UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{ X } Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 1998 or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from ____________ to
___________
Commission File Number: 0-23605
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CAVALRY BANCORP, INC.
--------------------------------
(exact name of registrant as specified in its charter)
Tennessee 62-1721072
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
------------------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)
(615) 893-1234
-----------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Issued and Outstanding: 7,437,050 as of November 10, 1998.
CAVALRY BANCORP, INC.
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998
And December 31, 1997 1
Consolidated Statements of Income for the Three and Nine Month
Periods Ended September 30, 1998 and 1997 2
Consolidated Statement of Comprehensive Income for the Three and
Nine Month Periods Ended September 30,1998 and 1997 3
Consolidated Statements of Cash Flows for the Three and Nine Month
Periods Ended September 30, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information 22-23
Signatures 24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
---- ----
Cash $ 12,231 $ 10,695
Interest-bearing deposits with
other financial institutions 33,278 26,963
-------- --------
Cash and cash equivalents 45,509 37,658
Investment securities available-for-sale (note 3) 48,525 10,077
Investment securities held to maturity (note 3) 700 1,700
Mortgage-backed securities held to maturity (note 4) 996 1,301
Loans held for sale, at estimated fair value (note 5) 9,981 4,855
Loans receivable, net 233,363 212,979
Accrued interest receivable 2,448 1,724
Real Estate Owned 23 -
Office properties and equipment, net 8,389 8,072
Federal Home Loan Bank of Cincinnati stock - at cost 1,721 1,631
Other assets 2,088 2,132
------- -------
TOTAL ASSETS $ 353,743 $ 282,129
======= =======
LIABILITIES AND EQUITY
LIABILITIES:
Deposits $246,880 $248,267
Accrued interest payable 332 328
Advance payments by borrowers for property
taxes and insurance 917 295
Other liabilities and accrued expenses 3,645 2,792
------- -------
Total Liabilities 251,774 251,682
------- -------
STOCKHOLDERS' EQUITY:
Preferred Stock
250,000 shares, no par value per share; authorized;
none issued and outstanding - -
Common Stock
49,750,000 shares, no par value per share,
authorized; 7,538,250 issued and outstanding 73,877 NA
Retained earnings 33,992 30,452
Unearned ESOP Shares (5,977) NA
Accumulated other comprehensive
income, net of taxes 77 (5)
Total Stockholders' Equity 101,969 30,447
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $353,743 $282,129
======= =======
See accompanying notes to consolidated financial statements.
1
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Interest and dividend income:
First mortgage loans $ 2,807 $3,227 $ 8,553 $ 9,312
Other loans 2,686 2,033 7,560 5,750
Investment securities 670 119 1,348 399
Deposits with other financial institutions 520 276 2,221 629
Mortgage-backed securities held to maturity 15 22 54 70
Total interest and dividend income 6,698 5,677 19,736 16,160
----- ----- ------ ------
Interest expense on deposits 2,310 2,403 7,233 6,815
----- ----- ------ ------
Net interest income 4,388 3,274 12,503 9,345
----- ----- ------ ------
Provision for loan losses 173 550 308 700
Net interest income after provision
for loan losses 4,215 2,724 12,195 8,645
----- ----- ------ ------
Noninterest income:
Servicing income 103 125 305 398
Gain on sale of loans, net 587 333 1,625 674
Gain on sale of office properties
and equipment - - 42 -
Deposit servicing fees and charges 377 295 1,091 854
Trust service fees 171 164 505 435
Other operating income 55 54 157 153
----- ----- ------ ------
Total noninterest income 1,293 971 3,725 2,514
----- ----- ------ ------
Noninterest expenses:
Compensation, payroll taxes and
fringe benefits 1,843 1,523 5,159 4,081
Occupancy expense 170 150 452 404
Supplies, communications and other
office expenses 237 180 615 468
Federal insurance premiums 37 34 112 76
Advertising expense 47 42 140 145
Equipment and service bureau expense 603 529 1,706 1,452
Other operating expenses 325 342 862 728
----- ----- ----- -----
Total noninterest expenses 3,262 2,800 9,046 7,354
----- ----- ----- -----
Earnings before income tax expense 2,246 895 6,874 3,805
----- ----- ----- -----
Income tax expense 842 423 2,579 1,547
----- ----- ----- -----
Net income $1,404 $472 $4,295 $2,258
===== === ===== =====
Basic earnings per share $0.20 N/A $0.62 N/A
===== === ===== =====
Weighted average shares outstanding (1) 6,960,318 N/A 6,947,846 N/A
========= === ========= =====
Dividends declared $0.05 per share payable October 16, 1998 for stockholders
of record date September 30, 1998.
