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 June 30, 2002 or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from___________
To ___________
Commission File Number: 0-23605
CAVALRY BANCORP, INC.
---------------------
(exact name of registrant as specified in its charter)
Tennessee 62-1721072
--------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(615) 893-1234
---------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Issued and Outstanding: 6,908,137 as of August 12, 2002.
CAVALRY BANCORP, INC.
Table of Contents
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 (unaudited)
and December 31, 2001 1
Consolidated Statements of Income (unaudited) for the Three and Six Months
Ended June 30, 2002 and 2001 2
Consolidated Statements of Comprehensive Income (unaudited) for the
Three and Six Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12-13
Part II Other Information 14
Signatures 15
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
ASSETS June 30, 2002 December 31, 2001
- --------------------------------------------------------------------------- --------------- -------------------
(Unaudited)
Cash and due from banks $ 20,385 $ 23,596
Interest-bearing deposits with other financial institutions 319 393
Federal funds sold 33,313 45,292
--------------- -------------------
Cash and cash equivalents 54,017 69,281
Investment securities available-for-sale at fair value (amortized cost:
$33,365 and $41,571 at June 30, 2002 and December 31, 2001, respectively) 33,485 41,808
Investment securities held to maturity - at amortized cost (fair value:
$535 and $632 at June 30, 2002 and December 31, 2001, respectively) 538 637
Federal Home Loan Bank of Cincinnati and
Federal Reserve Bank stock - at cost 3,449 2,159
Loans held for sale, at estimated fair value 4,496 10,423
Loans receivable, net of allowances for loan losses of $4,531 in 2002 and
$4,470 in 2001 291,925 280,239
Accrued interest receivable 1,880 2,139
Office properties and equipment, net 17,783 15,554
Bank owned life insurance 7,662 7,500
Foreclosed assets, net 305 184
Goodwill 1,772 -
Other assets 2,147 2,950
--------------- -------------------
Total assets $ 419,459 $ 432,874
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
Liabilities:
Deposits:
Interest-bearing $ 318,547 $ 332,688
Non-interest-bearing 47,835 48,302
--------------- -------------------
Total deposits 366,382 380,990
Advances from Federal Home Loan Bank of Cincinnati 971 998
Accrued expenses and other liabilities 2,759 2,080
--------------- -------------------
Total liabilities 370,112 384,068
--------------- -------------------
Shareholders' equity:
Preferred stock, no par value
Authorized- 250,000 shares; none issued or outstanding at
June 30, 2002 and December 31, 2001 - -
Common stock, no par value
Authorized- 49,750,000 shares; issued and outstanding
6,958,637 and 7,079,801 at June 30, 2002
and December 31, 2001, respectively 10,380 11,683
Retained earnings 42,332 40,700
Unallocated ESOP Shares (3,440) (3,723)
Accumulated other comprehensive income, net of tax 75 146
--------------- -------------------
Total shareholders' equity 49,347 48,806
--------------- -------------------
Total liabilities and shareholders' equity $ 419,459 $ 432,874
=============== ===================
Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date
but does not include all of the information and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements.
See accompanying notes to consolidated financial statements.
