UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{ X } Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 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: 7,089,801 as of November 9, 2001.
CAVALRY BANCORP, INC.
Table of Contents
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000 1
Consolidated Statements of Income (unaudited) for the Three
and Nine Months Ended September 30, 2001 and 2000 2
Consolidated Statements of Comprehensive Income (unaudited) for
the Three and Nine Months Ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2001 and 2000 4
Notes to Consolidated Financial Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information 13
Signatures 14
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
September 30, December 31,
ASSETS 2001 2000
------ --------- --------
(Unaudited)
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,604 $ 18,025
Interest-bearing deposits with other financial institutions . . . . . . . . . . 30,405 27,000
--------- ---------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,009 45,025
Investment securities available-for-sale at fair value (amortized cost: . . . . 59,739 32,247
$59,115 and $32,096 at September 30, 2001 and December 31, 2000, respectively)
Mortgage-backed securities held to maturity - at amortized cost (fair value:. . 553 594
$549 and $589 at September 30, 2001 and December 31, 2000, respectively)
Loans held for sale, at estimated fair value. . . . . . . . . . . . . . . . . . 8,542 4,183
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,010 279,478
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,765 2,559
Office properties and equipment, net. . . . . . . . . . . . . . . . . . . . . . 15,742 15,255
Federal Home Loan Bank of Cincinnati stock - at cost. . . . . . . . . . . . . . 2,130 2,020
Real estate and other assets acquired in settlement of loans. . . . . . . . . . 169 86
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,172 2,838
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $418,831 $384,285
========= =========
LIABILITIES AND EQUITY
- -------------------------------------------------------------------------------
Liabilities:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $367,749 $336,534
Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 1,578
Accounts payable and other liabilities. . . . . . . . . . . . . . . . . . . . . 2,314 2,202
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 371,075 340,314
--------- ---------
Equity:
Preferred stock, no par value
Authorized- 250,000 shares; none issued or outstanding at
September 30, 2001 and December 31, 2000 . . . . . . . . . . . . . . . . . - -
Common stock, no par value
Authorized- 49,750,000 shares; issued and outstanding
7,104,801 at September 30, 2001 and December 31, 2000. . . . . . . . . . . 11,786 11,489
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,991 39,991
Unearned restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,499) (3,224)
Unallocated ESOP Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,908) (4,380)
Accumulated other comprehensive income, net of tax. . . . . . . . . . . . . . . 386 95
--------- ---------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,756 43,971
--------- ---------
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . . . . . . . $418,831 $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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest and dividend income:
Loans. . . . . . . . . . . . . . . . . . . . . . $ 5,845 $ 6,651 $ 18,523 $ 19,199
Investment securities. . . . . . . . . . . . . . 806 446 2,038 1,142
Deposits with other financial institutions . . . 270 431 1,025 1,345
Mortgage-backed securities held to maturity. . . 10 10 31 31
---------- ----------- ---------- ----------
Total interest and dividend income . . . . 6,931 7,538 21,617 21,717
---------- ----------- ---------- ----------
Interest expense - deposits . . . . . . . . . . . 3,168 3,248 10,263 9,311
Interest expense - borrowings . . . . . . . . . . 6 15 25 160
---------- ----------- ---------- ----------
Total interest expense. . . . . . . . . . . 3,174 3,263 10,288 9,471
---------- ----------- ---------- ----------
Net interest income. . . . . . . . . . . . . . . 3,757 4,275 11,329 12,246
Provision for loan losses. . . . . . . . . . . . 82 - 248 141
---------- ----------- ---------- ----------
Net interest income after provision
for loan losses. . . . . . . . . . . . . . . 3,675 4,275 11,081 12,105
---------- ----------- ---------- ----------
