,419
Construction and development . 56,015 69,421
------------------
Total first mortgage loans 224,837 242,526
Junior mortgage loans. . . . . 5,322 4,788
Commercial loans . . . . . . . 38,177 36,456
Consumer loans . . . . . . . . 46,773 49,090
------------------
315,109 332,860
Less:
Loans in process. . . . . . . . 26,471 51,243
Allowance for loan losses . . . 4,235 4,136
Deferred loan fees, net . . . . 742 785
Loans held for sale . . . . . . 4,183 4,485
------------------
Loans receivable, net. . . . $279,478 $272,211
==================
Loans are presented net of loans serviced for the benefit of others
totaling approximately $111.4 million, $124.1 million and $124.9 million at
December 31, 2000, 1999 and 1998, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow amounts,
disbursing payments to investors and foreclosure processing.
Qualified one-to-four first mortgage loans are pledged to the Federal Home
Loan Bank of Cincinnati as discussed in note 10.
Impaired loans and related valuation allowance amounts at December 31, 2000
and 1999 were as follows:
2000 1999
- ------------------------------------------
Recorded investment $3,900 $3,623
Valuation allowance $ 615 $ 553
The average recorded investment in impaired loans for the years ended
December 31, 2000, 1999 and 1998 was $3,666,000, $1,492,000 and $700,000,
respectively. Interest income recognized on impaired loans was not significant
during the years ended December 31, 2000, 1999 and 1998.
Activity in the allowance for loan losses consisted of the following:
2000 1999 1998
- ---------------------------------------------------------
Balance at beginning of period $4,136 $3,231 $2,804
Provision for loan losses. . . 306 991 452
Recoveries . . . . . . . . . . 29 16 29
Charge-offs. . . . . . . . . . (236) (102) (54)
-------------------------
Balance at end of period . . . $4,235 $4,136 $3,231
=========================
Non-accrual loans totaled approximately $123,000 and $333,000 at December
31, 2000 and 1999, respectively. Interest income foregone on such loans was not
significant during the years ended December 31, 2000, 1999 and 1998. The
Company is not committed to lend additional funds to borrowers whose loans have
been placed on a non-accrual basis.
There were no loans three months or more past due which were still accruing
interest as of December 31, 2000 and 1999.
39
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
The Company originates loans to officers and directors at terms
substantially identical to those available to other borrowers. Mortgage and
consumer loans to officers and directors at December 31, 2000 and 1999 were
approximately $2,011,000 and $3,155,000, respectively. At December 31, 2000
funds committed that were undisbursed to officers and directors approximated
$4,019,000.
The following summarizes activity of these loans for the years ended
December 31, 2000 and 1999:
2000 1999
- --------------------------------------------------
Balance at beginning of period $ 3,155 $ 1,753
New loans. . . . . . . . . . . 4,754 9,291
Principal repayments . . . . . (5,898) (7,889)
------------------
Balance at end of period . . . $ 2,011 $ 3,155
==================
(6) Office Properties and Equipment, Net:
Office properties and equipment, less accumulated depreciation, consisted
of the following at December 31, 2000 and 1999:
2000 1999
- --------------------------------------------------------
Land . . . . . . . . . . . . . . . . . $ 3,440 $ 2,904
Office buildings . . . . . . . . . . . 11,170 4,897
Furniture, fixtures, and equipment . . 7,514 6,547
Leasehold improvements . . . . . . . . 315 293
Automobiles. . . . . . . . . . . . . . 146 176
Construction in process. . . . . . . . 7 1,654
----------------
22,592 16,471
Less accumulated depreciation. . . . . 7,337 6,579
----------------
Office properties and equipment, net $15,255 $ 9,892
================
During the years ended December 31, 2000, the Company capitalized construction
period expenses of approximately $117,000.
(7) Required Investment in Stock of Federal Home Loan Bank:
The Bank is a member of the Federal Home Loan Bank (FHLB). As a member of
this system, the Bank is required to maintain an investment in capital stock of
the Federal Home Loan Bank of Cincinnati in an amount equal to the greater of 1%
of residential mortgage loans and mortgage-backed securities, or .3% of total
assets of the Bank. At December 31, 2000, no additional investments are
required. No ready market exists for the stock, and it has no quoted market
value, but may be redeemed for face value by the FHLB if the Bank withdraws its
membership. Accordingly, this investment is carried at the Bank's historical
cost.
(8) Mortgage Servicing Rights:
An analysis of the activity for originated mortgage servicing rights is as
follows:
Balance, December 31, 1997 $212
Originations 664
Amortization (207)
-----
Balance, December 31, 1998 669
Originations 323
Amortization (321)
-----
Balance, December 31, 1999 671
Originations -
Amortization (199)
-----
Balance, December 31, 2000 $472
=====
Mortgage servicing rights are included in other assets on the consolidated
balance sheet. During 2000, the Company sold an insignificant amount of
mortgage loans with servicing rights retained.