1
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------- ------------------- ------------------- -----------------
Interest and dividend income:
Loans $ 5,304 $ 6,186 $ 10,530 $ 12,678
Investment securities 312 669 705 1,253
Other 269 331 569 755
------------------- ------------------- ------------------- -----------------
Total interest and dividend income 5,885 7,186 11,804 14,686
------------------- ------------------- ------------------- -----------------
Interest expense - deposits 1,770 3,467 3,694 7,095
Interest expense - borrowings 5 5 11 19
------------------- ------------------- ------------------- -----------------
Total interest expense 1,775 3,472 3,705 7,114
------------------- ------------------- ------------------- -----------------
Net interest income 4,110 3,714 8,099 7,572
Provision for loan losses 54 63 163 166
------------------- ------------------- ------------------- -----------------
Net interest income after provision
for loan losses 4,056 3,651 7,936 7,406
------------------- ------------------- ------------------- -----------------
Non-interest income:
Servicing income 55 62 124 137
Gain on sale of loans, net 581 609 1,150 1,012
Deposit servicing fees and charges 921 1,004 1,800 1,826
Trust service fees 296 292 552 585
Insurance commissions and fees 555 - 1,054 -
Other operating income 301 158 500 327
------------------- ------------------- ------------------- -----------------
Total non-interest income 2,709 2,125 5,180 3,887
------------------- ------------------- ------------------- -----------------
Non-interest expenses:
Salaries and employee benefits 3,018 2,486 5,810 4,831
Occupancy expense 302 247 572 486
Supplies, communications and other
office expenses 263 231 522 460
Federal insurance premiums 16 15 32 31
Advertising expense 176 109 263 205
Equipment and service bureau expense 707 621 1,331 1,173
Other operating expense 434 397 890 776
------------------- ------------------- ------------------- -----------------
Total non-interest expenses 4,916 4,106 9,420 7,962
------------------- ------------------- ------------------- -----------------
Income before income taxes 1,849 1,670 3,696 3,331
Income tax expense 676 717 1,454 1,421
------------------- ------------------- ------------------- -----------------
Net income $ 1,173 $ 953 $ 2,242 $ 1,910
=================== =================== =================== =================
Basic earnings per share $ 0.18 $ 0.15 $ 0.35 $ 0.30
=================== =================== =================== =================
Diluted earnings per share $ 0.17 $ 0.15 $ 0.34 $ 0.30
=================== =================== =================== =================
Weighted average shares outstanding -Basic 6,436,781 6,469,086 6,465,859 6,456,937
=================== =================== =================== =================
Weighted average shares outstanding -Diluted 6,756,723 6,478,762 6,626,098 6,468,975
=================== =================== =================== =================
Dividends declared $0.05 per share payable July 12, 2002 for shareholders of
record date June 30, 2002.
See accompanying notes to consolidated financial statements.
2
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------ ------ ------- ------
Net income $1,173 $953 $2,242 $1,910
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available-for-sale 71 14 (71) 111
-------- ------ ------ ------
Comprehensive income $ 1,244 $ 967 $2,171 $2,021
======= ====== ======= ======
See accompanying notes to consolidated financial statements.
3
CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2002 2001
--------- ---------
Operating activities:
Net cash provided by operating activities $ 11,426 $ 861
--------- ---------
Investing activities:
Decrease ( increase) in loans receivable, net (12,140) 4,497
Principal payments on investment securities 1,538 22
Purchase of investment securities
available for sale (9,355) (41,991)
Purchase of Federal Reserve Stock (1,240) -
Proceeds from maturities of investment securities 16,000 24,630
Purchase of office properties and equipment (2,819) (1,087)
Proceeds from sale of real estate acquired
through foreclosure 81 -
Cash paid in acquisition of Miller & Loughry (1,964) -
--------- ---------
Net cash used in investing activities (9,899) (13,929)
--------- ---------
Financing activities:
Net increase (decrease) in deposits (14,608) 13,370
Retirement of common stock (1,546) -
Dividends paid (610) (620)
Net decrease in borrowings (27) (553)
--------- ---------
Net cash provided by (used in)
financing activities (16,791) 12,197
--------- ---------
Decrease in cash and cash equivalents (15,264) (871)
Cash and equivalents, beginning of period 69,281 45,025
--------- ---------
Cash and cash equivalents, end of period $ 54,017 $ 44,154
========= =========
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest $ 3,736 $ 6,992
========= =========
Income taxes $ 1,350 $ 1,529
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in deferred tax asset related
to unrealized gain (loss) on investments $ 46 $ (69)
========= =========
Net unrealized gain (loss) on investment
securities available for sale $ (117) $ 180
========= =========
Dividends declared and payable $ 306 $ 355
========= =========
See accompanying notes to consolidated financial statements.
4
CAVALRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the holding
company for Cavalry Banking (the "Bank") which is a state chartered Federal
Reserve member commercial bank. Miller & Loughry Insurance and Services, Inc.