Non-interest income:
Servicing income. . . . . . . . . . . . . . . . 59 60 196 191
Gain on sale of loans, net. . . . . . . . . . . 571 419 1,583 1,175
Gain on sale of office properties and equipment - (16) - 2
Deposit servicing fees and charges. . . . . . . 922 665 2,748 1,844
Trust service fees. . . . . . . . . . . . . . . 297 267 882 801
Other operating income. . . . . . . . . . . . . 160 67 487 246
---------- ----------- ---------- ----------
Total non-interest income . . . . . . . . . . 2,009 1,462 5,896 4,259
---------- ----------- ---------- ----------
Non-interest expenses:
Compensation, payroll taxes and
fringe benefits. . . . . . . . . . . . . . . 2,441 2,457 7,272 7,063
Occupancy expense. . . . . . . . . . . . . . . 246 174 732 523
Supplies, communications and other
office expenses. . . . . . . . . . . . . . . 214 192 674 592
Federal insurance premiums . . . . . . . . . . 17 16 48 47
Advertising expense. . . . . . . . . . . . . . 61 52 266 204
Equipment and service bureau expense . . . . . 607 512 1,780 1,536
Other operating expenses . . . . . . . . . . . 369 350 1,145 1,078
---------- ----------- ---------- ----------
Total non-interest expenses . . . . . . . . 3,955 3,753 11,917 11,043
---------- ----------- ---------- ----------
Earnings before income tax expense. . . . . . . 1,729 1,984 5,060 5,321
Income tax expense. . . . . . . . . . . . . . . 709 815 2,130 2,213
---------- ----------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . $ 1,020 $ 1,169 $ 2,930 $ 3,108
========== =========== ========== ==========
Basic and diluted earnings per share. . . . . . . $ 0.16 $ 0.18 $ 0.45 $ 0.49
========== =========== ========== ==========
Weighted average shares outstanding-Basic . . . . 6,493,217 6,397,364 6,469,163 6,353,054
========== =========== ========== ==========
Weighted average shares outstanding-Diluted . . . 6,529,616 6,397,364 6,539,280 6,353,054
========== =========== ========== ==========
Dividends declared $0.05 per share payable October 12, 2001 for shareholders of
record date September 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income . . . . . . . . . . . . . . $1,020 $1,169 $2,930 $3,108
Other comprehensive income, net of tax
Unrealized gains on securities
available for sale. . . . . . . . . . 180 41 291 13
------ ------ ------ ------
Comprehensive income . . . . . . . . . $1,200 $1,210 $3,221 $3,121
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2001 2000
--------- ---------
Operating activities:
Net cash provided by operating activities . . $ 1,491 $ 1,224
--------- ---------
Investing activities:
Decrease (increase) in loans receivable, net . . . . 673 (6,468)
Principal payments on mortgage
backed securities held to maturity. . . . . . . 40 36
Proceeds from sales of office properties and equipment. - 272
Purchase of investment securities
available for sale . . . . . . . . . . . . . . . . (62,639) (28,901)
Proceeds from maturities of investment securities . . 35,630 9,000
Purchase of office properties and equipment. . . . . (1,346) (6,215)
--------- ---------
Net cash used in investing activities . . . . (27,642) (32,276)
--------- ---------
Financing activities:
Net increase in deposits. . . . . . . . . . . . . . . 31,215 19,489
Dividends paid. . . . . . . . . . . . . . . . . . . . (930) (1,065)
Net decrease in borrowings. . . . . . . . . . . . . . (566) (43,408)
Payments by borrowers for
property taxes and insurance. . . . . . . . . . . . . 416 549
--------- ---------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . 30,135 (24,435)
--------- ---------
Decrease in cash and cash equivalents . . . . . . . . . 3,984 (55,487)
Cash and equivalents, beginning of period . . . . . . . 45,025 94,422
--------- ---------
Cash and cash equivalents, end of period . . . . . . . $ 49,009 $ 38,935
========= =========
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 10,380 $ 9,193
========= =========
Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 2,205 $ 2,831
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Interest credited to deposits. . . . . . . . . . . . . $ 3,708 $ 3,381
========= =========
Increase in deferred tax asset (liability) related
to unrealized gain (loss) on investments . . . . . . $ (181) $ (7)
========= =========
Net unrealized gain (losses) on investment
securities available for sale . . . . . . . . . . . $ 472 $ 20
========= =========
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 Bank has a wholly owned subsidiary Cavalry Enterprises, Inc.