40
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands, except percentages)
(9) Deposits:
Savings, demand, and time deposit account balances are summarized as
follows:
December 31, 2000
---------------------------
Weighted
Type of Account Average Rate Amount
- -------------------------------------------------
Personal accounts . . . -% $ 38,630
NOW accounts. . . . . . 1.47 52,343
Money market accounts . 4.79 69,797
Savings accounts. . . . 1.24 13,248
Certificates of deposit 6.37 162,516
--------
$ 336,534
=========
December 31, 1999
---------------------------
Weighted
Type of Account Average Rate Amount
- -------------------------------------------------
Personal accounts . . . -% $ 34,692
NOW accounts. . . . . . 1.23 46,472
Money market accounts . 4.04 63,796
Savings accounts. . . . 1.24 13,017
Certificates of deposit 5.47 150,952
--------
$ 308,929
=========
Scheduled maturities of certificates of deposit are as follows:
December 31, 2000
------------------------------
Weighted
Type of Account Average Rate Amount Percent
- ------------------------------------------------------------------
1 year or less . . . . . . . . . . . 6.39% $133,195 81.96%
Greater than 1 year through 2 years. 6.24 20,097 12.37
Greater than 2 years through 3 years 6.00 5,610 3.45
Greater than 3 years through 4 years 6.41 2,063 1.27
Greater than 4 years through 5 years 6.41 1,502 0.92
Thereafter . . . . . . . . . . . . . 5.75 49 0.03
-----------------
$162,516 100.00%
=================
December 31, 1999
------------------------------
Weighted
Type of Account Average Rate Amount Percent
- ------------------------------------------------------------------
1 year or less . . . . . . . . . . . 5.44% $125,691 83.27%
Greater than 1 year through 2 years. 5.56 14,352 9.51
Greater than 2 years through 3 years 5.76 3,445 2.28
Greater than 3 years through 4 years 5.51 5,060 3.35
Greater than 4 years through 5 years 5.52 2,227 1.48
Thereafter . . . . . . . . . . . . . 5.64 177 0.11
----------------
$150,952 100.00%
=================
Certificates of deposit in excess of $100,000 were approximately $45.0
million and $39.4 million at December 31, 2000 and 1999, respectively.
41
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands, except percentages)
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Bank must pay a risk-based annual
assessment which considers the financial soundness of the institution and
capitalization level. At December 31, 2000, the Bank was assessed at the FDIC's
lowest assessment level, as a well capitalized institution.
Interest expense on deposit balances for the years ended December 31, 2000,
1999 and 1998 is summarized as follows:
2000 1999 1998
- -----------------------------------------------------------------
Savings accounts $ 169 $ 184 $ 423
Money market and NOW accounts 3,660 2,885 2,364
Certificates of deposit 9,067 6,913 6,807
-------------------------
$12,896 $9,982 $9,594
===========================
(10) Advance from the Federal Home Loan Bank:
FHLB advances are summarized as follows:
December 31,
-----------------------------------
2000 1999
-----------------------------------
Weighted Weighted
Average Average
Type of Advance Amount Rate Amount Rate
- ----------------------------------------------------------------------
Fixed-rate $1,578 3.68% - -
===================================
Scheduled maturities of FHLB advances as of December 31, 2000 are as
follows:
Amount at
Year Ended Stated
December 31, Maturity
------------- --------
2001 $580
2002 54
2003 54
2004 54
2005 54
Thereafter 782
-----
$1,578
======
The Bank has an approved line of credit of $10,000,000 at December 31, 2000
which is secured by a blanket agreement to maintain residential first mortgage
loans with a principal value of 125% of the outstanding advances and has a
variable interest rate. The Company can increase its borrowings from the FHLB
to $40,392,000 at December 31, 2000.
(11) Short-Term Borrowings:
At December 31, 1999, the Company had outstanding a $45 million note
payable to a commercial bank. The note, dated December 16, 1999, bearing
interest at prime rate minus 1.125%, was due on June 16, 2000. All of the
outstanding stock of the Bank was pledged as collateral on the loan. The note
was paid in full on January 19, 2000.
42
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands, except percentages)
(12) Income Taxes:
The components of income tax expense (benefit) are as follows:
2000 1999 1998
- --------------------------------------------------------------------------
Current income tax expense:
Federal. . . . . . . . . . . . . . . . . . . . $2,538 $2,139 $3,286
State. . . . . . . . . . . . . . . . . . . . . 477 409 545
------------------------
Total current income tax expense. . . . . . 3,015 2,548 3,831
------------------------
Deferred income tax (benefit) expense:
Federal. . . . . . . . . . . . . . . . . . . . (11) 119 (193)
State. . . . . . . . . . . . . . . . . . . . . (1) 14 (40)
------------------------
Total deferred income tax (benefit) expense (12) 133 (233)
------------------------
Income tax expense . . . . . . . . . . . . . . $3,003 $2,681 $3,598
========================
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated statements of income, with that which would
be computed by applying the statutory federal income tax rate of 34% to income
before income taxes.