(1) Cavalry Bancorp's initial public offering closed on March 16, 1998. For
purposes of earnings per share calculations, shares issued on March 16, 1998
have been assumed to be outstanding as of January 1, 1998.
See accompanying notes to consolidated financial statements.
2
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income $1,404 $472 $4,295 $2,258
Other comprehensive income, net of tax
(NOTE 6)
Unrealized gains(losses) on securities
Available for sale 95 (7) 82 (7)
----- ---- ----- ------
Comprehensive income $1,499 $465 $4,377 $2,251
===== === ===== =====
See accompanying notes to consolidated financial statements.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Operating activities:
Net income $1,404 $472 $4,295 $2,258
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for loan losses 173 550 308 700
Gain on sales of loans, net (587) (333) (1,625) (674)
Gain on sale of office properties
and equipment - - (42) -
Depreciation and amortization on
Office properties and equipment 315 285 927 780
ESOP compensation expense 251 - 515 -
Net amortization (accretion) of
investments and mortgage-backed
securities premiums, net (142) 8 (262) 10
Amortization of deferred loan
origination fees (265) (297) (815) (820)
Loan fees collected 295 262 873 867
Deferred income tax benefit 58 (430) 58 (430)
Proceeds from sales of loans 31,849 21,610 72,461 48,684
Origination of loans held for sale (34,516)(21,199) (75,961) (46,907)
(Increase) decrease in accrued
interest receivable (169) (333) (724) (423)
Decrease (increase) in other assets (65) 99 (53) (464)
Increase (decrease) in accrued
interest payable 41 48 5 88
Stock dividends on Federal Home
Loan Bank stock (31) (57) (90) (83)
(Decrease) increase in accrued expenses
and other liabilities 81 448 (1) 290
(Decrease) increase in income
taxes payable (124) 103 11 123
----- ------ ----- -----
Net cash provided (used) by operating
activities (1,432) 1,236 (120) 3,999
------- ----- ----- -----
Investing activities:
Decrease (increase) in loans
receivable, net (8,758) (717) (20,748) (16,557)
Principal payments on mortgage
backed securities held to maturity 94 53 293 83
Proceeds from the sales of office
properties and equipment - - 203 -
Purchase of investment securities
Available for sale (8,951)(10,120) (47,104) (10,120)
Purchase of investment securities
held to maturity - - (4,940) -
Proceeds from maturities of investment
securities 11,000 2,000 15,000 4,000
Purchase of office properties
and equipment (471) (498) (1,404) (2,441)
------- ------ ------- -------
Net cash used in investing
activities (7,086) (9,282) (58,700) (25,035)
------- ------- -------- --------
4
Financing activities:
Net (decrease) increase in deposits 12,282 13,071 (1,389) 27,416
Issuance of common stock - - 69,352 -
Expenses of stock offering (4) - (1,536) -
Net increase in advance
payments by borrowers for
property taxes and insurance 163 233 621 792
Cash dividends paid on common stock (377) - (377) -
------- ----- ------- ------
Net Cash provided (used) by
financing activities 12,064 13,304 66,671 28,208
------ ------ ------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,546 5,258 7,851 7,172
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 41,963 21,433 37,658 19,519
------ ------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $45,509 26,691 45,509 26,691
======= ====== ====== ======
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest 1,406 1,479 4,352 4,648
===== ===== ===== =====
Income taxes 1,039 645 2,660 1,920
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Foreclosures and in substance
Foreclosures of loans during period 23 - 23 -
==== === ===== =====
Interest credited to deposits 863 822 2,876 2,079
==== === ===== =====
Net unrealized gains(losses) on investment
Securities available for sale 153 (11) 131 (11)
==== ==== ===== ======
(Decrease) increase in deferred tax asset
related to unrealized gain on investments (58) 4 (49) 4
===== ==== ====== =====
See accompanying notes to consolidated financial statements.
5
CAVALRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Cavalry Bancorp, Inc. (the "Company"), was organized on November 5,
1997 under Tennessee law at the direction of Cavalry Banking (the
"Bank") to acquire all of the capital stock that the Bank would issue
upon its conversion from the mutual to stock form of ownership. The
conversion was completed on March 16, 1998 through the sale and
issuance of 7,538,250 shares of common stock by the Company at a price
of $10.00 per share. Information set forth in this report relating to
periods prior to the Conversion, including consolidated financial
statements and related data, relates to Cavalry Banking and its
subsidiaries.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods.