which provides investment services for customers.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with Instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the three and nine months ended September 30,
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 nine
months ended September 30, 2001 and 2000. Diluted common shares arise from the
potentially dilutive effect of the Company's stock options outstanding.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic EPS:
Net income. . . . . . . . . . . . . $1,020,000 $1,169,000 $2,930,000 $3,108,000
Average common shares outstanding . 6,493,217 6,397,364 6,469,163 6,353,054
---------- ---------- ---------- ----------
Earnings per share. . . . . . . . . $ 0.16 $ 0.18 $ 0.45 $ 0.49
========== ========== ========== ==========
Diluted EPS:
Net income. . . . . . . . . . . . . $1,020,000 $1,169,000 $2,930,000 $3,108,000
---------- ---------- ---------- ----------
Average common shares outstanding . 6,493,217 6,397,364 6,469,163 6,353,054
Dilutive effect of stock options. . 36,399 - 70,117 -
---------- ---------- ---------- ----------
Average dilutive shares outstanding 6,529,616 6,397,364 6,539,280 6,353,054
---------- ---------- ---------- ----------
Earnings per share. . . . . . . . . $ 0.16 $ 0.18 $ 0.45 $ 0.49
========== ========== ========== ==========
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
September 30, 2001
Interest revenue. . . . . . . . . . $ 6,931 $ - $ - $ 6,931
Other income-external customers . . 1,082 59 297 1,438
Interest expense. . . . . . . . . . 3,174 - - 3,174
Depreciation and amortization . . . 246 42 10 298
Other significant items:
Provision for loan losses . . . 82 - - 82
Gain (loss) on sales of assets. - 571 - 571
Segment profit. . . . . . . . . . . 1,628 - 101 1,729
Segment assets. . . . . . . . . . . 409,768 8,710 353 418,831
Mortgage
For the quarter ended . . . . . . . Banking Banking Trust Consolidated
September 30, 2000
Interest revenue. . . . . . . . . . $ 7,538 $ - $ - $ 7,538
Other income-external customers . . 732 60 267 1,059
Interest expense. . . . . . . . . . 3,263 - - 3,263
Depreciation and amortization . . . 161 31 8 200
Other significant items:
Provision for loan losses. . . . - - - -
Gain (loss) on sales of assets . (16) 419 - 403
Segment profit. . . . . . . . . . . 1,920 - 64 1,984
Segment assets. . . . . . . . . . . 367,330 7,162 443 374,935
Mortgage
For the nine months ended . . . . . Banking Banking Trust Consolidated
September 30, 2001
Interest revenue. . . . . . . . . . $ 21,617 $ - $ - $ 21,617
Other income-external customers . . 3,235 196 882 4,313
Interest expense. . . . . . . . . . 10,288 - - 10,288
Depreciation and amortization . . . 706 125 27 858
Other significant items:
Provision for loan losses . . . 248 - - 248
Gain (loss) on sales of assets. - 1,583 - 1,583
Segment profit and (losses) . . . . 4,813 (5) 252 5,060
Segment assets. . . . . . . . . . . 409,768 8,710 353 418,831
Mortgage
For the nine months ended . . . . . Banking Banking Trust Consolidated
September 30, 2000
Interest revenue. . . . . . . . . . $ 21,717 $ - $ - $ 21,717
Other income-external customers . . 2,090 191 801 3,082
Interest expense. . . . . . . . . . 9,471 - - 9,471
Depreciation and amortization . . . 493 93 24 610
Other significant items:
Provision for loan losses. . . . 141 - - 141
Gain on sales of assets. . . . . 2 1,175 - 1,177
Segment profit and (losses) . . . . 5,126 (5) 200 5,321
Segment assets. . . . . . . . . . . 367,330 7,162 443 374,935
6
4. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The effective date of this Statement was deferred by the
issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. SFAS No.
133 was amended by SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities. This Statement became effective for the fiscal
year ending December 31, 2001, and will not be applied retroactively to
financial statements of prior periods. Upon adoption of provisions of SFAS No.
133, the Company did not have derivative instruments and there was no impact on
the financial statements of the Company.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and replaced
SFAS No. 125 of the same title. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures , but carries most of SFAS No. 125's
provisions without reconsideration. This Statement is effective for recognition
and reclassification of collateral and for fiscal years ending after December
15, 2001. Upon adoption of provisions of SFAS No. 140, there was no material
impact on the financial statements of the Company.
