0
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-23605
CAVALRY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1721072
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 893-1234
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the NASDAQ National Market System under the symbol "CAVB" on
March 26, 2002, was $90,858,560 (6,989,120 shares at $13.00 per share). It is
assumed for purposes of this calculation that none of the Registrant's officers,
directors and 5% stockholders (including the Cavalry Banking Employee Stock
Ownership Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2001 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders (Part III).
PART I
ITEM 1. BUSINESS
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GENERAL
Cavalry Bancorp, Inc. ("Company"), a Tennessee corporation, was organized
on November 5, 1997 for the purpose of becoming the holding company for Cavalry
Banking ("Bank") upon the Bank's conversion from a federally-chartered mutual to
a federally-chartered stock savings bank ("Conversion"). The Conversion was
completed on March 16, 1998. In January 2002, the Bank converted to a state
chartered commercial bank and was accepted as a member of the Federal Reserve
System. As of that date, the Company became a bank holding company. At
December 31, 2001, the Company had total assets of $432.9 million, total
deposits of $381.0 million and shareholders' equity of $48.8 million. The
Company has not engaged in any significant activity other than holding the stock
of the Bank. Accordingly, the information set forth in this report, including
financial statement and related data, relates primarily to the Bank.
Prior to its conversion to a state bank, the Bank's primary federal
regulator was the Office of Thrift Supervision ("OTS"). The Bank's deposits
have been federally insured since 1936 and are currently insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1936. As result of its conversion to a state bank
effective January 2002, the Bank's primary federal regulator is the Board of
Governors of the Federal Reserve System and it is also regulated by the
Tennessee Department of Financial Institutions. The Company is regulated as a
bank holding company by the Board of Governors of the Federal Reserve System.
To the extent laws and regulations applicable to savings banks are discussed
herein, such discussion is intended to provide information about the Bank's
historical operations prior to January 2002.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
originates both adjustable rate mortgage ("ARM") loans and fixed-rate mortgage
loans. Generally, ARM loans are retained in the Bank's portfolio and long-term
fixed-rate mortgage loans are originated for sale in the secondary market. In
addition, the Bank actively originates construction and acquisition and
development loans. The Bank also originates commercial real estate, commercial
business, and consumer and other non-real estate loans. The Bank also provides
trust and investment services through its trust division. The Bank also
provides brokerage and investment products through its brokerage division
Cavalry Investment Services. On January 4, 2002, the Bank purchased 100% of the
issued and outstanding capital stock of Miller & Loughry Insurance and Services,
Inc., an independent insurance agency. This purchase will allow the Bank to
offer a full line of insurance products and services through this subsidiary.
MARKET AREA
The Bank considers Rutherford, Bedford and Williamson Counties in Central
Tennessee to be its primary market area. A large number of the Bank's
depositors reside, and a substantial portion of its loan portfolio is secured by
properties located in Rutherford and Bedford Counties. With the creation of a
new division, Mid Tenn Mortgage, the Bank has moved into the Nashville Davidson
county market for loan originations.
The economy of Rutherford and Bedford Counties is diverse and generally
stable. According to the Rutherford and Bedford Area Chambers of Commerce,
major employers include Nissan Motor Manufacturing Corp. USA, Rutherford County
Government, Whirlpool Corp., Bridgestone/Firestone Inc., Middle Tennessee State
University, Alvin C. York Veterans Administration Medical Center and Ingram Book
Co., among others.
1
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of this safe harbor.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on the operations
and future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U. S.
Government, including policies of the U. S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area, implementation of new technologies, the Company's
ability to develop and maintain secure and reliable electronic systems and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
SELECTED FINANCIAL DATA
This information is incorporated by reference from pages 9 and 10 of the
2001 Annual Report to Shareholders ("Annual Report") included herein as Exhibit
13.
LENDING ACTIVITIES
GENERAL. At December 31, 2001, the Bank's total loans receivable portfolio
amounted to $290.7 million, or 67.1% of total assets at that date. The Bank
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by one-to-four family properties, with such loans
amounting to $68.0 million, or 21.0% of total gross loans at December 31, 2001.
In addition, the Bank originates construction loans, commercial real estate
loans, land loans, consumer loans and commercial business loans. A substantial
portion of the Bank's loan portfolio is secured by real estate, either as
primary or secondary collateral, located in its primary market area.
2
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Bank's loan portfolio by type of loan as of the dates indicated.
At December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- --------- ------- -------- ------- ------- ------- ------- --------
(Dollars in thousands)
Mortgage Loans:
One-to-four
family(1) . . . . . $ 68,002 21.0% $ 64,776 20.6% $ 60,261 18.1% $ 75,554 24.8% $ 82,930 32.9%
Multi-family. . . . . 3,224 0.9 2,519 0.8 780 0.2 1,125 0.4 1,338 0.5
Commercial. . . . . . 90,206 27.9 80,029 25.4 71,419 21.4 52,516 17.2 39,690 15.8
Construction. . . . . 57,287 17.7 56,015 17.8 69,421 20.9 84,900 27.9 54,666 21.7
Land acquisition
and development. . 19,058 5.9 21,498 6.8 40,645 12.2 15,367 5.1 17,011 6.8
-------- --------- -------- --------- -------- ------- -------- ------- -------- ------
Total mortgage
loans . . . . . . 237,777 73.4 224,837 71.4 242,526 72.8 229,462 75.4 195,635 77.7
-------- -------- -------- -------- --------
Consumer Loans:
Home equity
lines of credit. . 4,572 1.4 5,322 1.7 4,788 1.4 3,790 1.2 2,783 1.1
Automobile. . . . . . 9,348 2.9 8,609 2.7 8,632 2.6 6,788 2.2 5,028 2.0
Unsecured . . . . . . 1,519 0.5 1,884 0.6 1,649 0.5 1,527 0.5 1,684 0.7
Other secured . . . . 29,985 9.3 36,280 11.5 38,809 11.7 32,792 10.8 23,852 9.5
-------- --------- -------- --------- -------- ------- -------- ------- -------- ------
Total consumer
loans. . . . . . 45,424 14.1 52,095 16.5 53,878 16.2 44,897 14.7 33,347 13.3
-------- --------- -------- --------- -------- ------- -------- ------- -------- ------
Commercial
business loans. . . 40,594 12.5 38,177 12.1 36,456 11.0 30,213 9.9 22,544 9.0
-------- --------- -------- --------- -------- ------- -------- ------- -------- ------
Total loans . . . . 323,795 100.0% 315,109 100.0% 332,860 100.0% 304,572 100.0% 251,526 100.0%
========= ========= ======= ======= ======
Less:
Undisbursed
portion of
loans in process . . 27,896 26,471 51,243 52,098 30,178
Net deferred
loan fees . . . . 767 742 785 773 710
Allowance for
loan losses . . . . 4,470 4,235 4,136 3,231 2,804
-------- --------- -------- --------- --------
Total loans
receivable, net . . $290,662 $283,661 $276,696 $248,470 $217,834
======== ========= ======== ========= ========
<FN>
(1) Includes loans held-for-sale.
ONE-TO-FOUR FAMILY REAL ESTATE LENDING. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by first
mortgage loans on existing one-to-four family residences located in its primary
market area. At December 31, 2001, $68.0 million, or 21.0% of the Bank's total
loan portfolio, consisted of such loans. The Bank originated $231.7 million,
$103.2 million and $121.2 million of one-to-four family residential mortgage
loans during the years ended December 31, 2001, 2000, and 1999, respectively.
Generally, the Bank's fixed-rate one-to-four family mortgage loans
have maturities ranging from 15 to 30 years and are fully amortizing with
monthly payments sufficient to repay the total amount of the loan with interest
by the end of the loan term. Generally, they are originated under terms,
conditions and documentation which permit them to be sold to U.S. Government
sponsored agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC").
The Bank's fixed-rate loans customarily include "due on sale" clauses which give
the Bank the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
3
The Bank also originates ARM loans at rates and terms competitive with
market conditions. At December 31, 2001, $46.2 million, or 14.3% of the Bank's
gross loan portfolio, were subject to periodic interest rate adjustments. The
Bank originates for its portfolio ARM loans which provide for an interest rate
which adjusts every year or which is fixed for one, three or five years and then
adjusts every year after the initial period. Most of the Bank's one-year,
three-year and five-year ARMs adjust every year after the initial fixed rate
period based on the one year Treasury constant maturity index. The Bank's ARMs
are typically based on a 30-year amortization schedule. The Bank qualifies the
borrowers on its nonconforming ARM loans (i.e., loans not originated in
conformity with standards that would permit the loans to be sold in the
secondary market) based on the initial rate. The Bank qualifies the borrowers
on its conforming ARM loans based on the maximum note interest rate during the
second year of the loan. A one-year ARM loan that is originated according to
FHLMC secondary market standards may be converted to a fixed-rate loan within
five years of the origination date. ARM loans that are not saleable to the
FHLMC are not permitted to be converted to fixed rate loans. The Bank does not
offer deep discount or "teaser" rates. The Bank's current ARM loans do not
provide for negative amortization. The Bank's ARM loans generally provide for
annual and lifetime interest rate adjustment limits of 2% and 5% to 6%,
respectively.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce
the Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower. In
addition, although ARM loans allow the Bank to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations, the Bank has no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds. The Bank
believes these risks, which have not had a material adverse effect on the Bank
to date, generally are less than the risks associated with holding fixed-rate
loans in the portfolio during a rising interest rate environment.
The Bank also originates one-to-four family mortgage loans under
Federal Housing Administration ("FHA") and Veterans Administration ("VA")
programs and the Tennessee Housing and Development Agency ("THDA"), an
affordable housing program. FHA, VA and THDA loans are generally sold to
private investors with servicing released (i.e., the right to collect principal
and interest payments and forward it to the purchaser of the loan, maintain
escrow accounts for payment of taxes and insurance and perform other loan
administration functions are sold with the loan). See "-- Loan Originations,
Sales and Purchases."
The Bank generally requires title insurance insuring the status of its
lien or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
The Bank's one-to-four family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one-to-four
family residential loan; however, the Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% to 95% of the
appraised value of the security property.
4
CONSTRUCTION LENDING. The Bank actively originates three types of
residential construction loans: (i) speculative construction loans, (ii)
pre-sold construction loans and (iii) construction/permanent loans. To a
substantially lesser extent, the Bank also originates construction loans for the
development of multi-family and commercial properties.
5
At December 31, 2001, the composition of the Bank's construction loan portfolio
was as follows:
Outstanding Percent of
Balance(1) Total
--------------- -----------
(In thousands)
Residential:
Speculative construction $ 28,814 50.30%
Pre-sold construction 16,394 28.62
Construction/permanent 7,133 12.45
Commercial and multi-family 4,946 8.63
--------------- -----------
Total $ 57,287 100.00%
=============== ===========
<FN>
____________________
(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home. The home buyer may be identified either during or after the construction
period, with the risk that the builder will have to pay debt service on the
speculative construction loan and finance real estate taxes and other carrying
costs of the completed home for a significant time after the completion of
construction until the home buyer is identified. The Bank lends to
approximately 100 local builders, many of whom may have only one or two
speculative loans outstanding from the Bank. The Bank considers approximately 30
builders as core borrowers with several speculative loans outstanding at any one
time. Rather than originating lines of credit to homebuilders to construct
several homes at once, the Bank originates and underwrites a separate loan for
each home. Speculative construction loans are originated for a term of 12
months, with interest rates ranging from 0.0% to 2.0% above the prime lending
rate, and with a loan-to-value ratio of no more than 80% of the appraised
estimated value of the completed property. At December 31, 2001, the Bank had
18 borrowers each with aggregate outstanding speculative loan balances of more
than $500,000, all of which were performing according to their respective terms
and the largest of which amounted to $1.3 million.
Unlike speculative construction loans, pre-sold construction loans are made
to homebuilders who, at the time of construction, have a signed contract with a
homebuyer who has a commitment for permanent financing for the finished home
with the Bank or another lender. Pre-sold construction loans are generally
originated for a term of 12 months, with adjustable interest rates ranging from
0.0% to 1.0% above the prime lending rate, and with loan-to-value ratios of 80%
of the appraised estimated value of the completed property or cost, whichever is
less. At December 31, 2001, the largest outstanding pre-sold construction loan
had an outstanding balance of $514,000 and was performing according to its
terms.
Construction/permanent loans are originated to the homeowner rather than
the homebuilder. The construction phase of a construction/permanent loan
generally lasts 12 months and the interest rate charged is generally 7.25% to
8.50%, fixed, and with loan-to-value ratios of 80% (or up to 95% with private
mortgage insurance) of the appraised estimated value of the completed property
or cost, whichever is less. At the completion of construction, the Bank may
either originate a fixed-rate mortgage loan or an ARM loan. See "-- Lending
Activities -- One- to- Four Family Real Estate Lending." At December 31, 2001,
the largest outstanding construction/permanent loan had an outstanding balance
of $272,000 and was performing according to its terms.
The Bank also provides construction financing for non-residential
properties (i.e., multi-family and commercial properties). At December 31,
2001, such construction loans amounted to $4.9 million.
6
Construction loans may be approved by combining the lending authority of
loan officers up to a $2,000,000 aggregate lending limit. The maximum lending
authority for any one loan officer is $1,000,000. The level of each individual
loan officer's lending authority is reviewed and approved annually. All
construction loans to a borrower with aggregate debt exceeding $2,000,000 must
be approved by the executive Loan Committee or the full Board of Directors. See
"-- Loan Solicitation and Processing." Prior to preliminary approval of any
construction loan application, an appraiser approved by the Board of Directors
inspects the site and the Bank reviews the existing or proposed improvements,
identifies the market for the proposed project, analyzes the pro forma data and
assumptions on the project. In the case of a speculative or pre-sold
construction loan, the Bank reviews the experience and expertise of the builder.
After preliminary approval has been given, the application is processed, which
includes obtaining credit reports, financial statements and tax returns on the
borrowers and guarantors, an independent appraisal of the project, and any other
expert reports necessary to evaluate the proposed project. In the event of cost
overruns, the Bank requires that the borrower use its own funds to maintain the
original loan-to-value ratio.
The construction loan documents require that construction loan proceeds be
disbursed in increments as construction progresses. Disbursements are based on
periodic on-site inspections by an appraiser and/or Bank personnel approved by
the Board of Directors. The Bank regularly monitors the construction loan
portfolio and the economic conditions and housing inventory. Property
inspections are performed by the Bank's property inspector. The Bank believes
that the internal monitoring system helps reduce many of the risks inherent in
its construction lending.
Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due. The Bank has sought to address these
risks by adhering to strict underwriting policies, disbursement procedures, and
monitoring practices. In addition, because the Bank's construction lending is
in its primary market area, changes in the local economy and real estate market
could adversely affect the Bank's construction loan portfolio.
ACQUISITION AND DEVELOPMENT LENDING. The Bank originates acquisition and
development ("A&D") loans for the purpose of developing the land (i.e.,
installing roads, sewers, water and other utilities) for sale for residential
housing construction. At December 31, 2001, the Bank had land A&D loans with
aggregate approved commitments of $19.1 million, of which an aggregate of $12.2
million was outstanding. At December 31, 2001, the largest land A&D loan had an
outstanding balance of $3.0 million and was performing according to its terms.
All of the land A&D loans are secured by properties located in the Bank's
primary market area.
Land A&D loans are usually repaid through the sale of the developed land.
However, the Bank believes that its land A&D loans are made to individuals with,
or to corporations the principals of which possess, sufficient personal
financial resources out of which the loans could be repaid, if necessary.
Land A&D loans are secured by a lien on the property, made for a two-year
term, and with an interest rate that adjusts with the prime rate. The Bank
requires monthly interest payments during the term of the land A&D loan. After
the expiration of the two-year term, the loan is reevaluated, adjusted and/or
extended as a fixed or adjustable rate loan. In addition, the Bank generally
obtains personal guarantees from the principals of its corporate borrowers. At
December 31, 2001, the Bank did not have any nonaccruing land A&D loans.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to- four family residential mortgage loans because such loans are more
difficult to monitor and foreclose as the Bank may be confronted with a property
the value of which is insufficient to assure full repayment. Furthermore, if
the borrower defaults the Bank may have to expend its own funds to complete
development and also incur costs associated with marketing and holding the
building lots pending sale. Land A&D loans are generally considered to involve
a higher degree of risk than single-family permanent mortgage loans because of
the concentration of principal among relatively few borrowers and development
projects, the increased difficulty at the time the loan is originated of
estimating the development building costs, the increased difficulty and costs of
monitoring the loan, the higher degree of sensitivity to increases in market
rates of interest, and the increased difficulty of working out problem loans. A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses. The Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on A&D loans to
75%, although the Board of Directors has the authority to approve A&D loans with
loan-to-value ratios of up to 80%.
7
COMMERCIAL REAL ESTATE LENDING. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At December
31, 2001, $90.2 million, or 27.9% of the Bank's total loan portfolio, consisted
of loans secured by existing commercial real estate properties. The majority of
the Bank's commercial real estate properties are secured by small businesses,
retail properties and churches located in the Bank's primary market area.
Narrative appraisals are required for all properties securing commercial
real estate loans in excess of $250,000. On loans of $250,000 or less, a short
form or drive-by evaluation is acceptable. Narrative appraisals over $250,000
must be completed by a state certified appraiser with a "general" certification.
Appraisals or evaluations on loans of $250,000 or under may be performed by any
state certified or in-house appraiser. All appraisals go through final review
by bank management. The Bank considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property.
The average size of a commercial real estate loan in the Bank's portfolio
is approximately $100,000 to $200,000. Commercial real estate loans are
generally structured with fixed rates of interest and terms of three to five
years based on amortization schedules of 15 to 20 years. At December 31, 2001,
the largest commercial real estate loan had an outstanding balance of $3.7
million.
Loan-to-value ratios on the Bank's commercial real estate loans are
generally limited to 80%. As part of the criteria for underwriting commercial
real estate loans, the Bank generally imposes a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 1.2 times. Generally, it is also the Bank's policy to obtain
personal guarantees from the principals of its corporate borrowers on its
commercial real estate loans.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
COMMERCIAL BUSINESS LENDING. The Bank's commercial business lending
activities focus primarily on small to medium size businesses owned by
individuals well known to the Bank and who reside in the Bank's primary market
area. At December 31, 2001, commercial business loans amounted to $40.6
million, or 12.5% of total loans.
Commercial business loans may be unsecured loans, but generally are secured
by various types of business collateral other than real estate (i.e., inventory,
equipment, etc.). In many instances, however, such loans are often also secured
by junior liens on real estate. Commercial business loans are generally made in
amounts between $50,000 to $75,000 and may be either lines of credit or term
loans. Lines of credit are generally renewable and made for a one-year term.
Lines of credit are generally variable rate loans indexed to the prime rate.
Term loans are generally originated with three to five year maturities, with a
maximum of seven years, on a fully amortizing basis. As with commercial real
estate loans, the Bank generally requires annual financial statements from its
commercial business borrowers and, if the borrower is a corporation, personal
guarantees from the principals.
At December 31, 2001, the largest commercial business loan was a $2.5
million line of credit secured by commercial real estate. Such loan was
performing according to its terms at December 31, 2001.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
8
As part of its commercial business lending activities, the Bank issues
standby letters of credit or performance bonds as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."
CONSUMER LENDING. The Bank originates a variety of consumer loans that
generally have shorter terms to maturity and higher interest rates than
residential mortgage loans. At December 31, 2001, the Bank's consumer loans
totaled $45.4 million, or 14.1%, of the Bank's loans receivable. The Bank's
consumer loans consist primarily of home equity lines of credit, automobile
loans, and a variety of other secured loans, a substantial portion of which are
secured by junior mortgages on real estate. To a substantially lesser extent,
the Bank also originates unsecured consumer loans.
The Bank anticipates that it will continue to be an active originator of
consumer loans. Factors that may affect the ability of the Bank to increase its
originations in this area include the demand for such loans, interest rates and
the state of the local and national economy. Consumer loans accounted for
10.6%, 11.9% and 12.3% of the Bank's total loan originations in the fiscal years
ended December 31, 2001, 2000 and 1999, respectively.
The Bank offers open-ended home equity lines of credit secured by a second
mortgage on the borrower's primary residence. These lines of credit have an
interest rate that generally is one to two percentage points above the prime
lending rate, as published in The Wall Street Journal, which adjusts monthly.
The majority of the approved lines of credit at December 31, 2001 were less than
$75,000. At December 31, 2001, approved lines of credit totaled $6.5 million,
of which $4.6 million was outstanding.
At December 31, 2001, the Bank's automobile loan portfolio amounted to $9.3
million, or 2.9%, of total loans at such date, a substantial portion of which
were secured by used automobiles. The maximum term for the Bank's automobile
loans is 60 months. The Bank generally lends up to 80% to 90% of the purchase
price of the automobile. The Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft, with a maximum allowable
deductible and with the Bank listed as loss payee. The Bank does not engage in
indirect automobile lending.
The Bank's consumer loan portfolio also includes other consumer loans
secured by a variety of collateral, such as recreational vehicles, boats,
motorcycles, deposit accounts and, in many instances, junior mortgages on real
estate. Such other secured consumer loans were $30.0 million, or 9.3% of total
loans, at December 31, 2001.
At December 31, 2001, unsecured consumer loans amounted to $1.5 million, or
0.5% of total loans. Unsecured loans are made for a term up to 24 months with
fixed rates of interest and are offered primarily to existing customers of the
Bank.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At December 31, 2001, the Bank had $42,000
of consumer loans accounted for on a nonaccrual basis.
9
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 2001 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds and do not reflect the deduction for unearned
discounts, unearned income and allowance for loan losses.
After After
One Year 3 Years 5 Years
Within Through Through Through After
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- --------- -------- -------- -------
(In thousands)
Mortgage loans:
Residential $ 9,631 $ 17,169 $ 13,221 $ 15,903 $15,302 $ 71,226
Construction 41,964 5,825 660 - - 48,449
Commercial 33,698 36,368 17,135 2,801 204 90,206
Consumer and other loans 13,736 18,550 12,110 989 39 45,424
Commercial business loans 23,864 11,665 3,616 425 1,024 40,594
-------- -------- --------- --------- ------- --------
Total $122,893 $ 89,577 $ 46,742 $ 20,118 $16,569 $295,899
======== ======== ========= ========= ======= ========
The following table sets forth the dollar amount of all loans due after
December 31, 2002, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
------------ -----------------
(In thousands)
Mortgage loans:
Residential $ 20,200 $ 41,395
Construction - 6,485
Commercial 56,184 324
Consumer and other loans 27,527 4,161
Commercial business loans 16,048 682
------------ -----------------
Total $ 119,959 $ 53,047
============ =================
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management
believes that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
LOAN SOLICITATION AND PROCESSING. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, walk-in customers, referrals and
existing customers. A business development program has been implemented where
loan officers and sales personnel make sales calls on building contractors and
realtors. The Bank also advertises its loan products.
In marketing its products and services, the Bank emphasizes its community
ties, customized personal service and an efficient underwriting and approval
process. The Bank uses professional fee appraisers for most residential real
estate loans and construction loans and all commercial real estate and land
loans. The Bank requires hazard, title and, to the extent applicable, flood
insurance on all security property.
