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 March 31, 1999 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: 7,429,967 as of April 29, 1999.
CAVALRY BANCORP, INC.
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 1999
And December 31, 1998 1
Consolidated Statements of Income for the Three Month
Periods Ended March 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Income for the Three
Month Periods Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information 14
Signatures 15
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
-------------- --------
Cash $ 10,965 $ 12,110
Interest-bearing deposits with 32,880 41,078
other financial institutions
--------- -------
Cash and cash equivalents 43,845 53,188
Investment available-for-sale at fair value
(amortized cost: $52,083 and $46,424 at March 31,
1999 and December 31, 1998, respectively) 52,065 46,505
Mortgage-backed securities held to maturity - at
amortized cost (fair value: $793 and $963 at March
31, 1999 and December 31, 1998, respectively) 800 959
Loans held for sale, at estimated fair value 7,124 10,923
Loans receivable, net 244,488 237,547
Office properties and equipment, net 8,748 8,782
Federal Home Loan Bank of Cincinnati stock - 1,782 1,751
at cost
Other assets 7,731 5,237
--------- ---------
$ 366,583 $ 364,892
========= =========
LIABILITIES AND EQUITY
LIABILITIES:
Deposits $266,332 $266,032
Accounts payable and other liabilities 4,262 3,679
--------- --------
Total liabilities 270,594 269,711
--------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value
Authorized-250,000 shares, none issued or
outstanding at March 31, 1999 and December 31, 1998 - -
Common Stock, no par value
Authorized-49,750,000 shares; issued and outstanding
7,161,337 at March 31, 1999
and December 31, 1998 65,705 65,705
Retained earnings 35,906 35,037
Unallocated ESOP Shares (5,612) (5,612)
Accumulated other comprehensive income, net of tax (10) 51
-------- --------
Total Shareholders' Equity 95,989 95,181
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $366,583 $364,892
======== ========
See accompanying notes to consolidated financial statements.
1
CAVALRY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
------ -----
Interest and dividend income:
Loans $ 5,643 5,281
Investment securities 670 197
Deposits with other financial institutions 491 934
Mortgage-backed securities held to maturity 9 22
------ -----
Total interest and dividend income 6,813 6,434
------ ------
Interest expense 2,337 2,653
------ ------
Net interest income 4,476 3,781
------ ------
Provision for loan losses 89 54
------ ------
Net interest income after provision
for loan losses 4,387 3,727
------ ------
Noninterest income:
Servicing income 71 107
Gain on sale of loans, net 441 567
Deposit servicing fees and charges 424 332
Trust service fees 205 163
Other operating income 77 108
------ ------
Total noninterest income 1,218 1,277
------ ------
Noninterest expenses:
Compensation, payroll taxes and
fringe benefits 2,068 1,597
Occupancy expense 168 143
Supplies, communications and other
office expenses 231 168
Federal insurance premiums 37 37
Advertising expense 67 45
Equipment and service bureau expense 584 562
Other operating expenses 359 241
------ ------
Total noninterest expenses 3,514 2,793
Earnings before income tax expense 2,091 2,211
------ ------
Income tax expense 863 830
------ ------
Net income 1,228 1,381
====== ======
Basic earnings per share $0.19 $0.20
====== ======
Weighted average shares outstanding (1) 6,607,533 6,935,190
Dividends declared $0.05 per share payable April 16, 1999 for shareholders
of record date March 31, 1999.