In July 2001, the FASB issued SFAS No. 141, Business Combinations. The
Statement discontinues the use of the pooling of interest method of accounting
for business combinations. The Statement is effective for all business
combinations initiated after June 30, 2001. Management has completed an
evaluation of the effects of this Statement and does not believe it will have a
material effect on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The Statement will require discontinuing the amortization of goodwill
and other intangible assets with indefinite useful lives. Instead, these assets
will be tested periodically for impairment and written down to their fair market
value as necessary. This Statement is effective for fiscal years beginning
after December 15, 2001, however, early adoption is permitted for entities with
fiscal years beginning after March 15, 2001, provided that the first interim
financial statements have not previously been issued. Upon the adoption of the
provisions of SFAS No. 142, management believes there will be no material impact
on the financial statements of the Company.
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.
7
Comparison of Financial Condition at September 30, 2001 and December 31, 2000
Total assets were $418.8 million at September 30, 2001, compared to $384.3
million at December 31, 2000, an increase of $34.5 million or 8.98%. Increased
deposits and equity funded this increase in assets. Cash and cash equivalents
increased from $45.0 million at December 31, 2000, to $49.0 million at September
30, 2001. Investments available for sale increased from $32.2 million at
December 31, 2000, to $59.7 million at September 30, 2001 as a result of
investing excess liquidity. Loans receivable net decreased $1.5 million from
$279.5 million at December 31, 2000, to $278.0 million at September 30, 2001.
The Bank is actively involved in lending in the local market, but demand has not
kept up with the payments on portfolio loans. The mortgage banking segment saw
an increase in loans held for sale from $4.2 million at December 31, 2000 to
$8.5 million at September 30, 2001 as a result of volume. Office properties and
equipment increased from $15.3 million at December 31, 2000 to $15.7 million at
September 30, 2001.
Deposit accounts increased $31.2 million from $336.5 million at December 31,
2000, to $367.7 million at September 30, 2001. Certificates of deposit
decreased $8.0 from $162.5 million at December 31, 2000, to $154.5 million at
September 30, 2001. Savings deposits increased $800,000 from $13.2 million at
December 31, 2000, to $14.0 million at September 30, 2001. Money market
accounts increased $23.1 million from $69.8 million at December 31, 2000, to
$92.9 million at September 30, 2001. NOW accounts increased from $52.3 million
at December 31, 2000, to $57.2 million at September 30, 2001. Non
interest-bearing accounts increased $10.6 million from $38.6 million at December
31, 2000, to $49.2 million at September 30, 2001. These increases were
primarily a result of an ongoing effort to raise the deposit base for the Bank.
The Bank continues to emphasize increasing transaction accounts to improve
earnings.
Equity increased by $3.8 million from $44.0 million at December 31, 2000, to
$47.8 million at September 30, 2001, as a result of net income of $2.9 million
for the nine months ended September 30, 2001, release of ESOP shares of $769,000
and release of Management Recognition Plan (MRP) shares of $725,000 and an
unrealized gain on available for sale securities of $291,000 net of taxes.
These increases were offset by dividends declared of $930,000. The Company has
announced a stock buy back of approximately ten percent of the 7.1 million
shares outstanding.
Non-performing assets were $209,000 at December 31, 2000, and $492,000 at
September 30, 2001.
Comparison of Operating Results for the Three Months Ended September 30, 2001
and September 30, 2000.
Net Income. Net income was $1.0 million or $0.16 per basic and diluted share
for the three months ended September 30, 2001, compared to $1.2 million or $0.18
per basic and diluted share for the three months ended September 30, 2000. This
decrease was primarily a result of lower interest income, a larger provision for
loan losses, and higher non-interest expenses. These factors were partially
offset by lower interest expense and higher non-interest income. The Company
expects to see downward pressure on earnings as a result of interest rate cuts
and additional anticipated rate cuts by the Federal Reserve Board. As a result
of these Federal Reserve 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 $4.3 million for the
three months ended September 30, 2000, to $3.8 million for the three months
ended September 30, 2001. This decline is primarily a result of cuts by the
Federal Reserve Bank in the federal funds and discount rates. These cuts along
with similar cuts in the prime lending rate also contributed to this decline.
Since the Bank has more assets than liabilities subject to reprice in the
one-year time horizon, declining rates put downward pressure on net interest
margins. The Bank continues to try to lower rates on liabilities while
continuing to attempt to maintain deposits at an adequate level.