10
Loan approval authority varies based on loan type (secured or unsecured),
the aggregate debt outstanding to the specific borrower and the amount of the
specific loan. Loans up to the aggregate lending limit of $2,000,000 may be
approved by combining the specific lending authority of individual loan
officers. The maximum lending authority for any one loan officer is $1,000,000
secured and $500,000 unsecured. One-to-four family residential mortgage loans
that are originated for sale to investors and that are underwritten to the
investor's specifications may be approved by specifically authorized
underwriters and loan officers up to FHLMC loan limits. The level of each
individual loan officer lending authority is reviewed and approved by the
Executive Loan Committee and ratified by the Board of Directors. Loans over
$2,000,000 must be approved by the Executive Loan Committee, which is composed
of outside directors and members of senior management. The actions of the
Executive Loan Committee are reported to and ratified by the full Board of
Directors monthly. Each approved loan, regardless of type, is reviewed by the
Bank's quality control personnel to insure compliance with all regulatory and
policy requirements including proper approval.
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans in its primary market area.
The Bank sells most loans originated under FHA and VA programs, including
related servicing rights, including those originated for the THDA. The Bank
periodically sells conventional one-to-four family loans (i.e., non-FHA/VA
loans) with servicing retained and without recourse. These sales generally
involve fixed-rate loans which help to reduce the Bank's exposure to interest
rate risk, and the proceeds of sale are used to fund continuing operations.
However, the Bank occasionally may sell ARM loans to satisfy liquidity needs.
Sellers of loans are exposed to various degrees of "pipeline risk," which
is the risk that the value of the loan will decline during the period between
the time the loan is originated and the time of sale because of changes in
market interest rates. The Bank is exposed to a relatively low degree of
pipeline risk because it generally does not fix the loan interest rate until
shortly before or on the closing date and loans are generally closed against a
mandatory purchase commitment by the FHLMC or other purchaser.
When conventional loans are sold, the Bank may retain the responsibility
for servicing the loans, including collection and remitting mortgage loan
payments, accounting for principal and interest and holding and disbursing
escrow or impound funds for real estate taxes and insurance premiums. The Bank
receives a servicing fee for performing these services for others. The Bank's
servicing portfolio amounted to $87.9 million at December 31, 2001. The Bank is
generally paid a fee equal to 0.25% of the outstanding principal balance for
servicing sold loans. Loan servicing income totaled $85,000, $129,000 and
$112,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Bank earns late charges collected from delinquent customers whose loans are
serviced by the Bank. The Bank is allowed to invest escrow impounds (funds
collected from mortgage customers for the payment of property taxes and
insurance premiums on mortgaged real estate) until they are disbursed on behalf
of mortgage customers, but is not required to pay interest on these funds. At
December 31, 2001, borrowers' escrow funds amounted to $131,000.
Historically, the Bank has not been an active purchaser of loans or
participation interests in loans.
11
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Loans originated:
Mortgage loans:
One-to-four family $ 231,674 $ 103,150 $ 121,159
Multi-family 1,335 2,179 2,350
Commercial 26,903 16,404 21,403
Construction 74,503 63,066 87,956
Land 8,162 4,814 34,964
Consumer 45,934 31,131 46,043
Commercial business loans 44,523 40,238 59,556
---------- ---------- ----------
Total loans originated 433,034 260,982 373,431
Loans purchased:
One-to-four family - - -
---------- ---------- ----------
Total loans originated and purchased 433,034 260,982 373,431
Loans sold:
Whole loans sold (154,515) (104,074) (121,735)
---------- ---------- ----------
Total loans sold (154,515) (104,074) (121,735)
Mortgage loan principal repayments (164,821) (82,909) (84,602)
Other loan principal repayments (117,530) (70,315) (138,930)
Increase in other items, net 10,833 3,281 62
---------- ---------- ----------
Net increase in
loans, net $ 7,001 $ 6,965 $ 28,226
========== ========== ==========
LOAN COMMITMENTS AND LETTERS OF CREDIT. The Bank issues commitments for
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 45 days from approval, depending on the type of transaction.
At December 31, 2001, the Bank did not have any loan commitments (excluding
undisbursed portions of interim construction loans of $27.9 million) and unused
lines of credit of $32.5 million. See Note 17 of Notes to the Consolidated
Financial Statements contained in the Annual Report.
As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit or performance bonds in favor of entities, usually
municipalities, for whom the Bank's borrowers are performing work or other
services. At December 31, 2001, the Bank had outstanding standby letters of
credit of $4.6 million that were issued primarily to municipalities as
performance bonds. See Note 17 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
LOAN FEES. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loan portfolio. Income
from these activities varies from period to period depending upon the volume and
type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. In accordance with applicable accounting procedures,
loan origination fees and discount points in excess of loan origination costs
are deferred and recognized over the contractual remaining lives of the related
loans on a level yield basis. Discounts and premiums on loans purchased are
accreted and amortized in the same manner. The Bank recognized $882,000,
$837,000 and $1.0 million of deferred loan fees during the years ended December
31, 2001, 2000 and 1999, respectively, in connection with loan refinancings,
payoffs, sales and ongoing amortization of outstanding loans.
12
The Bank also earns fee income on loans serviced for others. Loan servicing
fees for the year ended December 31, 2001 and 2000 amounted to $85,000 and
$129,000, respectively. At December 31, 2001, the Bank serviced loans for others
totaling $87.9 million. See Note 5 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts are generally made
ten days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means and the Bank will attempt to work out a payment
schedule. While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on non-accrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more. Interest accrued but not collected at the date the loan is placed on
non-accrual status is reversed against income in the current period. Loans may
be reinstated to accrual status when payments are under 90 days past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
loans delinquent more than 60 days, all loans in foreclosure and all foreclosed
and repossessed property owned by the Bank.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At December 31,
-----------------------------------------
2001 2000 1999 1998 1997
--------- ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One- to- four family $ 233 $ 71 $ 328 $ 74 $ 73
Construction 97 10 - - 68
Commercial - - - - -
Consumer loans (automobile) 47 38 - 32 9
Other 17 4 5 1 -
--------- ------ ------ ------ ------
Total 394 123 333 107 150
Accruing loans which are contractually
past due 90 days or more - - - 66 98
--------- ------ ------ ------ ------
Total of nonaccrual and 90 days past
due loans 394 123 333 173 248
Real estate owned 143 64 117 80 -
Other repossessed assets 41 22 49 - -
--------- ------ ------ ------ ------
Total nonperforming assets $ 578 $ 209 $ 499 $ 253 $ 248
========= ====== ====== ====== ======
Restructured loans $ - $ - $ - $ - $ -
========= ====== ====== ====== ======
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, net 0.14% 0.04% 0.12% 0.07% 0.11%
Non-accrual and 90 days or more past due
loans as a percentage of total assets 0.09% 0.03% 0.08% 0.05% 0.09%
Non-performing assets as a percentage of
total assets 0.13% 0.05% 0.13% 0.03% 0.09%
13
Interest income that would have been recorded for the year ended December
31, 2001 had non-accruing loans been current in accordance with their original
terms was not significant. No interest was included in interest income on such
loans for the year ended December 31, 2001.
REAL ESTATE OWNED. See Note 1 of Notes to the Consolidated Financial
Statements contained in the Annual Report for a discussion of the accounting
treatment of real estate owned. At December 31, 2001, the Bank had 4 properties
in real estate owned which consisted of one single family residence and three
small acreage tracts of undeveloped property.
RESTRUCTURED LOANS. Under U.S. GAAP, the Bank is required to account for
certain loan modifications or restructuring as a "troubled debt restructuring."
In general, the modification or restructuring of a debt constitutes a troubled
debt restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that the
Bank would not otherwise consider. Debt restructurings or loan modifications
for a borrower do not necessarily always constitute troubled debt
restructurings, however, and troubled debt restructurings do not necessarily
result in non-accrual loans. The Bank did not have any restructured loans at
December 31, 2001.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Bank.
The aggregate amounts of the Bank's classified and special mention assets
were as follows:
At December 31,
------------------
2001 2000
---- ----
(In thousands)
Loss $ - $ -
Doubtful 152 142
Substandard assets 3,957 3,641
Special mention - 202
At December 31, 2001, substandard assets consisted of eleven repossessed
assets totaling $184,000, one construction loan totaling $514,000, ten
one-to-four family mortgage loans totaling $929,000, forty consumer loans
totaling $330,000 and twenty-six commercial loans totaling $2.0 million.
Doubtful loans consisted of five consumer loans totaling $102,000 and one
commercial loan totaling $50,000. See Note 5 to the Consolidated Financial
Statements contained in the Annual Report for further discussion.
14
ALLOWANCE FOR LOAN LOSSES. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured. The
amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation. Generally, a
provision for loan losses is charged against income quarterly to maintain the
allowances.
At December 31, 2001, the Bank had an allowance for loan losses of $4.5
million. Management believes that the amount maintained in the allowance at
December 31, 2001 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with U.S. GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
15
The following table sets forth an analysis of the Bank's gross allowance for
loan losses for the periods indicated.
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Allowance at beginning of period $ 4,235 $ 4,136 $ 3,231 $ 2,804 $ 2,123
Provision for loan losses 661 306 991 452 700
Recoveries:
Mortgage loans:
One- to- four family 2 - - - -
Multi-family - - - - -
Commercial - - - - -
Construction - - - - -
Consumer loans:
Automobiles 39 23 13 8 23
Unsecured 54 - - - 5
Other 14 - - 21 1
Commercial business loans 5 6 3 - 1
---------- ---------- ---------- ---------- ----------
Total recoveries 114 29 16 29 30
Charge-offs:
Mortgage loans:
One- to- four family 81 48 5 - -
Construction - - - - -
Consumer loans:
Home equity lines of credit - - - - -
Automobile 92 52 35 16 40
Credit card 223 6 3 5 1
Unsecured 26 25 9 - -
Other - 37 47 33 5
Commercial business loans 118 68 3 - 3
---------- ---------- ---------- ---------- ----------
Total charge-offs 540 236 102 54 49
---------- ---------- ---------- ---------- ----------
Net recoveries (charge-offs) (426) (207) (86) (25) (19)
---------- ---------- ---------- ---------- ----------
Allowance at end of period $ 4,470 $ 4,235 $ 4,136 $ 3,231 $ 2,804
========== ========== ========== ========== ==========
Allowance for loan losses as a percentage of
total loans outstanding at the end of the period 1.38% 1.34% 1.24% 1.06% 1.11%
Net (charge-offs) recoveries as a percentage
of average loans outstanding during the period (0.15)% (0.07)% (0.03)% (0.01)% (0.01)%
Allowance for loan losses as a percentage of
nonperforming loans at end of period 1,134.52% 3,443.09% 1,242.04% 3,019.63% 1,130.65%
16
At December 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ----------------- ------------------- ------------------ ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------- ------
(Dollars in thousands)
Mortgage loans:
One-to-four family. . $ 374 21.0% $ 395 20.6% $ 301 18.1% $ 378 24.8% $ 415 32.9%
Multi-family. . . . . 14 0.9 11 0.8 4 0.2 6 0.4 20 0.5
Commercial. . . . . . 1,210 27.9 1,075 25.4 1,101 21.4 788 17.2 595 15.8
Construction. . . . . 844 17.7 840 17.8 740 20.9 492 27.9 367 21.7
Land. . . . . . . . . 85 5.9 142 6.8 346 12.2 231 5.1 255 6.8
Consumer loans:
Home equity lines
of credit . . . . . 61 1.4 72 1.7 72 1.4 57 1.2 42 1.1
Automobile. . . . . . 155 2.9 144 2.7 129 2.6 102 2.2 75 2.0
Credit cards. . . . . - 0.0 3 0.1 74 0.1 6 0.1 3 0.1
Loans secured
by deposit
accounts . . . . . . - 0.1 - - - 0.6 - - - -
Unsecured . . . . . . 25 0.4 26 0.5 17 0.4 17 0.4 22 0.6
Other secured . . . . 493 9.3 532 11.5 582 11.1 453 10.8 358 9.5
Commercial
business loans. . . 914 12.5 807 12.1 547 11.0 338 9.9 338 9.0
Unallocated. . . . . . 295 N/A 188 N/A 223 N/A 363 N/A 314 N/A
------- ------- -------- -------- ------ ------ ------ ------- ------ ------
Total allowance
for loan losses. . $ 4,470 100.0% $4,235 100.0% $4,136 100.0% $3,231 100.0% $2,804 100.0%
======= ======= ====== ======= ====== ======= ====== ======= ====== ======
17
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and state and municipal governments, deposits at the
FHLB-Cincinnati, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, the Bank may also invest a portion of its assets in commercial
paper and corporate debt securities. Savings institutions like the Bank are
also required to maintain an investment in FHLB stock. The Bank is required
under federal regulations to maintain a minimum amount of liquid assets. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," contained in the
Annual Report.
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's investment securities purchases
generally have been limited to U.S. Government and agency securities with
contractual maturities of between one and five years.
The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposit,
marketable corporate debt obligations, and mortgage-backed securities. The
Bank's investment policy does not permit hedging activities or the purchase of
high-risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the interest
rate, yield, settlement date and maturity of the investment, the Bank's
liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments). The effect that the proposed
investment would have on the Bank's credit and interest rate risk and risk-based
capital is also considered.
The following table sets forth the amortized cost and fair value of the
Bank's debt and mortgage-backed and related securities, by accounting
classification and by type of security, at the dates indicated.
At December 31,
----------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- ------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Total Cost(1) Total Cost(1) Total
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Held to Maturity:
Debt Securities:
Mortgage-backed securities. $ 537 1.20% $ 594 1.70% $ 651 6.86%
Certificate of Deposit. . . 100 0.23 - - - -
FHLB stock. . . . . . . . . 2,159 4.84 2,020 5.80 1,878 19.78
----------- ----------- ----------- ----------- ----------- -----------
Total held to
maturity securities . . 2,796 6.27 2,614 7.50 2,529 26.64
----------- ----------- ----------- ----------- ----------- -----------
Available for Sale:
Debt Securities:
U.S. Treasury obligations. 1,004 2.25 9,009 25.84 - -
U.S. Government
agency obligations. . . 30,982 69.46 23,238 66.66 6,964 73.36
Mortgage backed
securities and
Collateralized mortgage
obligations. . . . . . . 9,822 22.02 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total available
for sale securities. . 41,808 93.73 32,247 92.50 6,964 73.36
----------- ----------- ----------- ----------- ----------- -----------
Total portfolio . . . . . . $ 44,604 100.00% $ 34,861 100.00% $ 9,493 100.00%
=========== =========== =========== =========== =========== ===========
<FN>
(1) The market value of the investment portfolio amounted to $44.6 million,
$34.9 million and $9.5 million at December 31, 2001, 2000 and 1999,
respectively. At December 31, 2001, the market value of the principal
components of the Bank's investment securities portfolio was as follows:
U.S. Government securities, $41.8 million; mortgage-backed securities and
certificates of deposit, $632,000, and FHLB, $2.2 million.
18
The following table sets forth the maturities and weighted average yields
of the investment securities in the Bank's portfolio at December 31, 2001.
Less Than One to Over Five to Over Ten
One Year Five Years Ten years Years
------------------- ---------------------- ---------------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ------- ------------- ------- -------- -------- ------- ------
(Dollars in thousands)
Held to Maturity:
Debt Securities:
Certificate of deposit . . . . . $ - -% $ 100 1.85% $ - -% $ - -%
Mortgage-backed securities . . . - - - - - - 537 6.46
FHLB stock. . . . . . . . . . . 2,159 5.50 - - - - - -
---------- -------- ---------- --------- ------- ------ ------- ------
Total held to maturity
securities. . . . . . . . . . 2,159 5.50 100 1.85 - - 537 6.46
---------- -------- ---------- --------- ------- ------ ------- ------
Available for Sale:
Debt Securities:
U.S. Treasury obligations . . . 1,004 6.65 - - - - - -
U.S. Government agency
obligations . . . . . . . . . 12,252 6.08 17,716 4.78 1,014 2.55 - -
Mortgage backed securities and
Collateralized mortgage
obligations . . . . . . . . . 2,698 5.42 7,015 5.44 109 4.89 - -
---------- -------- ---------- --------- ------- ------ ------- ------
Total available-for-sale
securities. . . . . . . . . . 15,954 6.00 24,731 4.97 1,123 2.78 - -
---------- -------- ---------- --------- ------- ------ ------- ------
Total portfolio. . . . . . . . . $ 18,113 5.94% $ 24,831 4.96% $ 1,123 2.78% $ 537 6.46%
========== ======== ========== ========= ======= ====== ======= ======
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings from
the FHLB-Cincinnati may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. At December 31,
2001, the Bank had no other borrowing arrangements.
DEPOSIT ACCOUNTS. Most of the Bank's depositors reside in Tennessee. The
Bank's deposit products include a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts, regular
passbook savings, statement savings accounts and certificate of deposits.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Bank
reviews its deposit mix and pricing weekly. The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
19
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest deposit rates but a competitive rate. The Bank determines the rates
paid based on a number of conditions, including rates paid by competitors, rates
on U.S. Treasury securities, rates offered on various FHLB-Cincinnati lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at December 31, 2001.
Weighted
Average Percentage
Interest Original Minimum of Total
Rate Term Category Amount Balance Deposits
- --------- ---------------- --------------------------- --------- -------- ---------
(In thousands)
0.82% - NOW Accounts $ 1,000 $ 81,599 24.53%
0.51 - Savings Accounts 100 13,938 4.19
1.86 - Money Market Accounts 5,000 91,594 27.53
Certificates of Deposit
---------------------------
1.90 32 to 89 Days Fixed-term, Fixed Rate 1,000 175 0.05
2.19 90 to 181 Days Fixed-term, Fixed Rate 1,000 1,717 0.52
2.94 182 to 364 Days Fixed-term, Fixed Rate 1,000 25,887 7.78
2.37 12 Months Fixed-term, Adjustable Rate 1,000 1,653 0.50
1.97 18 Months Floating Rate IRA 250 586 0.18
3.84 12 to 18 Months Fixed-term, Fixed Rate 1,000 37,269 11.20
5.39 18 to 23 Months Fixed-term, Fixed Rate 1,000 5,288 1.59
4.82 18 Months Fixed Rate IRA 250 8,660 2.60
5.58 24 to 35 Months Fixed-term, Fixed Rate 1,000 11,957 3.59
5.28 36 to 47 Months Fixed-term, Fixed Rate 1,000 1,692 0.51
4.18 48 to 59 Months Fixed-term, Fixed Rate 1,000 208 0.06
5.54 60+ Months Fixed-term, Fixed Rate 1,000 9,264 2.78
5.77 2 Years Fixed-term, Adjustable Rate 1,000 149 0.05
4.55 3 to 60 Months Fixed-term, Fixed Rate 100,000 41,052 12.34
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of December 31, 2001. Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.
Maturity Period Amount
- ---------------- ---------
(In thousands)
Three months or less $11,717
Over three through six months 10,209
Over six through twelve months 10,214
Over twelve months 8,912
--------
Total $41,052
=======
20
DEPOSIT FLOW
The following table sets forth the balances of deposits in the various
types of accounts offered by the Bank at the dates indicated.
At December 31,
----------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------ -----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- -------- --------- -------- ---------- -------- -------- -------
(Dollars in thousands)
Non-interest-bearing. $ 48,302 12.68% $ 9,672 $ 38,630 11.48% $ 3,938 $ 34,692 11.23%
NOW checking. . . . . 81,599 21.42 29,256 52,343 15.55 5,871 46,472 15.04
Passbook savings
accounts. . . . . 13,938 3.66 690 13,248 3.94 231 13,017 4.21
Money market deposit. 91,594 24.04 21,797 69,797 20.74 6,001 63,796 20.65
Fixed-rate
certificates which
mature in the
year ending:
Within 1 year . . . 112,468 29.52 (20,727) 133,195 39.58 7,504 125,691 40.69
After 1 year,
but within
2 years . . . . . 19,997 5.25 (100) 20,097 5.97 5,745 14,352 4.65
After 2 years,
but within
5 years . . . . . 13,088 3.43 3,913 9,175 2.73 (1,557) 10,732 3.47
Thereafter. . . . . 4 0.00 (45) 49 0.01 (128) 177 0.06
-------- ---------- --------- -------- ---------- -------- -------- -------
Total. . . . . . $380,990 100.00% $ 44,456 $336,534 100.00% $27,605 $308,929 100.00%
======== ========== ========= ======== ========== ======== ======== =======
TIME DEPOSITS BY RATES. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.
At December 31,
----------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
0.00 - 1.99% $ 2,438 $ 101 $ 400
2.00 - 3.99% 64,420 190 182
4.00 - 4.99% 28,765 3,062 24,087
5.00 - 5.99% 21,568 17,893 77,515
6.00 - 6.99% 19,668 107,738 48,657
7.00% and over 8,698 33,532 111
-------- -------- --------
Total $145,557 $162,516 $150,952
======== ======== ========
21
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of time
deposits in the Bank categorized by maturities at December 31, 2001.
Amount Due
-----------------------------------------------------
After After
One to Two to Three
Less Than Two Three to Four After
One Year Years Years Years 4 Years Total
-------- -------- ------- ------ ------- -------
(Dollars in thousands)
0.00 - 1.99% $ 2,183 $ 253 $ 2 $ - $ - $ 2,438
2.00 - 3.99% 57,151 6,842 240 95 92 64,420
4.00 - 4.99% 21,075 5,705 715 226 1,044 28,765
5.00 - 5.99% 10,291 3,019 7,793 229 236 21,568
6.00 - 6.99% 14,270 3,395 954 867 182 19,668
7.00% and over 7,498 783 100 317 - 8,698
-------- ------- ------ -------- ------ --------
Total $112,468 $19,997 $9,804 $ 1,734 $1,554 $145,557
======== ======= ====== ======== ====== ========
DEPOSIT ACTIVITY. The following table set forth the savings activity of
the Bank for the periods indicated.
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Beginning balance $336,534 $308,929 $266,032
-------- -------- --------
Net deposits
before interest credited 39,996 23,075 39,070
Interest credited 4,460 4,530 3,827
-------- -------- --------
Net increase
in deposits 44,456 27,605 42,897
-------- -------- --------
Ending balance $380,990 $336,534 $308,929
======== ======== ========
BORROWINGS. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the FHLB-Cincinnati to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Cincinnati functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of
the FHLB-Cincinnati, the Bank is required to own capital stock in the
FHLB-Cincinnati and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
that are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At December 31, 2001, the
Bank had one advance outstanding from the FHLB-Cincinnati in the amount of
$998,000 with a weighted average rate of 2.25%.