("Miller & Loughry"), an independent insurance agency, is a wholly-owned
subsidiary of the Bank.
The unaudited consolidated financial statements include the accounts of Miller &
Loughry, the Bank and the Company. All material intercompany accounts and
transactions have been eliminated in consolidation.
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 accounting principles
generally accepted in the United States of America 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 six months ended June 30, 2002, are
not necessarily indicative of the results to be expected for the year ending
December 31, 2002. The consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2001.
2. Acquisitions
On January 4, 2002, Cavalry Banking, a wholly owned subsidiary of Cavalry
Bancorp, Inc., completed the acquisition of 100% of the capital stock issued and
outstanding of Miller & Loughry Insurances and Services, Inc., for a cash
purchase price of approximately $2.0 million.
Due to the insignificant effect on the financial position and results of
operations, no pro-forma data of this acquisition is required or presented.
3. Earnings Per Share
The following schedule reconciles the numerators and denominators of the basic
and diluted earnings per share ("EPS") computations for the three and six months
ended June 30, 2002 and 2001. Diluted common shares arise from the potentially
dilutive effect of the Company's stock options outstanding.
Quarter Ended June 30 Six Months Ended June 30
--------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic EPS:
Net income $1,173,000 $ 953,000 $2,242,000 $1,910,000
Average common shares outstanding 6,436,781 6,469,086 6,465,859 6,456,937
---------- ---------- ---------- ----------
Earnings per share - basic $ 0.18 $ 0.15 $ 0.35 $ 0.30
========== ========== ========== ==========
Diluted EPS:
Net income $1,173,000 $ 953,000 $2,242,000 $1,910,000
---------- ---------- ---------- ----------
Average common shares outstanding 6,436,781 6,469,086 6,465,859 6,456,937
Dilutive effect of stock options 319,942 9,676 160,239 12,038
---------- ---------- ---------- ----------
Average dilutive shares outstanding 6,756,723 6,478,762 6,626,098 6,468,975
---------- ---------- ---------- ----------
Earnings per share - diluted $ 0.17 $ 0.15 $ 0.34 $ 0.30
========== ========== ========== ==========
5
4. Business Segments
The Company and its subsidiary provide community oriented banking services to
individuals and businesses primarily within Rutherford and Bedford counties in
Middle Tennessee.
The Company's segments are identified by the products and services offered,
principally distinguished as banking, trust, insurance, and mortgage banking
operations. The majority of loans originated for sale are sold with the
servicing rights attached.
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 2001 Annual Report to Shareholders. Segment
performance is evaluated by the Company based on profit or loss before income
taxes. Revenue, expense, and asset levels reflect those which can be
specifically identified and those assigned based on internally developed
allocation methods. These methods have been consistently applied.
Mortgage
For the quarter ended Banking Banking Trust Insurance Eliminations Consolidated
June 30, 2002:
Interest revenue $ 5,885 $ - $ - $ - $ - $ 5,885
Other income-external customers 1,384 55 296 368 - 2,103
Interest expense 1,775 - - - - 1,775
Depreciation and amortization 269 47 1 9 - 326
Other significant items:
Provision for loan losses 54 - - - - 54
Gain on sales of assets 25 581 - - - 606
Segment profit 1,897 - 43 9 (100) 1,849
Segment assets 413,837 4,832 379 2,629 (2,218) 419,459
Mortgage
For the quarter ended Banking Banking Trust Consolidated
June 30, 2001:
Interest revenue $ 7,186 $ - $ - $ 7,186
Other income-external customers 1,162 62 292 1,516
Interest expense 3,472 - - 3,472
Depreciation and amortization 236 42 9 287
Other significant items:
Provision for loan losses 63 - - 63
Gain on sale of assets - 609 - 609
Segment profit 1,592 1 77 1,670
Segment assets 391,813 7,268 322 399,403
Mortgage
For the six months ended Banking Banking Trust Insurance Eliminations Consolidated
June 30, 2002:
Interest revenue $ 11,804 $ - $ - $ - $ - $ 11,804
Other income-external customers 2,507 124 552 822 - 4,005
Interest expense 3,705 - - - - 3,705
Depreciation and amortization 515 91 12 18 - 636
Other significant items:
Provision for loan losses 163 - - - - 163
Gain on sales of assets 25 1,150 - - - 1,175
Segment profit (loss) 3,619 (5) 116 85 (119) 3,696
Segment assets 413,837 4,832 379 2,629 (2,218) 419,459
Mortgage
For the six months ended Banking Banking Trust Consolidated
June 30, 2001:
Interest revenue $ 14,686 $ - $ - $ 14,686
Other income-external customers 2,153 137 585 2,875
Interest expense 7,114 - - 7,114
Depreciation and amortization 460 83 17 560
Other significant items:
Provision for loan losses 166 - - 166