8
Interest income declined from $7.5 million for the three months ended September
30, 2000 to $6.9 million for the three months ended September 30, 2001.
Interest on loans decreased from $6.7 million for the three months ended
September 30, 2000, to $5.8 million for the same period in 2001. Average loans
outstanding decreased from $281.1 million for the three months ended September
30, 2000, to $279.4 million for the same period in 2001. The average yield
decreased from 9.41% for the three months ended September 30, 2000, to 8.30% 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 $887,000 for the three
months ended September 30, 2000, to $1.1 million for the same period in 2001.
Average investments increased from $52.3 million for the three months ended
September 30, 2000, to $92.7 million for the same period in 2001. The average
yield decreased from 6.73% for the three months ended September 30, 2000, to
4.65% for the same period in 2001.
Interest expense decreased from $3.3 million for the three months ended
September 30, 2000, to $3.2 million for the same period in 2001. Average
interest-bearing deposits increased from $282.4 million for the three months
ended September 30, 2000, to $316.1 million for the same period in 2001. This
increase was a result of continuing efforts to increase market share of deposits
with an emphasis on checking accounts. The average cost of deposits decreased
from 4.57% for the three months ended September 30, 2000, to 3.98% for the same
period in 2001. This decrease was primarily a result of decreases in overall
interest rates. Average certificates of deposit increased from $154.9 million
for the three months ended September 30, 2000, to $158.4 million for the three
months ended September 30, 2001. The average cost of certificates of deposits
decreased from 5.76% for the three months ended September 30, 2000, to 5.54% for
the three months ended September 30, 2001. Average borrowings decreased from
$1.6 million at an average cost of 3.74% for the three months ended September
30, 2000, to $1.0 million at an average cost of 2.34% for the three months ended
September 30, 2001. The total cost of funds decreased from 4.57% for the three
months ended September 30, 2000, to 3.97% for the three months ended September
30, 2001. Average interest-bearing liabilities increased from $284.0 million
for the three months ended September 30, 2000, to $317.2 million for the same
period in 2001. Interest rate spread decreased from 4.43% for the three months
ended September 30, 2000, to 3.42% for the same period in 2001. Net interest
margin decreased from 5.10% for the three months ended September 30, 2000, to
4.01% 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 judgment, potential credit weaknesses.
The provision for loan losses increased from no provision for the three months
ended September 30, 2000, to $82,000 for the three months ended September 30,
2001. Management deemed the allowance for loan losses adequate at September 30,
2001.
Non-interest Income. Non-interest income increased from $1.5 million for the
three months ended September 30, 2000, to $2.0 million for the same period in
2001. In the mortgage banking segment, net gain on sale of loans increased from
$419,000 for the three months ended September 30, 2000, to $571,000 for the same
period in 2001. The higher gain in 2001 was a result of increased volume of
loan sales due in part to favorable interest rates and some refinancing of
mortgage loans. Loan servicing fees decreased slightly from $60,000 for the
three months ended September 30, 2000, to $59,000 for the same period in 2001.
In the banking segment, deposit fees and other operating incomes increased from
$732,000 for the three months ended September 30, 2000, to $1.1 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 September
30, 2000, to $297,000 for the same period in 2001 as a result of increased trust
charges offset by a decline in assets under management.
Non-interest Expense. Non-interest expense increased from $3.8 million for the
three months ended September 30, 2000, to $4.0 million for the same period in
2001. Compensation and other employee benefits decreased from $2.5 million for
the three months ended September 30, 2000, to $2.4 million for the three months
ended September 30, 2001. 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 $709,000 for the three months
ended September 30, 2001, compared to $815,000 for the same period in 2000.
This decrease was primarily a result of lower income before taxes.
9
Comparison of Operating Results for the Nine Months Ended September 30, 2001 and
September 30, 2000.
Net Income. Net income was $2.9 million or $0.45 per basic and diluted share
for the nine months ended September 30, 2001, compared to $3.1 million or $0.49
per basic and diluted share for the nine months ended September 30, 2000. This
decrease was primarily a result of higher interest expense, lower interest
income, an increased provision for loan losses, 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 Federal Reserve
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 $12.3 million for the
nine months ended September 30, 2000, to $11.3 million for the nine months ended
September 30, 2001. This decline is primarily a result of cuts by the Federal
Reserve Bank in the federal funds and discount rates. These cuts along with
similar cuts in the prime lending rate also contributed to this decline. Since
the Bank has more assets than liabilities subject to reprice in the one-year
time horizon, declining rates put downward pressure on net interest margins. The
Bank continues to try to lower rates on liabilities while continuing to attempt
to maintain deposits.