At December 31, 2001, the Company did not have any other borrowings outstanding.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
22
At or For the
Year Ended December 31,
--------------------------
2001 2000 1999
------- ------- --------
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end $1,574 $1,614 $45,000
Approximate average borrowings
outstanding 1,144 3,414 2,005
Approximate weighted average rate paid
on borrowings 2.71% 5.10% 7.38%
TRUST DEPARTMENT
The OTS granted trust powers to the Bank on December 13, 1991. The Bank is
one of the few banks in the Bank's primary market area providing a broad range
of trust services. These services include acting as trustee under a living
trust, a Standby Trust or Testamentary Trust; acting as personal representative;
agency services, including custody accounts, agent for the trustee, and agent
for the personal representative; and trustee and agent services for accounts
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). In addition to providing fiduciary and investment
advisory services, the Bank provides employee benefit services, such as
Self-Directed Individual Retirement Accounts ("IRAs"). At December 31, 2001,
trust assets under management totaled approximately $250.2 million.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
(OTS prior to January 2002, the Tennessee Department of Financial Institutions
there after,) its chartering agency, and by its primary federal regulator (the
FRB) and by the insurer of its deposits (the FDIC). The Bank must file reports
with one or more of these regulatory agencies concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by these agencies
to review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the FRB, the Tennessee Department of
Financial Institutions, the FDIC or Congress, could have a material adverse
impact on the Company, the Bank and their operations. The Company, as a savings
and loan holding company, was also required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS, and as a bank
holding company is required to file similar reports and comply with the rules
and regulations of the FRB.
FEDERAL REGULATION
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Cincinnati, is required to acquire and hold shares of capital stock
in the FHLB-Cincinnati in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Cincinnati. The Bank
is in compliance with this requirement with an investment in FHLB-Cincinnati
stock of $2.2 million at December 31, 2001. Among other benefits, the
FHLB-Cincinnati provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Cincinnati.
23
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry. The FDIC maintains two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. The Bank's deposit accounts are insured by
the FDIC under the SAIF to the maximum extent permitted by law. As insurer of
the Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 20, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Bank, to recapitalize the SAIF. As a
result of the DIF Act and the special one-time assessment, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interests on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits are charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013%. Since December 31, 1999 FICO
payments have been shared pro rata between BIF and SAIF members.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. Management of the Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations, mortgage-backed securities and
certain other investments) equal to a monthly average of not less than a
specified percentage (currently 4.0%) of its net withdrawable accounts plus
short-term borrowings. Similar requirements are imposed on the Bank as a state
member bank through reserve requirements imposed on members of the Federal
Reserve System. Monetary penalties may be imposed for failure to meet liquidity
requirements.
PROMPT CORRECTIVE ACTION. The FDIA requires each federal banking agency to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
24
The FDIA also provides that a federal banking agency may, after notice and
an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At December 31, 2001, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS and of the FRB.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the FRB determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. Management is aware of no conditions relating to these safety and
soundness standards which would require submission of a plan of compliance.
QUALIFIED THRIFT LENDER TEST. Prior to January 2002, the Bank, as a
savings bank, was required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 2001, the
Bank met the test and its QTL percentage was 75.27%. The QTL test is no longer
relevant to the Bank as a state member bank.
CAPITAL REQUIREMENTS. Under FRB regulations a bank must satisfy three
minimum capital requirements: core capital, tangible capital and risk-based
capital. Savings associations must meet all of the standards in order to comply
with the capital requirements. In addition certain minimum capital requirements
are imposed on the Company as a bank holding company. These requirements were
not applicable as a savings and loan holding company.
OTS and FRB capital regulations establish a 4% (3% for banks or savings
banks which have the highest regulatory examination ratings used by bank
examiners) core capital or leverage ratio (defined as the ratio of core capital
to adjusted total assets). Core capital is defined to include common
stockholders' equity, noncumulative perpetual preferred stock and any related
surplus, and minority interests in equity accounts of consolidated subsidiaries,
less (i) any intangible assets, except for certain qualifying intangible assets;
(ii) certain mortgage servicing rights; and (iii) equity and debt investments in
subsidiaries that are not "includable subsidiaries," which is defined as
subsidiaries engaged solely in activities not impermissible for a national bank,
engaged in activities impermissible for a national bank but only as an agent for
its customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable subsidiaries.
25
An institution that fails to meet the core capital requirement would be required
to file with its primary federal regulator a capital plan that details the steps
they will take to reach compliance. In addition, prompt corrective action
regulation provides that banks or savings institution that has a leverage ratio
of less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation -- Prompt Corrective Action."
Each bank or savings institution must maintain total risk-based capital
equal to at least 8% of risk-weighted assets. Total risk-based capital consists
of the sum of core and supplementary capital, provided that supplementary
capital cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
subject to an amortization schedule, and (iii) general valuation loan and lease
loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a bank or savings institution to one of four risk categories based on the amount
of credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included in risk-weighted assets.
The following table presents the Bank's regulatory capital compliance as of
December 31, 2001.
Percent of
Adjusted Total
Amount Assets(1)
----------------------- ---------
(Dollars in thousands)
Tangible capital. . . . . . . . . . . . $ 36,030 8.60%
Minimum required tangible capital . . . 6,283 1.50
---------------- ---------
Excess. . . . . . . . . . . . . . . . . $ 29,747 7.10%
================ =========
Core capital. . . . . . . . . . . . . . $ 36,030 8.60%
Minimum required core capital(2). . . . 12,567 3.00
---------------- ---------
Excess. . . . . . . . . . . . . . . . . $ 23,463 5.60%
================ =========
Risk-based capital(3) . . . . . . . . . $ 40,500 11.64%
Minimum risk-based capital requirement. 27,825 8.00
---------------- ---------
Excess. . . . . . . . . . . . . . . . . $ 12,675 3.64%
================ =========
<FN>
(1) Based on adjusted total assets of $418.9 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $347.8
million for purposes of the risk-based capital requirement.
(2) A core capital ratio of 3% of adjusted assets for banks or thrifts that
receive the highest supervisory ratings for safety and soundness and a core
ratio of 4% is required for all other banks and thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
26
LIMITATIONS ON CAPITAL DISTRIBUTIONS. Tennessee state law, FRB regulations
and OTS regulations all impose limitations on the ability of banks and savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. Generally under all of these
regulations prior regulatory application and approval is required, if the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years
HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The Bank Holding Company Act (as applicable
to the Company since January 2002) and the HOLA and OTS regulations issued
thereunder (applicable prior to January 2002) generally prohibit a bank or
savings and loan holding company, without prior regulatory approval, from
acquiring more than 5% of the voting stock of any other bank or savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any bank or
savings association, unless the acquisition has regulatory approval.
HOLDING COMPANY ACTIVITIES. As a bank holding company, the Company may
only engage in certain activities, and its acquisition of companies engaged in
non-banking activities is subject to FRB approval under certain circumstances.
These activity limitations were not applicable to the Company as a unitary
savings and loan holding company.
COMPETITION
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance companies. As of December 31, 2001, there were 14 commercial banks
operating in Rutherford and Bedford Counties, Tennessee. Particularly in times
of high interest rates, the Bank has faced additional significant competition
for investors' funds from short-term money market securities and other corporate
and government securities. The Bank's competition for loans comes from
commercial banks, thrift institutions, credit unions and mortgage bankers. Such
competition for deposits and the origination of loans may limit the Bank's
growth in the future.
SUBSIDIARY ACTIVITITIES
Under OTS regulations, the Bank generally may invest up to 3% of its assets
in service corporations, provided that any investment in excess of 2% of assets
shall be used primarily for community, inner-city and community development
projects. The Bank's investment in its wholly-owned service corporation,
Cavalry Enterprises, Inc., which was approximately $92,000 at December 31, 2001,
did not exceed these limits.
Cavalry Enterprises, Inc., a Tennessee corporation, was organized on July
26, 2000 for the purpose of providing services, including securities, insurance
and other financial or financially related services. Cavalry Enterprises, Inc.,
began activities in the fourth quarter of 2000 by offering mutual funds, stocks,
bonds, annuities, life insurance, and long-term care insurance. The Bank
recorded income from this investment of $28,000 for the year ended December 31,
2001. With the change in charter to a state bank, the Company expects Cavalry
Enterprises, Inc. to become inactive with the activities of the subsidiary being
performed by the Bank.
PERSONNEL
As of December 31, 2001, the Bank had 154 full-time employees and 54
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees is
good.
27
- ------
ITEM 2. PROPERTIES
- --------------------
The following table sets forth certain information regarding the Bank's
offices at December 31, 2001, all of which are owned. Management believes that
the current facilities are adequate to meet the present and immediately
foreseeable needs of the Bank and the Company.
Approximate Square
Location Year Opened Footage Deposits
- --------------------------------- -------------- -------------- ---------
(In thousands)
Main Office:
114 W. College Street 1974 48,632 $ 230,189
Murfreesboro, Tennessee 37130
Branch Offices:
1745 Memorial Boulevard 1984 1,925 18,474
Murfreesboro, Tennessee 37129
1645 N.W. Broad Street 1995 1,500 9,958
Murfreesboro, Tennessee 37129
123 Cason Lane 1997 2,987 30,137
Murfreesboro, Tennessee 37128
604 N. Main Street 1958 1,500 26,393
Shelbyville, Tennessee 37160
269 S. Lowry Street 1972 3,898 31,913
Smyrna, Tennessee 37167
1300 Hazelwood Drive 1997 1,100 1,400
Smyrna, Tennessee 37167
2604 South Church Street 1998 2,470 8,562
Murfreesboro, TN 37129
2035 SE Broad Street 1997 2,038 23,964
Murfreesboro, TN 37130
Financial Services Building:
214 W. College 2000 60,000 NA
Murfreesboro, Tennessee 37130
The Bank owns two commercial building lots, both of which are for future
branch office development. One building site is located on Sam Ridley Parkway
in Smyrna, Tennessee and the second is located on the Lascassas Highway in
Murfreesboro, Tennessee. The lot located at 2014 Lascassas Pike is the location
of a free-standing automated teller machine.
The Bank uses the services of an outside service bureau for its significant
data processing applications. At December 31, 2001, the Bank had 13 proprietary
automated teller machines. At December 31, 2001, the net book value of the
Bank's office properties and the Bank's fixtures, furniture and equipment was
$15.6 million.
28
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on properties
in which the Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Company's
business. The Company is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Company. See note 19 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------- -------------------------------------------------------------------
MATTERS
-------
The information contained under the section captioned "Common Stock
Information" is included in the Company's Annual Report and is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- -------- -------------------------
The information contained under the section captioned "Selected
Consolidated Financial Information" is included in the Company's Annual Report
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------- -------------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
included in the Company's Annual Report and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Market Risk and Asset and Liability Management" is included in the Company's
Annual Report and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -----------------------------------------------
The information contained under the section captioned "Consolidated
Financial Statements" is included in the Company's Annual Report and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- -------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank.
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
Age at Position
December -----------------------------------------------------
Name 31, 2000 Company Bank
- ------ --------- ------------------------ ---------------------------
Ed C. 59 Chairman of the Board Chairman of the Board
Loughry, Jr. and Chief Executive and Chief Executive
Officer Officer
Gary Brown 59 Vice Chairman of the Vice Chairman of the
Board Board
Ronald F. Knight 51 President and Chief President and Chief
Operating Officer Operating Officer
William S. Jones 42 Executive Vice President Executive Vice President
and Chief Administrative and Chief Administrative
Officer Officer
Hillard C. "Bud" 53 Senior Vice President and Senior Vice President and
Gardner Chief Financial Officer Chief Financial Officer
David W. Hopper 58 -- Senior Vice President
and Trust Officer
Ira B. Lewis, Jr. 55 Senior Vice President Senior Vice President/CRA
and Secretary Compliance Officer and
Secretary
R. Dale Floyd 51 -- Senior Vice President
M. Glenn Layne 47 -- Senior Vice President
Joy B. Jobe 57 -- Senior Vice President
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the executive officers of
the Company and the Bank. Unless otherwise stated, each executive officer has
held his current occupation for the last five years. There are no family
relationships among or between the executive officers.
Ed C. Loughry, Jr. joined the Bank in 1968 and currently serves as Chairman
of the Board and Chief Executive Officer. Mr. Loughry has served on the Boards
of Directors of the Rutherford County Chamber of Commerce, United Way, Heart
Fund, Federal Home Loan Bank of Cincinnati, and the Tennessee Bankers
Association where he is currently serving as Chairman-Elect. He currently
serves on the HealthSpring Board and the ABA BankPac Board, and the
Christy-Houston Foundation. He was selected Business Person of the Year in 1993
and Business Legend in 2000 by the Chamber of Commerce.
30
Gary Brown is the owner and manager of Roscoe Brown, Inc., a heating and
air conditioning company, Murfreesboro, Tennessee. Mr. Brown is a member of the
Murfreesboro Water Sewer Department Board, the Electrical Examining Board, and
Middle Tennessee State University Foundation Board.
Ronald F. Knight joined the Bank in 1972 and currently serves as President
and Chief Operating Officer of the Bank and the Company. Mr. Knight currently
serves on the Board of Directors of the Tennessee Housing Development Agency,
the Rutherford County Economic Development Council, is the past Chairman of the
Board of the Rutherford County Chamber of Commerce and a past member of the
Board of Directors of the Tennessee Bankers Association. Mr. Knight actively
supports various charitable organizations and is the Co-Founder of a local
charity "Christmas For The Children" which benefits children with special needs.
William S. Jones joined the Bank in 1992 and currently serves as Executive
Vice President and Chief Administrative Officer. Mr. Jones has held the
position of Vice President/Senior Vice President and Trust Officer of the Bank.
Mr. Jones currently serves as President of the Board of Trustees of the Middle
Tennessee State University Foundation, is a Director of the Rutherford County,
Tennessee, Chamber of Commerce and is a member of the Middle Tennessee Medical
Center Foundation.
Hillard C. "Bud" Gardner joined the Bank in 1981 and has been Senior Vice
President and Chief Financial Officer since 1982. Mr. Gardner is a member of
the Tennessee Society of Certified Public Accountants, the American Institute of
Certified Public Accountants and the Optimist International.
David W. Hopper joined the Bank in 1992 and has been Senior Vice President
and Trust Officer since that time. Mr. Hopper is a graduate of the ABA's
National Graduate Trust School and has served as Chairman of the Tennessee
Bankers Association Trust Division. Mr. Hopper has over thirty years experience
in the trust and investment management industry and has successfully started
trust departments at two banks. Mr. Hopper is a member of the Murfreesboro
Rotary Club, a Director of the Linebaugh Library Foundation, and Chairman of the
Murfreesboro School Board.
R. Dale Floyd joined the Bank in September 1987 and has been Senior Vice
President since October 1988. As Senior Vice President, he supervises the
Bank's mortgage lending activities, including originations, construction and
land development lending and mortgage loan servicing. Mr. Floyd's civic
activities include participation in Leadership Rutherford, Habitat for Humanity,
Stones River Ducks Unlimited and Kids Castle Volunteers. Mr. Floyd is also a
member of the Affordable Housing Advisory Council of the City of Murfreesboro.
M. Glenn Layne joined the Bank in August 1994 with over 17 years of banking
experience and is currently Senior Vice President and Manager of Commercial and
Consumer Lending. Before joining the Bank Mr. Layne served as Vice President
and Manager of a Commercial Lending Group with SunTrust Bank. Mr. Layne serves
as Finance Committee Chairman and is a Deacon in the Belle Aire Baptist Church.
Joy B. Jobe joined the Bank in May 1995 with over 24 years of banking
experience and serves as Senior Vice President of Retail Banking and Business
Development. Before joining the Bank Ms. Jobe was a Commercial Loan Officer,
Relationship Manager and Assistant Vice President with SunTrust Bank. Ms. Jobe
is a member of the Board of Directors of the American Red Cross. Ms. Jobe also
a graduate of Leadership Rutherford.
Ira B. Lewis, Jr. joined the Bank in 1993 as a Vice President Internal
Audit and Compliance. Mr. Lewis became Secretary in January 1996 and Senior
Vice President in January 2000. Before joining the Bank, Mr. Lewis was an
Examiner and Field Manager of the Office of Thrift Supervision's Nashville Area
Office.
ITEM 11. EXECUTIVE COMPENSATION
- ------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and is
incorporated herein by reference.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security Ownership
of Certain Beneficial Owners and Management" is included in the Company's Proxy
Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security Ownership
of Certain Beneficial Owners and Management" and "Proposal I -- Election of
Directors" is included in the Company's Proxy Statement and are incorporated
herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Transactions with Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C. Loughry, Jr.**
10.2 Employment Agreement with Ronald F. Knight**
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis**
10.5 Severance Agreement with R. Dale Floyd**
10.6 Severance Agreement with M. Glenn Layne**
10.7 Severance Agreement with Joy B. Jobe**
10.8 Severance Agreement with William S. Jones**
10.9 Severance Agreement with David W. Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
10.12 Cavalry Bancorp, Inc. 1999 Stock Option Plan***
10.13 Cavalry Bancorp, Inc. 1999 Management Recognition Plan***
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Rayburn, Betts & Bates, P.C.
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission on March 30, 1998.
*** Incorporated herein by reference to the Registrant's Annual Meeting Proxy
Statement dated March 15, 1999, as filed with the securities and Exchange
Commission on March 15, 1999.
(b) Reports on Form 8-K
On November 7, 2001 Cavalry Bancorp, Inc. filed an 8-K to announce that it
was terminating the Company's Management Recognition Plan (the Plan) and would
record a non-recurring, non-cash charge of approximately $1.8 million
(after-tax) during the fourth quarter ending December 31, 2001.
32
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: March 25, 2002 By: /s/Ed C. Loughry, Jr.
------------------------
Ed C. Loughry, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ----------------------------- ------------------------------------ --------------
/s/Ed C. Loughry, Jr. Chief Executive Officer, Chairman of March 25, 2002
- ----------------------------- the Board
Ed C. Loughry, Jr.
(Principal Executive Officer)
/s/Hillard C. "Bud" Gardner Senior Vice President and Chief March 21, 2002
- -----------------------------
Hillard C. "Bud" Gardner Financial Officer
(Principal Financial and
Accounting Officer)
/s/Gary Brown Vice Chairman of the Board March 25, 2002
- -----------------------------
Gary Brown
/s/Ronald F. Knight Director, President March 22, 2002
- ----------------------------- and Chief Operating Officer
Ronald F. Knight
/s/William K. Coleman Director March 25, 2002
- -----------------------------
William K. Coleman
/s/Tim J. Durham Director March 22, 2002
- -----------------------------
Tim J. Durham
- ------------------------------ Director
Ed Elam
/s/James C. Cope Director March 25, 2002
- -----------------------------
James C. Cope
/s/Terry G. Haynes Director March 22, 2002
- -----------------------------
Terry G. Haynes
/s/William H. Huddleston, IV Director March 22, 2002
- -----------------------------
William H. Huddleston, IV
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
[Cavalry Bancorp, Inc. logo]
2001 Annual Report to Shareholders
[Photos of local interests]
Corporate Profile
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the holding
company for Cavalry Banking (the "Bank"), a federally chartered savings bank.
In January 2002, the Bank converted from a federally chartered savings bank to a
state chartered commercial bank. As a result of this conversion, the primary
regulator for the Company and the Bank is the Board of Governors of the Federal
Reserve System. The Bank is also under the supervision of the Tennessee
Department of Financial Institutions. The Bank and its subsidiaries provide a
full range of financial products and services to individuals and businesses
primarily within Rutherford and Bedford counties in Middle Tennessee from the
following locations:
114 West College Street
Murfreesboro, TN 37130
893-1234
2035 Southeast Broad Street
Murfreesboro, TN 37130
895-0905
1745 Memorial Boulevard
Murfreesboro, TN 37129
890-2919
123 Cason Lane
Murfreesboro, TN 37129
893-1812
1645 Northwest Broad Street
Murfreesboro, TN 37129
895-3380
2604 South Church Street
Murfreesboro, TN 37128
848-1966
604 North Main Street
Shelbyville, TN 37160
684-6166
269 South Lowry Street
Smyrna, TN 37167
459-2535
1300 Hazelwood Drive
Smyrna, TN 37167
459-6828
Table of Contents
1 Highlights
2-6 Letters to Shareholders
7 Board of Directors and Community Board
8 Officers
9-10 Selected Financial Data
11-21 Management's Discussion and Analysis of
Financial Condition and Results of Operations
22 Independent Auditors' Report
23-28 Consolidated Financial Statements
29-48 Notes to Consolidated Financial Statements
Inside Back Cover Corporate Information
2001 Accomplishments
- - Total deposits grew by 13% to $381 million at December 31, 2001, despite
the economically challenging conditions that existed for most of the year.
- - Other operating income increased 39% to a record $5.8 million in 2001.
- - Asset Management and Trust services continued to outperform expectations.
- - Technology continued to be utilized to improve service and increase
efficiency.
- - Phase 1 of the Lascassas Pike office, which provides more convenient
services to meet the needs of customers was completed.
2001 Highlights
Total Assets [graph]
($ in millions)
1997 - 282
1998 - 365
1999 - 395
2000 - 384
2001 - 433
Loans Receivable, net [graph]
($ in millions)
1997 - 213
1998 - 238
1999 - 272
2000 - 279
2001 - 280
Deposits [graph]
($ in millions)
1997 - 248
1998 - 266
1999 - 309
2000 - 337
2001 - 381
1
[Photo of Ed C. Loughry, Jr.]
I am pleased to report that Cavalry Bancorp, Inc. achieved another year of
progress in 2001. Many of the same factors that have contributed to our growth
in recent years were again in place this past year: Our local markets have some
of the most desirable economic characteristics of any market in the state of
Tennessee; we stayed clearly focused on serving our customers by offering them
the right financial product to meet their specific needs; and our experienced
employees continue to exhibit the dedication that helped make the year ended
December 31, 2001, another successful one.
For fiscal year 2001, total assets increased to $433.0 million, an increase of
$48.6 million from 2000. At December 31, 2001, total deposits grew to $381.0
million. This represents a growth in deposits of 13% during 2001 and is
particularly significant during these economically challenging times when many
community-oriented financial institutions have experienced difficulties in
increasing their deposits.
Cavalry Banking continued to experience loan growth in 2001. Total loans
receivable, net at December 31, 2001, increased to $280.2 million compared with
$279.5 million a year ago. Loan originations were up 38% and reflect the
increase in re-financings due to lower interest rates this past year. Our
strategy remains to focus on achieving steady loan growth while following
standards that help insure soundness and quality in our loan portfolio.
We firmly believe that asset quality is a key to our company's continued
long-term success. Our non-performing loans at December 31, 2001, remained very
manageable at only 0.14% of total loans outstanding. We are pleased with the
overall quality of our loan portfolio and believe we are well positioned for the
future.
Net income for 2001 was $2.0 million, or $0.31 per share, compared with net
income of $4.1 million, or $0.64 per share, earned in 2000 and primarily
reflects the non-recurring, non-cash charge of $1.8 million (after-tax) taken in
the fourth quarter related to the termination of the Company's Management
Deposit Accounts [graph]
(in thousands)
1997 - 23.1
1998 - 24.8
1999 - 27.9
2000 - 29.4
2001 - 30.6
2
Recognition Plan. (See footnote 13 for more information about the one-time
charge.) The dramatic decline in interest rates during the year also adversely
affected our net interest income, which declined from $16.1 million to $14.8
million. Non interest income for 2001 increased to $8.3 million from $5.7
million a year ago.
