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, 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
-------
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: 7,104,801 as of November 9, 1999.
CAVALRY BANCORP, INC.
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 1
Consolidated Statements of Income for the Three and
Nine Month Periods Ended September 30, 1999 and 1998 2-3
Consolidated Statements of Comprehensive Income for
the Three and Nine Month Periods Ended September 30,
1999 and 1998 4
Consolidated Statements of Changes in Equity for the
Three and Nine Month Periods Ended September 30,
1999 and 1998 5-6
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1999 and 1998 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22-23
Part II. Other Information 24
Signatures 25
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 1999 1998
------- -------
Cash $ 11,421 $ 12,110
Interest-bearing deposits with
other financial institutions 44,263 41,078
--------- ---------
Cash and cash equivalents 55,684 53,188
Investment securities available-for-sale
(amortized cost: $40,967 and $46,424 at September 30,
1999 and December 31, 1998, respectively) 40,923 46,505
Mortgage-backed securities held to maturity - at
amortized cost (fair value: $704 and $963 at September
30, 1999 and December 31, 1998, respectively ) 714 959
Loans held for sale, at estimated fair value 5,578 10,923
Loans receivable, net 271,715 237,547
Accrued interest receivable 2,507 2,376
Office properties and equipment, net 9,028 8,782
Real Estate Owned and Other Repossessed Assets 49 80
Federal Home Loan Bank of Cincinnati stock - at cost 1,846 1,751
Other assets 2,831 2,781
--------- ---------
TOTAL ASSETS $ 390,875 $ 364,892
========= =========
LIABILITIES AND EQUITY
LIABILITIES:
Deposits $297,415 $266,032
Accrued interest payable 324 285
Advance payments by borrowers for property
taxes and insurance 796 237
Other liabilities and accrued expenses 2,216 3,157
--------- ---------
Total Liabilities 300,751 269,711
---------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized - 250,000 shares; none issued or outstanding at
September 30, 1999 and December 31, 1998 - -
Common Stock, no par value:
Authorized - 49,750,000 shares; issued and outstanding:
7,104,801 and 7,161,337 at September 30, 1999 and
December 31, 1998, respectively 64,104 65,705
Retained earnings 37,399 35,037
Unallocated ESOP Shares (5,167) (5,612)
Unearned restricted stock (6,185) -
Accumulated other comprehensive
income, net of taxes (27) 51
--------- ---------
Total Stockholders' Equity 90,124 95,181
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 390,875 $ 364,892
========= =========
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,
1999 1998 1999 1998
---- ---- ---- ----
Interest and dividend income:
Loans $ 6,036 $5,493 $ 17,468 $ 16,113
Investment securities 543 670 1,768 1,348
Deposits with other financial
institutions 499 520 1,419 2,221
Mortgage-backed securities held
to maturity 9 15 30 54
------ ------ ------ ------
Total interest and dividend
income 7,087 6,698 20,685 19,736
------ ------ ------ ------
Interest expense on deposits 2,532 2,310 7,231 7,233
------ ------ ------ ------
Net interest income 4,555 4,388 13,454 12,503
------ ------ ------ ------
Provision for loan losses 132 173 644 308
------ ------ ------ ------
Net interest income after
provision for loan losses 4,423 4,215 12,810 12,195
------ ------ ------ ------
Noninterest income:
Servicing income 59 103 198 305
Gain on sale of loans, net 692 587 1,598 1,625
Gain on sale of office
properties and equipment - - - 42
Deposit servicing fees and charges 546 377 1,451 1,091
Trust service fees 249 171 687 505
Other operating income 61 55 197 157
------ ------ ------ ------
Total non-interest income 1,607 1,293 4,131 3,725
------ ------ ------ ------
2
Noninterest expenses:
Compensation, payroll taxes and
fringe benefits 2,381 1,843 6,761 5,159
Occupancy expense 186 170 533 452
Supplies, communications and other
office expenses 204 237 654 615
Federal insurance premiums 37 37 112 112
Advertising expense 48 47 229 140
Equipment and service bureau
expense 603 603 1,776 1,706
Other operating expenses 315 325 1,038 862
------ ------ ------ ------
Total non-interest expenses 3,774 3,262 11,103 9,046
------ ------ ------ -------
Earnings before income tax
expense 2,256 2,246 5,838 6,874
------ ------ ------ ------
Income tax expense 918 842 2,407 2,579
------ ------ ------ ------
Net income $ 1,338 $ 1,404 $3,431 $4,295
====== ====== ====== ======
Basic earnings per share $0.20 $0.20 $0.52 $0.62
====== ====== ====== ======
Weighted average
shares outstanding (1) 6,580,643 6,960,318 6,656,391 6,947,846
========= ========= ========= =========
Dividends declared $0.05 per share payable October 15, 1999 for stockholders
of record date September 30, 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.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ----- ----- -------
Net income $1,338 $1,404 $3,431 $4,295
Other comprehensive income, net of tax
Unrealized gains(losses) on securities
Available for sale 14 95 (78) 82
------ ------- ------- -------
