UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{ X } Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 2001 or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from___________
To ___________
Commission File Number: 0-23605
CAVALRY BANCORP, INC.
---------------------
(exact name of registrant as specified in its charter)
Tennessee 62-1721072
--------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(615) 893-1234
---------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Issued and Outstanding: 7,104,801 as of August 10, 2001.
CAVALRY BANCORP, INC.
Table of Contents
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 (unaudited)
and December 31, 2000 1
Consolidated Statements of Income (unaudited) for the Three
and Six Months Ended June 30, 2001 and 2000 2
Consolidated Statements of Comprehensive Income (unaudited)
for the Three and Six Months Ended June 30, 2001 and 2000 3
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2001 and 2000 4
Notes to Consolidated Financial Statements (unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11-12
Part II Other Information 13
Signatures 14
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
June 30 December 31
ASSETS 2001 2000
------ -------- -----------
(Unaudited)
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,728 $ 18,025
Interest-bearing deposits with other financial institutions . . . . . . . . . 23,426 27,000
--------- ---------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 44,154 45,025
Investment securities available-for-sale at fair value (amortized cost: . . . 49,828 32,247
$49,497 and $32,096 at June 30, 2001 and December 31, 2000, respectively)
Mortgage-backed securities held to maturity - at amortized cost (fair value:. 571 594
$569 and $589 at June 30, 2001 and December 31, 2000, respectively)
Loans held for sale, at estimated fair value. . . . . . . . . . . . . . . . . 7,160 4,183
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,926 279,478
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,366 2,559
Office properties and equipment, net. . . . . . . . . . . . . . . . . . . . . 15,760 15,255
Federal Home Loan Bank of Cincinnati stock - at cost. . . . . . . . . . . . . 2,093 2,020
Real estate and other assets acquired in settlement of loans. . . . . . . . . 96 86
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,449 2,838
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $399,403 $384,285
========= =========
LIABILITIES AND EQUITY
-----------------------
Liabilities:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $349,904 $336,534
Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 1,578
Accounts payable and other liabilities. . . . . . . . . . . . . . . . . . . . 2,091 2,202
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 353,020 340,314
--------- ---------
Equity:
Preferred stock, no par value
Authorized- 250,000 shares; none issued or outstanding at
June 30, 2001 and December 31, 2000. . . . . . . . . . . . . . . . . . . - -
Common stock, no par value
Authorized- 49,750,000 shares; issued and outstanding
7,104,801 at June 30, 2001 and December 31, 2000 . . . . . . . . . . . . 11,701 11,489
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,282 39,991
Unearned restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . (2,741) (3,224)
Unallocated ESOP Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,065) (4,380)
Accumulated other comprehensive income, net of tax. . . . . . . . . . . . . . 206 95
--------- ---------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,383 43,971
--------- ---------
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . . . . . . $399,403 $384,285
========= =========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to consolidated financial statements.
1
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest and dividend income:
Loans . . . . . . . . . . . . . . . . . . . $ 6,186 $ 6,420 $ 12,678 $ 12,548
Investment securities . . . . . . . . . . . 658 404 1,232 696
Deposits with other financial institutions. 331 365 755 914
Mortgage-backed securities held to maturity 11 11 21 21
---------- ---------- ---------- ----------
Total interest and dividend income. . 7,186 7,200 14,686 14,179
---------- ---------- ---------- ----------
Interest expense - deposits. . . . . . . . . 3,467 3,085 7,095 6,063
Interest expense - borrowings. . . . . . . . 5 15 19 145
---------- ---------- ---------- ----------
Total interest expense . . . . . . . . 3,472 3,100 7,114 6,208
---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . 3,714 4,100 7,572 7,971
Provision for loan losses . . . . . . . . . 63 67 166 141
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses . . . . . . . . . . . . 3,651 4,033 7,406 7,830
---------- ---------- ---------- ----------
Non-interest income:
Servicing income . . . . . . . . . . . . . 62 67 137 131