2000 1999 1998
- --------------------------------------------------------------------------------
Tax expense at statutory rates. . $2,399 34.0% $2,091 34.0% $3,160 34.0%
Increases (decrease) in taxes
resulting from:
State income tax, net of
federal effect . . . . . . . 314 4.5 279 4.5 333 3.6
Nondeductible ESOP compensation 299 4.2 228 3.7 160 1.7
Other, net. . . . . . . . . . . (9) (0.1) 83 1.4 (55) (0.6)
---------------------------------------------
Total income tax expense. . . . $3,003 42.6% $2,681 43.6% $3,598 38.7%
=============================================
In years ended December 31, 1995 and prior, the Bank was allowed under the
Internal Revenue Code to deduct, subject to certain conditions, an annual
addition to a reserve for bad debts (reserve method) in determining taxable
income. Legislation enacted in August 1996 repealed the reserve method
effective for the Bank for the year ended December 31, 1996.
The tax effects of temporary differences that give rise to the significant
portions of deferred tax assets and liabilities at December 31, 2000 and 1999,
are as follows:
2000 1999
- -------------------------------------------------------------
Deferred tax assets:
Loans receivable, allowance for loan losses $1,589 $1,541
Deferred loan fees. . . . . . . . . . . . . 281 298
Other . . . . . . . . . . . . . . . . . . . - 1
--------------
Total deferred tax asset. . . . . . . . . . 1,870 1,840
==============
Deferred tax liabilities:
FHLB stock. . . . . . . . . . . . . . . . . 464 410
Office properties and equipment . . . . . . 126 162
--------------
Total deferred tax liability. . . . . . . . 590 572
--------------
Net deferred tax asset. . . . . . . . . . . $1,280 $1,268
==============
SFAS 109, Accounting for Income Taxes, requires that the tax benefit of
deductible temporary differences be recorded as an asset to the extent that
management assesses the utilization of such temporary differences to be "more
likely than not." In accordance with SFAS 109, the realization of tax benefits
of deductible temporary differences depends on whether the Company has
sufficient taxable income within the carryback and carryforward period permitted
by tax law to allow for utilization of the deductible amounts. Taxable income
in the carryback period and estimates of taxable income in the carryforward
period were expected to be sufficient to utilize such differences. As such, no
valuation allowance was established at December 31, 2000 and 1999.
43
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(13) Employee Benefit Plans:
401(k) Plan - The Company sponsors a 401(k) plan, which is available to all
employees who meet minimum eligibility requirements. Management has contributed
2% of employees' earnings to the Plan on the employees' behalf. Participants
may generally contribute up to 15% of earnings, and, in addition, management
will match employee contributions up to 4%. Expense related to Company
contributions amounted to $285,000, $213,000 and $174,000 in the years ended
December 31, 2000, 1999 and 1998, respectively.
Employee Stock Ownership Plan - The Cavalry Banking Employee Stock
Ownership Plan (ESOP) is a noncontributory retirement plan adopted by the
Company effective January 1, 1998 which includes all employees who meet minimum
eligibility requirements. The ESOP acquired 603,060 shares of the Corporation's
common stock in the Conversion at a price of $10 per share with proceeds of a
loan from the Corporation in the amount of approximately $6,031,000. The Bank
makes periodic cash contributions to the ESOP in an amount sufficient for the
ESOP to make the scheduled payments under the note payable to the Corporation.
In connection with the cash distribution (discussed in note 15), the ESOP
received approximately $4.5 million on its shares of the Corporation's common
stock. The ESOP purchased an additional 321,305 shares with the proceeds.
The note payable has a term of 12 years, bears interest at 8.5% and
requires a level quarterly payment of principal and interest of approximately
$202,000. The note is collateralized by the shares of common stock held by the
ESOP.
As the note is repaid, shares are released from collateral based on the
proportion of the payment in relation to total payments required to be made on
the loan. The shares released from collateral are then allocated to
participants based upon compensation. Compensation expense is determined by
multiplying the per share market price of the Corporation's stock at the time
the shares are committed to be released by the number of shares to be released.