Comprehensive income $1,352 $ 1,499 $ 3,353 $4,377
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999
(Dollars in Thousands)
(Unaudited)
Unallocated Total
Common Common Retained ESOP MRP Comp Shareholders'
Shares Stock Earnings Shares Shares Income Equity
------ ------ --------- ------ ----- ------ ------
Balance
June 30,
1998
7,538,250 73,850 32,965 (6,031) - (18) 100,766
========== ======= ======= ======= === ==== ========
Net income - - 1,404 - - - 1,404
Change in valuation
allowance for
investment securities
available for sale - - - - 95 95
ESOP shares committed
for release - 27 - 54 - - 81
Dividends - - (377) - - - (377)
--------- ------ ------ ------ ---- ---- ------
Balance
September 30,
1998 7,538,250 73,877 33,992 (5,977) - 77 101,969
========= ====== ====== ======= ==== ==== =======
Balance,
December 31,
1997 - $ - $30,452 $ - $ - $(5) $30,447
========= ====== ====== ====== ==== ==== =======
Net income - - 4,295 - - - 4,295
Change in valuation
allowance for
investment securities
available for sale - - - - 82 82
Issuance of common
stock 7,538,250 73,850 - (6,031) - - 67,819
ESOP shares committed
for release - 27 - 54 - - 81
Dividends - - (755) - - - (755)
--------- ------ ------ ------ ---- ---- ------
Balance
September 30,
1998
Total 7,538,250 73,877 33,992 (5,977) - 77 101,969
========== ======== ======= ======= === === =======
5
Balance
June 30,
1999
Total 7,104,801 63,942 36,403 (5,316) (6,522) (41) 88,466
========= ====== ====== ====== ======= ==== ======
Net income - - 1,338 - - - 1,338
Change in valuation
allowance for
investment
securities
available-for-sale - - - - 14 14
ESOP shares committed
for release - 162 - 149 - - 311
Restricted shares
for release - - - - 337 - 337
Dividends - - (342) - - - (342)
--------- ------ ------ ----- ----- --- ------
Balance,
September 30,
1999 7,104,801 64,104 37,399 (5,167) (6,185) (27) 90,124
========= ====== ====== ======= ====== ==== ======
Balance,
December 31,
1998 7,161,337 $65,705 35,037 (5,612) - 51 95,181
Net income - - 3,431 - - - 3,431
Change in valuation
allowance for
investment securities
available-for-sale - - - - (78) (78)
Issuance of
common
stock 301,530 6,747 - - (6,747) - -
ESOP shares committed
for release - 517 - 445 - - 962
Restricted shares
for release - - - - 562 - 562
Purchase and
retirement of common
stock (358,066) (8,865) - - - - (8,865)
Dividends - - (1,069) - - - (1,069)
--------- ------ ------ ------ ---- ---- ------
Balance,
September 30,
1999 7,104,801 64,104 37,399 (5,167)(6,185) (27) 90,124
========= ====== ====== ======= ====== ==== ======
6
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
----- ----
Operating activities:
Net cash provided (used) by operating activities 10,303 (120)
-------- --------
Investing activities:
Decrease (increase) in loans
receivable, net (34,857) (20,748)
Principal payments on mortgage
backed securities held to maturity 237 293
Proceeds from the sales of office
properties and equipment - 203
Purchase of investment securities
available for sale (35,965) (47,104)
Purchase of investment securities
held to maturity - (4,940)
Proceeds from maturities of investment
securities 41,500 15,000
Purchase of office properties
and equipment (1,085) (1,404)
-------- --------
Net cash used in investing activities (30,170) (58,700)
-------- --------
Financing activities:
Net (decrease) increase in deposits 31,383 (1,389)
Issuance of common stock - 69,352
Expenses of stock offering - (1,536)
Stock repurchase and retirement (8,865) -
Net increase in advance
payments by borrowers for
property taxes and insurance 559 621
Cash dividends paid on common stock (714) (377)
-------- --------
Net Cash provided (used) by
financing activities 22,363 66,671
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,496 7,851
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 53,188 37,658
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD 55,684 45,509
======== ========
7
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest 7,201 7,228
======== ========
Income taxes 3,569 2,660
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Foreclosures and in substance
Foreclosures of loans during period 69 23
======== ========
Interest credited to deposits 2,946 2,876
======== ========
Net unrealized gains(losses) on investment
Securities available for sale (124) 131
======== ========
(Decrease) increase in deferred tax asset related
to unrealized gain on investments 46 (49)
======== ========
See accompanying notes to consolidated financial statements.
8
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.
Statements contained in this Form 10-Q which are not historical facts
are forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
are subject to risk and uncertainties which could cause actual results
to differ materially from those projected. Such risks and uncertainties
include potential changes in interest rates, competitive factors in the
financial services industry, general economic conditions, the effects of
new legislation and other risks detailed in documents filed by the Company
with the Securities and Exchange Commission from time to time.