The results of operations for the three and nine months ended September
30,1998 are not necessarily indicative of the results to be expected for
the year ending December 31, 1998. The consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 1997.
2. Earnings Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per
Share, established new standards for computing and presenting earnings
per share. The standard is effective for annual and interim periods
ending after December 15, 1997. This standard had no impact on the
computation of the Company's earnings per share upon adoption.
Earnings per share has been computed for the three and nine months
ended September 30, 1998 based upon weighted average common shares
outstanding of 6,960,318 and 6,947,846, respectively. For the purpose
of computing weighted average shares outstanding for the nine months
ended September 30, 1998, shares issued in the Conversion on March 16,
1998 were assumed to have been outstanding since January 1, 1998.
Earnings per share for the three and nine months ended September 30, 1997
is not presented as there was no common stock issued or outstanding. ESOP
shares are not considered in the weighted average shares outstanding until
shares are committed to be released or earned.
6
3. Investment Securities Held to Maturity and Investment Securities
Available-for-Sale:
The amortized cost and estimated fair values of investment securities
held to maturity and available-for-sale at September 30, 1998 and December
31, 1997.
Investment securities held to maturity:
September 30, 1998
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -------
U.S. Treasury securities and
Obligations of U.S.
Government agencies $ 700 - - $ 700
===== ===== ====== =======
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ------ ------ ------
U.S. Treasury securities and
Obligations of U.S.
Government agencies $1,700 1 1 $1,700
====== ==== === ======
Investment securities available-for-sale:
September 30, 1998
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- -------- -------
U.S. Treasury securities and
Obligations of U.S.
Government agencies $48,402 123 - $48,525
======= === ===== =======
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ------- ------ -------
U.S. Treasury securities and
Obligations of U.S.
Government agencies $10,085 - 8 $10,077
======= ====== ==== =======
7
4. Mortgage-backed Securities Held to Maturity:
September 30, 1998
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ------ ------ -----
Mortgage-backed securities:
FHLMC $263 4 - 267
FNMA 733 5 - 738
------ --- -- ----
Total mortgage backed
securities held to maturity $ 996 9 - 1,005
====== === ==== =====
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Mortgage-backed securities:
FHLMC $420 6 - 426
FNMA 881 9 4 886
---- -- --- ---
Total mortgage backed
securities held to maturity $1,301 15 4 1,312
====== ==== === =====
5. Loans Held-for-Sale, Net
Loans held for sale, net are summarized as follows:
September 1998 December 1997
-------------- -------------
One-to-four family loans $9,981 $4,855
------- ------
Total loans held for sale, net $9,981 $4,855
======= ======
The Bank 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.
8
6. Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income," establishes standards of disclosure and
financial statement display for reporting total comprehensive income
and the individual components thereof. Comprehensive income is defined
as the change in equity(net assets) of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions
to owners. The only component of comprehensive income for Cavalry
Bancorp is unrealized holding gains/(losses) on available-for-sale
securities. Cavalry Bancorp adopted this standard beginning with the
first quarter of 1998.
COMPONENTS OF OTHER COMPREHENSIVE INCOME AND RELATED TAX
(Dollars in thousands)
Gain/(Loss) Tax effect Net-of-tax
----------- ---------- ----------
Unrealized market adjustments $ 153 58 $ 95
for the period ----- -- ----
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE QUARTER ENDING
SEPTEMBER 30,1998 $ 153 58 $ 95
===== == ====
Unrealized market adjustments $ (11) 4 $ (7)
For the period ------ -- -----
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE QUARTER ENDING
SEPTEMBER 30,1997 $ (11) 4 $ (7)
======= == =====
Unrealized market adjustments $ 131 49 $ 82
For the period ------- -- -----
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 $ 131 49 $ 82
====== == ====
Unrealized market adjustments $ (11) 4 $ (7)
For the period ------ -- -----
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 $ (11) 4 $ (7)
====== == =====
9
7. Recent Pronouncements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS 131). This statement
establishes standards relating to public business enterprises' reporting
of information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This statement need not
be applied to interim financial statements in the initial year of
application. SFAS 131 is not expected to change the reporting
requirements of the Company.