Gain on sale of assets - 1,012 - 1,012
Segment profit (loss) 3,185 (5) 151 3,331
Segment assets 391,813 7,268 322 399,403
6
5. New Accounting Standards Pronouncements
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 2000. This statement
replaces SFAS No. 125, and requires certain disclosures, but carries over most
of the provisions of SFAS No. 125. SFAS 140 was effective for transfers and
servicing of financial assets and extinguishments of liabilities of the Company
occurring after March 31, 2001 and did not have a material impact on the
Company's financial statements.
SFAS No. 141, "Business Combinations" issued on June 29, 2001 requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Specifically identifiable intangible assets
acquired, other than goodwill, will be amortized over their estimated useful
economic life. This pronouncement had no material effect on the Company's
financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets", issued on June 29, 2001,
addresses how intangible assets that are acquired individually or with a group
of other assets should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. This statement results in the end to systematic goodwill
and other intangible amortization and requires impairment testing on those
balances at least annually or if circumstances arise that suggest that
impairment may be an issue. SFAS No. 142 was effective for the Company
beginning on January 1, 2002 and is applicable to all goodwill and other
intangible assets regardless of when those assets were initially recognized.
SFAS No. 143, "Accounting for Asset Retirement Obligations", issued in June
2001, addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. This Statement is not expected to have a material impact
on the Company's financial statements.
SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets" issued in
August 2001, supercedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. While SFAS No. 144 retains many of the fundamental
provisions of SFAS No. 121, it establishes a single accounting model for
long-lived assets to be disposed of by sale, and resolves certain implementation
issues not previously addressed by SFAS No. 121. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. This Statement did not have a
material impact on the Company's financial statements.
6. Deferred Compensation and Retirement Plans
The Company has entered into separate deferred compensation arrangements
with the Board of Directors and certain senior officers. The plans call for
amounts payable at retirement, death or disability as defined in the agreements.
The estimated present value of the deferred compensation will be accrued over
the remaining expected term of active employment. The Bank has purchased life
insurance policies that it intends to use to finance this liability.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
This Quarterly Report contains forward-looking statements within the meaning of
the federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause the Company's actual results, performance,
and achievements to be materially different from those expressed or implied by
the forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including
changes in market interest rates and changes in monetary and fiscal policies of
the federal government; legislative and regulatory changes; and other factors
disclosed periodically in the Company's filings with the Securities and Exchange
Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Total assets were $419.5 million at June 30, 2002, compared to $432.9 million at
December 31, 2001, a decrease of $13.4 million or 3.10%. This decline was
primarily a result of a decline in total deposits. As a result of the decline
in deposits, cash and cash equivalents decreased from $69.3 million at December
31, 2001, to $54.0 million at June 30, 2002. Investment securities
available-for-sale decreased from $41.8 million at December 31, 2001, to $33.5
million at June 30, 2002 as a result of maturing securities being used to fund
increases in office properties and equipment. Loans receivable net increased
$11.7 million from $280.2 million at December 31, 2001, to $291.9 million at
June 30, 2002. Office properties and equipment increased from $15.6 million at
December 31, 2001 to $17.8 million at June 30, 2002. This increase was a result
of the purchase of land for a future branch location, completion of the first
floor of the Financial Services Building, and purchase of computers and banking
equipment. The first floor of the Financial Services Building now houses Miller
and Loughry, the Investment Management and Trust Department and Cavalry
Investment services. In the first quarter of 2002, the Company completed the
purchase of Miller & Loughry, an independent insurance agency, for $2.0
million. The increase in goodwill was a result of the purchase of Miller &
Loughry.