The results of operations for the three and nine months ended September
30,1999 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
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.
9
Earnings per share has been computed for the three and nine months
ended September 30, 1999 based upon weighted average common shares
outstanding of 6,580,643 and 6,656,391, respectively. For the purpose
of computing weighted average shares outstanding for the three and 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, 1998 was based upon 6,960,318 and 6,947,846, respectively. ESOP
shares are not considered in the weighted average shares outstanding
until shares are committed to be released or earned.
3. Business Segments
The Company and its subsidiary provide community oriented banking
services to individuals and businesses 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 in
1998 and 50% of the mortgage banking revenues for the nine month period
ended September 30, 1999 are derived each year from transactions with
agencies of the U.S. and state government. In addition, one
separate and unrelated entity purchased approximately 50% of mortgages
sold in 1998 with another separate and unrelated entity doing the same
in 1999. 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.
For the quarter ended Mortgage
September 30, 1999 Banking Banking Trust Consolidated
------- ------- ------- ------------
Interest Revenue $7,087 $ - $ - $7,087
Other income-external customers 607 59 249 915
Interest expense 2,532 - - 2,532
Depreciation and amortization 200 48 22 270
Other significant items:
Provision for loan losses 132 - - 132
Gain on sale of assets - 692 - 692
Segment profit 2,033 161 62 2,256
Segment assets 384,990 5,703 182 390,875
For the quarter ended Mortgage
September 30, 1998 Banking Banking Trust Consolidated
------- ------- ------- ------------
Interest Revenue $6,698 $ - $ - $6,698
Other income -external customers 432 103 171 706
Interest expense 2,310 - - 2,310
Depreciation and amortization 284 67 9 360
10
Other significant items:
Provision for loan losses 173 - - 173
Gain on sales of assets - 587 - 587
Segment profit 1,738 487 21 2,246
Segment assets 343,599 10,106 38 353,743
For the nine months ended Mortgage
September 30, 1999 Banking Banking Trust Consolidated
------- ------- ------- ------------
Interest revenue $20,685 $ - $ - $20,685
Other income-external customers 1,648 198 687 2,533
Interest expense 7,231 - - 7,231
Depreciation and amortization 622 150 43 815
Other significant items
Provision for loan losses 644 - - 644
Gain on sale of assets - 1,598 - 1,598
Segment profits 5,413 262 163 5,838
Segment assets 384,990 5,703 182 390,875
For the nine months ended Mortgage
September 30, 1998 Banking Banking Trust Consolidated
------- ------- ------- ------------
Interest revenue $19,736 $ - $ - $19,736
Other income-external customers 1,248 305 505 2,058
Interest expense 7,233 - - 7,233
Depreciation and amortization 671 188 27 886
Other significant items:
Provision for loan losses 308 - - 308
Gain on sales of assets 42 1,625 - 1,667
Segment profit 6,194 588 92 6,874
Segment assets 343,599 10,106 38 353,743
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. The buyback was completed June 10, 1999. The Company repurchased
358,066 shares at the average price of $24.76 per share with the last
purchase being a negotiated single block trade from an unaffiliated
shareholder. This block consisted of 212,303 shares purchased at a
price of $26.125, which represents a 8.29% large block premium, paid
over recent trading prices.
11
5. Stock Compensation Plans
Restricted stock-On April 22, 1999, 301,530 shares of restricted stock
were awarded to participants in the Cavalry Bancorp, Inc. Management
Recognition Plan ("MRP") which was approved at the Company's Annual
Meeting of the Stockholders on April 22, 1999. The stock awards vest
over a five-year period. The stock was issued from authorized but
unissued shares on the date of the grant. The Company recorded the stock
award at the market value on the date of the grant ($22.375 per share) as
unearned compensation in stockholders' equity and will amortize it over
the vesting period.
Stock option plan-On April 22, 1999 at the Annual Meeting of the
Stockholders approval was given to implement a Stock Option Plan.
This plan authorizes the issuance of options on 753,825 shares of
authorized and unissued shares of Cavalry Bancorp, Inc. stock with
an exercise price at least equal to the fair market value of a share
of Common Stock on the grant date. Currently no options have been
granted.
ITEM 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
Total assets were $390.9 million at September 30, 1999 and $364.9 million
at December 31, 1998, an increase of $26.0 million or 7.1%. This increase
was a result of growth in net loans receivable and interest bearing
deposits with other financial institutions offset by a decline in
loans available for sale. Cash and cash equivalents increased $2.5 million
while total investments decreased $5.6 million. The decrease was a
result of increased portfolio lending and the repurchase and retirement of
Cavalry Bancorp, Inc. stock. Mortgage-backed securities decreased $245,000
from $959,000 at December 31, 1998 to $714,000 at September 30, 1999 as a
result of repayments. Loans held for sale decreased $5.3 million. The
decrease resulted primarily from a decline in the volume of loans originated
for sale. This decline was a result of fewer refinances during this period.