In June 1998, the FASB issued Statement No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). This statement addresses
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal
years beginning after June 15,1999. The Company has not yet determined
the impact that this standard will have on the financial statements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. This statement revised
employers' disclosure about pension and other postretirement benefits
plans. It does not change the measurement or recognition of those plans.
This Statement standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligation and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures. Restatement of disclosures for earlier
periods is required. This statement is effective for financial
statements for the year ending December 31, 1998.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Total assets were $353.7 million at September 30, 1998 and $282.1 million
at December 31, 1997, an increase of $71.6 million or 25.4%. This
increase resulted primarily from the proceeds of the initial public
offering of stock which was completed on March 16, 1998. As a result
of this offering, the Company realized an increase in cash of
approximately $67.8 million. These funds were invested in interest
bearing deposits and short-term investments. Cash and cash equivalents
increased $7.9 million while total investments increased $37.4 million.
Mortgage-backed securities decreased $305,000 as a result of
repayments. Loans held for sale increased $5.1 million. The
variances resulted primarily from timing differences in the funding of
loans. Loans receivable, net increased from $213.0 million at December
31, 1997 to $233.4 million at September 30, 1998. Consumer, commercial, and
commercial real estate increased $29.2 million as a result of
additional loan officers, general market conditions and more aggressive
pricing. Net construction loans also increased $5.5 million. Theses
increases were offset by declines in land and one-to-four family mortgage
loans. The declines in one-to-four family mortgage loans were primarily a
result of refinancing activity.
Deposit accounts decreased $1.4 million from December 31, 1997 to September
30, 1998. Certificates of deposit decreased $7.2 million primarily as
a result of withdrawals to fund stock purchases. The Bank's savings
account balances declined $1.8 million. These declines were partially
offset by an increase of $1.0 in money market accounts and $6.6 million
in transactional accounts.
Stockholders' equity increased by $71.5 million from December 31, 1997
to September 30, 1998, as a result net proceeds received in the conversion
of $67.8 million and net income of $4.3 million for the nine month
period ending September 30, 1998, unrealized gains on available for sale
securities of 82,000 and a reduction of unallocated ESOP shares of
$53,000 reduced by dividends of $754,000.
Nonperforming assets decreased from $150,000 at December 31, 1997 to
$60,000 at September 30, 1998.
11
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1997.
Net Income. Net income increased to $1.4 million for the three months
ended September 30, 1998 from $472,000 for the three months ended
September 30, 1997 primarily as a result of increased investment and
deposit income and a decline in the provision for loan losses. The
increase in investment and deposit income is principally the result of
additional funds available for investment in the three month period
ended September 30, 1998 from the conversion.
Net Interest Income. Total interest income increased 17.5% to $6.7
million for the three months ended September 30, 1998 from $5.7 million for
the same period in 1997. Interest on loans increased from $5.3 million
for the period ended September 30, 1997 to $5.5 million for the same period
in 1998. This was a result of average loans outstanding increasing from
$218.7 million in 1997 to $234.3 million for the same period in 1998.
The average yield decreased from 9.6% for the period ended September
30, 1997 compared to 9.4% for the same period in 1998. This decrease
was a result of declining rates and market competition. Income on all other
investments consisting of mortgage backed securities, investments, FHLB
stock, bank deposits and federal funds increased from $417,000 for the
period ended September 30, 1997 to $1.2 million for 1998. Average
investments increased from $29.5 million for the three months in 1997 to
$86.7 million for the same period in 1998 as a result of the investment of
stock subscription funds. The average yield was 5.6% for the periods ended
September 30, 1997 and 1998.
Interest Expense. Interest expense decreased from $2.4 million for
the period ended September 30, 1997 to $2.3 million for the same period in
1998. Average costing liabilities declined from $211.6 million for the
period ended September 1997 to $208.3 million for 1998. The average cost
of funds decreased from 4.5% in 1997 to 4.4% in 1998. This decrease was
primarily a result of the average balance in NOW accounts, a lower
cost deposit, increasing from $29.3 million in 1997 to $30.3 million in
1998 with the cost declining from 1.7% in 1997 to 1.4% in 1998.
The decrease in average costs was a result of the Bank lowering the
rate on these accounts.
Provision for Loan Loses. Provision for loan losses are charges to
earnings to bring the total allowance for loan losses to a level
considered by management as adequate to provide for estimated loan
losses based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired
loans and economic conditions. Management also considers the level of
problem assets giving greater weight to the level of classified assets
than to the level of nonperforming assets because classified assets
include not only nonperforming assets but also performing assets that
otherwise exhibit, in management's judgement, potential credit
weaknesses.