Gain on sale of loans, net . . . . . . . . 609 442 1,012 756
Deposit servicing fees and charges . . . . 1,004 618 1,826 1,179
Trust service fees . . . . . . . . . . . . 292 267 585 534
Other operating income . . . . . . . . . . 158 59 327 197
---------- ---------- ---------- ----------
Total non-interest income. . . . . . . . 2,125 1,453 3,887 2,797
---------- ---------- ---------- ----------
Non-interest expenses:
Compensation, payroll taxes and
fringe benefits . . . . . . . . . . . . 2,486 2,268 4,831 4,606
Occupancy expense . . . . . . . . . . . . 247 193 486 349
Supplies, communications and other
office expenses . . . . . . . . . . . . 231 189 460 400
Federal insurance premiums. . . . . . . . 15 16 31 31
Advertising expense . . . . . . . . . . . 109 62 205 152
Equipment and service bureau expense. . . 621 526 1,173 1,024
Other operating expenses. . . . . . . . . 397 350 776 728
---------- ---------- ---------- ----------
Total non-interest expenses. . . . . . 4,106 3,604 7,962 7,290
---------- ---------- ---------- ----------
Earnings before income tax expense . . . . 1,670 1,882 3,331 3,337
Income tax expense . . . . . . . . . . . . 717 771 1,421 1,398
---------- ---------- ---------- ----------
Net income. . . . . . . . . . . . . . . $ 953 $ 1,111 $ 1,910 $ 1,939
========== ========== ========== ==========
Basic and diluted earnings per share . . . . $ 0.15 $ 0.18 $ 0.30 $ 0.31
========== ========== ========== ==========
Weighted average shares outstanding-Basic. . 6,469,086 6,320,328 6,456,937 6,330,656
========== ========== ========== ==========
Weighted average shares outstanding-Diluted. 6,478,762 6,320,328 6,468,975 6,330,656
========== ========== ========== ==========
Dividends declared $0.05 per share payable July 13, 2001 for shareholders of
record date June 30, 2001.
See accompanying notes to consolidated financial statements.
2
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income. . . . . . . . . . . . . . . $953 $1,111 $1,910 $1,939
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale . . . . . . . . . . 14 (2) 111 (28)
---- ------- ------ -------
Comprehensive income. . . . . . . . . . $967 $1,109 $2,021 $1,911
==== ======= ====== =======
See accompanying notes to consolidated financial statements.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2001 2000
---- ----
Operating activities:
Net cash provided by operating activities . . $ 562 $ 1,619
--------- ---------
Investing activities:
Decrease (increase) in loans receivable, net . . . . 4,497 (4,793)
Principal payments on mortgage
backed securities held to maturity. . . . . . . 22 26
Proceeds from sales of office properties and equipment. - 18
Purchase of investment securities
available for sale . . . . . . . . . . . . . . . . (41,991) (23,854)
Proceeds from maturities of investment securities . . 24,630 7,000
Purchase of office properties and equipment. . . . . (1,087) (4,571)
--------- ---------
Net cash used in investing activities . . . . (13,929) (26,174)
--------- ---------
Financing activities:
Net increase in deposits. . . . . . . . . . . . . . . 13,370 13,753
Dividends paid. . . . . . . . . . . . . . . . . . . . (620) (710)
Net decrease in borrowings. . . . . . . . . . . . . . (553) (43,395)
Payments by borrowers for
property taxes and insurance. . . . . . . . . . . . . 299 396
--------- ---------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . 12,496 (29,956)
--------- ---------
Decrease in cash and cash equivalents . . . . . . . . . (871) (54,511)
Cash and equivalents, beginning of period . . . . . . . 45,025 94,422
--------- ---------
Cash and cash equivalents, end of period . . . . . . . $ 44,154 $ 39,911
========= =========
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 6,992 $ 6,230
========= =========
Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 1,529 $ 1,791
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Interest credited to deposits. . . . . . . . . . . . . $ 2,512 $ 2,174
========= =========
Increase in deferred tax asset related
to unrealized loss on investments. . . . . . . . . . $ 69 $ 10
========= =========
Net unrealized gain (losses) on investment
securities available for sale . . . . . . . . . . . $ 180 $ (38)
========= =========
Dividends declared and payable. . . . . . . . . . . . . $ 355 $ 355
========= =========
See accompanying notes to consolidated financial statements.
4
CAVALRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the holding
company for Cavalry Banking (the "Bank") which is a federally chartered stock
savings bank.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with Instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the three and six months ended June 30, 2001, are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001. The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 2000.