(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. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended
March 31
1999 1998
---- ----
Net income $ 1,228 $1,381
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
Available-for-sale (61) 5
Comprehensive income $ 1,167 $1,386
======= ======
3
CAVALRY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
Operating activities: ------ ------
Net cash provided by operating activities $3,139 $(1,559)
------- ------
Investing activities:
Increase in loans receivable, net (6,949) (8,654)
Principal payments on mortgage
backed securities held to maturity 153 130
Proceeds from the sale of office
properties and equipment - 203
Purchase of investment securities
Available for sale (25,083) (4,940)
Proceeds from maturities of investment securities 19,500 1,000
Purchase of office properties and equipment (246) (639)
------- -------
Net cash used in investing activities (12,625) (12,900)
------- -------
Financing activities:
Net (decrease) increase in deposits 300 (1,582)
Issuance of common stock - 69,352
Expenses of stock offering - (1,481)
Dividends paid (358) -
Net increase in advance
payments by borrowers for
property taxes and insurance 201 276
------- ------
Net Cash provided by
financing activities 143 66,565
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,343) 52,106
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 53,188 37,658
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $43,845 $89,764
======== =======
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest 2,302 2,662
======== ========
Income taxes 522 -
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Interest credited to deposits 959 1,121
======== ========
Decrease in deferred tax asset related
to unrealized gain on investments 7 3
======== ========
4
Cavalry Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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. 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 months ended March 31, 1999, are
not necessarily indicative of the results to be expected for the year
ending December 31, 1999. 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, 1998.
2. Earnings Per Share
Earnings per share has been computed for the three months ended March 31,
1999, based upon weighted average common shares outstanding of 6,607,533.
Earnings per share has been computed for the three months ended March 31,
1998, based upon weighted average common shares outstanding of 6,935,190.
For the purpose of computing weighted average shares outstanding for the
three months ended March 31, 1998, shares issued in the conversion on
March 16, 1998, were assumed to have been outstanding since January 1,
1998.
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 31, 1997. The Company had no dilutive securities,
therefore diluted earnings per share is the same as basic earnings per
share.
3. Business Segments
The Company and its subsidiary provide community oriented banking
services to individuals and business primarily within Rutherford, Bedford
and Williamson counties in middle Tennessee.
The Company's segments are identified by the products and services
offered, principally distinguished as banking, trust and mortgage banking
operations. 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 mortgages
sold in 1999 and 1998.
Segment information is derived from the internal reporting system
utilized by management with accounting policies and procedures consistent
with those described in Note 1 of the 1998 Annual Report to Shareholders.
Segment performance is evaluated by the Company based on profit or loss
before income taxes. Revenue, expense and asset levels reflect those
which can be specifically identified and those assigned based on
internally developed allocation methods. These methods have been
consistently applied.
5
For the quarter ended Mortgage
March 31, 1999 Banking Banking Trust Consolidated
Interest revenue $ 6,813 $ - $ - $ 6,813
Other income-external customers 501 71 205 777
Interest expense 2,337 - - 2,337
Depreciation and amortization 210 52 11 273
Other significant items:
Provision for loan losses 89 - - 89
Gain on sales of assets - 441 - 441
Segment profit 1,854 195 42 2,091
Segment assets 359,140 7,263 180 366,583
For the quarter ended Mortgage
March 31, 1998 Banking Banking Trust Consolidated
Interest revenue $ 6,434 $ - $ - $ 6,434
Other income-external customers 441 107 163 711
Interest expense 2,653 - - 2,653
Depreciation and amortization 226 57 9 292
Other significant items:
Provision for loan losses 54 - - 54
Gain on sales of assets - 567 - 567
Segment profit 1,928 241 42 2,211
Segment assets 341,954 8,855 45 350,854
4. On March 25, 1999 Cavalry Bancorp, Inc. announced plans to implement a
program to repurchase in the open market up to 358,066 shares or
approximately 5 percent of its 7.2 million shares outstanding at that
time. As of April 28, 1999 the Company has repurchased 32,900 shares for
$721,000 or approximately $21.91 a share.
6
ITEM 2. Management's Discussion and Analysis of Financial condition and
Results of Operations
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Total assets were $366.6 million at March 31, 1999, compared to $364.9
million at December 31, 1998, an increase of $1.7 million or 0.46%. Cash
and cash equivalents decreased from $53.2 million at December 31, 1998,
to $43.8 million at March 31, 1999. This decrease was a result of funds
being used to purchase investment securities and to originate loans.
Investments available for sale increased from $46.5 million at December
31, 1998, to $52.1 million at March 31, 1999, as a result of the purchase
of short - term investments.