The provision for loan losses was $173,000 for the period ending September
30, 1998 compared to $550,000 for the same period in 1997. Classified
assets were $1.3 million at December 31, 1997 and September 30, 1998.
Management expects classified assets to increase moderately, although no
assurances can be given that this will in fact occur. Management's
expectation is based upon its anticipation of continued loan growth,
particularly in the areas of construction, commercial real estate,
commercial and consumer lending. Management deemed the allowance for
loan losses adequate at September 30, 1998.
12
Noninterest Income. Noninterest income increased to $1.3 million for
the three months ended September 30, 1998 from $971,000 for the same period
in 1997. Net gain on sale of loans increased from $333,000 for the
three months ended September 30, 1997 to $587,000 for the same period in
1998. This increase was a result of increased volume, increased
pricing spreads, and overall more favorable market conditions in 1998
than in 1997. Deposit servicing fees increased from $295,000 in 1997
to $377,000 as a result of increased volume in transactional accounts
and an increased pricing structure. Trust fees also increased from
$164,000 in 1997 to $171,000 in 1998 because of more trust assets under
management and an increase in fees charged. These gains were offset by
a decline in loan servicing income from $125,000 in 1997 to $103,000 in
1998 largely as a result of increased amortization of originated
servicing rights.
Noninterest Expense. Noninterest expense was $3.3 million for the
period ending September 30, 1998 compared to $2.8 million in 1997.
Compensation and other employee benefits increased from $1.5 million at
September 30, 1997 to $1.8 million at September 1998 primarily as a result
of increases in commission expense, compensation and other employee
benefits. These increases were a result of increased staffing to
service the increased volumes in deposits and lending and normal annual
salary increases. The increases in other categories of operating
expenses generally are attributable to the growth of the Company.
The Company anticipates that other operating expenses will continue
to increase in subsequent periods as a result of increased cost
associated with operating a public company.
Income taxes. The provision for income taxes was $842,000 for the
period ended September 30, 1998 compared to $423,000 for the same period in
1997. This was a result of higher income before income taxes for the
period ended September 30, 1998.
13
Comparison of Operating Results for the Nine Months Ended September 30, 1998
and September 30, 1997.
Net Income. Net income increased to $4.3 million for the nine months
ended September 30, 1998 from $2.3 million for the nine months ended
September 30, 1997 primarily as a result of increased investment and
deposit income a lower provision for losses on loans and an increase
in noninterest income. These increases were offset partially by an
increased in interest expense on deposits, increased noninterest expenses
and a larger provision for income taxes due to increased income before
taxes. The increase in investment and deposit income is principally the
result of additional funds available for investment in the nine month
period ended September 30, 1998 from the conversion.
Net Interest Income. Total interest income increased 21.6% to $19.7
million for the nine months ended September 30, 1998 from $16.2 million
for the same period in 1997. Interest on loans increased from $15.1
million for the period ended September 30, 1997 to $16.1 million for the
same period in 1998. This was a result of average loans outstanding
increasing from $212.2 million for the nine months ended September 30,
1997 to $228.9 for the same period in 1998. This increase was partially
offset by a decline in average yield from 9.5% for the nine months ended
September 30,1997 to 9.4% for the same period in 1998. Income on all other
investments consisting of mortgage backed securities, investments, FHLB
stock, bank deposits and federal funds sold increased from $1.1 million for
the nine months ended September 30,1997 to $3.6 million for the same period
in 1998. Average investments increased from $25.4 million for the nine
months ended September 30, 1997 to $88.3 million for the same period in
1998 as a result of the investment of the conversion. The average yield
declined from 5.8% for the nine months ended September 30,1997 to 5.5%
for the same period in 1998 as a result of conversion funds being mostly
invested in overnight and other short-term investments.
Interest Expense. Interest expense increased from $6.8 million for the
nine month period ended September 30, 1997 to $7.2 million for the nine
month period ended September 30, 1998. Average costing liabilities
increased from $203.5 million for the nine months ended September 30, 1997
to $226.4 million for the same period in 1998. The average cost of funds
declined from 4.5% for the nine months ended September 30, 1997 to 4.3% for
the same period in 1998. This increase in average deposits was primarily
a result of the stock subscription process. Average passbook savings
increased from $15.4 million for the nine months ended September 30, 1997
to $25.0 million for the same period in 1998. The average cost of passbook
deposits declined from 2.0% for the nine months ended September 30, 1997
to 1.9% for the same period in 1998. Money market accounts also increased
from $33.2 million for the nine months ended September 30, 1997 to $45.6
million for the same period in 1998. The average cost of the money market
accounts for both periods was 4.2%.