It is the Board's stated intention to have shareholders directly participate in
the long-term success of the Company; therefore, the Board elected to pay
quarterly cash dividends to provide shareholders with a current cash return.
Dividend payments totaling $0.20 per share were paid to shareholders in 2001.
Like all Americans, we shared a profound sense of sorrow in the events of last
September 11th. However, we remain determined to live our lives and build our
company in a manner undeterred by the horrors of that day, as we are convinced
that our day-by-day efforts will be the ultimate expression of victory of good
over evil. I want to thank our customers for their relationships with Cavalry.
In times of challenge, it is comforting to know the people with whom you deal on
a daily basis.
As we look to the future, we see plenty of reason for optimism and opportunity
for growth. Our local markets are strong and diverse. Our approach of being a
community-oriented, total relationship-focused financial institution appears to
be the right strategy for our company.
We enter 2002 as a state chartered commercial bank now under the supervision of
the Tennessee Department of Financial Institutions and as a member of the
Federal Reserve of Atlanta. This change should better position the Bank to
execute soundly our plan to grow in a controlled and financially responsible
manner. The Board of Directors and your management team remain committed to
achieving growth and increasing returns to shareholders in the years ahead.
Sincerely,
/s/ Ed C. Loughry, Jr.
Ed C. Loughry, Jr.
Chairman and Chief Executive Officer
3
[Photo of Ronald F. Knight]
I would like to share with you a few significant accomplishments Cavalry Banking
completed in 2001 and some of the plans for the future. In July, we announced
plans to purchase Miller & Loughry Insurance and Services, Inc., which was
founded in 1949 and is one of Murfreesboro's oldest and largest independent
insurance agencies in Rutherford County.
In addition to offering a full array of insurance products and services, the
firm also specializes in providing Human Resource services to small and medium
size businesses including recruitment, training programs, assistance in
government compliance, consulting and much more. The acquisition of Miller &
Loughry provides us with a strategic opportunity to expand and diversify our
financial products and services to our customers in Rutherford and surrounding
counties.
Also, during the year, Cavalry Banking announced plans to expand its mortgage
lending. We have hired experienced real estate professionals in Nashville
operating under the name Mid Tenn Mortgage. Mid Tenn Mortgage which is a
division of Cavalry Banking, offers a range of mortgage lending products, from
residential mortgage loans including conventional as well as FHA and VA, and
will also provide commercial real estate loans, construction and permanent
financing, and investor loans. We are excited about our new division in
Nashville, as it should allow us to expand our markets and provide
mortgage-lending products to other areas in Middle Tennessee.
In addition to acquisitions and expansions, we have not forgotten what has made
our Bank a success. We continued to grow our core business as well. Deposit
accounts have grown at rates that exceed the majority of our peers and our
lending activity far
4
surpasses the levels of the previous year. Even during a year of turbulent
economic times, our Asset Management and Trust department continues to out
perform our expectations and more and more of our friends and neighbors are
turning to our Cavalry Investment Services division for a variety of investment
choices, which is now operating profitably in only a short time since it was
created. We also added new services in 2001, such as Free Checking in February.
The service has proved to be well received by customers. We are humbled by the
confidence that our customers continue to place in us and strive daily to exceed
their expectations.
Cavalry Banking continued its commitment to the local communities it serves by
being a leader in helping many charities and civic organizations during the past
year. This is something about which we all feel very strongly. We co-sponsor a
series of events that benefit area children featured under the umbrella benefit,
"Christmas For The Children." In it's eleventh year, the events raised over
$45,000 this past year. Fifty percent of this amount was contributed to the
Indigent Children's Fund of the Murfreesboro City and Rutherford County School
systems, and the remainder was used to purchase Christmas presents for children
with special needs.
The employees of Cavalry Banking and our divisions are deeply committed to the
communities that have allowed us to be successful. We are very involved in
community and civic activities that benefit organizations such as Middle
Tennessee State University, The Chamber of Commerce, Main Street, Leadership
Rutherford, Rutherford County Homebuilders Association, The American Heart
Association, The American Cancer Society, United Way, The Boys and Girls Club,
Habitat For Humanity, and many more.
On behalf of the Board of Directors and management team of Cavalry Banking, I
extend our appreciation to our employees for their efforts and achievements.
They truly are the greatest assets of our bank. I believe the year ahead has an
even greater potential for success than was achieved in 2001.
Sincerely,
/s/ Ronald F. Knight
Ronald F. Knight
President
[Photos of local interests]
5
[Photo of William S. Jones]
Many of our shareholders and customers watched the construction of our new
building located in downtown Murfreesboro, across the street from our main
office. The new building, which was officially opened in September 2000,
improved our overall productivity and efficiency by allowing us to consolidate
certain departments into one location. During 2001 we continued to improve our
efficiency by utilizing the new space for an expanded information technology
department. As we begin 2002, we have named the building "The Cavalry Banking
Financial Center". Very soon we will locate our new insurance division, Miller &
Loughry Insurance and Services, in the southern half of the first floor, our
investment division, Cavalry Investment Services, in the northeast quadrant of
the first floor, and our Asset Management and Trust Department in the northwest
quadrant of the first floor. This will consolidate three very important
financial services into one location for the convenience of our customers.
We continued to utilize technology to improve service and increase efficiency in
2001. Throughout the year improvements and enhancements were made to better
serve our customers in a more efficient manner. On December 17, 2001 a new and
improved website was launched. The new site, www.cavb.com, was designed with the
customer in mind for ease of use and expanded options and services. The number
of Internet Banking customers continues to grow as more and more of our
customers turn to their computers for convenient financial services. The world
of banking technology is rapidly developing and we are currently preparing for
the future by planning a system conversion in June 2002. The new system will
provide the latest technology in commercial bank products and services and
provide the foundation for future growth and enhancements.
While we expand and enhance our technology capabilities we also continue to
expand our branch network as well. We are pleased to have completed Phase I of
our Lascassas Pike Facility. Located at the corner of Rutherford Boulevard and
Lascassas Pike, the extension of our services will be more convenient with the
installation of a new state-of-the-art ATM to serve the banking needs of our
customers 24 hours a day, seven days a week. Future plans at this site include
the construction of a full service office facility. Currently, plans are being
finalized for the construction of our largest branch facility on an out parcel
at the entrance of the Kroger Center on Sam Ridley Parkway in Smyrna, Tennessee.
This facility will accommodate all of our traditional bank services as well as
mortgage, commercial, and consumer lending, and investment sales and brokerage.
As always, we continue to strive to improve existing operations and offer the
types of products and services our customers want. We appreciate the past
support of our customers and will endeavor to work even harder to merit their
continued support.
Sincerely,
/s/ William S. Jones
William S. Jones
Executive Vice President
6
Board of Directors
Ed C. Loughry, Jr. Kent Coleman Ed Elam
Chairman and Attorney Rutherford County Clerk
Chief Executive Officer Rucker, Rucker & Coleman
Cavalry Banking
Ronald F. Knight James C. Cope Terry G. Haynes
President Attorney Chief Executive Officer
Cavalry Banking Murfree, Cope, Hudson & Scarlett Haynes Bros. Lumber Co.
Gary Brown Tim Durham W. H. Huddleston, IV
Vice-Chairman of the Board Owner President
President Durham Realty & Auction, Inc. Huddleston-Steele Engineering, Inc.
Roscoe Brown, Inc.
Community Board
Gloria Bonner, Ed.D. Ken Halliburton Tina Patel
Middle Tennessee Miller & Loughry Insurance Merck & Co.
State University and Services, Inc.
Rick Sain
Robbie Cleveland, M.D. Ben Jamison, D.D.S. Reeves-Sain Drug Store, Inc.
Murfreesboro Medical Clinic Private Dental Practice
Dow Smith
Melanie Davenport Miles Lane, D.V.M. Dow Smith Contracting
Cellular Concepts, Inc. Brogli Lane Weaver Company, Inc.
Animal Hospital
Chuck Farrer Greg Waldron
Farrer Construction Company Bud Mitchell Waldron Enterprises, LLC
Bud's Tire
John Goodman Phyllis Washington, Ph.D.
Bob Parks Realty Sandra Parks Rutherford County
Mitchell-Neilson Primary School Board of Education
7
Cavalry Banking
Corporate Officers
Ed C. Loughry, Jr. Joe W. Townsend Joe G. Sadler
Chairman & Vice President Assistant Vice President
Chief Executive Officer
Libby L. Green David K. Bailiff
Ronald F. (Ronnie) Knight Vice President Assistant Vice President
President &
Chief Operating Officer Christopher L. Kelly E. Cannon Loughry, III
Vice President & Trust Officer Assistant Vice President
William S. (Bill) Jones
Executive Vice President & James O. (Jamie) Sweeney, III Donna K. Davis
Chief Administrative Officer Vice President Assistant Vice President
Hillard C. (Bud) Gardner Gary E. Green Jane H. Lester
Senior Vice President & CPA, Vice President Assistant Vice President
Chief Financial Officer
Suzanne S. McClaran P. David Edwards
R. Dale Floyd Assistant Vice President Assistant Vice President
Senior Vice President
Peggy A. Hollandsworth JoAnn Fann
David W. Hopper Assistant Vice President Assistant Vice President
Senior Vice President &
Trust Officer Roger D. White Charles Simmons
Assistant Vice President Assistant Vice President
M. Glenn Layne
Senior Vice President Linda F. Eakes Wendy Tompkins
Assistant Vice President Assistant Vice President
Joy B. Jobe
Senior Vice President James V. (Jim) Gregory Elizabeth Bazzell
Assistant Vice President Assistant Vice President
Ira B. Lewis, Jr.
Senior Vice President Mary W. Schneider Vallie M. Reed
Assistant Vice President Assistant Vice President
Rhonda P. Smith
Assistant Vice President
Banking Officers
Peggy F. Gilbert Jane K. Lewellen Debbie Morgan
Carrolyn A. Gilley Linda Bucy James (Jim) Vinson
Lisa R. Knight Travis Stalsworth Lyndell Parks
8
Cavalry Bancorp, Inc. and Subsidiaries
Selected Financial Data
(Dollars in thousands)
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the periods indicated.
At December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------
(Dollars in thousands)
Financial Condition Data:
Total asset $432,874 $384,285 $395,419 $364,892 $282,129
Loans receivable, net 280,239 279,478 272,211 237,547 212,979
Loans held-for-sale 10,423 4,183 4,485 10,923 4,855
Investment securities
held-to-maturity 100 - - - 1,700
Investment securities
available-for-sale 41,808 32,247 6,964 46,505 10,077
Mortgage-backed securities
held-to-maturity 537 594 651 959 1,301
Cash, federal funds sold
and overnight
interest-bearing deposits 69,281 45,025 94,422 53,188 37,658
Deposit accounts 380,990 336,534 308,929 266,032 248,267
Borrowings 998 1,578 45,000 - -
Total equity 48,806 43,971 38,765 95,181 30,447
For the Year Ended December 31,
-------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating Data:
Interest income $28,108 $29,436 $28,008 $26,596 $21,939
Interest expense 12,649 13,070 10,130 9,594 9,289
------- ------- ------- ------- -------
Net interest income 15,459 16,366 17,878 17,002 12,650
Provision for loan losses 661 306 991 452 700
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 14,798 16,060 16,887 16,550 11,950
------- ------- ------- ------- -------
Gains from sale of loans 2,537 1,548 2,245 2,266 1,126
Other income 5,763 4,147 3,403 2,960 2,535
Other expenses 18,664 14,700 16,385 12,481 10,498
------- ------- ------- ------- -------
Income before income taxes 4,434 7,055 6,150 9,295 5,113
Provision for income taxes 2,435 3,003 2,681 3,598 1,911
------- ------- ------- ------- -------
Net income $ 1,999 $ 4,052 $ 3,469 $ 5,697 $ 3,202
======= ======= ======= ======= =======
At December 31,
-------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Other Data:
Number of:
Real estate loans 3,888 5,377 5,128 5,126 4,833
Deposit accounts 30,622 29,429 27,878 24,828 23,054
Full-service offices 9 9 9 10 9
9
Cavalry Bancorp, Inc. and Subsidiaries
Selected Financial Data (Continued)
Key Financial Ratios:
For the Year Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (1) 0.50% 1.11% 0.92% 1.66% 1.22%
Return on average equity (2) 4.33 9.90 4.05 6.63 11.09
Interest rate spread (4) 3.65 4.22 3.92 4.01 4.55
Net interest margin (5) 4.24 4.89 5.10 5.29 5.21
Average interest-earning
assets to average
interest-bearing liabilities 117.19 117.19 140.48 142.81 117.16
Non-interest expense as a
percent of average
total assets 4.67 4.02 4.35 3.63 4.01
Efficiency ratio (6) 78.56 66.63 69.65 56.15 64.36
Dividend payout ratio (7) 64.52 31.25 38.46 18.07 N/A
Asset Quality Ratios:
Non-accrual and 90 days or
more past due loans
as a percent of total loans, net 0.14 0.04 0.12 0.07 0.11
Non-performing assets as a percent
of total assets 0.13 0.05 0.13 0.03 0.09
Allowance for loan losses as a
percent of total
loans receivable 1.38 1.34 1.24 1.06 1.11
Allowance for loan losses as a
percent of
non-performing loans 1,134.52 3,443.09 1,242.04 3,019.63 1,130.65
Net charge-offs to average
outstanding loans 0.15 0.07 0.03 0.01 0.01
Capital Ratios: (8)
Total equity-to -assets ratio 11.27 11.44 9.80 26.08 10.79
Average equity to average assets(3) 11.56 11.19 22.75 25.01 11.04
<FN>
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average total equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses divided by the sum of net interest income and other income.
(7) Dividends per share divided by net income per share.
(8) All information in this table for 1997 reflects the Company's predecessor,
Cavalry Banking, a federal mutual savings bank which converted to a federal
stock savings bank on March 16, 1998. During 1999, the Company repurchased
358,066 shares of its outstanding common stock for $8.9 million, and on
December 23, 1999, the Company paid a special dividend to shareholders of
$7.50 per share ($53.3 million in the aggregate).
10
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes contained in this Annual Report.
Private Securities Litigation Reform Act Safe Harbor Statement
This Annual Report contains forward-looking statements within the meaning
of the federal securities laws. These statements are not historical facts,
rather statements based on the Company's expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause the Company's actual results,
performance, and achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to these differences include, without limitation, general economic conditions,
including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; and
other factors disclosed periodically in the Company's filings with the
Securities and Exchange Commission.
Because of the risks and uncertainties in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
The Company's Business and Strategy
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the
holding company for Cavalry Banking (the "Bank"), a federal savings bank with
its main office located in Murfreesboro, Tennessee. As of the first of January
2002 the Bank converted to a state chartered commercial bank and was accepted as
a member of the Federal Reserve System. The Company charter became a bank
holding company as a result of the conversion. The Company's primary federal
regulator is the Board of Governors of the Federal Reserve System. The Bank's
regulators became the State of Tennessee Department of Financial Institutions
and the Board of Governors of the Federal Reserve System.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
originates one-to-four family mortgage loans, construction loans, commercial
real estate loans, consumer loans, commercial business loans, and land
acquisition and development loans. In addition, the Bank invests in U.S.
Government and federal agency obligations. The Bank continues to fund its
assets primarily with retail deposits, although FHLB-Cincinnati advances can be
used as an additional source of funds. The Bank offers investment management
and trust services, brokerage services through a dual employee contractual
relationship with a third party brokerage firm. In the last half of 2001 the
Bank added a new division, Mid Tenn Mortgage, which is a mortgage banking
operation in the Nashville, Tennessee market. This division will allow the Bank
to increase volumes and expand into new markets. In January of 2002, the Bank
completed the purchase of all issued and outstanding capital stock of Miller &
Loughry Insurance and Services, Inc., a local independent insurance agency. The
addition of this agency as a subsidiary of the Bank will allow the Bank to offer
a full range of financial services and products to its customers.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and other borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The level of
other income and expenses also affects the Bank's profitability. Other income,
net, includes income associated with the origination and sale of mortgage loans,
loan servicing fees, deposit-related fees and trust fees. Other expenses
include compensation and benefits, occupancy and equipment expenses, deposit
premiums, data servicing expenses and other operating costs. The Bank's results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
Management of the Company views its operation as three distinct operating
segments. These three segments are banking, mortgage banking and trust
services. The banking segment's profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolios and its cost of funds, which consists of interest
paid on deposits and other borrowings. The banking segment also depends on
deposit fees and other fee income. The mortgage banking segment originates
loans for sale in the secondary market and services residential mortgage loans
for third party investors. These loans are sold either with or without the
rights to service these loans. The mortgage banking segment relies on the net
gains on the sale of these loans for its profitability. Other fees related to
secondary marketing activities also include any pricing concessions that may be
offered, as well as mortgage servicing rights. Servicing rights permit the
collection of fees for gathering and processing monthly payments for the owner
of the mortgage loans. The trust segment relies on the fees collected for
services related to a line of investment and trust products. These products
include a line of investment management accounts, personal trusts, employee
benefits, custodial and corporate trust services.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
Consolidated total assets increased from $384.3 million at December 31,
2000, to $432.9 million at December 31, 2001, an increase of $48.6 million or
12.65%. This increase in assets was primarily funded by increases in deposits.
Loans receivable net, increased to $280.2 million at December 31, 2001,
from $279.5 million at December 31, 2000, a 0.25%
11
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
increase. A substantial portion of the loan portfolio is secured by real
estate, either as primary or secondary collateral, located in the Bank's primary
market areas. In addition, the Bank continued to originate consumer and
commercial loans with shorter maturities for asset and liability management
purposes.
Loans held-for-sale increased from $4.2 million at December 31, 2000, to
$10.4 million at December 31, 2001. The increase resulted primarily from
increased lending activity and timing differences in the funding of loan sales.
Cash and cash equivalents increased $24.3 million or 54.0% from $45.0
million at December 31, 2000, to $69.3 million at December 31, 2001. The
increase was a result of increases in deposits outstanding.
Investment securities available-for-sale increased from $32.2 million at
December 31, 2000, to $41.8 million at December 31, 2001. This increase was a
result of increases in deposits outstanding.
Office properties and equipment, net, were $15.3 million at December 31,
2000, compared to $15.6 million at December 31, 2001.
Deposit accounts totaled $381.0 million and $336.5 million at December 31,
2001, and December 31, 2000, respectively. The increase was a result of a
continuing effort to aggressively solicit and promote deposit growth.
Total borrowings decreased from $1.6 million at December 31, 2000, to
$998,000 at December 31, 2001. The decrease was a result of the retirement of
one advance at its maturity and the scheduled monthly principal reductions on
the remaining advance. The current borrowing is an advance from the Federal
Home Loan Bank of Cincinnati.
Total stockholders' equity was $48.8 million at December 31, 2001, and
$44.0 million at December 31, 2000. This increase was the result of earnings of
$2.0 million, the allocation of shares under the Bank's Employee Stock Ownership
Plan ("ESOP") and the Management Recognition Plan ("MRP") that totaled $4.3
million, and increases in the valuation allowance for available-for-sale
securities of $51,000. These increases were offset by dividends of $1.3 million
for the year ended December 31, 2001 and the repurchase and retirement of
$271,000 of the Company's common stock.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
Net Income. Net income was $2.0 million or $0.31 per diluted share for the
year ended December 31, 2001, compared to $4.1 million or $0.64 per diluted
share for the year ended December 31, 2000, a decrease of 51.22%. This decrease
was primarily the result of the increased compensation expense associated with
the acceleration of the vesting of restricted stock grants, as well as decreases
in interest income, a larger provision for loan losses, and higher operating
expenses. These factors were partially offset by decreased interest expense and
higher non-interest income.
Net Interest Income. Net interest income decreased 5.49% from $16.4
million for the year ended December 31, 2000, to $15.5 million for the same
period in 2001. Total interest income decreased 4.42% from $29.4 million for
fiscal 2000 to $28.1 million for fiscal 2001 as interest rates declined
dramatically during the year. This decrease was a result of a decrease in
average yield on earning assets from 8.80% for fiscal 2000 to 7.71% for fiscal
2001. This decrease in yield was partially offset by an increase in average
earning assets from $334.4 million for fiscal 2000 to $364.8 million for fiscal
2001 as a result of funds received from increased deposit balances. Average
loans receivable increased from $280.1 million for fiscal 2000 to $283.2 million
for fiscal 2001. This increase in volume was accompanied by a decrease in
average yield from 9.26% for fiscal 2000 to 8.53% for fiscal 2001. Average
investment securities increased from $23.3 million for fiscal 2000 to $46.4
million for fiscal 2001. This increase in volume was offset by a decrease in
average yield from 6.44% for fiscal 2000 to 5.53% for fiscal 2001. Federal
funds sold and other interest bearing deposits increased from $28.4 million for
fiscal 2000 to $32.6 million for fiscal 2001. The average yield decreased from
6.34% for fiscal 2000 to 3.74% for fiscal 2001. Interest expense decreased
3.82% from $13.1 million for fiscal 2000 to $12.6 million for fiscal 2001. This
decrease was a result of declining interest rates. Average deposits and
borrowings increased from $285.3 million for fiscal 2000 to $311.3 million for
fiscal 2001. The average cost of funds decreased from 4.58% for fiscal 2000 to
4.06% for fiscal 2001. The decrease was primarily a result of lower costs for
NOW accounts and money market accounts. The cost of certificates of deposit
also decreased from 5.86% for fiscal 2000 to 5.66% for fiscal 2001. The
interest rate spread decreased from 4.22% for fiscal 2000 to 3.65% for fiscal
2001. The decrease in yields and cost were attributable to declining rates for
fiscal 2001 as compared to fiscal 2000.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated losses based on concentrations,
trends in historical loss experience, specific impaired loans and economic
conditions. In determining the adequacy of the allowance for loan losses,
management periodically reviews the loan portfolio and considers such factors as
delinquency status, past performance problems, historical loss experience,
adverse situations that may affect the ability of the borrowers to repay, known
and inherent risks in the portfolio, assessments of economic conditions,
regulatory policies, and the estimated value of underlying collateral. The
Bank's credit management systems have resulted in low loss experience, however
there can be no assurances that such experience will continue. The allowance
for loan losses is based principally on the risks associated with the type of
loans in the portfolio with greater emphasis placed on higher risk assets. This
requires a heavier weight being assigned to internally identified problem
assets, repossessed assets, and non-performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses. The required level of
allowance is then calculated based upon the outstanding balances in each loan
category and the risk weight assigned to each category.
The provision for loan losses was $661,000, charge-offs were $540,000 and
recoveries were $114,000 for the year ended December 31, 2001, compared with a
provision of $306,000, charge-offs of $236,000 and recoveries of $29,000 for the
year ended December 31, 2000. The allowance for loan losses increased from $4.2
million at December 31, 2000, to $4.5 million at December 31, 2001. The
allowance for loan losses as a percentage of loans outstanding increased from
1.34% at December 31, 2000, to 1.38% at December 31, 2001. Non-accrual loans
increased from $123,000 at December 31, 2000, to $394,000 at December 31, 2001.