Deposit accounts increased $300,000 from December 31, 1998, to March
31, 1999. Certificates of deposit increased $224,000 while savings
deposits increased $445,000. Money market accounts increased $6.1
million. These increases were offset by declines in transaction accounts
of $6.5 million.
Stockholders' equity increased by $808,000 from December 31, 1998, to
March 31, 1999, as a result of net income of $1.2 million for the three
months ended March 31, 1999. This increase was offset by dividends
declared of $358,000 and a decline in accumulated other comprehensive
income of $61,000.
Nonperforming assets were $253,000 at December 31, 1998 and $251,000 at
March 31, 1999.
Comparison of Operating Results for the Three Months Ended
March 31, 1999 and March 31, 1998.
Net Income. Net income decreased to $1.2 million for the three months
ended March 31, 1999, from $ 1.4 million for the three months ended March
31, 1998, primarily as a result of a decrease in non interest income and
increases in the provision for loan losses and income tax expenses.
These increased expenses were offset partially by an increase in interest
and dividend income and a decline in interest expense.
Net Interest Income. Net interest income increased 6.25% to $6.8 million
for the three months ended March 31, 1999, from $6.4 million for the same
period in 1998. Interest on loans increased from $5.3 million for the
period ended March 31, 1998, to $5.6 million for the same period in 1999.
This was a result of average loans outstanding increasing from $224.1
million for the three months ended March 31, 1998, to $249.5 million for
the same period in 1999. The average yield decreased from 9.4% for the
period ended March 31, 1998 to 9.1% for the same period in 1999. This
increase in volume was a result of growth in the construction, commercial
and consumer loan portfolio. The decline in yield was primarily a result
of a decline in the prime interest rates between the two periods. Income
on all other investments consisting of mortgage backed securities,
investments, FHLB stock, bank deposits and federal funds was $1.2 million
for 1998 and 1999. Average investments increased from $87.0 million for
the three months ended March 31, 1998, to $87.6 million for the same
period in 1999. The average yield for both periods was 5.3%.
7
Interest Expense. Interest expense decreased from $2.7 million for the
period ended March 31, 1998, to $2.3 million for the same period in
1999. Average deposits decreased from $262.3 million for the period in
1998 to $233.3 million for 1999. This decrease was a result of stock
subscription funds being on deposit during the three-month period ended
March 31, 1998. These funds were either used to purchase stock in the
offering or were returned to the subscriber after the completion of the
initial public offering. The average cost of deposits decreased from
4.10% for the three months ended March 31, 1998, to 4.06% for the same
period in 1999. Interest rate spread decreased from 4.17% in 1998 to
4.02% for 1999. Net interest margin increased from 4.86% for the three
months ended March 31, 1998, to 5.31% for the same period in 1999. This
increase in net interest margin was primarily a result of an increase in
the ratio of average interest-earning assets to average interest-bearing
liabilities from 118.62% for the three months ended March 31, 1998 to
144.49% for the same period in 1999.
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 $89,000 for the period ending March 31,
1999 compared to $54,000 for the same period in 1998. The increase in
the provision was a result of growth in the construction, commercial and
consumer loan portfolios, which by nature involve more risk. Management
deemed the allowance for loan losses adequate at March 31, 1999.
Noninterest Income. Noninterest income decreased to $1.2 million for the
three months ended March 31, 1999 from $1.3 million for the same period
in 1998. In the mortgage banking segment net gain on sale of loans
decreased from $567,000 for the three months ended March 31,1998 to
$441,000 for the same period in 1999. This decrease was a result of
narrower pricing spreads due to market competition. Loan servicing fees
also declined from $107,000 for the three months ended March 31, 1998, to
$71,000 primarily as a result of increased amortization of originated
servicing rights. In the banking segment deposit fees and other
operating incomes increased from $441,000 for the three months ended
March 31, 1998, to $501,000 for the same period in 1999. This increase
was primarily as result of growth in the number of transaction accounts.
In the trust segment trust fees increased from $163,000 for the months
ended March 31, 1998, to $205,000 for the same period in 1999 as a result
of more trust assets under management.