Loans receivable, net increased from $237.5 million at December 31, 1998 to
$271.7 million at September 30, 1999. Gross loans outstanding increased
$39.3 million from $304.6 million at December 31, 1998 to $343.9 at
September 30, 1999. The portfolio of one-to-four family mortgage loans
declined $11.5 million or 15.2% from $75.6 million at December 31, 1998
to $64.1 million at September 30, 1999. This decline was primarily a
result of pay-offs in the adjustable rate mortgage portfolio with very
limited origination activity in those types of mortgages. The multifamily
portfolio also declined $302,000 from $1.1 million at December 31, 1998 to
$798,000 at September 30, 1999 as a result of repayments. The commercial
mortgage portfolio increased from $52.5 million at December 31, 1998 to
$68.0 million at September 30, 1999, an increase of $15.5 million or 29.5%.
This increase was primarily a result of active solicitation and competitive
pricing of all consumer, commercial, construction, land and commercial real
estate loan products. Construction and land loans increased $21.4 million
or 21.3% from $100.3 million at December 31, 1998 to $121.7 million at
September 30, 1999. Consumer and commercial loans increased $14.2 million
or 18.9% from $75.1 million at December 31, 1998 to $89.3 million
at September 30, 1999.
12
Deposit accounts increased $31.4 million from $266.0 million
at December 31, 1998 to $297.4 million at September 30, 1999.
Certificates of deposit increased $17.4 million from $125.3
million at December 31, 1998 to $142.7 million at September 30, 1999. The
Bank's savings account balances decreased $100,000 from $13.6 million
at December 31, 1998 to $13.5 million at September 30, 1999. NOW account
balances increased $7.8 million from $35.6 million at December 31, 1998
to $43.4 million at September 30, 1999. Money market accounts increased
$6.7 million from $52.5 million at December 31, 1998 to $59.2 million at
September 30, 1999. Non-interest-bearing deposits declined from $39.1
million at December 31, 1998 to $38.7 million at September 30, 1999. The
increases in deposit activity as well as the increase in the
loan activity can be attributed primarily to the branch network production.
Most branches are now full service, which would include the ability to
originate loans.
Stockholders' equity decreased by $5.1 million from December 31, 1998
to September 30, 1999. This decrease was primarily a result of the stock
repurchases and retirement program. The company repurchased and retired
358,066 shares at a cost of $8.9 million. At the annual meeting of the
stockholders on April 22, 1999 the stockholders approved two incentive
plans which included a management recognition plan and a stock option
plan. The management recognition plan resulted in the issuance of 301,530
shares of restricted stock at a market value of $6.7 million with an
offsetting reduction to capital in the form of unearned restricted
stock. This stock will be earned over a five year vesting period.
During this period capital increased $562,000 as a result of
restricted stock being earned. During the period 44,469 ESOP shares
were committed to be released increasing capital by $962,000.
Capital also increased as a result of earnings for the nine month
period of $3.4 million. These increases were offset by dividends
of $1.1 million and comprehensive income of ($78,000). The negative
comprehensive income was a result of the decline in the market value
of available for sale investment securities.
Nonperforming assets increased from $187,000 at December 31, 1998 to
$428,000 at September 30, 1999. The recorded investment in impaired loans
was $1.3 million at December 31, 1998 and September 30, 1999.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and September 30, 1998.
Net Income. Net income decreased to $1.3 million for the three months
ended September 30, 1999 from $1.4 million for the three months ended
September 30, 1998 primarily as a result of increased operating expenses
and higher interest expense. These increased expenses were
partially offset by higher interest income, a lower allowance for loan
losses and higher operating incomes.
13
Net Interest Income. Total interest income increased 6.0% to $7.1
million for the three months ended September 30, 1999 from $6.7 million
for the same period in 1998. Interest on loans increased from $5.5 million
for the period ended September 30, 1998 to $6.0 million for the same period
in 1999. This was a result of average loans outstanding increasing from
$234.3 million in 1998 to $274.6 million for the same period in 1999.
The average yield decreased from 9.4% for the period ended September
30, 1998 compared to 8.8% for the same period in 1999. This decrease
was a result of lower rates and market competition. Income on all
other investments consisting of mortgage backed securities, investments,
FHLB stock, bank deposits and federal funds decreased from $1.2 million
for the period ended September 30, 1998 to $1.1 million for 1999. Average
investments decreased from $86.7 million for the three months in 1998
to $82.1 million for the same period in 1999. These funds were used
to repurchase stock and to fund lending activity. The average yield
declined from 5.6% for the three months ended September 30, 1998 to 5.1%
for the same period in 1999. This decline in yield was a result of
lower rates for the three month period ended September 30, 1999 compared
to the same period in 1998. All interest income is allocated to
the banking segment.