Total non-performing assets increased from $209,000 at December 31, 2000, to
$578,000 at December 31, 2001.
During the year ended December 31, 2001, commercial real estate and
commercial loans continued to increase as well as the
12
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
percentages of these loans to the total portfolio. Although these types of
loans are normally of shorter maturity, management feels that there is greater
risk inherent in these loans than the typical 1-to-4 family mortgage loans.
Therefore management assigns these types of loans a higher risk weighting in the
analysis of the loan loss reserve. Commercial loans are loans made to
businesses to either manufacture a product, sell a product, or provide a
service. These loans are also influenced by economic factors. Some of these
factors include the economic environment, the ability of the business to compete
and generate a profit and other similar types of risks. Since it is the
intention of the Bank to continue with this strategy the provision will continue
to reflect the added risk factors associated with this type of lending.
At December 31, 2001, and December 31, 2000, management believed the
provision and allowance for loan losses was adequate.
Non-interest Income. Non-interest income increased 45.6% from $5.7 million
for the year ended December 31, 2000, to $8.3 million for the year ended
December 31, 2001.
Mortgage Banking. In the mortgage banking segment, gain on sale of loans
increased from $1.5 million for fiscal 2000 to $2.5 million for fiscal 2001.
This increase was a result of increased volume of loan sales during the year
ended December 31, 2001, compared to the year ended December 31, 2000. This
increase in volume was a result of declining mortgage rates and increased
refinancing activity. Loan servicing income decreased slightly from $256,000
for fiscal 2000 to $249,000 for fiscal 2001.
Banking. In the banking segment, deposit servicing fees and charges
increased from $2.5 million for fiscal 2000 to $3.7 million for fiscal 2001.
This increase was a result of increased transaction account volume and increased
deposit fees charged for services. During 2001, the Bank introduced a new free
checking account and a new program of overdraft privileges for customers of the
Bank. These programs were the primary reason for the increase in deposit
servicing fees and charges.
Trust. In the trust segment, trust fees were $1.1 million for fiscal 2000
and 2001.
Non-interest Expense. Non-interest expense increased 27.21% from $14.7
million for the year ended December 31, 2000, to $18.7 million for the year
ended December 31, 2001. The increase was primarily a result of increased
employee compensation and benefits, which increased to $12.2 million for the
year ended December 31, 2001, from $9.3 million for the year ended December 31,
2000. This increase was primarily a result of increased commissions paid for
loan originations and the termination of the Management Recognition Plan. These
two items accounted for increases of $2.5 million from the prior year.
Increases in occupancy expense were primarily the result of increased
depreciation and utilities related to the operations building which was
completed and occupied during the fourth quarter of 2000. Increases in other
expenses are primarily the result of increased loan and deposit activity.
Income Tax Expense. Income tax expense was $2.4 million for the year ended
December 31, 2001, compared to $3.0 million for the year ended December 31,
2000. This decrease was a result of lower income before income taxes for fiscal
2001. The effective tax rate (See Footnote 11 of Notes to Consolidated
Financial Statements) for fiscal 2001 was 54.9% compared to 42.6 % for fiscal
2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
Net Income. Net income was $4.1 million or $0.64 per basic share for the
year ended December 31, 2000, compared to $3.5 million or $0.52 per basic share
for the year ended December 31, 1999, an increase of 17.14%. This increase was
a result of increases in interest income, a smaller provision for loan losses,
lower operating expenses and increased non-interest income. These earnings
improvements were partially offset by increased interest expense.
Net Interest Income. Net interest income decreased 8.38% from $17.9
million for the year ended December 31, 1999, to $16.4 million for the same
period in 2000. Total interest income increased 5.00% from $28.0 million for
fiscal 1999 to $29.4 million for fiscal 2000. This increase was a result of an
increase in average yield on earning assets from 7.98% for fiscal 1999 to 8.80%
for fiscal 2000. This increase in rate was offset by a decrease in average
earning assets from $350.8 million for fiscal 1999 to $334.4 million for fiscal
2000 as a result of funds being used to reduce borrowings. Average loans
receivable increased from $267.2 million for fiscal 1999 to $280.1 million for
fiscal 2000. This increase in volume was accompanied by an increase in average
yield from 8.87% for fiscal 1999 to 9.26% for fiscal 2000. Average
mortgage-backed securities declined from $775,000 for fiscal 1999 to $624,000
for fiscal 2000. The average yield increased from 5.03% for fiscal 1999 to
6.73% for fiscal 2000. Average investment securities decreased from $39.6
million for fiscal 1999 to $23.3 million for fiscal 2000. This decrease in
volume was offset by an increase in average yield from 5.26% for the fiscal 1999
to 6.44% for fiscal 2000. Federal funds sold and other interest bearing
deposits decreased from $41.4 million for fiscal 1999 to $28.4 million for
fiscal 2000. The average yield increased from 4.99% for fiscal 1999 to 6.34%
for fiscal 2000. Interest expense increased 29.70% from $10.1 million for
fiscal 1999 to $13.1 million for fiscal 2000. This increase was a result of
increases in average deposits and borrowings from $249.7 million for fiscal 1999
to $285.3 million for fiscal 2000. The average cost of funds increased from
4.06% for fiscal 1999 to 4.58% for fiscal 2000. The increase was primarily a
result of higher costs for NOW accounts and money market accounts. The cost of
certificates also increased from 5.21% for fiscal 1999 to 5.86% for fiscal 2000.
The interest rate spread increased from 3.92% for fiscal 1999 to 4.22% for
fiscal 2000. The increase in yields and cost were attributable to increasing
rates for fiscal 2000 as compared to fiscal 1999.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated losses based on concentrations,
trends in historical loss experience, specific impaired loans and economic
conditions. In determining the adequacy of the allowance for loan losses,
management periodically reviews the loan portfolio and considers such factors as
delinquency status, past performance problems, historical loss experience,
adverse situations that may affect the ability of the borrowers to repay, known
and inherent risks in the portfolio, assessments of economic conditions,
regulatory policies, and the estimated value of underlying collateral. The
Bank's credit management systems have resulted in low loss experience, however
there can be no assurances that such experience will continue. The allowance
for loan losses is based principally on the risks associated with the type of
loans in the portfolio with greater emphasis placed on higher risk assets. This
requires a heavier weight being assigned to internally identified problem
assets, repossessed assets, and non-performing assets that otherwise
13
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
exhibit, in management's judgment, potential credit weaknesses. The required
level of allowance is then calculated based upon the outstanding balances in
each loan category and the risk weight assigned to each category.
The provision for loan losses was $306,000, charge-offs were $236,000 and
recoveries were $29,000 for the year ended December 31, 2000, compared with a
provision of $991,000, charge-offs of $102,000 and recoveries of $16,000 for the
year ended December 31, 1999. The allowance for loan losses increased from $4.1
million at December 31, 1999, to $4.2 million at December 31, 2000. The
allowance for loan losses as a percentage of loans outstanding increased from
1.24% at December 31, 1999, to 1.34% at December 31, 2000. Non-accrual loans
decreased from $333,000 at December 31, 1999, to $123,000 at December 31, 2000.
Total non-performing assets decreased from $499,000 at December 31, 1999, to
$209,000 at December 31, 2000.
During the year ended December 31, 2000, commercial real estate and
commercial loans continued to increase as well as the percentages of these loans
to the total portfolio. Although these types of loans are normally of shorter
maturity, management feels that there is greater risk inherent in these loans
than the typical 1-to-4 family mortgage loans. Therefore management assigns
these types of loans a higher risk weighting in the analysis of the loan loss
reserve. Commercial loans are loans made to businesses to either manufacture a
product, sell a product, or provide a service. These loans are also influenced
by economic factors. Some of these factors include the economic environment,
the ability of the business to compete and generate a profit and other similar
types of risks. Since it is the intention of the Bank to continue with this
strategy the provision will continue to reflect the added risk factors
associated with this type of lending.
At December 31, 2000, and December 31, 1999, management believed the
provision and allowance for loan losses was adequate.
Non-interest Income. Non-interest income increased 1.79% from $5.6 million
for the year ended December 31, 1999, to $5.7 million for the year ended
December 31, 2000.
Mortgage Banking. In the mortgage banking segment, gain on sale of loans
decreased from $2.2 million for fiscal 1999 to $1.5 million for fiscal 2000.
This decrease was a result of decreased volume of loan sales during the year
ended December 31, 2000, compared to the year ended December 31, 1999. Loan
servicing income increased from $219,000 for fiscal 1999 to $256,000 for fiscal
2000. This increase was primarily a result of increased late fee payments.
Banking. In the banking segment, deposit servicing fees and charges
increased from $2.0 million for fiscal 1999 to $2.5 million for fiscal 2000.
This increase was a result of increased transaction account volume and increased
deposit fees charged for services.
Trust. In the trust segment, trust fees increased from $936,000 for fiscal
1999 to $1.1 million for fiscal 2000. This increase was a result of increased
assets under management.
Non-interest Expense. Non-interest expense decreased 10.37% from $16.4
million for the year ended December 31, 1999, to $14.7 million for the year
ended December 31, 2000. The decrease was primarily a result of decreased
employee compensation and benefits, which decreased to $9.3 million for the year
ended December 31, 2000, from $10.5 million for the year ended December 31,
1999. Total compensation expense recognized for the MRP for fiscal 1999 was
$2.4 million, comprised of a one-time, non-recurring charge for the special cash
distribution and normal vesting of shares as compared to $1.2 million of MRP
compensation expense recognized for fiscal 2000. The increase in occupancy
expense was a result of increased cost associated with the operation of the new
operations building. The increase in other operating expenses was primarily a
result of increases in professional fees paid. Declines in other expenses were
a result of increased efforts to control expenses.
Income Tax Expense. Income tax expense was $3.0 million for the year ended
December 31, 2000, compared to $2.7 million for the year ended December 31,
1999. This increase was a result of higher income before income taxes for the
fiscal 2000. The effective tax rate for fiscal 2000 was 42.6% compared to 43.6
% for fiscal 1999.
14
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities respectively,
for the periods presented. Average balances are derived from daily balances for
the years ended.
Years Ended December 31,
--------------------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets:
Loans receivable,
net (1) $ 283,199 $ 24,146 8.53% $ 280,066 $25,947 9.26% $ 267,176 $23,691 8.87%
Mortgage-backed
securities 569 39 6.85 624 42 6.73 775 39 5.03
Investment securities 46,374 2,565 5.53 23,341 1,503 6.44 39,592 2,083 5.26
FHLB stock 2,075 140 6.75 1,929 142 7.36 1,797 127 7.07
Federal funds sold
and overnight
interest-bearing
deposits 32,558 1,218 3.74 28,426 1,802 6.34 41,431 2,068 4.99
----------- ---------- --------- ---------- ------- -------- ---------- ------- -----
Total interest-
earning assets 364,775 28,108 7.71 334,386 29,436 8.80 350,771 28,008 7.98
Non-interest-
earning assets 34,676 31,424 26,169
----------- ---------- ---------
Total assets 399,451 365,810 376,940
----------- ---------- ---------
Interest-bearing
liabilities:
Passbook
accounts 13,677 130 0.95 13,636 169 1.24 13,913 184 1.32
Money Market
accounts 82,001 2,813 3.43 66,852 3,056 4.57 59,090 2,382 4.03
NOW accounts 55,077 648 1.18 46,589 604 1.30 41,887 503 1.20
Certificates
of Deposit 159,365 9,027 5.66 154,855 9,067 5.86 132,801 6,913 5.21
----------- ---------- --------- ---------- ------- -------- ---------- ------- -----
Total deposits 310,120 12,618 4.07 281,932 12,896 4.57 247,691 9,982 4.03
----------- ---------- --------- ---------- ------- -------- ---------- ------- -----
Borrowings 1,144 31 2.71 3,414 174 5.10 2,005 148 7.38
----------- ---------- --------- ---------- ------- -------- ---------- ------- -----
Total interest-
bearing liabilities 311,264 12,649 4.06 285,346 13,070 4.58 249,696 10,130 4.06
---------- ------- -------
Non-interest-
bearing
liabilities (2) 42,009 39,533 41,489
----------- ---------- ---------
Total liabilities 353,273 324,879 291,185
Equity 46,178 40,931 85,755
----------- ---------- ---------
Total liabilities
and equity $ 399,451 $ 365,810 $376,940
----------- ---------- ---------
Net interest income $ 15,459 $ 16,366 $17,878
----------- --------- ---------
Interest rate spread 3.65% 4.22% 3.92%
----------- ---------- ------
Net interest margin 4.24% 4.89% 5.10%
----------- ---------- ------
Ratio of average interest-
earning assets to average
interest-bearing liabilities 117.19% 117.19% 140.48%
----------- ---------- -------
<FN>
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
(2) Includes non-interest bearing deposits of $39.2 million, $36.9 million, and
$33.5 million for the years ended December 31, 2001, 2000, and 1999, respectively.
15
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates indicated
the weighted average yields earned on the Company's assets and the weighted
average interest rates paid on the Company's liabilities, together with the
interest rate spread and net interest margin on interest-earning assets.
Year Ended December 31,
December 31, -------------------
2001 2001 2000 1999
------------- ----- ----- -----
Weighted average yield on:
Loans receivable 7.02% 8.53% 9.26% 8.87%
Mortgage-backed securities 6.46 6.85 6.73 5.03
Investment securities 5.24 5.53 6.44 5.26
FHLB stock 5.50 6.75 7.36 7.07
Federal funds sold and overnight
interest-bearing deposits 1.19 3.74 6.34 4.99
All interest-earning assets 6.13 7.71 8.80 7.98
Weighted average rate paid on:
Passbook savings accounts 0.51 0.95 1.24 1.32
NOW accounts 0.82 1.18 1.30 1.20
Money market accounts 1.86 3.43 4.57 4.03
Certificates of Deposit 4.22 5.66 5.86 5.21
Borrowings 2.25 2.71 5.10 7.38
All interest-bearing liabilities 2.58 4.06 4.58 4.06
Interest rate spread (spread between weighted
average rate on all
interest-earning assets and all
interest-bearing liabilities) 3.55 3.65 4.22 3.92
Net interest margin (net interest income
(expense) as a percentage
of average interest-earning assets) N/A 4.24 4.89 5.10
16
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate): and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended December 31, Year Ended December 31, Year Ended December 31,
2001 Compared to Year 2000 Compared to Year 1999 Compared to Year
Ended December 31, 2000 Ended December 31, 1999 Ended December 31, 1998
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Total Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ ----- ---- ------ -----
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $(2,091) $ 290 $(1,801) $1,113 $ 1,143 $ 2,256 $(1,339) $3,229 $1,890
Mortgage-backed
securities 1 (4) (3) 10 (7) 3 (9) (21) (30)
Investments (421) 1,483 1,062 275 (855) (580) (58) 325 267
FHLB stock (13) 11 (2) 6 9 15 (2) 9 7
Federal funds sold
and overnight
interest-bearing
deposits (846) 262 (584) 383 (649) (266) (139) (583) (722)
-------- ------- -------- ------- -------- -------- -------- ------- -------
Total net change in
income on interest-
earning assets (3,370) 2,042 (1,328) 1,787 (359) 1,428 (1,547) 2,959 1,412
Interest-bearing liabilities:
Passbook accounts (40) 1 (39) (11) (4) (15) (82) (157) (239)
NOW accounts (66) 110 44 45 56 101 (68) 131 63
Money market accounts (935) 692 (243) 361 313 674 (70) 528 458
Certificates of Deposit (304) 264 (40) 1,005 1,149 2,154 (354) 460 106
Borrowings (27) (116) (143) (78) 104 26 - 148 148
-------- ------- -------- ------- -------- -------- -------- ------- -------
Total net change
in expense on
interest-bearing
liabilities (1,372) 951 (421) 1,322 1,618 2,940 (574) 1,110 536
-------- ------- -------- ------- -------- -------- -------- ------- -------
Net Change in
net interest income $(1,998) $1,091 $ (907) $ 465 $(1,977) $(1,512) $ (973) $1,849 $ 876
======== ======= ======== ======= ======== ======== ======== ======= =======
<FN>
(1) Does not include interest on 90 days or more past due. Includes loans originated for sale.
Asset and Liability Management
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the OTS, the Bank receives a
report, which measures interest rate risk by modeling the changes in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. The assets
and liabilities at the parent company level are not considered in the analysis.
The exclusion of parent company assets and liabilities does not have a
significant effect on the analysis of NPV sensitivity. This procedure for
measuring interest rate risk was developed by the OTS to replace the "gap"
analysis (the difference between interest-earning assets and interest-bearing
liabilities that mature within a specific time period). NPV is the present value
of expected cash flows from assets, liabilities and off-balance sheet contracts.
The calculation is intended to illustrate the change in NPV that will occur in
the event of an immediate change in interest rates of at least 200 basis points
with no effect given to any steps that management might take to counter the
effect of that interest rate movement.
17
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
Cavalry Bancorp, Inc. and Subsidiaries
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 2001, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change. Due to the level of
interest rates at December 31, 2001, the OTS did not provide a calculation for
interest rate declines of 200 and 300 basis points.
Changes (in Basis Points) Estimated Change in Estimated Change in Board Approved
in Interest Rates Net Portfolio Value Net Portfolio Value Limits
- ------------------------- -------------------- -------------------- ---------------
(Dollars in Thousands) (Percentage) (Percent)
+300 bp 515 1 (30)
+200 bp 711 1 (20)
+100 bp 385 1 (10)
0 bp 0 0 0
-100 bp (982) (2) (10)
-200 bp 0 0 (20)
-300 bp 0 0 (30)
The above table illustrates, for example, that an instantaneous 100 basis point
decrease in market interest rates at December 31, 2001, would reduce the Bank's
NPV by approximately $982,000 or 2.0%.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features, which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table. Under the Federal
Reserve Board of Governors rules the NPV analysis is not a part of risk-based
capital calculations.
The following table presents the Company's interest sensitivity gap at
December 31, 2001.
Six After One After Three
Within Six Months to Three to Five Over
Months to One Year Years Years Five Years Total
------------ ------------- ------------- --------- ------------ --------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 73,390 $ 48,969 $ 88,508 $ 45,673 $ 34,122 $290,662
Investments held to maturity 39 37 225 97 239 637
FHLB Stock 2,159 - - - - 2,159
Investment securities
available for sale 9,472 6,392 19,783 4,861 1,300 41,808
Federal funds sold
overnight and other
interest-bearing deposits 45,685 - - - - 45,685
------------ ------------- ------------- --------- ------------ ---------
Total rate sensitive assets $ 130,745 $ 55,398 $ 108,516 $ 50,631 $ 35,661 $380,951
============ ============= ============= ========= ============ =========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 8,160 $ 8,160 $ 32,639 $ 32,640 $ - $ 81,599
Passbook savings accounts 1,394 1,394 5,575 5,575 - 13,938
Money market accounts 9,160 9,159 36,638 36,637 - 91,594
Certificates of Deposit 71,653 40,815 29,801 3,284 4 145,557
Borrowings 27 27 108 108 728 998
------------ ------------- ------------- --------- ------------ ---------
Total rate sensitive liabilities $ 90,394 $ 59,555 $ 104,761 $ 78,244 $ 732 $333,686
============ ============= ============= ========= ============ =========
Excess (deficiency) of
interest sensitive
assets over interest
sensitive liabilities 40,351 (4,157) 3,755 (27,613) 34,929 47,265
Cumulative excess(deficiency)
of interest sensitive assets 40,351 36,194 39,949 12,336 47,265 47,265
Cumulative ratio of
interest-earning assets
to interest-bearing liabilities 144.64% 124.14% 115.68% 103.71% 114.16% 114.16%
Interest sensitive gap
to total assets 10.59% (1.09)% 0.99% (7.25)% 9.17% 12.41%
Ratio of interest-earning assets to
interest -bearing liabilities 144.64% 93.02% 103.58% 64.71% 4,871.72% 114.16%
Ratio of cumulative
gap to total assets 10.59% 9.50% 10.49% 3.24% 12.41% 12.41%
18
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
Liquidity and Capital Resources
The Company's primary source of funds are customer deposits, proceeds from
loan principal and interest payments, sale of loans, maturing securities and
FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient liquidity to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2001, cash and cash equivalents totaled $69.3 million or 16.00% of total assets.
At December 31, 2001, the Bank also maintained an available line of credit of
$10.0 million with the FHLB-Cincinnati that may be used as an additional source
of liquidity.
At December 31, 2001, the Bank's commitments to extend funds consisted of
unused lines of credit of $32.5 million, outstanding letters of credit of $4.6
million issued primarily to municipalities as performance bonds, and commitments
to originate loans of $27.9 million. The commitments to originate loans at
December 31, 2001 consisted of commitments to originate variable rate loans of
$22.7 million, and commitments to originate fixed rate loans of $5.2 million at
interest rates ranging from 5.90% to 8.13%.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 4.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. The Bank's liquidity ratio at December 31, 2001 was 15.11%.
The Bank to a large extent originates real estate mortgage loans for sale
in the secondary market. During the years ended December 31, 2001, 2000, and
1999, the Bank originated $158.2 million, $102.2 million, and $113.1 million of
such loans, respectively. During the years ended December 31, 2001, 2000, 1999,
the Bank sold in the secondary market $154.5 million, $104.1 million, and $121.7
million of these loans. At December 31, 2001, the Bank had loan commitments
totaling $27.9 million that were made up completely of undisbursed loans in
process. The Bank anticipates that it will have sufficient funds available to
meet current loan commitments. Certificates of deposit that are scheduled to
mature in less than one year from December 31, 2001 totaled $112.5 million.
Historically, the Bank has been able to retain a significant amount of its
deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of December 31, 2001, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 8.60%, 8.60% and 11.64%, respectively. The capital requirements which must
be met by the Bank as a state member bank are not materially different from
those required by the OTS.
Impact of Accounting Pronouncements and Regulatory Policies
Business Combinations. In June 2001, the FASB issued SFAS 141,"Business
Combinations". The Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16,"Business Combinations",
and SFAS 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of SFAS 141 are to be
accounted for using the purchase method. The provisions of SFAS 141 apply to
all business combinations initiated after June 30, 2001. SFAS 141 also applies
to all business combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001, or later. There is no expected impact
on earnings, financial conditions, or equity upon adoption of SFAS 141.
Goodwill and Other Intangible Assets. In June 2001, the FASB issued SFAS
142, "Goodwill and Other Intangible Assets". SFAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No 17, "Intangible Assets". However, SFAS 142 does not
supersede SFAS 72, "Accounting for Certain Acquisition of Banking or Thrift
Institutions" which applies to acquisitions of a commercial bank, a savings and
loan association, a mutual savings bank, a credit union, other depository
institutions having assets and liabilities of the same types as those
institutions, and branches of such enterprises. SFAS 142 addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. SFAS 142 also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The provisions of SFAS
142 are required to be applied starting with years beginning after December 15,
2001, except that goodwill and intangible assets acquired after June 30, 2001,
will be subject immediately to the nonamortization and amortization provisions
of SFAS 142. SFAS 142 is required to be applied at the beginning of an entity's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date.