8
Noninterest Expense. Noninterest expense was $3.5 million for the three-
month period ended March 31, 1999 compared to $2.8 million for the same
period in 1998. Compensation and other employee benefits were up from
$1.6 million for the three-month period ended March 31, 1998 to $2.1
million for the same period in 1999. This increase was primarily a
result of increased staffing due to growth in both the loan and deposit
function of the Bank. This increased staffing resulted in increased
salary and related benefits, which also includes an employee stock
ownership plan implemented after the stock conversion. 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 $863,000 for the period
ended March 31, 1999 compared to $830,000 for the same period in 1998.
This increase was primarily a result of an increase in nondeductible
expenses for the period ended March 31, 1999. The gross tax rate for the
period ended March 31, 1998 was 37.5% compared to 41.3% for the same
period in 1999.
Liquidity and Capital Resources
The company's primary sources of funds are customer deposits, proceeds
from loan principal and interest payments 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 loans 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 March 31, 1999, cash and cash equivalents totaled $43.8
million or 11.9% of total assets, and investments available -for -sale of
$52.1 million. At March 31, 1999, 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 March 31, 1999, The Bank's regulatory capital was in excess of all
applicable regulatory requirements. At March 31, 1999, under regulations
of the OTS, the Bank's actual tangible, core and risk-based capital
ratios were 21.4%, 21.4% and 23.3%, respectively, compared to
requirements of 1.5%, 3.0% and 8.0%, respectively.
9
At March 31, 1999, the Bank had loan commitments of approximately $58.2
million. In addition, at March 31, 1999, the unused portion of lines of
credit extended by the Bank was approximately $8.9 million consumer and
$25.4 million commercial. Standby letters of credit and financial
guarantees are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions.
Most guarantees extend from one to two years. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. At March 31, 1999, the Bank had
$7.5 million of letters of credit outstanding.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP,
which require the measurement of financial condition and operating
results in terms of historical dollars without considering the change in
relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are financial. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and
services.
Year 2000 Readiness
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,
estimate cost, and compile a schedule or plan of action. The Bank is on
schedule by having all internal mission critical systems tested and/or
certified as Year 2000 compliant.
The Bank's plan of action follows the FFIEC's suggested steps of
Awareness, Assessment, Renovation, Validation, and Implementation. The
Bank's progress toward completion of each step 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.
This step has been completed by the Bank.
10
Assessment Phase
By August of 1997, management believed that all business processes and
elements of the Bank's internal information systems and embedded chip
systems had been identified and priorities set. Resource needs were
identified, time frames established, and contingency plans were reviewed.
This step has been completed by the Bank.
Renovation Phase
This phase includes hardware and software upgrades, system replacements,
vendor certification and associated changes. This phase also encompasses
discussions with and monitoring of outside servicers and third party
software providers.
In 1996, the Bank began replacing 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 our primary
critical systems provider's efforts to renovate their systems to be Year
2000 compliant. The Bank has also made efforts to monitor other third
party non-mission critical vendors' progress in attaining Year 2000
compliance.
Internal Hardware - Since 1996, the Bank has replaced in excess of 95% of
its internal hardware. The 20 units that have not been replaced have been
renovated, validated and implemented. Management feels that all internal
hardware is Year 2000 compliant as of December 31, 1998.
Internal Software - The Bank has received certification by the
appropriate vendors that all critical software utilized by our Wide Area
Network as well as the consumer/commercial lending, the tellering, the
general ledger, the trust, and the FedLine areas are Year 2000 compliant.
The Bank has scheduled some additional upgrades to the consumer /
commercial loan application software, the trust posting software
and our mortgage lending application software. Vendor certified Year 2000
software to operate the check processing system has been installed and
will be implemented upon completion of testing. Management feels that
all internal software is Year 2000 compliant.
Any additional hardware or software acquisitions or replacements will be
vendor certified Year 2000 compliant before purchase. As is our practice
with all mission critical system upgrades, we will test the upgrades
prior to replacement of current Year 2000 compliant hardware or software.