Interest Expense. Interest expense increased from $2.3 million for
the period ended September 30, 1998 to $2.5 million for the same period in
1999. Average costing liabilities increased from $208.3 million for
the period ended September 30, 1998 to $253.2 million for the same period
in 1999. The average cost of funds decreased from 4.4% for the three
months ended September 30, 1998 to 4.0% for the same period in 1999.
This decrease was primarily a result of an increase in the average
balance in NOW accounts, a lower cost deposit, increasing from $30.3
million for the three month period ended September 30, 1998 to $43.3
million for the same period in 1999. This increase was also coupled
with a decline in the average cost from 1.4% for the three months
ended September 30, 1998 to 1.2% for the same period in 1999. This
decline in cost was a result of the bank lowering the rate offered on NOW
accounts. The average balances of money market accounts outstanding
increased from $42.1 million for the three months ended September 30, 1998
to $61.6 million for the same period in 1999. This increase in volume
was offset by a decline in average cost from 4.2% for the three months
ended September 30, 1998 to 4.0% for the same period in 1999. This
decrease in cost was a result of lower rates. Average passbook balances
also increased from $13.3 million for the period ended September 30,
1998 to $14.3 million for the same period in 1999. The average cost
declined from 2.0% to 1.2% between 1998 and 1999. This decline was a
result of the bank lowering the rates paid on passbook deposits. Average
balances in certificates of deposits increased from $122.6 million for
the three months ended September 30, 1998 to $134.1 million for the
same period in 1999. Lower rates accounted for the decline in
the average cost from 5.5% for the three month period ended September
30, 1998 to 5.1% for the same period in 1999. All interest expense is
allocated to the banking segment.
14
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 $132,000 for the period ending September
30, 1999 compared to $173,000 for the same period in 1998. The decrease
in the provision was primarily a result of slower growth in the construction,
land, commercial real estate, commercial and consumer loan portfolios.
The Bank assigns a higher risk to these credits than to one-to-four
family mortgages. Internally classified assets were $1.3 million at
September 30, 1999 compared to $1.3 million at September 30, 1998.
Management expects classified assets to increase moderately, although no
assurances can be given that this will in fact occur. Management deemed
the allowance for loan losses adequate at September 30, 1999. The
provision for loan losses is allocated to the banking segment
Noninterest Income. Noninterest income increased to $1.6 million for
the three months ended September 30, 1999 from $1.3 million for the same
period in 1998. The mortgage banking segment saw an increase in net gain
on sale of loans from $587,000 for the three months ended September 30, 1998
to $692,000 for the same period in 1999. This increase was primarily a
result of a slight increase in volume of loans sold. Also during this
quarter the Bank decided to sell all Tennessee Housing Development Authority
guaranteed loans servicing released. This allowed for a greater profit on
the sale of these loans. Servicing income declined from $103,000 for the
quarter ended September 30, 1998 to $59,000 for the same quarter in 1999.
This decline was a result of increased amortization of the originated s
servicing asset. In the banking segment service fees and other operating
incomes increased from $432,000 for the three months ended September 30,
1998 to $607,000 for the same period in 1999. This increase was a result of
volume in transactional accounts and an increased fee structure. In the
trust segment trust fees increased from $171,000 for the three months ended
September 30, 1998 to $249,000 for the same period in 1999. This increase
was a result of more trust assets under management.
15
Noninterest Expense. Noninterest expense was $3.8 million for the
period ending September 30, 1999 compared to $3.3 million for the
same period in 1998. Compensation and other employee benefits
increased from $1.8 million for the three months ended September 30,
1998 to $2.4 million for the period ended September 30, 1999.
This increase was a result of the implementation of the management
recognition plan, increased ESOP expense and increased staffing
to support the branch network. The increases in other categories
of operating expenses generally are attributable to the growth of
the Company.
Income taxes. The provision for income taxes was $918,000 for the
period ended September 30, 1999 compared to $842,000 for the same
period in 1998.
Comparison of Operating Results for the Nine Months Ended September
30, 1999 and September 30, 1998.
Net Income. Net income decreased to $3.4 million for the nine months
ended September 30, 1999 from $4.3 million for the nine months ended
September 30, 1998 primarily as a result of an increased provision
for losses on loans and increased noninterest expense. These
increased expenses were offset partially by an increase in interest
income and increased noninterest income.
Net Interest Income. Total interest income increased 5.1% to $20.7
million for the nine months ended September 30, 1999 from $19.7
million for the same period in 1998. Interest on loans increased
from $16.1 million for the period ended September 30, 1998 to $17.5
million for the same period in 1999. This was a result of average
loans outstanding increasing from $228.9 million for the nine months
ended September 30, 1998 to $262.9 for the same period in 1999.