Accounting for Asset Retirement Obligation. SFAS 143, "Accounting for
Asset Retirement Obligation" establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. The provisions of this statement are effective
for financial statements issued for fiscal years beginning after June 15, 2002,
with earlier application encouraged. The Company does not anticipate any
material impact on the Company's financial position, results of operations and
cash flow subsequent to the effective date of this statement.
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
144,"Accounting for the Impairment or Disposal of Long-Lived Assets", addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of this statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with earlier application encouraged. The Company
does not anticipate any material impact on the Company's financial position,
results of operations and cash flow subsequent to the effective date of this
statement.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative Aspects of Market Risk. The principal market risk affecting
the Company is risk associated with interest rate volatility ("interest rate
risk"). The Company does not maintain a trading account for any class of
financial instrument nor does it engage in
19
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Company is not subject to foreign currency exchange rate risk or commodity
price risk. Substantially all of the Company's interest rate risk is derived
from the Bank's lending and deposit taking activities. This risk could result
in reduced net income, loss in fair values of assets and/or increases in fair
values of liabilities due to upward changes in interest rates.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the
exposure of its earnings to changes in market interest rates by attempting to
manage the mismatch between assets and liability maturities and interest rates.
The principal element in achieving this objective is to increase the
interest-rate sensitivity of the Company's interest-earning assets by retaining
for its portfolio loans with interest rates subject to periodic adjustment to
market conditions and the selling of fixed-rate one- to- four family mortgage
loans. In addition the Company maintains an investment portfolio of U.S.
Government and agency securities with contractual maturities of between zero and
two years. The Company relies on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered deposits,
reduce the effects of its interest rate fluctuations because they generally
represent a more stable source of funds. As part of its interest rate risk
management strategy, the Bank promotes transaction accounts and certificates of
deposit with primarily terms of up to four years.
Interest Rate Sensitivity. The table below provides information about the
Company's financial instruments at December 31, 2001 that are sensitive to
changes in interest rates including off-balance sheet items. For financial
instruments the table presents principle cash flows and related average interest
rates by expected maturity dates with estimated fair values.
Since this presentation is a snapshot of the financial instruments as of
December 31, 2001 there are material limitations in not fully reflecting market
risk exposures. The table does not consider the effects of interest rate
changes on the embedded options on loans and deposit liabilities. Changes in
interest rates may cause borrowers to exercise the option to prepay loans before
the scheduled maturity. Depositors have the option to withdraw deposits before
maturity, which is the case with certificates of deposits or to withdraw funds
anytime from accounts with no stated maturity such as savings accounts. This
table also does not take into consideration the effects on reinvestment of
maturing financial instruments. This presentation does not consider that all
rate changes do not affect assets or liabilities in the same maturity range by
equal amounts. When interest rates change, all rates do not change in equal
amounts nor do they change at the same time. Some financial instruments have
indefinite maturities. That is to say that some assets and some significant
liabilities do not have clear maturities.
As of December 31, 2001, the Company's greatest exposure would be to
falling rates. The Company has more assets maturing than liabilities during the
one-year time frame, which can decrease the yield on assets faster than the cost
of funds on liabilities would decrease.
20
Cavalry Bancorp, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition
and Results of Operations (Continued)
After 3
Within One Years After 5
One Year To To 5 Years To Beyond 10
Year 3 Years Years 10 Years Years Total Fair Value
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Sensitive Assets:
Fixed rate loans $ 74,454 $ 71,456 $ 35,312 $ 4,901 $ 3,587 $ 189,710
Average Rate 7.017% 7.791% 7.963% 10.767% 6.381% 7.570%
Adjustable rate loans 47,905 17,052 10,361 12,652 12,982 100,952
Average Rate 5.671 6.302 6.908 7.380 7.410 6.342
---------------------------------------------------------------------------------
Total loans 122,359 88,508 45,673 17,553 16,569 290,662 293,268
Adjustable rate
Mortgage-backed securities 76 225 97 152 87 637 632
Average Rate 6.460 6.460 6.460 6.460 6.460 6.460
Fixed rate
Investments and other
interest-earning assets 15,864 19,783 4,861 1,300 - 41,808 41,808
Average Rate 5.959 4.822 5.458 3.068 - 5.273
Adjustable rate
Investments and other
interest-earning deposits 45,685 - - - - 45,685 45,685
Average Rate 1.186 - - - - 1.186
FHLB Stock 2,159 - - - - 2,159 2,159
Average Rate 5.500 - - - - 5.500
---------------------------------------------------------------------------------
Total Interest-
Sensitive Assets $186,143 $108,516 $ 50,631 $ 19,005 $16,656 $ 380,951
=================================================================================
Interest-Sensitive Liabilities:
Deposits with no
stated maturity
Now accounts $ 16,320 $ 32,639 $ 32,640 $ - $ - $ 81,599 $ 81,599
Average Rate 0.820% 0.820% 0.820% -% -% 0.820%
Savings accounts 2,788 5,575 5,575 - - 13,938 13,938
Average Rate 0.505 0.505 0.505 - - 0.505
Money Market 18,319 36,638 36,637 - - 91,594 91,594
Average Rate 1.860 1.860 1.860 - - 1.860
Fixed rate
Certificates of Deposit 110,484 29,547 3,284 4 - 143,319
Average Rate 4.106 4.637 5.910 4.750 - 4.243
Adjustable rate
Certificates of Deposit 1,984 254 - - - 2,238
Average Rate 2.203 1.970 - - - 2.177
---------------------------------------------------------------------------------
Total Certificates of Deposit 112,468 29,801 3,284 4 - 145,557 147,882
Fixed Rate Borrowings 54 108 108 270 458 998 765
Average Rate 2.250 2.250 2.250 2.250 2.250 2.250
---------------------------------------------------------------------------------
Total Interest-Sensitive
Liabilities $149,949 $104,761 $ 78,244 $ 274 $ 458 $ 333,686
=================================================================================
Off-Balance Sheet Items:
Commitments to extend credit $ 27,896 $ 27,896
Average Rate 5.380%
Unused lines of credit $ 32,492 $ 32,492
Average Rate 4.750%
21
[Rayburn, Betts & Bates, P.C. logo]
Independent Auditors' Report
----------------------------
Board of Directors
Cavalry Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the accompanying consolidated balance sheets of Cavalry
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of income, comprehensive income, changes
in equity and cash flows for each of the three years in the period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Rayburn, Betts & Bates
Nashville, Tennessee
January 25, 2002
22
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
--------- ---------
Assets
Cash (note 2) $ 23,596 $ 18,025
Interest-bearing deposits with other financial institutions 45,685 27,000
--------- ---------
Cash and cash equivalents 69,281 45,025
Investment securities available-for-sale (note 3) 41,808 32,247
Investment securities held-to-maturity (note 4) 637 594
Loans held for sale, at estimated fair value (note 5) 10,423 4,183
Loans receivable, net (notes 5 and 10) 280,239 279,478
Accrued interest receivable:
Loans, net of allowance for delinquent interest of
$16 and $15 in 2001 and 2000, respectively 1,544 2,005
Investment securities available-for-sale 577 549
Investment securities held-to-maturity 18 5
Office properties and equipment, net (note 6) 15,554 15,255
Required investment in stock of Federal Home Loan Bank, at cost (note 7) 2,159 2,020
Deferred tax asset, net (note 11) 1,295 1,280
Real estate acquired in settlement of loans 184 86
Bank owned life insurance 7,500 -
Other assets (note 8) 1,655 1,558
--------- ---------
Total assets $432,874 $384,285
========= =========
Liabilities and Equity
Liabilities:
Deposits (note 9) $380,990 $336,534
Advances from Federal Home Loan Bank of Cincinnati (note 10) 998 1,578
Accrued interest payable 338 555
Advance payments by borrowers for property taxes and insurance 131 174
Income taxes payable (note 11) 332 207
Accrued expenses and other liabilities (note 12) 1,279 1,266
--------- ---------
Total liabilities 384,068 340,314
--------- ---------
Equity (notes 12, 13, 14 and 15):
Preferred stock, no par value:
Authorized - 250,000 shares, none issued or outstanding at:
December 31, 2001 and 2000 - -
Common stock, no par value:
Authorized - 49,750,000 shares; issued and outstanding:
7,079,801 and 7,104,801 shares at December 31, 2001
and 2000, respectively 11,683 11,489
Retained earnings 40,700 39,991
Unearned restricted stock - (3,224)
Unallocated ESOP shares (3,723) (4,380)
Accumulated other comprehensive income, net of taxes 146 95
--------- ---------
Total equity 48,806 43,971
--------- ---------
Total liabilities and equity $432,874 $384,285
========= =========
Commitments and contingencies (notes 2, 12 and 19)
See accompanying notes to consolidated financial statements.
23
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share amounts)
2001 2000 1999
------- ------- --------
Interest and dividend income:
Loans $24,146 $25,947 $23,691
Investment securities 2,744 1,687 2,249
Deposits with other financial institutions 1,218 1,802 2,068
------- ------- --------
Total interest and dividend income 28,108 29,436 28,008
------- ------- --------
Interest expense:
Deposits (note 9) 12,618 12,896 9,982
Advances from Federal Home Loan Bank of Cincinnati 31 45 -
Other borrowings - 129 148
------- ------- --------
Total interest expense 12,649 13,070 10,130
------- ------- --------
Net interest income 15,459 16,366 17,878
Provision for loan losses (note 5) 661 306 991
------- ------- --------
Net interest income after provision for loan losses 14,798 16,060 16,887
------- ------- --------
Non-interest income:
Servicing income 249 256 219
Gain on sale of real estate acquired in settlement of loans 24 6 3
Gain on sale of loans, net 2,537 1,548 2,245
Gain on sale of office properties and equipment - 2 -
Deposit servicing fees and charges 3,710 2,513 2,002
Trust service fees 1,096 1,067 936
Other operating income 684 303 243
------- ------- --------
Total non-interest income 8,300 5,695 5,648
------- ------- --------
Non-interest expenses:
Compensation, payroll taxes and fringe benefits (notes 12 and 13) 12,211 9,268 10,539
Occupancy expense 977 789 728
Supplies, communications and other office expenses 883 793 855
Federal insurance premiums 63 63 153
Advertising expense 365 278 297
Equipment and service bureau expense 2,457 2,064 2,378
Other taxes 379 299 393
Other operating expenses 1,329 1,146 1,042
------- ------- --------
Total non-interest expenses 18,664 14,700 16,385
------- ------- --------
Income before income tax expense 4,434 7,055 6,150
Income tax expense (note 11) 2,435 3,003 2,681
------- ------- --------
Net income $ 1,999 $ 4,052 $ 3,469
======= ======= ========
Basic earnings per share (note 16) $ 0.31 $ 0.64 $ 0.52
======= ======= ========
Diluted earnings per share (note 16) $ 0.31 $ 0.64 $ 0.52
======= ======= ========
See accompanying notes to consolidated financial statements.
24
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
------- ------- --------
Net income $ 1,999 $ 4,052 $ 3,469
Other comprehensive income, net of tax (note 22) -
Unrealized gain (loss) on investment securities available-for-sale 51 97 (53)
------- ------- --------
Comprehensive income $ 2,050 $ 4,149 $ 3,416
======= ======= ========
See accompanying notes to consolidated financial statements.
25
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share amounts)
Accumulated
Unearned Unallocated Other
Common Common Retained Restricted ESOP Comprehensive Total
Shares Stock Earnings Stock Shares Income (Loss) Equity
------------ ------------- ---------- ------------ -------- --------------- ---------
Balance, December 31, 1998 7,161,337 $ 65,705 $ 35,037 $ - $(5,612) $ 51 $ 95,181
Net income - - 3,469 - - - 3,469
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $32 - - - - - (53) (53)
Issuance of common
stock for MRP (note 13) 301,530 6,747 - (6,747) - - -
ESOP shares committed for
release (note 12) - 671 - - 593 - 1,264
Purchase and retirement
of common stock
(note 14) (358,066) (8,865) - - - - (8,865)
Dividends
($0.20 per share) - - (1,312) - - - (1,312)
Deferred MRP shares
earned (note 13) - - - 2,367 - - 2,367
Cash distribution
($7.50 per share) - (53,286) - - - - (53,286)
------------ ------------- ---------- ------------ -------- --------------- ---------
Balance, December 31, 1999 7,104,801 10,972 37,194 (4,380) (5,019) (2) 38,765
Net income - - 4,052 - - - 4,052
Change in valuation
allowance for
investment securities
available-for-sale,
net of income taxes of $58 - - - - - 97 97
ESOP shares committed
for release (note 12) - 517 - - 639 - 1,156
Dividends ($0.20 per share) - - (1,255) - - - (1,255)
Deferred MRP shares
earned (note 13) - - - 1,156 - - 1,156
------------ ------------- ---------- ------------ -------- --------------- ---------
Balance, December 31, 2000 7,104,801 11,489 39,991 (3,224) (4,380) 95 43,971
Net income - - 1,999 - - - 1,999
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $35 - - - - - 51 51
ESOP shares committed for
release (note 12) - 465 - - 657 - 1,122
Purchase and retirement of
common stock (note 14) (25,000) (271) - - - - (271)
Dividends ($0.20 per share) - - (1,290) - - - (1,290)
Deferred MRP shares
earned (note 13) - - - 3,224 - - 3,224
------------ ------------- ---------- ------------ -------- --------------- ---------
Balance, December 31, 2001 7,079,801 $ 11,683 $ 40,700 $ - $(3,723) $ 146 $ 48,806
============ ============= ========== ============ ======== =============== =========
See accompanying notes to consolidated financial statements.
26
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
---------- ---------- ----------
Operating activities:
Net income $ 1,999 $ 4,052 $ 3,469
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 661 306 991
Gain on sales of real estate acquired in settlement of loans, net (24) (6) (3)
Gain on sales of loans, net (2,537) (1,548) (2,245)
Gain on sale of office properties and equipment - (2) -
Depreciation and amortization on office properties and equipment 1,200 928 1,101
Allocation of ESOP shares at fair value 1,122 1,156 1,264
Compensation expense recognized on restricted stock 3,224 1,156 2,367
Net amortization (accretion) of investment securities premiums and discounts 34 (266) (112)
Accretion of deferred loan origination fees (882) (837) (1,035)
Loan fees collected 907 794 1,047
Deferred income tax (benefit) expense (15) (12) 133
Stock dividends on Federal Home Loan Bank stock (139) (142) (127)
Proceeds from sales of loans 154,515 104,074 121,735
Origination of loans held for sale (158,218) (102,224) (113,052)
Decrease (increase) in accrued interest receivable 420 (775) 592
Decrease (increase) in other assets (97) 140 (318)
Increase (decrease) in accrued interest payable (217) 48 222
Decrease in accrued expenses and other liabilities (21) (350) (81)
Increase (decrease) in income taxes payable 125 (275) (1,002)
---------- ---------- ----------
Net cash provided by operating activities 2,057 6,217 14,946
---------- ---------- ----------
Investing activities:
Increase in loans receivable, net (1,727) (7,842) (35,750)
Principal payments on investment securities available-for-sale and held-to-maturity 168 55 297
Proceeds from the sales of office properties and equipment - 44 -
Purchases of investment securities available-for-sale (72,750) (37,860) (41,920)
Purchases of investment securities held-to-maturity (100) - -
Proceeds from maturities of investment securities available-for-sale 63,130 13,000 81,500
Purchases of office properties and equipment (1,499) (6,333) (2,211)
Proceeds from sale of real estate acquired through foreclosure 206 398 -
Purchase of bank owned life insurance (7,500) - -
---------- ---------- ----------
Net cash (used in) provided by investing activities (20,072) (38,538) 1,916
---------- ---------- ----------
Financing activities:
Net increase in deposits 44,456 27,605 42,897
Advances from Federal Home Loan Bank of Cincinnati - 1,614 -
Repayment of advances from Federal Home Loan Bank of Cincinnati (580) (36) -
Other borrowings advances (repayments) - (45,000) 45,000
Net decrease in advance payments by borrowers
for property taxes and insurance (43) (4) (59)
Cash distribution - - (53,286)
Retirement of common stock (271) - (8,865)
Dividends paid (1,291) (1,255) (1,315)
---------- ---------- ----------
Net cash provided by (used in) financing activities 42,271 (17,076) 24,372
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 24,256 (49,397) 41,234
Cash and cash equivalents, beginning of year 45,025 94,422 53,188
---------- ---------- ----------
Cash and cash equivalents, end of year $ 69,281 $ 45,025 $ 94,422
========== ========== ==========
See accompanying notes to consolidated financial statements.
27
Cavalry Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------- -------- -------
Supplemental Disclosures of Cash Flow Information:
Payments during the period for:
Interest $12,866 $13,022 $9,908
======== ======== =======
Income taxes $ 2,310 $ 3,485 $3,550
======== ======== =======
Supplemental Disclosures of Noncash Investing and Financing Activities:
Foreclosures and in substance foreclosures of loans during year $ 321 $ 392 $ 86
======== ======== =======
Interest credited to deposits $ 4,460 $ 4,530 $3,827
======== ======== =======
Net unrealized gains (losses) on investment securities available-for-sale $ 86 $ 155 $ (85)
======== ======== =======
Increase in deferred tax asset (liability) related
to unrealized gain (loss) on investments $ (35) $ (58) $ 32
======== ======== =======
Issuance of common stock to MRP $ - $ - $6,747
======== ======== =======
Dividends declared and payable $ 354 $ 355 $ 355
======== ======== =======
See accompanying notes to consolidated financial statements.
28
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
1) Summary of Significant Accounting Policies:
Nature of Operations and Customer Concentration
Cavalry Bancorp, Inc. (the Corporation) is a unitary thrift holding company
incorporated in the state of Tennessee. The Company's principal business
activities are conducted through it's wholly-owned subsidiary, Cavalry Banking
(the Bank), which is a federally chartered savings bank engaged in the business
of accepting savings and demand deposits and providing mortgage, consumer,
construction and commercial loans to the general public through its retail
banking offices. The Bank's business activities are primarily limited to within
Rutherford County and adjacent counties of Tennessee. The Bank is subject to
competition from other financial institutions. Deposits at the Bank are insured
up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC).
The Bank is subject to comprehensive regulation, examination and supervision by
the Office of Thrift Supervision (OTS) and the FDIC.
A substantial portion of the Bank's loans are secured by real estate in the
Middle Tennessee market. In addition, foreclosed real estate is located in this
same market. Accordingly, the ultimate collectibility of a substantial portion
of the Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate is susceptible to changes in local
market conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation, the Bank and its wholly-owned subsidiary Cavalry Enterprises, Inc.,
(collectively the Company). Significant intercompany balances and transactions
have been eliminated in consolidation under the equity method.
Accounting
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices in the banking industry.
Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and revenues and
expenses for the year. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
Cash Equivalents
Cash equivalents include cash and demand and time deposits at other
financial institutions with remaining maturities of three months or less.
Investment Securities
In accordance with Statement of Financial Accounting Standards No. (SFAS)
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company is required to report debt, readily-marketable equity, mortgage-backed
and mortgage related securities in one of the following categories: (i)
"held-to-maturity" (management has a positive intent and ability to hold to
maturity) which are to be reported at amortized cost adjusted, in the case of
debt securities, for the amortization of premiums and accretion of discounts;
(ii) "trading" (held for current resale) which are to be reported at fair value,
with unrealized gains and losses included in earnings; and (iii)
"available-for-sale" (all other debt, equity, mortgage-backed and mortgage
related securities) which are to be reported at fair value, with unrealized
gains and losses reported net of tax as a separate component of equity. At the
time of new securities purchases, a determination is made as to the appropriate
classification. Realized and unrealized gains and losses on trading securities
are included in net income. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in equity,
net of any tax effect. Cost of securities sold is recognized using the specific
identification method.
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. Unearned discounts on
installment loans are recognized as income over the term of the loans using the
interest method.
Loan origination and commitment fees, as well as certain origination costs,
are deferred and amortized as a yield adjustment over the
29
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
lives of the related loans adjusted for estimated prepayments based on the
Company's historical prepayment experience, using the interest method. Loans
are placed on nonaccrual when a loan is specifically determined to be impaired
or when principal or interest is delinquent for 90 days or more. Any unpaid
interest previously accrued on these loans is reversed from income and an
allowance for accrued interest is recorded.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses.
Loans are considered to be impaired when, in management's judgement,
principal or interest is not collectible according to the contractual terms of
the loan agreement. When conducting loan evaluations, management considers
various factors such as historical loan performance, the financial condition of
the borrower and adequacy of collateral to determine if a loan is impaired.
The measurement of impaired loans generally is based on the present value
of future cash flows discounted at the historical effective interest rate,
except that collateral-dependent loans generally are measured for impairment
based on the fair value of the collateral. When the measured amount of an
impaired loan is less than the recorded investment in the loan, the impairment
is recorded as a charge to income and a valuation allowance which is included as
a component of the allowance for loan losses.
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate basis.
Net unrealized losses are recognized in a valuation allowance through charges to
income. Gains and losses on the sale of loans held for sale are determined
using the specific identification method.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans includes property acquired
through foreclosure and deeds in lieu of foreclosure. Property acquired by deed
in lieu of foreclosure results when a borrower voluntarily transfers title to
the Company in full settlement of the related debt in an attempt to avoid
foreclosure. Real estate acquired in settlement of loans is valued at the date
of acquisition and thereafter at the lower of fair value less costs to sell or
the Company's net investment in the loan and subsequent improvements to the
property. Certain costs relating to holding the properties, and gains or losses
resulting from the disposition of properties are recognized in the current
period's operations.
Office Properties and Equipment
Depreciation and amortization are provided over the estimated useful lives
of the respective assets which range from 3 to 40 years. All office properties
and equipment are recorded at cost and are depreciated on the straight-line
method.
Advertising
The Company expenses the production cost of advertising as incurred.
Income Taxes
Under the asset and liability method of SFAS 109, Accounting for Income
Taxes, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance must
be established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files consolidated federal income and combined state franchise
and excise tax returns. All taxes are accrued on a separate entity basis.
Fair Values of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the consolidated balance sheets for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Fair value estimates are made at a point in
time, based on relevant market information and information about the financial
instrument. Accordingly, such estimates involve uncertainties and matters of
judgment and therefore cannot be determined with precision. SFAS 107 excludes
certain financial instruments and all non-financial instruments
30
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following are the more significant methods and assumptions used by the
Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximate those
assets' fair values, because they mature within 90 days or less and do not
present credit risk concerns.
Investment securities available-for-sale and held-to-maturity: Fair values
for investment securities available-for-sale and held-to-maturity are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for loans receivable are estimated using
discounted cash flow analysis which considers future repricing dates and
estimated repayment dates, and further using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics.
Loans held for sale: Fair value is based on investor commitments, or in
the absence of such commitments, on current investor yield requirements.
Accrued interest receivable: Fair value is estimated to approximate the
carrying amount because such amounts are expected to be received within 90 days
or less and any credit concerns have been previously considered in the carrying
value.