2. Earnings Per Share
The following schedule reconciles the numerators and denominators of the basic
and diluted earnings per share ("EPS") computations for the three and six months
ended June 30, 2001 and 2000. Diluted common shares arise from the potentially
dilutive effect of the Company's stock options outstanding.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS:
Net income. . . . . . . . . . . . . $ 953,000 $1,111,000 $1,910,000 $1,939,000
Average common shares outstanding . 6,469,086 6,320,328 6,456,937 6,330,656
---------- ---------- ---------- ----------
Earnings per share. . . . . . . . . $ 0.15 $ 0.18 $ 0.30 $ 0.31
========== ========== ========== ==========
Diluted EPS:
Net income. . . . . . . . . . . . . $ 953,000 $1,111,000 $1,910,000 $1,939,000
---------- ---------- ---------- ----------
Average common shares outstanding . 6,469,086 6,320,328 6,456,937 6,330,656
Dilutive effect of stock options. . 9,676 - 12,038 -
---------- ---------- ---------- ----------
Average dilutive shares outstanding 6,478,762 6,320,328 6,468,975 6,330,656
---------- ---------- ---------- ----------
Earnings per share. . . . . . . . . $ 0.15 $ 0.18 $ 0.30 $ 0.31
========== ========== ========== ==========
3. Business Segments
The Company and its subsidiaries provide community oriented banking services to
individuals and businesses primarily within Rutherford and Bedford counties in
Middle Tennessee.
The Company's segments are identified by the products and services offered,
principally distinguished as banking, trust and mortgage banking operations.
The majority of loans originated for sale are sold with the servicing rights
attached. One unrelated entity purchased approximately 50% of mortgage loans
sold in 2000 and 2001.
5
Segment information is derived from the internal reporting system utilized by
management with accounting policies and procedures consistent with those
described in Note 1 of the 2000 Annual Report to Shareholders. Segment
performance is evaluated by the Company based on profit or loss before income
taxes. Revenue, expense, and asset levels reflect those which can be
specifically identified and those assigned based on internally developed
allocation methods. These methods have been consistently applied.
Mortgage
For the quarter ended. . . . . . . Banking Banking Trust Consolidated
June 30, 2001
Interest revenue . . . . . . . . . $ 7,186 $ - $ - $ 7,186
Other income-external customers. . 1,162 62 292 1,516
Interest expense . . . . . . . . . 3,472 - - 3,472
Depreciation and amortization. . . 236 42 9 287
Other significant items:
Provision for loan losses. . . 63 - - 63
Gain (loss) on sales of assets - 609 - 609
Segment profit . . . . . . . . . . 1,592 1 77 1,670
Segment assets . . . . . . . . . . 391,813 7,268 322 399,403
Mortgage
For the quarter ended . . . . . Banking Banking Trust Consolidated
June 30, 2000
Interest revenue. . . . . . . . $ 7,200 $ - $ - $ 7,200
Other income-external customers 674 67 267 1,008
Interest expense. . . . . . . . 3,100 - - 3,100
Depreciation and amortization . 159 29 8 196
Other significant items:
Provision for loan losses. . 67 - - 67
Gain on sales of assets. . . 3 442 - 445
Segment profit. . . . . . . . . 1,813 - 69 1,882
Segment assets. . . . . . . . . 362,129 4,521 403 367,053
Mortgage
For the six months ended. . . . . . Banking Banking Trust Consolidated
June 30, 2001
Interest revenue. . . . . . . . . . $ 14,686 $ - $ - $ 14,686
Other income-external customers . . 2,153 137 585 2,875
Interest expense. . . . . . . . . . 7,114 - - 7,114
Depreciation and amortization . . . 460 83 17 560
Other significant items:
Provision for loan losses . . . 166 - - 166
Gain (loss) on sales of assets. - 1,012 - 1,012
Segment profit and (losses) . . . . 3,185 (5) 151 3,331
Segment assets. . . . . . . . . . . 391,813 7,268 322 399,403
Mortgage
For the six months ended . . . . Banking Banking Trust Consolidated
June 30, 2000
Interest revenue . . . . . . . . $ 14,179 $ - $ - $ 14,179
Other income-external customers. 1,358 131 534 2,023
Interest expense . . . . . . . . 6,208 - - 6,208
Depreciation and amortization. . 331 62 17 410
Other significant items:
Provision for loan losses . . 141 - - 141
Gain on sales of assets . . . 18 756 - 774
Segment profit and (losses). . . 3,253 (52) 136 3,337
Segment assets . . . . . . . . . 362,129 4,521 403 367,053
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
This Quarterly Report contains forward-looking statements within the meaning of
the federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause the Company's actual results, performance,
and achievements to be materially different from those expressed or implied by
the forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including
changes in market interest rates and changes in monetary and fiscal policies of
the federal government; legislative and regulatory changes; and other factors
disclosed periodically in the Company's filings with the Securities and Exchange
Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
Total assets were $399.4 million at June 30, 2001, compared to $384.3 million at
December 31, 2000, an increase of $15.1 million or 3.93%. Increased deposits
and equity funded this increase in assets. Cash and cash equivalents decreased
from $45.0 million at December 31, 2000, to $44.2 million at June 30, 2001.