This increase was partially offset by a decline in
average yield from 9.4% for the nine months ended September 30, 1998
to 8.9% for the same period in 1999. Income on all other investments
consisting of mortgage backed securities, investments, FHLB stock,
bank deposits and federal funds sold decreased from $3.6 million
for the nine months ended September 30, 1998 to $3.2 million for
the same period in 1999. Average investments decreased from $88.3
million for the nine months ended September 30, 1998 to $86.4
million for the same period in 1999. The average yield declined
from 5.5% for the nine months ended September 30, 1998 to 5.0%
for the same period in 1999 as a result of declining rates. Total
interest income is allocated to the banking segment.
16
Interest Expense. Interest expense remained constant at $7.2 million
for the nine month periods ended September 30, 1998 and 1999. Average
costing liabilities increased from $226.4 million for the nine months
ended September 30, 1998 to $242.1 million for the same period in 1999.
The average cost of funds declined from 4.3% for the nine months ended
September 30, 1998 to 4.0% for the same period in 1999. Average
passbook savings decreased from $25.0 million for the nine months
ended September 30, 1998 to $14.0 million for the same period in 1999.
The average cost of passbook deposits declined from 1.9%
for the nine months ended September 30, 1998 to 1.3% for the same
period in 1999. The decline in volume was a result of the returning of
subscription funds during the nine month period of 1998. The decline
in rate was a result of the bank's pricing policy on those deposits.
Average deposits in money market accounts increased from $45.6 million
for the nine months ended September 30, 1998 to $58.4 million for
the same period in 1999. The average cost of the money market accounts
declined from 4.2% for the nine month period ended September 30, 1998
to 4.0% for the same period in 1999 as a result of declining rates.
Average balances in NOW accounts increased from $32.0 million
for the nine month period ended September 30, 1998 to $41.0 million
for the same period in 1999. This increase was primarily a result
of active solicitation of these accounts by the use of employee
incentives. The average cost of NOW accounts declined from 1.5% for
the nine months ended September 30, 1998 to 1.2% for the same period in
1999 as a result of the Bank lowering the rate paid on these deposits.
The average balances in certificates of deposits increased slightly from
$123.8 million for the nine month period ended September 30, 1998 to $128.6
million for the same period in 1999. The average cost declined from 5.5%
for the nine months ended September 30, 1998 to 5.1% for the same period in
1999 as a result of declining rates. Total interest expense is allocated
to the banking segment.
Provision for Loan Losses. The provision for loan losses was $644,000
for the nine month period ended September 30, 1999 compared to $308,000
for the same period in 1998. The increase was a result of increased loan
portfolio growth in construction, land development, commercial, consumer
commercial real estate loans. See "Comparison of Operating Results for the
Three Months Ended September 30, 1999 and September 30, 1998 - Provision
for Losses."
Noninterest Income. Noninterest income increased to $4.1 million for
the nine months ended September 30, 1999 compared to $3.7 million for
the same period in 1998. In the mortgage banking segment the gain on
sale of loans was $1.6 million for both nine month periods ended
September 30, 1999 and 1998. The mortgage banking segment
saw a decline in mortgage servicing fees from $305,000 for the nine
month period ended September 30, 1998 to $198,000 for the same period
in 1999. This decline was a result of the amortization of the originated
servicing asset. The trust segment saw trust fees increase from $505,000
for the nine months ended September 30, 1998 to $687,000 for the same
period in 1999. In the banking segment deposit servicing fees and
other operating income increased from $1.2 million for the nine months
ended September 30, 1998 to $1.6 million for the same period in 1999
as a result of increased volume in transactional accounts and increased
fee pricing.
17
Noninterest Expense. Noninterest expense was $11.1 million for the
nine month period ended September 30, 1999 compared to $9.0 million
for the same period in 1998. Compensation, payroll taxes and fringe
benefits increased from $5.2 million for the nine month period ended
September 30, 1998 to $6.8 million for the same period in 1999.
This increase was primarily a result of increased staffing to service
the increased volumes in deposits and lending, normal annual salary
increases, increased ESOP expense and the expense of restricted stock
awards. The increases in other categories of operating expenses
generally are attributable to the growth of the Company.
Income Taxes. The provision for income taxes was $2.4 million for the
nine month period ended September 30, 1999 compared to $2.6 million
for the same period in 1998. This decrease was a result of lower income
before taxes for the nine months ended September 30, 1999.
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, 1999, cash and cash
equivalents totaled $55.7 million or 14.2% of total assets, and
investments available for sale totaled $40.9 million. At September 30,
1999, the Bank also maintained, but did not draw upon, a line of credit
with the FHLB of Cincinnati in the amount of $20.0 million.
18
As of September 30, 1999, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At September 30, 1999, under
regulations of the OTS, the Bank's tangible, core and risk-based
capital ratios were 20.45%, 20.45% and 22.29%, respectively, compared to
requirements of 1.5%, 3.0% and 8.0%, respectively.