Management considers this phase complete but ongoing.
Validation/Testing Phase
Starting in June of 1998 a systematic testing of all internal computer
hardware and software has been conducted by the Bank. The Bank has
completed extensive testing by converting computer dates to potentially
troublesome dates such as January 1, 2000, or February 29, 2000, and
then running various transactions and verifying the results are correct.
As noted above internal testing of upgrades will continue as necessary to
insure a smooth transition to the year 2000. Many third party vendors
have been tested and others are scheduled for testing soon. Management
considers this phase complete but ongoing.
11
Implementation Phase
Systems successfully tested will be certified as Year 2000 compliant.
For any system failing validation testing, the business impact must be
assessed and a contingency plan implemented. Since all internal systems
have been validated, implemented and certified the Bank is focusing its
efforts on Third Party Provider's certification and implementation
efforts. This phase is scheduled for completion by June 30, 1999.
Third Party Providers - BISYS provides the Bank with mainframe services
in the mission critical teller, general ledger, consumer, commercial, and
mortgage lending areas. BISYS has certified that its systems are Year
2000 compliant. The Bank and BISYS have successfully completed the
testing of the interface between BISYS and the Bank and the software's
performance when encountering potentially troublesome dates such as
January 3, 2000, and February 29, 2000.
In addition to BISYS, the other third party providers that the Bank
believes would impact mission critical systems are the Federal Reserve's
FedLine System and the telecommunications and electric utilities. The
FedLine System has been renovated, tested and implemented and management
believes it is Year 2000 compliant. The local telecommunication industry
has indicated that they are approximately 75% complete with testing and
anticipate 100% completion of validation and testing by June 30, 1999.
The local power companies have indicated that they are working to achieve
Year 2000 compliance, but will not provide assurances that service will
not be interrupted at the beginning of the new millenium. The Bank can
only monitor the efforts of the utilities to become Year 2000 compliant.
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 the Bank is the only financial institution in
the area without service. However, the Bank will be finalizing
contingency plans for these worse case scenarios during the second
quarter of 1999.
Cost - The Bank believes that the Year 2000 issue will not pose
significant operational problems and is not anticipated to be material to
its financial position or results of operations in any given year. Year
2000 costs are not always easy to separate from upgrades or changes in
hardware/software for other reasons. Therefore, the Company believes
some costs disclosed as Year 2000 costs could just as easily have been
excluded as replacement costs unrelated to Year 2000 issues. The
Company's estimated Year 2000 related cost for 1996 was $700,000. The
Company's estimated Year 2000 related cost for fiscal 1997 was $250,000
and the Company's estimated Year 2000 cost for fiscal 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
12 months. This cost will relate primarily to personnel cost incurred in
the validation and implementation phases.
12
Customer Awareness - The last four quarterly newsletters, which have been
distributed to all customers, included articles to assist customers in
understanding Year 2000 issues and to inform them of the Bank's Year 2000
preparation. The Bank intends to continue to use the newsletters, plus
FDIC brochures, internally generated handouts, seminars and other venues
to keep the customers informed.
Contingency Planning - A formal Year 2000 contingency plan has been
developed and approved by the Board of Directors. 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 June 1999.
The costs and completion dates for Year 2000 issues 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.
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, 1998, to March 31, 1999. However, the OTS
results are not yet available for the quarter ended March 31, 1999. All
methods used to measure interest rate sensitivity involve the use of
assumptions. Management cannot predict what assumptions are made by the
OTS, which can vary from management's assumptions. Therefore, the
results of the OTS calculations can differ from management's internal
calculations. The Company's interest rate sensitivity should be reviewed
in conjunction with the financial statement and notes thereto contained
in the Company's Annual Report for the fiscal year ended December 31,
1998.
13
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
None
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C Loughry, Jr.**
10.2 Employment Agreement with Ronald F Knight **
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis **
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**
13 Annual Report to Stockholders**
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, 1998.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,1999.
14
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: April 29, 1999 By: /s/Hillard C. Gardner
-----------------------------
Hillard C. Gardner
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15