Investments available for sale increased from $32.2 million at December 31,
2000, to $49.8 million at June 30, 2001 as a result of investing excess
liquidity. Loans receivable net decreased $4.6 million from $279.5 million at
December 31, 2000, to $274.9 million at June 30, 2001. Office properties and
equipment increased from $15.3 million at December 31, 2000 to $15.8 million at
June 30, 2001.
Deposit accounts increased $13.4 million from $336.5 million at December 31,
2000, to $349.9 million at June 30, 2001. Certificates of deposit decreased
$700,000 from $162.5 million at December 31, 2000, to $161.8 million at June 30,
2001. Savings deposits increased $200,000 from $13.2 million at December 31,
2000, to $13.4 million at June 30, 2001. Money market accounts increased $9.9
million from $69.8 million at December 31, 2000, to $79.7 million at June 30,
2001. NOW accounts declined from $52.3 million at December 31, 2000, to $49.2
million at June 30, 2001. Non interest-bearing accounts increased $7.2 million
from $38.6 million at December 31, 2000, to $45.8 million at June 30, 2001.
These increases were primarily a result of an ongoing effort to raise the
deposit base for the Bank.
Equity increased by $2.4 million from $44.0 million at December 31, 2000, to
$46.4 million at June 30, 2001, as a result of net income of $1.9 million for
the six months ended June 30, 2001, release of ESOP shares of $527,000 and
release of Management Recognition Plan (MRP) shares of $483,000 and an
unrealized gain on available for sale securities of $111,000 net of taxes.
These increases were offset by dividends declared of $620,000.
Non-performing assets were $209,000 at December 31, 2000, and $744,000 at June
30, 2001.
Comparison of Operating Results for the Three Months Ended June 30, 2001 and
June 30, 2000.
Net Income. Net income was $953,000 for the three months ended June 30, 2001,
compared to $1.1 million for the three months ended June 30, 2000. This
decrease was primarily a result of higher interest expense and higher
non-interest expenses. These factors were partially offset by higher
non-interest income. The Company expects to see downward pressure on earnings
as a result of interest rate cuts by the Federal Reserve Board. As a result of
these Fed rate cuts, banks have cut the prime rate in a similar manner. The
majority of the Bank's construction loan portfolio is tied to this prime rate
and adjusts immediately with changes in the prime rate. These declines have a
short-term negative impact on interest income.
7
Net Interest Income. Net interest income declined from $4.1 million for the
three months ended June 30, 2000, to $3.7 million for the three months ended
June 30, 2001. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased from 117.18% for the three months ended
June 30, 2000, to 116.59% for the three months ended June 30, 2001.This is a
result of higher percentage increases in costing liabilities compared to
percentage increases in earning assets.
Interest income remained constant at $7.2 million for the three months ended
June 30, 2001 and 2000. Interest on loans decreased from $6.4 million for the
three months ended June 30, 2000, to $6.2 million for the same period in 2001.
Average loans outstanding increased from $280.4 million for the three months
ended June 30, 2000, to $282.7 million for the same period in 2001. The average
yield decreased from 9.16% for the three months ended June 30, 2000, to 8.78%
for the same period in 2001 as a result of declining interest rates. Income on
all other investments consisting of mortgage backed securities, investments,
FHLB stock, bank deposits and federal funds increased from $780,000 for the
three months ended June 30, 2000, to $1.0 million for the same period in 2001.