Provision for Loan Losses. The provision for loan losses was $308,000
for the nine month period ended September 30, 1998 compared to $700,000
for the same period in 1997. See "Comparison of Operating Results for the
Three Months Ended September 30, 1998 and September 30,1997 - Provision for
Losses."
14
Noninterest Income. Noninterest income increased to $3.7 million for
the nine months ended September 30 ,1998 compared to $2.5 million for the
same period in 1997. Gain on sale of loans increased from $674,000 for
the nine months ended September 30, 1997 to $1.6 million for the same
period in 1998 as a result of increased volume, increased pricing spreads,
and overall more favorable market conditions in 1998 than in 1997.
Deposit servicing fees increased from $854,000 for the nine months ended
September 30, 1997 to $1.1 million for the same period in 1998 as a result
of increased volume in transactional accounts and an increased pricing
structure. Trust fees also increased from $435,000 for the nine months end
September 30,1997 to $505,000 for the nine months ended September 30, 1998
as a result of increases in trust assets under management and an increase
in fees charged. These gains were offset by a decline in loan servicing
income from $398,000 for the nine month period ended September 30 ,1997 to
$305,000 for the same period in 1998 largely as a result of increased
amortization of originated servicing rights.
Noninterest expense. Noninterest expense was $9.0 million for the nine
month period ended September 30, 1998 compared to $7.4 million for the
same period in 1997. Compensation, payroll taxes and fringe benefits
increased from $4.1 million for the nine month period ended September 30,
1997 to $5.2 million for the same period in 1998. This increase was
primarily a result of increased staffing to service the increased
volumes in deposits and lending and normal annual salary increases. The
increases in other categories of operating expenses generally are
attributable to the growth of the Company. The Company anticipates that
operating expenses will continue to increase in subsequent periods as
a result of increased costs associated with operating a public company.
Income taxes. The provision for income taxes was $2.6 million for the
nine month period ended September 30 ,1998 compared to $1.5 million for
the same period in 1997. This increase was a result of increased income
before taxes for the nine months ended September 30, 1998.
15
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments from and the sale of loans,
maturing securities and FHLB of Cincinnati advances. While maturities
and scheduled amortization of loans are a predictable source of funds,
deposit flows and mortgage prepayments are influenced greatly by
general interest rates, other economic conditions and competition.
Regulations of the Office of Thrift Supervision ("OTS"), the Bank's
primary regulator, require the Bank to maintain an adequate level of
liquidity to ensure the availability of sufficient funds to fund loan
originations, deposit withdrawals and to satisfy other financial
commitments. Currently, the OTS regulatory liquidity for the Bank is
the maintenance of an average daily balance of liquid assets (cash and
eligible investments) equal to at least 4% of the daily balance of net
withdrawal deposits and short-term borrowings. This liquidity
requirement is subject to periodic change. The Company and the Bank
generally maintain sufficient cash and short-term investments to meet
short-term liquidity needs. At September 30, 1998, cash and cash
equivalents totaled $45.5 million or 12.9% of total assets, and
investments available for sale totaled $48.5 million. At September 30,
1998, the Bank also maintained, but did not draw upon, a line of credit
with the FHLB of Cincinnati in the amount of $15.0 million.
As of September 30, 1998, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At September 30, 1998, under
regulations of the OTS, the Bank's tangible, core and risk-based
capital ratios were 22.6%, 22.6% and 24.61%, respectively, compared to
requirements of 1.5%, 3.0% and 8.0%, respectively.