Deposits: The fair values disclosed for deposits with no stated maturity
such as demand deposits, interest-bearing checking accounts and passbook savings
accounts are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair values for
certificates of deposit and other fixed maturity time deposits are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on such type accounts to a schedule of aggregated contractual
maturities on such time deposits.
Accrued interest payable: The carrying amount will approximate fair value
as the majority of such interest will be paid within 90 days or less.
Other borrowings: The carrying amount will approximate fair value because
they mature within 90 days.
Advances from the FHLB: The fair value of these advances is estimated by
discounting the future cash flows of these advances using the current rates at
which similar advances could be obtained.
Commitments to extend credit: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates.
Sale and Servicing of Mortgage Loans
The Company sells mortgage loans for cash proceeds equal to the principal
amount of the loans sold but with yield rates which reflect the current market
rate. Gain or loss is recorded at the time of sale in an amount reflecting the
difference between the contractual interest rates of the loans sold and the
current market rate. Certain loans are sold with the servicing retained by the
Company. Servicing income is recognized as collected and is based on the normal
agency servicing fee as defined by GNMA, FNMA, or FHLMC. For mortgage servicing
rights that are created through the origination of mortgage loans, and where the
loans are subsequently sold or securitized with servicing rights retained, the
Company allocates the total cost of the mortgage loans to the mortgage servicing
rights and the loans based on their relative fair values. The Company
periodically makes an assessment of capitalized mortgage servicing rights for
impairment based on the current fair value of those rights.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights (MSRs) are
amortized, as a reduction to loan service fee income, using the interest method
over the estimated remaining life of the underlying mortgage loans. MSR assets
are carried at fair value and impairment, if any, is recognized through a
valuation allowance. The Company primarily sells its mortgage loans on a
non-recourse basis.
Earnings Per Share
Earnings per share (EPS) consists of two separate components, basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents (CSE). CSE
consists of dilutive stock options granted through the Company's stock option
plan. Common stock equivalents which are considered antidilutive are not
included for the purposes of this calculation. During 2001, 2000 and 1999,
there were no antidilutive CSEs.
Stock Options
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, as permitted by SFAS
123, Accounting for Stock-Based Compensation. As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock
31
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
exceeds the exercise price. SFAS 123 requires entities which continue to apply
the provisions of APB Opinion No. 25 to provide pro-forma earnings per share
disclosure for stock option grants made in 1995 and subsequent years as if the
fair value based method defined in SFAS 123 had been applied.
Effect of New Accounting Pronouncements
In June 2001, the FASB issued SFAS 141, Business Combinations. The
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and SFAS 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of SFAS 141 are to be accounted for using the
purchase method. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001. SFAS 141 also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. There is no expected impact on earnings,
financial conditions, or equity upon adoption of SFAS 141.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No 17,
Intangible Assets. However, SFAS 142 does not supersede SFAS 72, Accounting for
Certain Acquisition of Banking or Thrift Institutions which applies to
acquisitions of a commercial bank, a savings and loan association, a mutual
savings bank, a credit union, other depository institutions having assets and
liabilities of the same types as those institutions, and branches of such
enterprises. SFAS 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. SFAS 142 also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. The provisions of SFAS 142 are required to be applied
starting with years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of SFAS 142. SFAS 142 is
required to be applied at the beginning of an entity's fiscal year and to be
applied to all goodwill and other intangible assets recognized in its financial
statements at that date.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 establishes accounting standards for the recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assets. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The Company does not anticipate any material impact on
the Company's financial position, results of operations and cash flow subsequent
to the effective date of this statement.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions
of this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with earlier application encouraged. The Company does not anticipate any
material impact on the Company's financial position, results of operations and
cash flow subsequent to the effective date of this statement.
Reclassification
Certain 2000 and 1999 amounts have been reclassified to conform to the
December 31, 2001 presentation.
(2) Cash:
The Company is required to maintain cash on hand or in the Federal Reserve
Bank account for various regulatory purposes. During 2001 and 2000, such
required cash averaged approximately $6,417,000 and $5,345,000, respectively.
32
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
(3) Investment Securities Available-for-Sale:
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31, 2001 and 2000 are as follows:
December 31, 2001
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- --------
U.S. Treasury securities $ 1,000 $ 4 $ - $ 1,004
Obligations of U.S. Government agencies 30,571 411 - 30,982
Collateralized mortgage obligations and mortgage-backed securities 10,000 - 178 9,822
---------- ----------- ----------- --------
$ 41,571 $ 415 $ 178 $41,808
========== =========== =========== ========
December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ----------- --------- --------
U.S. Treasury securities $ 8,976 $ 33 $ - $ 9,009
Obligations of U.S. Government agencies 23,120 126 8 23,238
------------- ----------- --------- --------
$ 32,096 $ 159 $ 8 $32,247
============= =========== ========= ========
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 2001, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
---------- -------
U.S. Treasury securities and obligations of U.S. Government agencies:
Maturing within one year $ 13,048 $13,256
Maturing within one through five years 17,511 17,716
Maturing within five through ten years 1,012 1,014
---------- -------
31,571 31,986
Collateralized mortgage obligations and mortgage-backed securities 10,000 9,822
---------- -------
$ 41,571 $41,808
========== =======
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 2000, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
---------- -------
U.S. Treasury securities and obligations of U.S. Government agencies:
Maturing within one year $ 21,096 $21,142
Maturing within one through five years 11,000 11,105
---------- -------
$ 32,096 $32,247
========== =======
Certain securities, with amortized cost of $29.6 million and estimated fair
value of $30.0 million at December 31, 2001 and amortized cost and estimated
fair value of $11.0 million at December 31, 2000, were pledged as collateral as
permitted or required by law.
There were no sales of investment securities available-for-sale in the
years ended December 31, 2001, 2000, and 1999.
33
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
(4) Investment Securities Held-to-Maturity:
The amortized cost and estimated fair values of investment securities
held-to-maturity at December 31, 2001 and 2000, are as follows:
December 31, 2001
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ------
Certificate of Deposit $ 100 $ - $ 5 $ 95
Mortgage-backed securities:
FHLMC 161 1 1 161
FNMA 376 1 1 376
---------- ----------- ----------- ------
Total investment securities held-to-maturity $ 637 $ 2 $ 7 $ 632
========== =========== =========== ======
December 31, 2000
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ------
Mortgage-backed securities:
FHLMC $ 185 $ - $ 3 $ 182
FNMA 409 1 3 407
---------- ----------- ----------- ------
Total investment securities held-to-maturity $ 594 $ 1 $ 6 $ 589
========== =========== =========== ======
As of December 31, 2001, the certificate of deposit had a contractual
maturity of within one year through five years and the mortgage-backed
securities had contractual maturity dates of greater than ten years.
As of December 31, 2000, investment securities held-to-maturity had
contractual maturity dates of greater than ten years.
(5) Loans Held for Sale, Net and Loans Receivable, Net:
Loans held for sale, net are summarized as follows:
2001 2000
------- ------
One-to-four family loans $10,423 $4,183
------- ------
Total loans held for sale, net $10,423 $4,183
======= ======
The Company originates most fixed rate loans for immediate sale to the
Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally,
the sale of such loans is arranged at the time the loan application is received
through commitments.
Loans receivable, net at December 31, 2001 and 2000, consisted of the
following:
2001 2000
-------- --------
First mortgage loans:
One-to-four family $ 68,002 $ 64,776
Multi-family 3,224 2,519
Land 19,058 21,498
Commercial real estate 90,206 80,029
Construction and development 57,287 56,015
-------- --------
Total first mortgage loans 237,777 224,837
Junior mortgage loans 4,572 5,322
Commercial loans 40,594 38,177
Consumer loans 40,852 46,773
-------- --------
323,795 315,109
Less:
Loans in process 27,896 26,471
Allowance for loan losses 4,470 4,235
Deferred loan fees, net 767 742
Loans held for sale 10,423 4,183
-------- --------
Loans receivable, net $280,239 $279,478
======== ========
34
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
Loans serviced for the benefit of others totaled approximately $87.9
million, $111.4 million and $124.1 million at December 31, 2001, 2000 and 1999,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow amounts, disbursing payments to investors
and foreclosure processing.
Qualified one-to-four family first mortgage loans are pledged to the
Federal Home Loan Bank of Cincinnati as discussed in note 10.
Impaired loans and related valuation allowance amounts at December 31, 2001
and 2000 were as follows:
2001 2000
---- ----
Recorded investment $3,925 $3,900
Valuation allowance $ 642 $ 615
The average recorded investment in impaired loans for the years ended
December 31, 2001, 2000 and 1999 was $3,509,000, $3,666,000 and $1,492,000,
respectively. Interest income recognized on impaired loans was not significant
during the years ended December 31, 2001, 2000 and 1999.
Activity in the allowance for loan losses, consisted of the following:
2001 2000 1999
------- ------- -------
Balance at beginning of period $4,235 $4,136 $3,231
Provision for loan losses 661 306 991
Recoveries 114 29 16
Charge-offs (540) (236) (102)
------- ------- -------
Balance at end of period $4,470 $4,235 $4,136
======= ======= =======
Non-accrual loans totaled approximately $394,000 and $123,000 at December
31, 2001 and 2000, respectively. Interest income foregone on such loans was not
significant during the years ended December 31, 2001, 2000 and 1999. The
Company is not committed to lend additional funds to borrowers whose loans have
been placed on a non-accrual basis.
There were no loans three months or more past due which were still accruing
interest as of December 31, 2001 and 2000.
The Company originates loans to officers and directors at terms
substantially identical to those available to other borrowers. Mortgage and
consumer loans to officers and directors at December 31, 2001 and 2000 were
approximately $1,656,000 and $2,011,000, respectively. At December 31, 2001
funds committed that were undisbursed to officers and directors approximated
$4,596,000.
The following summarizes activity of these loans for the year ended
December 31, 2001 and 2000:
2001 2000
-------- --------
Balance at beginning of period $ 2,011 $ 3,155
New loans 3,652 4,754
Principal repayments (4,007) (5,898)
-------- --------
Balance at end of period $ 1,656 $ 2,011
======== ========
(6) Office Properties and Equipment, Net:
Office properties and equipment, less accumulated depreciation and
amortization, consisted of the following at December 31, 2001 and 2000:
2001 2000
------- -------
Land $ 3,440 $ 3,440
Office buildings 11,638 11,170
Furniture, fixtures, and equipment 8,440 7,514
Leasehold improvements 432 315
Automobiles 128 146
Construction in process 3 7
------- -------
24,081 22,592
Less accumulated depreciation and amortization 8,527 7,337
------- -------
Office properties and equipment, net $15,554 $15,255
======= =======
35
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands, except percentages)
(7) Required Investment in Stock of Federal Home Loan Bank:
The Bank is a member of the Federal Home Loan Bank (FHLB). As a member of
this system, the Bank is required to maintain an investment in capital stock of
the Federal Home Loan Bank of Cincinnati in an amount equal to the greater of 1%
of residential mortgage loans and mortgage-backed securities, or .3% of total
assets of the Bank. At December 31, 2001, no additional investments are
required. No ready market exists for the stock, and it has no quoted market
value, but may be redeemed for face value by the FHLB if the Bank withdraws its
membership. Accordingly, this investment is carried at the Bank's historical
cost.
(8) Mortgage Servicing Rights:
An analysis of the activity for originated mortgage servicing rights is as
follows:
Balance, December 31, 1998 $ 669
Originations 323
Amortization (321)
------
Balance, December 31, 1999 671
Originations -
Amortization (199)
------
Balance, December 31, 2000 472
Originations -
Amortization (172)
------
Balance, December 31, 2001 $ 300
======
Mortgage servicing rights are included in other assets on the consolidated
balance sheet. During 2001 and 2000, the Company sold an insignificant amount
of mortgage loans with servicing rights retained.
(9) Deposits:
Savings, demand, and time deposit account balances are summarized as
follows:
December 31, 2001
-----------------------
Weighted
Type of Account Average Rate Amount
- ----------------------- ------------- --------
Personal accounts -% $ 48,302
NOW accounts .82 81,599
Money market accounts 1.86 91,594
Savings accounts .51 13,938
Certificates of deposit 4.22 145,557
--------
$380,990
========
December 31, 2000
-----------------------
Weighted
Type of Account Average Rate Amount
- ----------------------- ------------- --------
Personal accounts -% $ 38,630
NOW accounts 1.47 52,343
Money market accounts 4.79 69,797
Savings accounts 1.24 13,248
Certificates of deposit 6.37 162,516
--------
$336,534
========
Scheduled maturities of certificates of deposit are as follows:
December 31, 2001
---------------------------------
Weighted
Average Rate Amount Percent
------------- --------- --------
1 year or less 4.08% $112,468 77.27%
Greater than 1 year through 2 years 4.39 19,997 13.74
Greater than 2 years through 3 years 5.08 9,804 6.74
Greater than 3 years through 4 years 5.96 1,734 1.19
Greater than 4 years through 5 years 4.57 1,550 1.06
Thereafter 4.75 4 -
--------- --------
$ 145,557 100.00%
========== =========
36
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands, except percentages)
December 31, 2000
----------------------------------------
Weighted
Average Rate Amount Percent
------------------- --------- --------
1 year or less 6.39% $133,195 81.96%
Greater than 1 year through 2 years 6.24 20,097 12.37
Greater than 2 years through 3 years 6.00 5,610 3.45
Greater than 3 years through 4 years 6.41 2,063 1.27
Greater than 4 years through 5 years 6.41 1,502 0.92
Thereafter 5.75 49 0.03
--------- --------
$ 162,516 100.00%
========= =======
Certificates of deposit in excess of $100,000 were approximately $41.1
million and $45.0 million at December 31, 2001 and 2000, respectively.
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Bank must pay a risk-based annual
assessment which considers the financial soundness of the institution and
capitalization level. At December 31, 2001, the Bank was assessed at the FDIC's
lowest assessment level, as a well capitalized institution.
Interest expense on deposit balances for the years ended December 31, 2001,
2000 and 1999 is summarized as follows:
2001 2000 1999
------- ------- ------
Savings accounts $ 130 $ 169 $ 184
Money market and NOW accounts 3,461 3,660 2,885
Certificates of deposit 9,027 9,067 6,913
------- ------- ------
$12,618 $12,896 $9,982
======= ======= ======
(10) Advances from the Federal Home Loan Bank of Cincinnati:
FHLB advances are summarized as follows:
December 31,
-----------------------------------
2001 2000
-----------------------------------
Weighted Weighted
Average Average
Type of Advances Amount Rate Amount Rate
- -------------------------------------------------------------------------------
Fixed-rate $ 998 2.25% $1,578 3.68%
===== ===== ====== =====
Scheduled maturities of FHLB advances as of December 31, 2001 are as
follows:
Amount at
Year Ended Stated
December 31, Maturity
----------- --------
2002 $54
2003 54
2004 54
2005 54
2006 54
Thereafter 728
---
$998
====
The Bank has an approved line of credit of $10,000,000 at December 31, 2001
which is secured by a blanket agreement to maintain residential first mortgage
loans with a principal value of 125% of the outstanding advances and has a
variable interest rate. The Company can increase its borrowings from the FHLB
to $43,184,000 at December 31, 2001.
37
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands, except percentages)
(11) Income Taxes:
The components of income tax expense (benefit) are as follows:
2001 2000 1999
------- ------- ------
Current income tax expense:
Federal $2,071 $2,538 $2,139
State 379 477 409
------- ------- ------
Total current income tax expense 2,450 3,015 2,548
------- ------- ------
Deferred income tax (benefit) expense:
Federal (13) (11) 119
State (2) (1) 14
------- ------- ------
Total deferred income tax (benefit) expense (15) (12) 133
------- ------- ------
Income tax expense $2,435 $3,003 $2,681
======= ======= ======
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated statements of income, with that which would
be computed by applying the statutory federal income tax rate of 34% to income
before income taxes.
2001 2000 1999
- -------------------------------------------------------------------------------------------
Tax expense at statutory rates $1,508 34.0% $2,399 34.0% $2,091 34.0%
Increases (decrease) in taxes resulting from:
State income tax, net of federal effect 250 5.6 314 4.5 279 4.5
Nondeductible ESOP compensation 247 5.6 299 4.2 228 3.7
Nondeductible MRP compensation 286 6.5 105 1.5 40 0.7
Other, net 144 3.2 (114) (1.6) 43 0.7
------ ----- ------- ----- ------ -----
Total income tax expense $2,435 54.9% $3,003 42.6% $2,681 43.6%
====== ===== ======= ===== ====== =====
In years ended December 31, 1995 and prior, the Bank was allowed under the
Internal Revenue Code to deduct, subject to certain conditions, an annual
addition to a reserve for bad debts (reserve method) in determining taxable
income. Legislation enacted in August 1996 repealed the reserve method
effective for the Bank for the year ended December 31, 1996.
The tax effects of temporary differences that give rise to the significant
portions of deferred tax asset and liabilities at December 31, 2001 and 2000,
are as follows:
2001 2000
------ ------
Deferred tax assets:
Loans receivable, allowance for loan losses $1,670 $1,589
Deferred loan fees 291 281
Other 14 -
------ ------
Total deferred tax asset 1,975 1,870
------ ------
Deferred tax liabilities:
FHLB stock 518 464
Office properties and equipment 156 126
Other 6 -
------ ------
Total deferred tax liability 680 590
------ ------
Net deferred tax asset $1,295 $1,280
====== ======
SFAS 109, Accounting for Income Taxes, requires that the tax benefit of
deductible temporary differences be recorded as an asset to the extent that
management assesses the utilization of such temporary differences to be "more
likely than not." In accordance with SFAS 109, the realization of tax benefits
of deductible temporary differences depends on whether the Company has
sufficient taxable income within the carryback and carryforward period permitted
by tax law to allow for utilization of the deductible amounts. Taxable income
in the carryback period and estimates of taxable income in the carryforward
period were expected to be sufficient to utilize such differences. As such, no
valuation allowance was established at December 31, 2001 and 2000.
38
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(12) Employee Benefit Plans:
401(k) Plan - The Company sponsors a 401(k) plan, which is available to all
employees who meet minimum eligibility requirements. Management has contributed
2% of employees' earnings to the Plan on the employees' behalf. Participants
may generally contribute up to 15% of earnings, and, in addition, management
will match employee contributions up to 4%. Expense related to Company
contributions amounted to $345,000, $285,000 and $213,000 in the years ended
December 31, 2001, 2000 and 1999, respectively.
Employee Stock Ownership Plan - The Cavalry Banking Employee Stock
Ownership Plan (ESOP) is a noncontributory retirement plan adopted by the
Company effective January 1, 1998 which includes all employees who meet minimum
eligibility requirements. The ESOP acquired 603,060 shares of the Corporation's
common stock at the time of conversion at a price of $10 per share with proceeds
of a loan from the Corporation in the amount of approximately $6,031,000. The
Bank makes periodic cash contributions to the ESOP in an amount sufficient for
the ESOP to make the scheduled payments under the note payable to the
Corporation. In connection with the cash distribution (discussed in note 14),
the ESOP received approximately $4.5 million on its shares of the Corporation's
common stock. The ESOP purchased an additional 321,305 shares with the
proceeds.
This off-balance sheet note payable has a term of 12 years, bears interest
at 8.5% and requires a level quarterly payment of principal and interest of
approximately $202,000. The note is collateralized by the shares of common
stock held by the ESOP.
As the note is repaid, shares are released from collateral based on the
proportion of the payment in relation to total payments required to be made on
the loan. The shares released from collateral are then allocated to
participants based upon compensation. Compensation expense is determined by
multiplying the per share market price of the Corporation's stock at the time
the shares are committed to be released by the number of shares to be released.
The value of the released shares is recorded at cost as a deduction to common
stock and the value of the released shares at market is recorded as an addition
or deduction to unallocated ESOP shares. The Company recognized approximately
$1,122,000, $1,156,000, and $1,264,000 in compensation expense in the years
ended December 31, 2001, 2000 and 1999, respectively, related to the ESOP of
which approximately $657,000, $639,000 and $593,000 reduced the cost of
unallocated ESOP shares and $465,000, $517,000 and $671,000 increased common
stock on the balance sheets, respectively.
The cost of the unallocated shares is reflected as a reduction of equity.
Unallocated shares are considered neither outstanding shares for computation of
basic earnings per share nor potentially dilutive securities for computation of
diluted earnings per share. Dividends on unallocated ESOP shares are reflected
as a reduction in the note payable.
Shares released or committed to be released for allocation during the years
ended December 31, 2001 and 2000 totaled 101,471 and 150,871, respectively.
Shares remaining not released or committed to be released for allocation at
December 31, 2001 and 2000 totaled 570,844 and 672,315, and had a market value
of approximately $6,542,000 and $7,143,000, respectively.
(13) Stock Compensation Plans:
Management Recognition Plan - On April 22, 1999, the Corporation's
stockholders approved the Cavalry Bancorp, Inc. 1999 Management Recognition Plan
(MRP). 301,530 shares were awarded under the MRP. The objective of the MRP was
to reward performance and build the participant's equity interest in the Company
by providing long-term incentives and rewards to officers, key employees and
other persons who provide services to the Company and its subsidiaries. Shares
of common stock awarded under the MRP originally were to vest over a five year
period. Compensation expense is determined by the value of the stock on the
award date, recognized on a straight-line basis over the vesting period.
Participants are entitled to all voting and other stockholder rights related to
the shares, including unvested shares. Participants also receive dividends and
other distributions with respect to such stock. Also, all such shares are
included in outstanding shares for the computation of basic earnings per share.
Total compensation expense recognized for the MRP during 2001, 2000 and
1999 was $3.2 million, $1.2 million and $2.4 million, respectively. The 1999
compensation expense amount was comprised of a one-time nonrecurring charge for
the special cash distribution (discussed in note 14) and vesting of shares.
Also, as a result of the special cash distribution, the basis of recognizing
compensation over the vesting period was reduced from $22.38 to $16.76. The MRP
was terminated during the fourth quarter of 2001 and all remaining compensation
expense was recognized.
Stock Option Plan - On April 22, 1999, the Corporation's stockholders
approved the Cavalry Bancorp, Inc. 1999 Stock Option Plan (SOP). The SOP allows
the granting to management and directors the option to purchase common stock of
the Corporation (options) aggregating to 753,825 shares. All employees and
non-employee directors are eligible to participate in the SOP. Each option will
have a term of 10 years and the exercise price of each option will not be less
than the fair market value of the shares on the date of the grant. Options will
vest in equal installments over a five-year period. In the event of a change in
control of the Company, all options will become fully vested and immediately
exercisable. If provision is not made for the assumption of the options in
connection with the change of control, the SOP provides for cash settlement of
any outstanding options.