Average investments increased from $49.0 million for the three months ended June
30, 2000, to $77.0 million for the same period in 2001. The average yield
decreased from 6.40% for the three months ended June 30, 2000, to 5.21% for the
same period in 2001.
Interest expense increased from $3.1 million for the three months ended June 30,
2000, to $3.5 million for the same period in 2001. Average deposits increased
from $279.5 million for the three months ended June 30, 2000, to $307.5 million
for the same period in 2001. This increase was a result of continuing efforts
to increase market share of deposits. The average cost of deposits increased
from 4.43% for the three months ended June 30, 2000, to 4.52% for the same
period in 2001. This increase was primarily a result of increases in average
certificates of deposit from $151.9 million for the three months ended June 30,
2000, to $164.0 million for the three months ended June 30, 2001. The average
cost of certificates of deposits increased from 5.72% for the three months ended
June 30, 2000, to 6.08% for the three months ended June 30, 2001. Average
borrowings decreased from $1.6 million at an average cost of 3.74% for the three
months ended June 30, 2000, to $1.0 million at an average cost of 1.95% for the
three months ended June 30, 2001. The total cost of funds increased from 4.42%
for the three months ended June 30, 2000, to 4.51% for the three months ended
June 30, 2001. Average interest-bearing liabilities increased from $281.1
million for the three months ended June 30, 2000, to $308.6 million for the same
period in 2001. Interest rate spread decreased from 4.32% for the three months
ended June 30, 2000, to 3.48% for the same period in 2001. Net interest margin
decreased from 4.98% for the three months ended June 30, 2000, to 4.14% for the
same period in 2001.
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets, giving greater weight to the level of classified assets than to
the level of nonperforming assets because classified assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgement, potential credit weaknesses.
The provision for loan losses decreased from $67,000 for the three months ended
June 30, 2000, to $63,000 for the three months ended June 30, 2001. Management
deemed the allowance for loan losses adequate at June 30, 2001.
Non-interest Income. Non-interest income increased from $1.5 million for the
three months ended June 30, 2000, to $2.1 million for the same period in 2001.
In the mortgage banking segment, net gain on sale of loans increased from
$442,000 for the three months ended June 30, 2000, to $609,000 for the same
period in 2001. The higher gain in 2001 was a result of increased volume of
loan sales. Loan servicing fees decreased slightly from $67,000 for the three
months ended June 30, 2000, to $62,000 for the same period in 2001. In the
banking segment, deposit fees and other operating incomes increased from
$677,000 for the three months ended June 30, 2000, to $1.2 million for the same
period in 2001. This increase was a result of growth in the number of
transaction accounts and increased charges. The Bank also implemented an
overdraft privilege program coupled with a new free checking account program.
These factors also helped to increase deposit and overdraft fees. In the trust
segment, trust fees increased from $267,000 for the three months ended June 30,
2000, to $292,000 for the same period in 2001 as a result of increased trust
assets under management.
8
Non-interest Expense. Non-interest expense increased from $3.6 million for the
three months ended June 30, 2000, to $4.1 million for the same period in 2001.
Compensation and other employee benefits increased from $2.3 million for the
three months ended June 30, 2000, to $2.5 million for the three months ended
June 30, 2001. This increase was a result of increased commission expenses,
increased overtime compensation, and other incentives. Other increases in
compensation were a result of increased staffing and normal annual increases in
compensation. The increase in occupancy expense was primarily a result of the
opening of the new operations building and increases in the cost of utilities.
The increases in other expenses were primarily due to increased loan and deposit
activity.
Income taxes. The provision for income taxes was $717,000 for the three months
ended June 30, 2001, compared to $771,000 for the same period in 2000. This
decrease was primarily a result of lower income before taxes.
Comparison of Operating Results for the Six Months Ended June 30, 2001 and June
30, 2000.