The value of the released shares at cost is recorded as a deduction to common
stock and the value of the released shares at market is recorded as an addition
or deduction to unallocated ESOP shares. The Company recognized approximately
$1,156,000, $1,264,000 and $886,000 in compensation expense in the years ended
December 31, 2000, 1999 and 1998, respectively, related to the ESOP of which
approximately $639,000, $593,000 and $419,000 reduced the cost of unallocated
ESOP shares and $517,000, $671,000 and $467,000 increased common stock on the
balance sheets.
The cost of the unallocated shares is reflected as a reduction of equity.
Unallocated shares are considered neither outstanding shares for computation of
basic earnings per share nor potentially dilutive securities for computation of
diluted earnings per share. Dividends on unallocated ESOP shares are reflected
as a reduction in the note payable.
Shares released or committed to be released for allocation during the years
ended December 31, 2000 and 1999 totaled 150,871 and 59,335, respectively.
Shares remaining not released or committed to be released for allocation at
December 31, 2000 and 1999 totaled 672,315 and 501,881, and had a market value
of approximately $7,143,000 and $8,281,000, respectively.
(14) Stock Compensation Plans:
Management Recognition Plan - On April 22, 1999, the Corporation's
stockholders approved the Cavalry Bancorp, Inc. 1999 Management Recognition Plan
(MRP). A maximum of 301,530 shares may be awarded under the MRP. The objective
of the MRP is to reward performance and build the participant's equity interest
in the Company by providing long-term incentives and rewards to officers, key
employees and other persons who provide services to the Company and its
subsidiaries. Shares of common stock awarded under the MRP vest in equal
amounts over a five-year period. In the event of a change in control of the
Company, all shares will become fully vested at the election of the participant
that is made within 60 days following such event. Compensation expense is
determined by the value of the stock on the award date, recognized on a
straight-line basis over the vesting period. Participants are entitled to all
voting and other stockholder rights related to the shares, including unvested
shares. Participants also receive dividends and other distributions with
respect to such stock. Also, all such shares are included in outstanding shares
for the computation of basic earnings per share.
On April 22, 1999, 301,530 shares of stock were awarded and the closing
price of the stock on that date was $22.38 per share which became the basis of
recognizing compensation over the five-year period ending April 30, 2004. Total
compensation expense recognized for the MRP during 2000 and 1999 was $1.2
million and $2.4 million, respectively. The 1999 compensation expense amount
was comprised of a one-time nonrecurring charge for the special cash
distribution (discussed in note 15) and vesting of shares. Also, as a result of
the special cash distribution, the basis of recognizing compensation over the
resting period was reduced from $22.38 to $16.76.
Stock Option Plan - On April 22, 1999, the Corporation's stockholders
approved the Cavalry Bancorp, Inc. 1999 Stock Option Plan (SOP). The SOP allows
the granting to management and directors the option to purchase common stock of
the Corporation (options) aggregating to 753,825 shares. All employees and
non-employee directors are eligible to participate in the SOP. Each option will
have a term of 10 years and the exercise price of each option will not be less
than the fair market value of the shares on the date of the grant. Options will
vest in equal installments over a five-year period. In the event of a change in
control of the Company, all options will become fully vested and immediately
exercisable. If provision is not made for the assumption of the options in
connection with the change of control, the SOP provides for cash settlement of
any outstanding options.
No options had been granted as of December 31, 2000. On January 3, 2001,
options to purchase 188,464 shares at $10.625 per share were awarded.
(15) Equity:
Liquidation Account
At the time of the Conversion, the Bank established a liquidation account
for the benefit of eligible account holders who continue to maintain their
accounts at the Bank after the Conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held before any
distribution may be made to the Corporation with respect to the Bank's capital
stock.
44
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
Dividends
The Corporation's sources of income and funds for dividends to its
stockholders are earnings on its investments and dividends from the Bank. The
Bank's primary regulator, the Office of Thrift Supervision (OTS), has
regulations that impose certain restrictions on payment of dividends to the
Corporation. Current regulations of the OTS allow the Bank (based upon its
current capital level and supervisory status assigned by the OTS) to pay a
dividend of up to 100% of net income to date during the calendar year plus the
retained income for the preceding two years. Supervisory approval is not
required, but 30 days prior notice to the OTS is required. Any capital
distribution in excess of this amount would require supervisory approval.
Capital distributions are further restricted should the Bank's capital level
fall below the fully phased-in capital requirements of the OTS. In no case will
the Bank be allowed to make a capital distribution reducing equity below the
required balance of the liquidation account. The Bank paid dividends to the
Corporation totaling $43,250,000 during the year ended December 31, 2000. The
Bank did not declare or pay dividends to the Corporation during the year ended
December 31, 1999. On December 23, 1999, the Corporation paid a cash
distribution of $7.50 per share to its stockholders.