39
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
The following is an analysis of stock option activity:
Weighted
Options Average
Available Options Exercise
For Grant Outstanding Price
---------- ----------- ---------
Balance, December 31, 1999 - - $ -
Plan adopted 753,825 - -
---------- -----------
Balance, December 31, 2000 753,825 - -
Granted (753,825) 753,825 10.03
---------- -----------
Balance, December 31, 2001 - 753,825 10.03
========== ===========
The following is a summary of stock options outstanding at December 31,
2001:
Weighted
Average
Remaining
Exercise Contractual Options Options
Price Life (Years) Outstanding Exercisable
- --------- ------------ ----------- -----------
10.63 9.0 188,464 -
10.00 9.6 188,464 -
9.75 9.7 376,897 -
------- ---
10.03 9.5 753,825 -
======= ===
The Company applies Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations in
accounting for the plan. No compensation cost has been recognized for the plan
because the stock option price is equal to or greater than the fair value at the
grant date. Had compensation cost for the plan been determined based on the
fair value method of SFAS 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have decreased to the pro
forma amounts indicated below (in thousands, except per share data):
Year Ended
December 31, 2001
------------------
Net income:
As reported $ 1,999
Pro forma $ 1,933
Basic earnings per share:
As reported $ 0.31
Pro forma $ 0.30
The weighted average fair value of options granted in the year ended
December 31, 2001 was $2.65 per share. The fair value of the option grant is
estimated on the date of grant using an option pricing model with the following
assumptions:
Year Ended
December 31, 2001
------------------
Dividend yield 1.75%
Risk-free interest rate 4.52% -5.11%
Expected volatility 25%
Expected life (years) 7
40
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(14) Equity:
Liquidation Account
At the time of the conversion, the Bank established a liquidation account
for the benefit of eligible account holders who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held before any
distribution may be made to the Corporation with respect to the Bank's capital
stock.
Dividends
The Corporation's sources of income and funds for dividends to its
stockholders are earnings on its investments and dividends from the Bank. The
Bank's primary regulator, the Office of Thrift Supervision (OTS), has
regulations that impose certain restrictions on payment of dividends to the
Corporation. Current regulations of the OTS allow the Bank (based upon its
current capital level and supervisory status assigned by the OTS) to pay a
dividend of up to 100% of net income to date during the calendar year plus the
retained income for the preceding two years. Supervisory approval is not
required, but 30 days prior notice to the OTS is required. Any capital
distribution in excess of this amount would require supervisory approval.
Capital distributions are further restricted should the Bank's capital level
fall below the fully phased-in capital requirements of the OTS. In no case will
the Bank be allowed to make a capital distribution reducing equity below the
required balance of the liquidation account. The Bank paid dividends to the
Corporation totaling $11,600,000 and $43,250,000 during the years ended December
31, 2001 and 2000, respectively. On December 23, 1999, the Corporation paid a
cash distribution of $7.50 per share to its stockholders.
OTS regulations also place restrictions on the Corporation with respect to
repurchases of its common stock. With prior notice to the OTS, the Corporation
is allowed to repurchase its outstanding shares. During 2001, the Corporation
requested and received regulatory approval to acquire 710,480 shares of its
outstanding common stock. As of December 31, 2001, 25,000 shares had been
repurchased at a cost of approximately $271,000. No outstanding shares were
repurchased by the Corporation during the year ended December 31, 2000. During
1999, the Corporation requested and received regulatory approval to acquire
358,066 shares of its outstanding common stock. The shares were acquired for
$8,865,000.
(15) Regulatory Matters:
The amounts for retained earnings and net income reported to the OTS agree
to the amounts per the accompanying consolidated financial statements at
December 31, 2001, 2000 and 1999, and for the years then ended.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system of Prompt Corrective Action (PCA)
for all insured depository institutions. The regulations adopted pursuant to
FDICIA, effective December 19, 1992, established capital categories that
determine the degree of supervisory PCA to which a depository institution could
be subjected. The categories consist of "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized". An institution is deemed to be "well
capitalized" if (a) its risk-based capital ratio is 10% or greater, (b) its Tier
1 risk-based capital ratio is 6% or greater, and (c) its leverage ratio is 5% or
greater. At December 31, 2001 the Bank was "well-capitalized."
When an insured depository institution's capital ratios fall below the
"well-capitalized" level it becomes subject to a series of increasingly
restrictive supervisory actions, to the point where a conservator or receiver
must be designated for a "critically undercapitalized" institution unless
certain certifications are made by the appropriate regulatory agencies. An
institution is deemed to be
41
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands, except percentages)
critically undercapitalized" if its ratio of Tier 1 capital to total assets is
2% or less. The following table presents the Bank's equity capital and
regulatory capital ratios as of December 31, 2001 and December 31, 2000:
December 31, 2001
--------------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
---------- ---------- ---------- ---------- --------- ---------
Equity capital $ 36,176 $ 36,176 $ 36,176 $ 36,176 $ 36,176 $ 36,176
Unrealized gain on investment
securities available-for-sale - (146) (146) (146) (146) (146)
General valuation allowances - - - - - 4,470
---------- ---------- ---------- ---------- --------- ---------
Regulatory capital measure $ 36,176 $ 36,030 $ 36,030 $ 36,030 $ 36,030 $ 40,500
========== ========== ========== ========== ========= =========
Total assets $ 419,121
==========
Adjusted total assets $ 418,884 $ 418,884 $ 418,884
========== ========== ==========
Risk-weighted assets $347,814 $347,814
========= =========
Capital ratio 8.63% 8.60% 8.60% 8.60% 10.36% 11.64%
========== ========== ========== ========== ========= =========
December 31, 2001
--------------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
---------- ---------- ---------- ---------- --------- ---------
Equity capital $ 42,013 $ 42,013 $ 42,013 $ 42,013 $ 42,013 $ 42,013
Unrealized gain on investment
securities available-for-sale - (95) (95) (95) (95) (95)
General valuation allowances - - - - - 4,235
---------- ---------- ---------- ---------- --------- ---------
Regulatory capital measure $ 42,013 $ 41,918 $ 41,918 $ 41,918 $ 41,918 $ 46,153
========== ========== ========== ========== ========= =========
Total assets $ 381,785
==========
Adjusted total assets $ 381,634 $ 381,634 $ 381,634
========== ========== ==========
Risk-weighted assets $330,520 $330,520
========= =========
Capital ratio 11.00% 10.98% 10.98% 10.98% 12.68% 13.96%
========== ========== ========== ========== ========= =========
Bank's management believes that at December 31, 2001, that the Bank meets
all capital requirements to which it is subject.
(16) Earnings Per Share:
Earnings per share of common stock are based on the weighted average number
of basic shares and dilutive shares outstanding during the year.
The following is a reconciliation of weighted average common shares for the
basic and diluted earnings per share computations:
Years Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Basic Earnings per Share:
Weighted average common shares 6,478,827 6,370,127 6,641,040
========= ========= =========
Diluted Earnings per Share:
Weighted average common shares 6,478,827 6,370,127 6,641,040
Diluted effect of stock options 27,907 - -
--------- --------- ---------
Weighted average common and incremental shares 6,506,734 6,370,127 6,641,040
========= ========= =========
42
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
(17) Financial Instruments with Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making these commitments and conditional obligations as it
does for on-balance-sheet instruments.
At December 31, 2001 and 2000, unused lines of credit were approximately
$32,492,000 and $35,331,000, respectively, with the majority having terms of one
year for commercial and two to five years for consumer; outstanding letter of
credit balances were approximately $4,600,000 and $7,377,000, respectively; and
commitments to originate or purchase loans were approximately $27,896,000 and
$26,471,000, respectively. The commitments to originate loans at December 31,
2001 were composed of variable rate loans of approximately $22,744,000 and fixed
rate loans of approximately $5,152,000. The fixed rate loans had interest rates
ranging from 5.90% to 8.13%. The commitments to originate loans at December 31,
2000 were composed of variable rate loans of approximately $20,810,000 and fixed
rate loans of approximately $5,661,000. The fixed rate loans had interest rates
ranging from 6.25% to 9.63%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include property, plant, and equipment and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. Most guarantees extend from one to two years. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
(18) Fair Value of Financial Instruments:
Information about the fair value of the financial instruments in the
consolidated balance sheets, which should be read in conjunction with Note 1 and
certain other notes to the consolidated financial statements presented elsewhere
herein, is set forth as follows :
2001 2000
-----------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 69,281 $ 69,281 $ 45,025 $ 45,025
Investment securities available-
for-sale 41,808 41,808 32,247 32,247
Investment securities held-
to-maturity 637 632 594 589
Loans receivable, net 280,239 282,845 279,478 277,397
Loans held for sale 10,423 10,423 4,183 4,183
Accrued interest receivable 2,139 2,139 2,559 2,559
Required investment in stock of
the Federal Home Loan Bank 2,159 2,159 2,020 2,020
Bank owned life insurance 7,500 7,500 - -
Financial liabilities:
Deposits with no stated maturity 235,433 235,433 174,018 174,018
Certificates of deposits 145,557 147,882 162,516 163,279
Advances from the FHLB 998 765 1,578 1,453
Off-balance sheet assets (liabilities):
Unused lines of credit - - - -
Standby letters of credit - - - -
Commitments to extend credit - - - -
43
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
(19) Commitments and Contingencies:
In the normal course of the Company's business, there are outstanding
various commitments and contingent liabilities that have not been reflected in
the consolidated financial statements. In the opinion of management, the
financial position of the Company will not be affected materially as a result of
such commitments and contingent liabilities.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position of the Company will not be affected materially
by the outcome of such legal proceedings.
The Company's profitability depends to a large extent on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Like most financial
institutions, the Company's interest income and interest expense are
significantly affected by changes in market interest rates and other economic
factors beyond its control. The Company's interest earning assets consist
primarily of mortgage loans and investments which adjust more slowly to changes
in interest rates than its interest-bearing deposits. Accordingly, the
Company's earnings would be adversely affected during periods of rising interest
rates.
The Corporation and the Bank have agreed to enter into Employment
Agreements with two of the Bank's executive officers, which provide certain
benefits in the event of their termination following a change in control of the
Corporation or the Bank. The Employment Agreements provide for an initial term
of three years. On each anniversary of the commencement date of the Employment
Agreements, the term of each agreement may be extended for an additional year at
the discretion of the Board. In the event of a change in control of the
Corporation or the Bank, as defined in the agreement, each executive officer
will be entitled to a package of cash and/or benefits with a maximum value each
to 2.99 times their average annual compensation during the five-year period
preceding the change in control.
The Corporation and the Bank have also agreed to enter into Severance
Agreements with seven of the Bank's senior officers, none of whom are covered by
an Employment Agreement. Each agreement has an initial term of two years. On
each anniversary of the commencement due date of the Severance Agreements, the
term of each agreement may be extended for an additional year at the discretion
of the Board. In the event of a change in control of the Corporation or the
Bank, as defined in the agreement, each senior officer will be entitled to a
package of cash and/or benefits with a maximum value equal to 2.99 times their
average annual compensation during the five-year period preceding the change in
control.
The Corporation and the Bank have entered into a Key Employee Severance
Compensation Plan to provide benefits to eligible key employees in the event of
a change in control of the Corporation or the Bank. In general all officers
except those who have entered into separate Employment or Severance Agreements
with the Bank will be eligible to participate in the Severance Plan. In the
event of a change in control of the Corporation or the Bank, eligible key
employees who are terminated or who terminate employment within 12 months of the
effective date of a change in control will be entitled to a payment based on
years of service with the Bank, not to exceed an amount equal to three months of
their then current compensation.
(20) Condensed Parent Company Only Financial Statements:
The following table presents the condensed balance sheets of the
Corporation at December 31, 2001 and 2000, and the condensed statements of
income and cash flows for the years ended December 31, 2001, 2000 and 1999:
Condensed Balance Sheets:
2001 2000
------- -------
Assets:
Cash and cash equivalents $12,860 $ 2,244
Investment in Bank 184 5,419
Note receivable from Bank 4,180 4,781
Other assets 101 91
------- -------
Total assets $17,325 $12,535
======= =======
Liabilities and Equity:
Other liabilities $ 330 $ 377
Equity 16,995 12,158
------- -------
Total liabilities and equity $17,325 $12,535
======= =======
44
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Condensed Statements of Income:
Investment income:
Interest income $ 528 $ 499 $ 1,343
Dividends from Bank 11,600 43,250 -
-------- --------- ---------
12,128 43,749 1,343
Interest expense - 129 148
-------- --------- ---------
Net interest income 12,128 43,620 1,195
Non-interest expense 342 310 476
-------- --------- ---------
Income before income taxes and equity in
undistributed earnings of the Bank 11,786 43,310 719
Provision for income taxes 24 21 277
-------- --------- ---------
Income before equity in undistributed
earnings of Bank 11,762 43,289 442
Equity in undistributed earnings
(distribution In excess of earnings) of Bank (9,763) (39,237) 3,027
-------- --------- ---------
Net income $ 1,999 $ 4,052 $ 3,469
======== ========= =========
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 1,999 $ 4,052 $ 3,469
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of Bank - - (3,027)
Distributions in excess of earnings of Bank 9,763 39,237 -
Net accretion of investments available-for-sale and held-to-maturity - - (1)
Net change in other assets and liabilities (55) (109) 194
-------- --------- ---------
Net cash provided by operating activities 11,707 43,180 635
-------- --------- ---------
Cash flows from investing activities:
Investment in Bank (130) (166) (111)
Maturities of investments available-for-sale - - 13,500
Collection on notes receivable from Bank 601 535 451
-------- --------- ---------
Net cash provided by investing activities 471 369 13,840
-------- --------- ---------
Cash flows from financing activities:
Other borrowings advances (repayments) - (45,000) 45,000
Retirement of common stock (271) - (8,865)
Dividends paid (1,291) (1,255) (1,315)
Cash distribution - - (53,286)
-------- --------- ---------
Net cash used in financing activities (1,562) (46,255) (18,466)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 10,616 (2,706) (3,991)
Cash and cash equivalents at beginning of year 2,244 4,950 8,941
-------- --------- ---------
Cash and cash equivalents at end of year $12,860 $ 2,244 $ 4,950
======== ========= =========
45
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands, except per share amounts)
(21) Quarterly Results of Operations: (Unaudited)
Summarized unaudited quarterly operating results for the years ended
December 31, 2001 and 2000 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- -----------
December 31, 2001:
Interest income $ 7,500 $ 7,186 $ 6,931 $ 6,491
Interest expense 3,642 3,472 3,174 2,361
---------- ---------- ---------- -----------
Net interest income 3,858 3,714 3,757 4,130
Provision for loan losses 103 63 82 413
---------- ---------- ---------- -----------
Net interest income after provision for loan losses 3,755 3,651 3,675 3,717
Non-interest income 1,762 2,125 2,009 2,404
Non-interest expense 3,856 4,106 3,955 6,747
---------- ---------- ---------- -----------
Income before income taxes 1,661 1,670 1,729 (626)
Income taxes 704 717 709 305
---------- ---------- ---------- -----------
Net income $ 957 $ 953 $ 1,020 $ (931)
========== ========== ========== ===========
Basic earnings per share (note 16) $ 0.15 $ 0.15 $ 0.16 $ (0.14)
========== ========== ========== ===========
Diluted earnings share (note 16) $ 0.15 $ 0.15 $ 0.16 $ (0.14)
========== ========== ========== ===========
Weighted average shares
outstanding - basic (note 16) 6,444,654 6,469,086 6,493,217 6,506,975
========== ========== ========== ===========
Weighted average shares
outstanding - diluted (note 16) 6,458,994 6,478,762 6,529,616 6,576,473
========== ========== ========== ===========
December 31, 2000:
Interest income $ 6,979 $ 7,200 $ 7,538 $ 7,719
Interest expense 3,108 3,100 3,263 3,599
---------- ---------- ---------- -----------
Net interest income 3,871 4,100 4,275 4,120
Provision for loan losses 74 67 - 165
---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 3,797 4,033 4,275 3,955
Non-interest income 1,344 1,453 1,462 1,436
Non-interest expense 3,686 3,604 3,753 3,657
---------- ---------- ---------- -----------
Income before income taxes 1,455 1,882 1,984 1,734
Income taxes 627 771 815 790
---------- ---------- ---------- -----------
Net income $ 828 $ 1,111 $ 1,169 $ 944
========== ========== ========== ===========
Basic earnings per share (note 16) $ 0.13 $ 0.18 $ 0.18 $ 0.15
========== ========== ========== ===========
Weighted average
shares outstanding (note 16) 6,340,984 6,320,328 6,397,364 6,420,977
========== ========== ========== ===========
(22) Comprehensive Income:
SFAS 130, Reporting Comprehensive Income, established standards for
reporting comprehensive income. Comprehensive income includes net income and
other comprehensive net income which is defined as non-owner related
transactions in equity. The following table sets forth the amounts of other
comprehensive income included in equity along with the related tax effect for
the years ended December 31, 2001, 2000 and 1999:
Pre-Tax (Expense) Net of Tax
Amount Benefit Amount
--------- ---------- ------------
December 31, 2001:
Unrealized holding gains for the period $ 86 $ (35) $ 51
========= ========== ============
December 31, 2000:
Unrealized holding gains for the period $ 155 $ (58) $ 97
========= ========== ============
December 31, 1999:
Unrealized holding losses for the period $ (85) $ 32 $ (53)
========= ========== ============
46
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(Table amounts in thousands)
(23) Business Segments:
The Company's segments are identified by the products and services offered,
principally distinguished as banking, trust and mortgage banking operations.
Approximately 30% of mortgage banking revenues are derived each year from
transactions with agencies of the U.S. government. In addition, one unrelated
entity purchased approximately 50% of mortgage loans sold in 2001 and 2000.
Segment information is derived from the internal reporting system utilized
by management with accounting policies and procedures consistent with those
described in Note 1. Segment performance is evaluated by the Company based on
profit or loss before income taxes. Revenue, expense and asset levels reflect
those which can be specifically identified and those assigned based on
internally developed allocation methods. These methods have been consistently
applied.
Mortgage
2001 Banking Banking Trust Consolidated
- ----------------------------------------------------------------------------
Interest revenue $ 28,108 $ - $ - $ 28,108
Other income-external customers 4,394 249 1,096 5,739
Interest expense 12,649 - - 12,649
Depreciation and amortization 1,029 131 40 1,200
Other significant items:
Provisions for loan losses 661 - - 661
Gain on sale of assets 24 2,537 - 2,561
Segment profit 3,960 255 219 4,434
Segment assets 421,762 10,756 356 432,874
Mortgage
2000 Banking Banking Trust Consolidated
- ----------------------------------------------------------------------------
Interest revenue $ 29,436 $ - $ - $ 29,436
Other income-external customers 2,818 256 1,067 4,141
Interest expense 13,070 - - 13,070
Depreciation and amortization 762 133 33 928
Other significant items:
Provisions for loan losses 306 - - 306
Gain on sale of assets 6 1,548 - 1,554
Segment profit (loss) 6,976 (164) 243 7,055
Segment assets 379,594 4,305 386 384,285
Mortgage
1999 Banking Banking Trust Consolidated
- ----------------------------------------------------------------------------
Interest revenue $ 28,008 $ - $ - $ 28,008
Other income-external customers 2,245 219 936 3,400
Interest expense 10,130 - - 10,130
Depreciation and amortization 859 198 44 1,101
Other significant items:
Provisions for loan losses 991 - - 991
Gain on sale of assets 3 2,245 - 2,248
Segment profit (loss) 6,075 (49) 124 6,150
Segment assets 390,648 4,596 175 395,419
47
Cavalry Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000 and 1999
(24) Subsequent Events:
On January 4, 2002, the Bank entered into a Stock Purchase Agreement (the
Agreement) with the shareholders of Miller & Loughry Insurance and Services,
Inc. (MLI&S), a Tennessee corporation located in Murfreesboro, Tennessee.
Pursuant to the terms of the Agreement, the Bank purchased 100% of the capital
stock issued and outstanding of MLI&S for a cash purchase price of approximately
$2.0 million.
As of January 1, 2002, the Bank converted to a state chartered commercial
bank and was accepted as a member of the Federal Reserve System. The Company
charter became a bank holding company as a result of the conversion. The
Company's federal regulator became the Board of Governors of the Federal Reserve
System. The Bank's regulators became the Tennessee Department of Financial
Institutions and the Board of Governors of the Federal Reserve System.
48
Corporate Information
CORPORATE ADDRESS
114 West College Street
Murfreesboro, Tennessee 37130
(615) 893-1234
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, NJ 07660
INDEPENDENT AUDITORS
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED SECURITY MATTERS The
common stock of Cavalry Bancorp, Inc. is listed on the Nasdaq National Market
System under the symbol "CAVB." The following table discloses on a quarterly
basis the high, low and closing price and dividends declared for the stock for
the years ended December 31, 2001 and 2000.
2001
Fourth Third Second First
Quarter Quarter Quarter Quarter
- -----------------------------------------------------
Market Price:
High. . . . . $ 11.95 $ 11.94 $ 12.00 $ 12.63
Low . . . . . $ 10.17 $ 9.75 $ 10.53 $ 10.63
Close . . . . $ 11.46 $ 10.55 $ 10.65 $ 11.75
Dividends
Declared. . . $ 0.05 $ 0.05 $ 0.05 $ 0.05
2000
Fourth Third Second First
Quarter Quarter Quarter Quarter
- -----------------------------------------------------
Market Price:
High. . . . . $ 12.13 $ 12.25 $ 13.00 $ 16.44
Low . . . . . $ 10.50 $ 11.13 $ 10.63 $ 11.88
Close . . . . $ 10.63 $ 12.00 $ 11.56 $ 12.63
Dividends
Declared. . . $ 0.05 $ 0.05 $ 0.05 $ 0.05
The Company may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Company's regulatory capital to be reduced below
the amount required for the liquidation account established in connection with
the mutual to stock conversion. The approximate number of shareholders of the
Company's common stock as of March 1, 2002, was 2,500.
ANNUAL MEETING
The Annual Meeting of Shareholders of Cavalry Bancorp, Inc. will be held at
10:00 a.m. Central Daylight Time, April 25, 2002, in the Fifth Floor Auditorium
of the main office of Cavalry Banking, 114 West College Street, Murfreesboro,
Tennessee.
A COPY OF THE FORM 10-K, INCLUDING CONSOLIDATED FINANCIAL STATEMENTS, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING OF
SHAREHOLDERS UPON WRITTEN REQUEST TO IRA B. LEWIS, JR., SECRETARY, CAVALRY
BANCORP, INC., 114 WEST COLLEGE STREET, MURFREESBORO, TENNESSEE 37130.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Cavalry Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ----------------------------- ---------------- ----------------------
Cavalry Banking 100% United States
Cavalry Enterprises, Inc. (b) 100% Tennessee
<FN>
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Financial Statements contained in Item 8 of this Form 10-K.
(b) Cavalry Enterprises, Inc. is wholly owned by the subsidiary Cavalry
Banking. The Bank's investment is not material.
EXHIBIT 23
CONSENT OF RAYBURN, BETTS & BATES, P.C.
[Letterhead of Rayburn, Betts & Bates, P.C.]
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in Registration Statement No.
333-48007 and Registration Statement No. 333-35256 of Cavalry Bancorp, Inc. on
Forms S-8, of our report dated January 25, 2002, appearing in the Annual Report
to Shareholders of Cavalry Bancorp, Inc. for the year ended December 31, 2001
incorporated by reference in this Form 10-K.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
March 27, 2002