Net Income. Net income was $1.9 million for the six months ended June 30, 2001,
compared to $1.9 million for the six months ended June 30, 2000. There was a
decrease which was primarily a result of higher interest expense and higher
non-interest expenses. These factors were partially offset by higher
non-interest income. The Company expects to see downward pressure on earnings
as a result of interest rate cuts by the Federal Reserve Board. As a result of
these Fed rate cuts, banks have cut the prime rate in a similar manner. The
majority of the Bank's construction loan portfolio is tied to this prime rate
and adjusts immediately with changes in the prime rate. These declines have a
short-term negative impact on interest income.
Net Interest Income. Net interest income declined from $8.0 million for the six
months ended June 30, 2000, to $7.6 million for the six months ended June 30,
2001. The ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 116.79% for the six months ended June 30, 2000, to
116.37% for the six months ended June 30, 2001. This is a result of higher
percentage increases in costing liabilities compared to percentage increases in
earning assets.
Interest income increased from $14.2 million for the six months ended June 30,
2000, to $14.7 million for the six months ended June 30, 2001. Interest on
loans increased from $12.5 million for the six months ended June 30, 2000, to
$12.7 million for the same period in 2001. Average loans outstanding increased
from $277.6 million for the six months ended June 30, 2000, to $283.1 million
for the same period in 2001. The average yield decreased from 9.04% for the six
months ended June 30, 2000, to 9.03% for the same period in 2001 as a result of
declining interest rates. Income on all other investments consisting of
mortgage backed securities, investments, FHLB stock, bank deposits and federal
funds increased from $1.6 million for the six months ended June 30, 2000, to
$2.0 million for the same period in 2001. Average investments increased from
$52.7million for the six months ended June 30, 2000, to $72.4 million for the
same period in 2001. The average yield decreased from 6.20% for the six months
ended June 30, 2000, to 5.59% for the same period in 2001.
Interest expense increased from $6.2 million for the six months ended June 30,
2000, to $7.1 million for the same period in 2001. Average deposits increased
from $277.6 million for the six months ended June 30, 2000, to $304.2 million
for the same period in 2001. This increase was a result of continuing efforts
to increase market share of deposits. The average cost of deposits increased
from 4.39% for the six months ended June 30, 2000, to 4.70% for the same period
in 2001. This increase in cost of funds was primarily a result of increases in
average certificates of deposit from $152.4 million for the six months ended
June 30, 2000 to $164.9 million for the six months ended June 30, 2001. The
average cost of certificates of deposits increased from 5.64% for the six months
ended June 30, 2000, to 6.21% for the six months ended June 30, 2001. Average
borrowings decreased from $5.2 million at an average cost of 5.57% for the six
months ended June 30, 2000, to $1.3 million at an average cost of 2.99% for the
six months ended June 30, 2001. The total cost of funds increased from 4.41%
for the six months ended June 30, 2000, to 4.67% for the six months ended June
30, 2001. Average interest-bearing liabilities increased from $282.8 million
for the six months ended June 30, 2000, to $305.5 million for the same period in
2001. Interest rate spread decreased from 4.17% for the six months ended June
30, 2000, to 3.66% for the same period in 2001. Net interest margin decreased
from 4.83% for the six months ended June 30, 2000, to 4.26% for the same period
in 2001.
9
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets, giving greater weight to the level of classified assets than to
the level of non-performing assets because classified assets include not only
non-performing assets but also performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses.
The provision for loan losses increased from $141,000 for the six months ended
June 30, 2000, to $166,000 for the six months ended June 30, 2001. Management
deemed the allowance for loan losses adequate at June 30, 2001.
Non-interest Income. Non-interest income increased from $2.8 million for the
six months ended June 30, 2000, to $3.9 million for the same period in 2001. In
the mortgage banking segment, net gain on sale of loans increased from $756,000
for the six months ended June 30, 2000, to $1.0 million for the same period in
2001. The higher gain in 2001 was a result of increased volume of loan sales.
Loan servicing fees increased slightly from $131,000 for the six months ended
June 30, 2000, to $137,000 for the same period in 2001. In the banking segment,
deposit fees and other operating incomes increased from $1.2 million for the six
months ended June 30, 2000, to $1.8 million for the same period in 2001. This
increase was a result of growth in the number of transaction accounts and
increased charges. The Bank also implemented an overdraft privilege program
coupled with a new free checking account program. These factors also helped to
increase deposit and overdraft fees. In the trust segment, trust fees increased
from $534,000 for the six months ended June 30, 2000, to $585,000 for the same
period in 2001 as a result of increased trust assets under management.