OTS regulations also place restrictions after the Conversion on the
Corporation with respect to repurchases of its common stock. With prior notice
to the OTS, the Corporation is allowed to repurchase its outstanding shares. No
outstanding shares were repurchased by the Corporation during the year ended
December 31, 2000. During 1999, the Corporation requested and received
regulatory approval to acquire 358,066 shares of its outstanding common stock.
The shares were acquired for $8,865,000. During 1998, the Corporation requested
and received regulatory approval to acquire 376,913 shares of its outstanding
common stock. The shares were acquired for $8,578,000.
(16) Regulatory Matters:
The amounts for retained earnings and net income reported to the OTS agree
to the amounts per the accompanying consolidated financial statements at
December 31, 2000, 1999 and 1998, and for the years then ended.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system of Prompt Corrective Action (PCA)
for all insured depository institutions. The regulations adopted pursuant to
FDICIA, effective December 19, 1992, established capital categories that
determine the degree of supervisory PCA to which a depository institution could
be subjected. The categories consist of "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution is deemed to be "well
capitalized" if (a) its risk-based capital ratio is 10% or greater, (b) its Tier
1 risk-based capital ratio is 6% or greater, and (c) its leverage ratio is 5% or
greater. At December 31, 2000 the Bank was "well-capitalized."
When an insured depository institution's capital ratios fall below the
"well-capitalized" level it becomes subject to a series of increasingly
restrictive supervisory actions, to the point where a conservator or receiver
must be designated for a "critically undercapitalized" institution unless
certain certifications are made by the appropriate regulatory agencies. An
institution is deemed to be "critically undercapitalized" if its ratio of Tier 1
capital to total assets is 2% or less. The following table presents the Bank's
equity capital and regulatory capital ratios as of December 31, 2000 and
December 31, 1999:
45
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands, except percentages)
December 31, 2000
-----------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
- -------------------------------------------------------------------------------------
Equity capital. . . . . $ 42,013 $ 42,013 $ 42,013 $42,013 $42,013 $42,013
Unrealized gain on
investment securities
available-for-sale. . - (95) (95) (95) (95) (95)
General valuation
allowances. . . . . . - - - - - 4,235
-------------------------------------------------------------
Regulatory capital
measure . . . . . . . $ 42,013 $ 41,918 $ 41,918 $41,918 $41,918 $46,153
=============================================================
Total assets. . . . . . $381,785
=========
Adjusted total assets . $381,634 $381,634 $381,634
===============================
Risk-weighted assets. . $330,520 $330,520
====================
Capital ratio . . . . . 11.00% 10.98% 10.98% 10.98% 12.68% 13.96%
==============================================================
December 31, 1999
-----------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
- -------------------------------------------------------------------------------------
Equity capital. . . . . $ 79,210 $ 79,210 $ 79,210 $79,210 $79,210 $79,210
Unrealized loss on
investment securities
available-for-sale. . - 2 2 2 2 2
General valuation
allowances. . . . . . - - - - - 4,136
-------------------------------------------------------------
Regulatory capital
measure . . . . . . . $ 79,210 $ 79,212 $ 79,212 $79,212 $79,212 $83,348
-------------------------------------------------------------
Total assets. . . . . . $390,357
=========
Adjusted total assets . $390,357 $390,361 $390,361
===============================
Risk-weighted assets. . $355,026 $355,026
===================
Capital ratio . . . . . 20.29% 20.29% 20.29% 20.29% 22.31% 23.48%
=============================================================
The Bank's management believes that at December 31, 2000, that the Bank
meets all capital requirements to which it is subject.
(17) Earnings Per Share:
The Company had no potentially dilutive securities outstanding during the
years ended December 31, 2000, 1999 and 1998; therefore, diluted EPS is the same
as basic EPS.
(18) Financial Instruments with Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
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 and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making these commitments and conditional obligations as it
does for on-balance-sheet instruments.
At December 31, 2000 and 1999, unused lines of credit were approximately
$35,331,000 and $36,360,000, respectively, with the majority having terms of one
year for commercial and two to five years for consumer; outstanding letter of
credit balances were approximately $7,377,000 and $7,520,000, respectively; and
commitments to originate or purchase loans were approximately $26,471,000 and
$51,243,000, respectively. The commitments to originate loans at December 31,
2000 were composed of variable rate loans of approximately $20,810,000 and fixed
rate loans of approximately $5,661,000. The fixed rate loans had interest rates
ranging from 6.25% to 9.63%. The commitments to originate loans at December 31,
1999 were composed of variable rate loans of approximately $42,629,000 and fixed
rate loans of approximately $8,614,000. The fixed rate loans had interest rates
ranging from 6.75% to 8.50%.
46
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments 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 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 counter-party. Collateral held varies but
may include property, plant, and equipment and income-producing commercial
properties.
Standby letters of credit and financial guarantees written 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, 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.