The Bank's capital requirements and actual capital under OTS regulations
are as follows as of September 30, 1999:
AMOUNT % OF ASSETS
------- -----------
GAAP Capital $77,144 20.44%
======= ======
Tangible Capital:
Actual $77,171 20.45%
Required 5,661 1.50%
------- -----
Excess $71,510 18.95%
======= =======
Core Capital
Actual $77,171 20.45%
Required 11,322 3.00%
------- ------
Excess $65,849 17.45%
======= =======
Liquidity and Capital Resources (Continued)
Risk-based Capital:
Actual $80,998 22.29%
Required 29,074 8.00%
------- -------
Excess $51,924 14.29%
======= ======
At September 30, 1999, the Bank had loan commitments (including undisbursed
portions of construction loans) of approximately $61.9 million. In
addition, at September 30, 1999, the unused portion of lines of credit
extended by the Bank was approximately $8.4 million for consumer lines
of credit and $26.5 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, 1999, the Bank had $8.0
million of letters of credit outstanding.
19
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 approach of the Year 2000 presents significant issues for many
computer systems. The problems stem from the inability of some computer
systems to properly interpret dates after December 31, 1999, because such
systems allow only two digits to indicate the year in a date. The Year
2000 issues are not limited to dates in computer programs but is a complex
combination of problems that may exist in computer programs, data files,
computer hardware and other devices essential to the operation of the Bank.
Further, the Bank must consider the potential impact that Year 2000 may
have on services provided by third parties and our borrowing customers.
The Bank began working on the Year 2000 issue 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. The Bank has a formal Year 2000 plan
which follows the FFIEC's suggested steps of Awareness, Assessment,
Renovation, Validation and Implementation and has been reviewed by
senior management, the Audit Committee and the Board of Directors.
Included in the plan is a listing of all applications and systems
(whether in-house or provided by third parties) which may be impacted
by Year 2000 and a categorization of their potential impact on Bank
operations. The Bank's Year 2000 readiness has been reviewed by
Federal Regulators.
As of September 30, 1999, the Awareness and Assessment Phases have been
completed by the Bank. All internal computer hardware and software have
been Renovated, Validated and Implemented and are Year 2000 ready.
However, management feels that these phases, while complete, are also
ongoing due to unexpected but necessary hardware and software
replacements/upgrades between now and the end of the year. While
these upgrades/replacements will be limited, all necessary changes
will be thoroughly tested prior to replacement of the current Year
2000 compliant hardware or software.
20
The BISYS Group, Inc. ("BISYS") provides the Bank with core processing
systems in the mission critical teller, general ledger, consumer,
commercial, and mortgage lending areas. BISYS has developed a Year
2000 plan and provides the Bank with periodic updates. BISYS has also
provided Year 2000 workshops, whose objectives have been to assist the
Bank in the development of its Year 2000 plan, to provide updates on
the BISYS Year 2000 plan, and training on the use of the BISYS Year
2000 test facility. The BISYS test facility allows BISYS clients to
test their systems' compatibility with the BISYS system. BISYS has
certified that its systems are Year 2000 compliant. From November
1998 through January 1999, the Bank and BISYS have successfully
completed the compatibility 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. Like the Bank, BISYS' Year 2000 activities
are reviewed and monitored by Federal Regulators.
The Bank does not believe that the Year 2000 issue will be material
to its financial position in any given year. Year 2000 costs are not
always easy to separate from expenses related to routine upgrades or
changes in hardware/software. This is especially true since the Bank
started in late 1996 to perform a complete system wide upgrade of all
computer hardware and software. These upgrades were necessary from an
operational perspective but also solved many potential Year 2000
problems. Therefore, the Bank believes that most of the following
costs disclosed as Year 2000 costs could just as easily have been
excluded as replacement or upgrade costs. The Bank's estimated upgrade
and Year 2000 related cost for 1996 was $700,000. The Bank's estimated
upgrade and Year 2000 related cost for fiscal year 1997 was $250,000
and the Company's estimated upgrade and Year 2000 related cost for
fiscal year 1998 was $150,000. The Bank currently believes that all
major year 2000 expenditures have been made and therefore, estimates
that only an additional $35,000 in Year 2000 cost will be incurred
over the remaining 3 months. These costs will relate primarily to
personnel cost incurred in the validation and implementation phases.
The Bank's operations are highly dependent on computer systems and
computer hardware, both internal and those provided through third
parties. Due to such a high level of dependency on computers and
computer systems, the failure of systems due to Year 2000 problems
could have a material adverse financial impact on the Bank. The
following risks are believed by management to present the most likely
reasonable worst case scenario:
BISYS could experience unforeseen system(s) failure resulting in
the inability to access customer accounts and process transactions.
21
Loss of utilities could cause major disruptions of business.
Although the Bank has a backup generator to ensure that our
critical systems at the main office would be operational, the loss
of power to the branches would be disruptive. Should telephone
service be disrupted, the Bank would lose the ability to communicate
with BISYS, which would prohibit electronic access to customer accounts.