16
Liquidity and Capital Resources (Continued)
The Bank's capital requirements and actual capital under OTS regulations
are as follows as of September 30, 1998:
AMOUNT % OF ASSETS
------ -----------
GAAP Capital $71,074 22.07%
======= ======
Tangible Capital:
Actual $71,030 22.06%
Required 4,830 1.50
------- ------
Excess $66,200 20.56%
======= ======
Core Capital
Actual $71,030 22.06%
Required 12,881 4.00
------- ------
Excess $58,149 18.06%
======= ======
Risk-based Capital:
Actual $74,130 24.61%
Required 24,093 8.00
------- ------
Excess $50,037 15.58%
======= =======
At September 30, 1998, the Bank had loan commitments (excluding undisbursed
portions of construction loans) of approximately $9.4 million. In
addition, at September 30, 1998, the unused portion of lines of credit
extended by the Bank was approximately $7.2 million for consumer lines
of credit and $21.9 million for commercial lines of credit. Standby
letters of credit and financial guarantees are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most guarantees are for a term of
one to two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. At September 30, 1998, the Bank had $6.7 million
of letters of credit outstanding.
17
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP,
which require the measurement of financial condition and operating results
in terms of historical dollars without considering the change in relative
purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
the Company are financial. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services.
Year 2000
The Bank began working on its Year 2000 conversion process in 1996 as part
of a project to update our information systems to a level that would allow
us to compete in the 21st century. As a result, the Bank began a
comprehensive review to identify all systems that would be affected,
estimated cost projections were determined, and a schedule/plan of action
was compiled. The Bank is currently on schedule for having all internal
mission critical systems Year 2000 compliant by December 31, 1998, and all
third party testing completed by March 31, 1999.
The Bank's plan of action follows the FFIEC's suggested steps of Awareness,
Assessment, Renovation, Validation, and Implementation. The Bank's
Progress towards completion of each phase is as follows:
Awareness Phase - Starting in 1996 senior management assigned Year 2000
responsibility to a team of employees that developed a strategy to address
all internal and external systems. Routine periodic reports were furnished
to the board of directors and requests to purchase the necessary hardware
and software to completely upgrade all systems were approved by the board
of directors. In early 1998 the board of directors appointed the Audit
Committee, composed completely of outside directors, to monitor the bank's
Year 2000 efforts. The Audit Committee meets quarterly or more often if
necessary.
The Bank believes it has completed 100 percent of the awareness stage.
18
Assessment Phase - By August of 1997 the Bank believes that all business
processes and elements of the Bank's internal information systems and
embedded chip systems such as vault locks, heat/air systems, security
systems, elevators, and fire alarms had been identified and priorities set.
Resource needs were identified, time frames established, and contingency
plans were reviewed.
The Bank believes it has completed 100 percent of the assessment phase.
Renovation Phase - In 1996 the Bank started to replace all internal
hardware and software as necessary to upgrade to a Windows based operating
System that would be year 2000 compliant and meet the perceived
technological challenges of the future. In 1997 the Bank also started to
actively monitor the primary critical systems provider's efforts, BISYS, to
renovate their systems to be year 2000 compliant. The Bank has also made
efforts to monitor other third party vendors'progress in attaining Year
2000 compliance.
Management has reviewed all heating/air conditioning, security, vaults,
elevators, fire alarm and telephone systems and received assurances from
the manufactures that the equipment will function properly in the Year 2000
The renovation of the embedded chip systems was considered complete
by management with the $25,000 upgrade to the Company's telephone and voice
mail system.
Internal Hardware - Since in 1996 the Bank has replaced in excess of 92% of
its internal hardware. Of the 20 units that have not been replaced 19 have
been renovated, validated and implemented. The one remaining unit of
internal hardware (imaging controller) that is not Year 2000 compliant is
scheduled to be replaced in December 1998. Management estimates that
internal hardware Year 2000 compliance is currently 95% complete and will
be fully completed by December 1998.
19
Internal Software - The Bank has been assured by all appropriate vendors
that software utilized in the consumer and commercial lending area as well
as the tellering, general ledger, trust, and FedLine areas is Year 2000
compliant. However, the Bank has scheduled the installation of an upgrade
to the consumer and commercial lending software in December 1998, an
upgrade to a Windows version of FedLine during the first quarter of 1999,
and a upgrade to the trust posting software in April 1999. These upgrades
will be thoroughly validated prior to replacing the existing Year 2000
compliant software. The Bank has also scheduled a complete upgrade of our
mortgage lending application software to a Year 2000, Windows version in
early December 1998. In addition, the Bank has received the replacement
software that operates the imaging controller. However, this software
cannot be installed and tested until the new imaging controller noted above
is installed in December 1998. By giving each piece of these mission
critical software equal weight, Year 2000 internal software
renovation is considered by management to be 70% completed at this time.
Validation Phase - Starting in June of 1998 a systematic testing of all
internal computer hardware and software has been conducted by the Bank.