(19) Fair Value of Financial Instruments:
Information about the fair value of the financial instruments in the
consolidated balance sheets, which should be read in conjunction with Note 1 and
certain other notes to the consolidated financial statements presented elsewhere
herein, is set forth as follows:
2000 1999
--------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents . . . . . . $ 45,025 $ 45,025 $ 94,422 $ 94,422
Investment securities available-
for-sale. . . . . . . . . . . . . . 32,247 32,247 6,964 6,964
Mortgage-backed securities held
to maturity . . . . . . . . . . . . 594 589 651 645
Loans receivable, net . . . . . . . . 279,478 277,397 272,211 270,254
Loans held for sale . . . . . . . . . 4,183 4,183 4,485 4,485
Accrued interest receivable . . . . . 2,559 2,559 1,784 1,784
Required investment in stock of
the Federal Home Loan Bank. . . . . 2,020 2,020 1,878 1,878
Financial liabilities:
Deposits with no stated maturity. . . 174,018 174,018 157,977 157,977
Certificates of deposits. . . . . . . 162,516 163,279 150,952 151,531
Advances from the FHLB. . . . . . . . 1,578 1,453 - -
Other borrowings. . . . . . . . . . . - - 45,000 45,000
Off-balance sheet assets (liabilities):
Unused lines of credit. . . . . . . . . - - - -
Standby letters of credit . . . . . . . - - - -
Commitments to extend credit. . . . . . - - - -
(20) Commitments and Contingencies:
In the normal course of the Company's business, there are outstanding
various commitments and contingent liabilities that have not been reflected in
the consolidated financial statements. In the opinion of management, the
financial position of the Company will not be affected materially as a result of
such commitments and contingent liabilities.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position of the Company will not be affected materially
by the outcome of such legal proceedings.
The Company's profitability depends to a large extent on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Like most financial
institutions, the Company's interest income and interest expense are
significantly affected by changes in market interest rates and other economic
factors beyond its control. The Company's interest-earning assets consist
primarily of mortgage loans and investments which adjust more slowly to changes
in interest rates than its interest-bearing deposits. Accordingly, the
Company's earnings would be adversely affected during periods of rising interest
rates.
The Corporation and the Bank have agreed to enter into Employment
Agreements with two of the Bank's executive officers, which provide certain
benefits in the event of their termination following a change in control of the
Corporation or the Bank. The employment agreements provide for an initial term
of three years. On each anniversary of the commencement date of the Employment
Agreements, the term of each agreement may be extended for an additional year at
the discretion of the Board. In the event of a change in control of
47
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
the Corporation or the Bank, as defined in the agreement, each executive officer
will be entitled to a package of cash and/or benefits with a maximum value each
to 2.99 times their average annual compensation during the five-year period
preceding the change in control.
The Corporation and the Bank have also agreed to enter into Severance
Agreements with seven of the Bank's senior officers, none of whom are covered by
an Employment Agreement. Each agreement has an initial term of two years. On
each anniversary of the commencement due date of the Severance Agreements, the
term of each agreement may be extended for an additional year at the discretion
of the Board. In the event of a change in control of the Corporation or the
Bank, as defined in the agreement, each senior officer will be entitled to a
package of cash and/or benefits with a maximum value equal to 2.99 times their
average annual compensation during the five-year period preceding the change in
control.
The Corporation and the Bank have entered into a Key Employee Severance
Compensation Plan to provide benefits to eligible key employees in the event of
a change in control of the Corporation or the Bank. In general all officers
except those who have entered into separate Employment or Severance Agreements
with the Bank will be eligible to participate in the Severance Plan. In the
event of a change in control of the Corporation or the Bank, eligible key
employees who are terminated or who terminate employment within 12 months of the
effective date of a change in control will be entitled to a payment based on
years of service with the Bank, not to exceed an amount equal to three months of
their then current compensation.