Interest income decreased from $21.7 million for the nine months ended September
30, 2000, to $21.6 million for the nine months ended September 30, 2001.
Interest on loans decreased from $19.2 million for the nine months ended
September 30, 2000, to $18.5 million for the same period in 2001. Average loans
outstanding increased from $278.7 million for the nine months ended September
30, 2000, to $281.8 million for the same period in 2001. The average yield
decreased from 9.20% for the nine months ended September 30, 2000, to 8.79% 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 $2.5 million for the nine
months ended September 30, 2000, to $3.1 million for the same period in 2001.
Average investments increased from $52.6 million for the nine months ended
September 30, 2000, to $79.3 million for the same period in 2001. The average
yield decreased from 6.39% for the nine months ended September 30, 2000, to
5.22% for the same period in 2001.
Interest expense increased from $9.5 million for the nine months ended September
30, 2000, to $10.3 million for the same period in 2001. Average
interest-bearing deposits increased from $279.2 million for the nine months
ended September 30, 2000, to $308.3 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 remained constant at 4.45% for the nine
months ended September 30, 2000, and 2001. Average certificates of deposit
increased from $153.3 million for the nine months ended September 30, 2000 to
$162.7 million for the nine months ended September 30, 2001. The average cost
of certificates of deposits increased from 5.68% for the nine months ended
September 30, 2000, to 5.99% for the nine months ended September 30, 2001.
Average borrowings decreased from $4.0 million at an average cost of 5.31% for
the nine months ended September 30, 2000, to $1.2 million at an average cost of
2.80% for the nine months ended September 30, 2001. The total cost of interest
bearing liabilities decreased from 4.47% for the nine months ended September 30,
2000, to 4.44% for the nine months ended September 30, 2001. Average
interest-bearing liabilities increased from $283.2 million for the nine months
ended September 30, 2000, to $309.5 million for the same period in 2001.
Interest rate spread decreased from 4.29% for the nine months ended September
30, 2000, to 3.56% for the same period in 2001. Net interest margin decreased
from 4.94% for the nine months ended September 30, 2000, to 4.19% 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 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.
10
The provision for loan losses increased from $141,000 for the nine months ended
September 30, 2000, to $248,000 for the nine months ended September 30, 2001.
Management deemed the allowance for loan losses adequate at September 30, 2001.
Non-interest Income. Non-interest income increased from $4.3 million for the
nine months ended September 30, 2000, to $5.9 million for the same period in
2001. In the mortgage banking segment, net gain on sale of loans increased from
$1.2 million for the nine months ended September 30, 2000, to $1.6 million for
the same period in 2001. The higher gain in 2001 was a result of increased
volume of loan sales brought on by declining mortgage rates and mortgage
refinancing. Loan servicing fees increased slightly from $191,000 for the nine
months ended September 30, 2000, to $196,000 for the same period in 2001. In
the banking segment, deposit fees and other operating incomes increased from
$2.1 million for the nine months ended September 30, 2000, to $3.2 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 $801,000 for the nine months ended September
30, 2000, to $882,000 for the same period in 2001 as a result of increased trust
charges.
Non-interest Expense. Non-interest expense increased from $11.0 million for the
nine months ended September 30, 2000, to $11.9 million for the same period in
2001. Compensation and other employee benefits increased from $7.1 million for
the nine months ended September 30, 2000 to $7.3 million for the nine months
ended September 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 $2.1 million for the nine
months ended September 30, 2001, compared to $2.2 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 September 30,
2001, cash and cash equivalents totaled $49.0 million or 11.70% of total assets,
and investments available-for-sale totaled $59.7 million. At September 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 September 30, 2001, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At September 30, 2001, under regulations of
the OTS, the Bank's actual tangible, core and risk-based capital ratios were
10.45%, 10.45% and 13.80%, respectively, compared to requirements of 1.5%, 3.0%
and 8.0%, respectively.