All hardware has been tested and replaced or upgraded as needed except for
the imaging controller noted above. All software has been validated as
year 2000 compliant with the exception of the FedLine software, which is
scheduled for validation in November. All software upgrades between now
and the year 2000 will be thoroughly tested on the Bank's test bank system
prior to replacing existing Year 2000 compliant software.
Implementation Phase - The Bank's implementation is describe above.
20
Third Party Providers - BISYS provides the Bank with main frame services in
its teller, general ledger, consumer, commercial, and mortgage lending
areas. The Bank has received assurances that BISYS's systems will be Year
2000 compliant by March 31, 1998. The Bank is scheduled to begin a 90-day
testing period of the interface between BISYS and Cavalry on November
3,1998. The Bank is currently writing and reviewing test scripts for all
deposit and loan transactions. In addition to BISYS, the other third party
providers that the Bank believes would impact mission critical systems are
its utilities (telecommunications and electric). While both of these
entities have indicated that they are working to achieve Year 2000
compliance, neither has provided assurances that service will
not be interrupted at the beginning of the new millenium. While loss of
power or telephone/data line service would have a major impact on the
bank's operations and customers, it should not have a material effect on
the bank's results of operations, liquidity and financial condition unless
service to the Bank's service area generally is not interrupted. However,
the Bank will be addressing contingency plans for these worse case
scenarios starting upon completion of all testing with third party
providers in the first quarter of 1999.
Cost - Year 2000 costs are not always easy to separate from upgrades or
changes in hardware/software for other reasons. Therefore, the Bank
believes some costs disclosed as Year 2000 costs could just as easily have
been excluded as replacement costs unrelated to Year 2000 issues. The
Bank's estimated Year 2000 related cost for 1996 was $700,000. The
Bank's estimated Year 2000 related cost of 1997 was $250,000 and the
Bank's estimated Year 2000 cost for the first 9 months of 1998 has been
$150,000. The Bank currently believes that all major year 2000
expenditures have been made and therefore, estimates that only an
additional $150,000 in Year 2000 cost will be incurred over the remaining
15 months. This cost will relate primarily to personnel cost incurred in
the validation and implementation phases.
Contingency Planning - A formal Year 2000 contingency plan has been
developed and approved. However, the plan will be reviewed and its focus
narrowed to more definitively address worse case scenarios based upon the
results of internal and third party provider testing which will be
completed in March 1999.
The costs and completion dates for testing and corrections of Year 2000
problems are based on management's best estimates which were derived
utilizing numerous forward looking assumptions. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from these estimates. Specific factors that might cause
such material differences include,but are not limited to, the ability to
locate and correct all relevant computer programs, failure of a key third
party to meet expectations, availability and cost of key personnel.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's interest rate sensitivity is monitored by management through
selected interest rate risk measures produced internally and by the OTS.
Based on internal reviews, management does not believe that there has been
a material change in the Company's interest rate sensitivity from December
31, 1997 to September 30, 1998. However, the OTS results are not yet
available for the quarter ended September 30, 1998. All methods used to
measure interest rate sensitivity involve the use of assumptions.
Management cannot predict what assumptions are made by the OTS, which can
vary from management's assumptions. Therefore, the results of the OTS
calculations can differ from management's internal calculations. The
Company's interest rate sensitivity should reviewed in conjunction with
the financial statement and notes thereto contained in The
Company's Annual Report for the fiscal year ended December 31, 1997.
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
22
Item 6. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C Loughry, Jr.**
10.2 Employment Agreement with Ronald F Knight**
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis**
10.5 Severance Agreement with R Dale Floyd**
10.6 Severance Agreement with M. Glenn Layne**
10.7 Severance Agreement with Joy B Jobe**
10.8 Severance Agreement with William S Jones**
10.9 Severance Agreement with David W Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
21 Subsidiaries of the Registrant**
27 Financial Data Schedule
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
A Form 8-K (dated October 7, 1998) was filed announcing approval from the
Office of Thrift Supervision (OTS) to implement a program to repurchase
up to 376,913 shares or approximately 5% of its 7.5 million shares
outstanding.
23
Pursuant to the requirements of section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: November 10, 1998 By:
\s\ Ed C. Loughry, Jr.
-------------------------
Ed C. Loughry, Jr.
President and Chief Executive
Officer
Date: November 10, 1998 By:
\s\ Hillard C. Gardner
--------------------------
Hillard C. Gardner
Senior Vice President and
Chief Financial Office
24