(21) Condensed Parent Company Only Financial Statements:
The following table presents the condensed balance sheets of the
Corporation at December 31, 2000 and 1999, and the condensed statements of
income and cash flows for the years ended December 31, 2000, 1999 and 1998:
2000 1999
- -----------------------------------------------------------------------------------------
Condensed Balance Sheets:
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 2,244 $ 4,950
Investment in Bank. . . . . . . . . . . . . . . . . . . 5,419 42,081
Note receivable from Bank . . . . . . . . . . . . . . . 4,781 5,316
Other assets. . . . . . . . . . . . . . . . . . . . . . 91 112
--------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 12,535 $ 52,459
====================
Liabilities and Stockholders' Equity:
Borrowings. . . . . . . . . . . . . . . . . . . . . . . $ - $ 45,000
Other liabilities . . . . . . . . . . . . . . . . . . . 377 507
Stockholders' equity. . . . . . . . . . . . . . . . . . 12,158 6,952
--------------------
Total liabilities and stockholders' equity. . . . . . . $ 12,535 $ 52,459
====================
2000 1999 1998
- ------------------------------------------------------------------------------------------
Condensed Income Statements:
Investment income:
Interest income . . . . . . . . . . . . . . . . . . . $ 499 $ 1,343 $ 1,656
Dividend from Bank. . . . . . . . . . . . . . . . . . 43,250 - -
-------------------------------
43,749 1,343 1,656
Interest expense. . . . . . . . . . . . . . . . . . . 129 148 -
-------------------------------
Net interest income . . . . . . . . . . . . . . . . . 43,620 1,195 1,656
Noninterest expense . . . . . . . . . . . . . . . . . 310 476 294
-------------------------------
Income before income taxes and equity in
undistributed earnings of the Bank. . . . . . . . . . 43,310 719 1,362
Provision for income taxes. . . . . . . . . . . . . . . . 21 277 575
-------------------------------
Net income before equity in undistributed
earnings of Bank. . . . . . . . . . . . . . . . . . . 43,289 442 787
Equity in undistributed earnings of Bank. . . . . . . . . (39,237) 3,027 3,549
-------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 4,052 $ 3,469 $ 4,336
===============================
48
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
2000 1999 1998
- ------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows:
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 4,052 $ 3,469 $ 4,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of Bank . . . . . . 39,237 (3,027) (3,549)
Net accretion of investments available-
for-sale and held to maturity. . . . . . . . . . . - (1) (113)
Net change in other assets and liabilities . . . . . (109) 194 (154)
-------------------------------
Net cash provided by operating activities. . . . . . 43,180 635 520
-------------------------------
Cash flows from investing activities:
Investment in Bank . . . . . . . . . . . . . . . . . (166) (111) (36,910)
Purchase of investments available-for-sale . . . . . - - (27,446)
Purchase of investments held to maturity . . . . . . - - (3,940)
Maturities of investments available-for-sale . . . . - 13,500 14,000
Maturities of investments held to maturity . . . . . - - 4,000
Collection on notes receivable from Bank . . . . . . 535 451 264
-------------------------------
Net cash provided by (used in) investing activities. 369 13,840 (50,032)
-------------------------------
Cash flows from financing activities:
Borrowings . . . . . . . . . . . . . . . . . . . . . (45,000) 45,000 -
Issuance of common stock . . . . . . . . . . . . . . - - 69,352
Retirement of common stock . . . . . . . . . . . . . - (8,865) (8,578)
Stock issuance costs . . . . . . . . . . . . . . . . - - (1,567)
Dividends paid . . . . . . . . . . . . . . . . . . . (1,255) (1,315) (754)
Cash distribution. . . . . . . . . . . . . . . . . . - (53,286) -
-------------------------------
Net cash (used in) provided by financing activities. (46,255) (18,466) 58,453
-------------------------------
Net (decrease) increase in cash and cash equivalents (2,706) (3,991) 8,941
Cash and cash equivalents at beginning of year . . . 4,950 8,941 -
-------------------------------
Cash and cash equivalents at end of year . . . . . . $ 2,244 $ 4,950 $ 8,941
===============================
49
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands, except per share amounts)
(22) Quarterly Results of Operations: (Unaudited)
Summarized unaudited quarterly operating results for the years ended
December 31, 2000 and 1999 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
December 31, 2000:
Interest income. . . . . . . $ 6,979 $ 7,200 $ 7,538 $ 7,719
Interest expense . . . . . . 3,108 3,100 3,263 3,599
----------------------------------------------
Net interest income. . . . . 3,871 4,100 4,275 4,120
Provision for loan losses. . 74 67 - 165
----------------------------------------------
Net interest income after
provision for loan losses. 3,797 4,033 4,275 3,955
Noninterest income . . . . . 1,344 1,453 1,462 1,436
Noninterest expense. . . . . 3,686 3,604 3,753 3,657
----------------------------------------------
Income before income taxes . 1,455 1,882 1,984 1,734
Income taxes . . . . . . . . 627 771 815 790
----------------------------------------------
Net income . . . . . . . . . $ 828 $ 1,111 $ 1,169 $ 944
==============================================
Basic earnings per
share (note 17). . . . . . $ 0.13 $ 0.18 $ 0.18 $ 0.15
==============================================