Failure in the Federal Reserve payments system could cause a severe
disruption to the Bank's business causing processing backlogs and could
affect the Bank's ability to process customer deposits and withdrawals
as well as fund loans.
Loss of customer confidence that the Bank or the banking system in
general will be Year 2000 compliant could cause excessive deposit
withdrawals impairing the Bank's liquidity.
Business resumption plans have been developed and were tested during
the third quarter to deal with these worse case scenarios. However,
should any or a combination of any of the above scenarios actually
materialize, the results could be loss of revenue, increased cost
and/or impaired liquidity. It is not possible to estimate the extent
of loss that may occur nor is it possible to estimate the length of time
that it would take to remedy any problems encountered.
The forgoing Year 2000 cost and issues are based on management's
best estimates which were derived utilizing numerous forward looking
assumptions. However, there can be no guarantee and the actual results
could differ materially. Specific factors that might cause such material
differences include, but are not limited to, failure of a key third party
to meet expectations, availability and cost of key personnel, and the
public's perception of Year 2000 risk.
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 September 30, 1999. However, the OTS results are not
yet available for the quarter ended September 30, 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 statements and notes thereto contained in The Company's
Annual Report for the fiscal year ended December 31, 1998.
22
The following table presents the Company's interest sensitivity gap at
September 30, 1999.
After After
Six One Three
Within Months To To Over
Six To One Three Five Five
Months Year Years Years Years Total
Interest-earning assets:
Loans receivable, net $54,849 52,505 46,814 61,866 61,259 277,293
Mortgage-backed
securities 10 11 46 53 594 714
FHLB stock 185 185 738 738 - 1,846
Investment securities 39,934 989 - - - 40,923
Federal funds sold,
overnights, and other
interest-bearing
deposits 44,263 - - - - 44,263
------- ------ ------- ------- ------- -------
Total rate sensitive
Assets 139,241 53,690 47,598 62,657 61,853 365,039
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Deposits:
NOW accounts 4,341 4,341 17,364 17,364 - 43,410
Passbook savings
accounts 1,347 1,347 5,389 5,389 - 13,472
Money market
deposit accounts 5,922 5,922 23,687 23,687 - 59,218
Certificates of
deposits 63,743 56,588 13,467 8,726 129 142,653
------- ------- ------- ------- ------- -------
Total rate sensitive
Liabilities 75,353 68,198 59,907 55,166 129 258,753
======= ======= ======= ======= ======= =======
Excess (deficiency) of
interest sensitivity
assets over interest
sensitivity
liabilities 63,888 (14,508)(12,309) 7,491 61,724 106,286
Cumulative excess
(deficiency) of
interest sensitivity
assets 63,888 49,380 37,071 44,562 106,286 106,286
Cumulative ratio
of interest-earning
assets to interest-bearing
liabilities 184.78% 134.40% 118.22% 117.23% 141.08% 141.08%
Interest sensitivity
gap to total
assets 17.50% (3.97)% (3.37)% 2.05% 16.91% 29.12%
Ratio of interest
-earning assets to
interest-bearing
liabilities 184.78% 78.73% 79.45% 113.58% 47,948.06% 141.08%
Ratio of cumulative
gap to total
assets 17.50% 13.53% 10.16% 12.21% 29.12% 29.12%
23
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
Item 6. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Not applicable
(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 Management Recognition Plan with William H. Huddleston III
10.13 Management Recognition Plan with Gary Brown
10.14 Management Recognition Plan with Ed Elam
10.15 Management Recognition Plan with Frank E. Crosslin, Jr.
10.16 Management Recognition Plan with Tim J. Durham
10.17 Management Recognition Plan with James C. Cope
10.18 Management Recognition Plan with Terry G. Haynes
10.19 Management Recognition Plan with Ed C. Loughry, Jr.
10.20 Management Recognition Plan with Ronald F. Knight
10.21 Management Recognition Plan with William S. Jones
10.22 Management Recognition Plan with Hillard C. Gardner
10.23 Management Recognition Plan with R. Dale Floyd
10.24 Management Recognition Plan with David W. Hopper
10.25 Management Recognition Plan with Joe W. Townsend
10.26 Management Recognition Plan with M. Glenn Layne
10.27 Management Recognition Plan with Joy B. Jobe
10.28 Management Recognition Plan with Ira B. Lewis, Jr.
10.29 Management Recognition Plan with Elizabeth L. Green
10.30 Management Recognition Plan with James O. Sweeney, III
13 Annual Report to Stockholders **
21 Subsidiaries of the Registrant**
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.
24
Pursuant to the requirements of section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAVALRY BANCORP, INC.
Date: November 9, 1999 By: /s/Ronald F. Knight
-----------------------------
Ronald F. Knight
President and Chief Operating
Officer
Date: November 9, 1999 By: /s/Hillard C. Gardner
-----------------------------
Hillard C. Gardner
Senior Vice President and
Chief Financial Officer
24