Non-interest Expense. Non-interest expense increased from $7.3 million for the
six months ended June 30, 2000, to $8.0 million for the same period in 2001.
Compensation and other employee benefits increased from $4.6 million for the six
months ended June 30, 2000 to $4.8 million for the six months ended June 30,
2001. This increase was a result of increased commissions, incentives, overtime
compensation and normal salary increases. The increase in occupancy expense was
primarily a result of the opening of the new operations building and increases
in the cost of utilities. The increases in other expenses were primarily due to
increased loan and deposit activity.
Income taxes. The provision for income taxes was $1.4 million for the six
months ended June 30, 2001, compared to $1.4 million for the same period in
2000.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from loan
principal and interest payments, sale of loans, maturing securities and Federal
Home Loan Bank (FHLB) of Cincinnati advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are influenced greatly by general interest rates, other
economic conditions, and competition. Regulations of the Office of Thrift
Supervision ("OTS"), the Bank's primary regulator, require the Bank to maintain
an adequate level of liquidity to ensure the availability of sufficient
liquidity to fund loan originations, deposit withdrawals and to satisfy other
financial commitments. Currently, the OTS regulatory liquidity for the Bank is
the maintenance of an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4% of the daily balance of net withdrawal
deposits and short-term borrowings. This liquidity requirement is subject to
periodic change. The Company and the Bank generally maintain sufficient cash
and short-term investments to meet short-term liquidity needs. At June 30,
2001, cash and cash equivalents totaled $44.2 million or 11.07% of total assets,
and investments available-for-sale totaled $49.9 million. At June 30, 2001, the
Bank also maintained, but did not draw upon, a line of credit with the FHLB of
Cincinnati in the amount of $10.0 million.
As of June 30, 2001, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 2001, under regulations of the
OTS, the Bank's actual tangible, core and risk-based capital ratios were 10.82%,
10.82% and 13.69%, respectively, compared to requirements of 1.5%, 3.0% and
8.0%, respectively.
10
At June 30, 2001, the Bank had loan commitments of approximately $36.0 million.
In addition, at June 30, 2001, the unused portion of lines of credit extended by
the Bank was approximately $9.3 million for consumer loans and $29.2 million for
commercial loans. Standby letters of credit and financial guarantees are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most guarantees extend from one to two
years. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. At June 30,
2001, the Bank had $6.8 million of letters of credit outstanding.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial condition and operating results in terms of
historical dollars without considering the change in relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's interest rate sensitivity is monitored by management through
selected interest rate risk measures produced internally and by the OTS. All
methods used to measure interest rate sensitivity involve the use of
assumptions. Management cannot predict what assumptions are made by the OTS,
which can vary from management's assumptions. Therefore, the results of the OTS
calculations can differ from management's internal calculations. The Company's
interest rate sensitivity should be reviewed in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report for the
year ended December 31, 2000. The Company is more susceptible to declining
rates.
The following table presents the Company's maturity gap at June 30, 2001 (In
thousands).