Weighted average shares
outstanding (note 17) . . 6,340,984 6,320,328 6,397,364 6,420,977
==============================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
December 31, 1999:
Interest income. . . . . . . $ 6,813 $ 6,785 $ 7,087 $ 7,323
Interest expense . . . . . . 2,337 2,362 2,532 2,899
----------------------------------------------
Net interest income. . . . . 4,476 4,423 4,555 4,424
Provision for loan losses. . 89 423 132 347
----------------------------------------------
Net interest income after
provision for loan losses. 4,387 4,000 4,423 4,077
Noninterest income . . . . . 1,218 1,306 1,607 1,517
Noninterest expense. . . . . 3,514 3,815 3,774 5,282
----------------------------------------------
Income before income taxes . 2,091 1,491 2,256 312
Income taxes . . . . . . . . 863 626 918 274
----------------------------------------------
Net income . . . . . . . . . $ 1,228 $ 865 1,338 38
==============================================
Basic earnings per
share (note 17). . . . . . $ 0.19 $ 0.13 $ 0.20 $ 0.01
==============================================
Weighted average shares
outstanding (note 17) . . 6,607,533 6,781,294 6,580,643 6,595,487
==============================================
50
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
(23) Comprehensive Income:
SFAS 130, Reporting Comprehensive Income, was adopted by the Company on
January 1, 1998. SFAS 130 established standards for reporting comprehensive
income. Comprehensive income includes net income and other comprehensive net
income which is defined as non-owner related transactions in equity. The
following table sets forth the amounts of other comprehensive income included in
equity along with the related tax effect for the years ended December 31, 2000,
1999 and 1998:
Pre-Tax (Expense) Net of Tax
Amount Benefit Amount
- -------------------------------------------------------------------------
December 31, 2000:
Unrealized holding gains for the period. $155 $(58) $ 97
-----------------------------
$155 $(58) $ 97
=============================
December 31, 1999:
Unrealized holding losses for the period $(85) $ 32 $(53)
-----------------------------
$(85) $ 32 $(53)
=============================
December 31, 1998:
Unrealized holding gains for the period. $ 86 $(30) $ 56
-----------------------------
$ 86 $(30) $ 56
=============================
51
Cavalry Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2000, 1999 and 1998
(Table amounts in thousands)
(24) Business Segments
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 mortgage loans sold in 1999 and 1998.
Segment information is derived from the internal reporting system utilized
by management with accounting policies and procedures consistent with those
described in Note 1. 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.
Mortgage
2000 Banking Banking Trust Consolidated
- ------------------------------------------------------------------------
Interest revenue . . . . . . . . $ 29,436 $ - $ - $ 29,436
Other income-external customers. 2,818 256 1,067 4,141
Interest expense . . . . . . . . 13,070 - - 13,070
Depreciation and amortization. . 762 133 33 928
Other significant items:
Provisions for loan losses . . 306 - - 306
Gain on sale of assets . . . . 6 1,548 - 1,554
Segment profit (loss). . . . . . 6,976 (164) 243 7,055
Segment assets . . . . . . . . . 379,594 4,305 386 384,285
Mortgage
1999 Banking Banking Trust Consolidated
- -----------------------------------------------------------------------
Interest revenue . . . . . . . . $ 28,008 $ - $ - $ 28,008
Other income-external customers. 2,245 219 936 3,400
Interest expense . . . . . . . . 10,130 - - 10,130
Depreciation and amortization. . 859 198 44 1,101
Other significant items:
Provisions for loan losses . . 991 - - 991
Gain on sale of assets . . . . 3 2,245 - 2,248
Segment profit (loss). . . . . . 6,075 (49) 124 6,150
Segment assets . . . . . . . . . 390,648 4,596 175 395,419
Mortgage
1998 Banking Banking Trust Consolidated
- ----------------------------------------------------------------------
Interest revenue. . . . . . . . $ 26,956 $ - $ - $ 26,956
Other income-external customers 1,789 374 795 2,958
Interest expense. . . . . . . . 9,594 - - 9,594
Depreciation and amortization . 927 245 35 1,207
Other significant items:
Provisions for loan losses. . 452 - - 452
Gain on sale of assets. . . . 2 2,266 - 2,268
Segment profit. . . . . . . . . 8,430 631 234 9,295
Segment assets. . . . . . . . . 353,020 11,719 153 364,892
52
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Cavalry Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ----------------- ------------- ------------------------
Cavalry Banking 100% United States
Cavalry Enterprises (b) 100% Tennessee
- -------------
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Financial Statements contained in Item 8 of this
Form 10-K.
(b) Cavalry Enterprises is wholly owned by the subsidiary Cavalry Banking.
The Bank's investment is not material.
EXHIBIT 23
CONSENT OF RAYBURN, BETTS & BATES, P.C.
[Letterhead of Rayburn, Betts & Bates, P.C.]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-48007 and Registration Statement No. 333-35256 of Cavalry Bancorp, Inc. on
Forms S-8, of our report dated January 18, 2001, appearing in the Annual Report
to Shareholders of Cavalry Bancorp, Inc. for the year ended December 31, 2000
incorporated by reference in this Form 10-K.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
March 23, 2001