At September 30, 2001, the Bank had loan commitments of approximately $30.0
million. In addition, at September 30, 2001, the unused portion of lines of
credit extended by the Bank was approximately $9.5 million for consumer loans
and $27.0 million for commercial loans. Standby letters of credit and financial
guarantees are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most guarantees
extend from one to two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. At September 30, 2001, the Bank had $5.4 million of letters of
credit outstanding.
11
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 US 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 September 30, 2001
(In thousands).
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. . . . . . . . . . . . . . . . $ 60,924 $48,731 $ 80,033 $ 40,508 $ 56,356 $286,552
Mortgage-backed securities . . . . . . . . . . . . . 17 17 66 66 387 553
FHLB Stock . . . . . . . . . . . . . . . . . . . . . 2,130 - - - - 2,130
Investment securities. . . . . . . . . . . . . . . . 34,754 18,773 5,802 410 - 59,739
Federal funds sold overnight and other
interest-bearing deposits . . . . . . . . . . . . . 30,405 - - - - 30,405
--------- -------- --------- ---------- ---------- ---------
Total rate sensitive assets. . . . . . . . . . . . $128,230 $67,521 $ 85,901 $ 40,984 $ 56,743 $379,379
========= ======== ========= ========== ========== =========
Interest-bearing liabilities:
Deposits:
NOW accounts . . . . . . . . . . . . . . . . . . . . $ 5,720 $ 5,720 $ 22,879 $ 22,878 $ - $ 57,197
Passbook savings accounts. . . . . . . . . . . . . . 1,398 1,398 5,593 5,593 - 13,982
Money market deposit accounts. . . . . . . . . . . . 9,286 9,286 37,146 37,147 - 92,865
Certificates of deposit. . . . . . . . . . . . . . . 82,185 41,888 27,405 3,026 4 154,508
Borrowings. . . . . . . . . . . . . . . . . . . . . . . 27 27 108 108 742 1,012
--------- -------- --------- ---------- ---------- ---------
Total rate sensitive liabilities . . . . . . . . . $ 98,616 $58,319 $ 93,131 $ 68,752 $ 746 $319,564
========= ======== ========= ========== ========== =========
Excess (deficiency) of interest sensitive
assets over interest sensitive liabilities . . . . . . $ 29,614 $ 9,202 ($7,230) ($27,768) $ 55,997 $ 59,815
Cumulative excess (deficiency) of
interest sensitive assets. . . . . . . . . . . . . . . $ 29,614 $38,816 $ 31,586 $ 3,818 $ 59,815 $ 59,815
Cumulative ratio of interest-earning assets
to interest-bearing liabilities. . . . . . . . . . . . 130.03% 124.73% 112.63% 101.20% 118.72% 118.72%
Interest sensitivity gap to total rate sensitive assets 7.81% 2.43% (1.91)% (7.32)% 14.76% 15.77%
Ratio of interest-earning assets to
interest -bearing liabilities. . . . . . . . . . . . . 130.03% 115.78% 92.24% 59.61% 7,606.30% 118.72%
Ratio of cumulative gap to total rate sensitive assets. 7.81% 10.23% 8.33% 1.01% 15.77% 15.77%
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
None
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
On September 26, 2001 filed an 8-K under Item 5. Other Events.
Cavalry Bancorp, Inc. announced on September 26, 2001, that it plans to
implement a program to repurchase 710,480 shares or approximately 10% of its 7.1
million outstanding shares.
On August 8, 2001 filed an 8-K under Item 5. Other Events.
Cavalry Bancorp, Inc. announced on August 8, 2001, that its subsidiary
Cavalry Banking has entered into a letter of intent to purchase, for cash,
Miller & Loughry Insurance Services, Inc. of Murfreesboro, Tennessee. The
purchase, which is subject to completion of due diligence, execution of a
definitive agreement and regulatory approvals, is expected to be completed in
the fourth quarter of this year.
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: November 9, 2001 by: /s/ Ed C.Loughry, Jr.
--------------------------
Ed C. Loughry, Jr.
Chairman of the Board of Directors
Chief Executive Officer
Date: November 9, 2001 by: /s/ Hillard C. Gardner
------------------------
Hillard C. Gardner
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
14