11
Six After After
Within Months One to Three Over
Six To One Three to Five Five
Months Year Years Years Years Total
------ ---- ----- ----- ----- -----
Interest-earning assets:
Loans receivable, net. . . $ 59,487 $53,362 $86,222 $ 44,048 $ 38,967 $282,086
Mortgage-backed
securities. . . . . . . . 42 39 133 103 254 571
FHLB Stock . . . . . . . . 2,093 - - - - 2,093
Investment securities. . . 33,557 13,100 3,171 - - 49,828
Federal funds sold
overnight and other
interest-bearing deposits 23,426 - - - - 23,426
--------- -------- -------- ---------- ---------- ---------
Total rate
sensitive assets . . . $118,605 $66,501 $89,526 $ 44,151 $ 39,221 $358,004
========= ======== ======== ========== ========== =========
Interest-bearing liabilities:
Deposits:
NOW accounts . . . . . . . $ 4,925 $ 4,925 $19,698 $ 19,698 $ - $ 49,246
Passbook savings
accounts. . . . . . . . . 1,339 1,339 5,354 5,354 - 13,386
Money market
deposit accounts. . . . . 7,965 7,965 31,860 31,860 - 79,650
Certificates of
deposit . . . . . . . . . 106,821 34,519 17,425 3,059 4 161,828
Borrowings. . . . . . . . . . 27 27 109 109 753 1,025
--------- -------- -------- ---------- ---------- ---------
Total rate
sensitive liabilities . $121,077 $48,775 $74,446 $ 60,080 $ 757 $305,135
========= ======== ======== ========== ========== =========
Excess (deficiency) of
interest sensitive
assets over interest
sensitive liabilities. . . ($2,472) $17,726 $15,080 ($15,929) $ 38,464 $ 52,869
Cumulative excess
(deficiency) of
interest sensitive
assets . . . . . . . . . . ($2,472) $15,254 $30,334 $ 14,405 $ 52,869 $ 52,869
Cumulative ratio of
interest-earning assets
to interest-bearing
liabilities. . . . . . . . 97.96% 108.98% 112.42% 104.73% 117.33% 117.33%
Interest sensitivity
gap to total rate
sensitive assets . . . . . (0.69)% 4.95% 4.21% (4.45)% 10.74% 14.77%
Ratio of interest-
earning assets to
interest -bearing
liabilities. . . . . . . . 97.96% 136.34% 120.26% 73.49% 5,181.11% 117.33%
Ratio of cumulative gap
to total rate
sensitive assets . . . . . (0.69)% 4.26% 8.47% 4.02% 14.77% 14.77%
12
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 26, 2001 at the annual meeting of shareholders of Cavalry
Bancorp, Inc. the following Directors were elected for three-year terms:
Name For Against
Ed C. Loughry, Jr. 5,208,021 31,303
William Kent Coleman 5,224,321 15,003
James C. Cope 5,223,770 15,554
The shareholders approved the appointment of Rayburn, Betts & Bates, P.C. as the
Company's independent auditors for the fiscal year ending December 31, 2001 with
votes as follows:
For Against Abstain
5,228,491 6,337 4,496
Item 5. Other Information
None
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C. Loughry, Jr.**
10.2 Employment Agreement with Ronald F. Knight **
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis, Jr.**
10.5 Severance Agreement with R. Dale Floyd **
10.6 Severance Agreement with M. Glenn Layne **
10.7 Severance Agreement with Joy B. Jobe**
10.8 Severance Agreement with William S. Jones**
10.9 Severance Agreement with David W. Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
10.12 Management Recognition Plan with William H. Huddleston III***
10.13 Management Recognition Plan with Gary Brown ***
10.14 Management Recognition Plan with Ed Elam ***
10.15 Management Recognition Plan with Frank E. Crosslin, Jr. ***
10.16 Management Recognition Plan with Tim J. Durham ***
10.17 Management Recognition Plan with James C. Cope ***
10.18 Management Recognition Plan with Terry G. Haynes ***
10.19 Management Recognition Plan with Ed C. Loughry, Jr. ***
10.20 Management Recognition Plan with Ronald F. Knight ***
10.21 Management Recognition Plan with William S. Jones ***
10.22 Management Recognition Plan with Hillard C. Gardner ***
10.23 Management Recognition Plan with R. Dale Floyd ***
10.24 Management Recognition Plan with David W. Hopper ***
10.25 Management Recognition Plan with Joe W. Townsend ***
10.26 Management Recognition Plan with M. Glenn Layne ***
10.27 Management Recognition Plan with Joy B. Jobe ***
10.28 Management Recognition Plan with Ira B. Lewis, Jr. ***
10.29 Management Recognition Plan with Elizabeth L. Green ***
10.30 Management Recognition Plan with James O. Sweeney, III ***
13 Annual Report to Stockholders****
21 Subsidiaries of the Registrant****
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission on March 30, 1998.
*** Incorporated herein by reference to the Registrant's Annual Meeting
Proxy Statement dated March 15, 1999, as filed with the Securities and
Exchange Commission on March 15, 1999.
**** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission on March 26, 2001.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 2001.
13
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: August 9, 2001 by: /s/ Ed C. Loughry, Jr.
----------------------
Ed C. Loughry, Jr.
Chairman of the Board of Directors
Chief Executive Officer
Date: August 9, 2001 by: /s/ Hillard C. Gardner
--------------
Hillard C. Gardner
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
14