Deposit accounts decreased $14.6 million from $381.0 million at December 31,
2001, to $366.4 million at June 30, 2002. Certificates of deposit increased
$4.1 million from $145.6 million at December 31, 2001 to $149.7 million at June
30, 2002. Savings deposits increased $2.0 million from $13.9 million at
December 31, 2001 to $15.9 million at June 30, 2002. Money market accounts
decreased $1.4 million from $91.6 million at December 31, 2001 to $90.2 million
at June 30, 2002. NOW accounts declined $18.9 million from $81.6 million at
December 31, 2001 to $62.7 million at June 30, 2002. Transaction accounts
decreased $500,000 from $48.3 million at December 31, 2001 to $47.8 million at
June 30, 2002. Management feels that these declines are temporary, and will
continue to market deposit relationships.
Stockholders' equity increased by $500,000 from $48.8 million at December 31,
2001, to $49.3 million at June 30, 2002. This increase was a result of net
income of $2.2 million and the release of $526,000 in ESOP shares. These
increases were partially offset by dividends of $610,000, the repurchase and
retirement of $1.5 million in Company common stock, and a decrease in unrealized
gains on available-for-sale securities of $71,000, net of taxes.
Non-performing assets were $394,000 at December 31, 2001 and $982,000 at June
30, 2002.
8
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
June 30, 2001.
Net Income. Net income was $1.2 million for the three months ended June 30,
2002 compared to $953,000 for the three months ended June 30, 2001. Return on
average assets increased from 0.97% for the three months ended June 30, 2001, to
1.14% for the same period in 2002. Return on average equity also increased from
8.40% for the three months ended June 30, 2001, to 9.58% for the same period in
2002. Earnings per share increased from $0.15 per diluted share for the three
months ended June 30, 2001, to $0.17 per diluted share for the same period in
2002. This increase was primarily a result of higher net interest income, a
lower provision for loan losses and higher non-interest income. These increases
were partially offset by higher non-interest expenses.
Net Interest Income. Net interest income increased $396,000 from $3.7 million
for the three months ended June 30, 2001, to $4.1 million for the same period in
2002. Interest rate spread increased from 3.48% for the three months ended June
30, 2001, to 4.25% for the same period in 2002. Net interest margin increased
from 4.14% for the three months ended June 30, 2001, to 4.53% for the same
period in 2002. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased from 116.59% for the three months ended
June 30, 2001, to 113.79% for the same period in 2002.
Interest income decreased 18.06% to $5.9 million for the three months ended June
30, 2002, from $7.2 million for the same period in 2001. Interest on loans
decreased from $6.2 million for the three months ended June 30, 2001, to $5.3
million for the same period in 2002. Average loans outstanding increased from
$282.7 million for the three months ended June 30, 2001, to $289.7 million for
the same period in 2002. The average yield decreased from 8.78% for the three
months ended June 30, 2001, to 7.34% for the same period in 2002, as a result of
declining interest rates. Income on all other investments consisting of
mortgage backed securities, other investments, Federal Home Loan Bank and
Federal Reserve Bank stock, bank deposits and federal funds decreased from $1.0
million for the three months ended June 30, 2001, to $581,000 for the same
period in 2002. Average investments decreased from $77.0 million for the three
months ended June 30, 2001, to $74.3 million for the same period in 2002. The
average yield decreased from 5.21% for the three months ended June 30, 2001, to
3.13% for the same period in 2002.
Interest expense decreased from $3.5 million for the three months ended June 30,
2001, to $1.8 million for the same period in 2002. Average interest-bearing
deposits increased from $307.5 million for the three months ended June 30, 2001,
to $319.0 million for the same period in 2002. This increase was a result of
continuing efforts to increase market share of deposits. The average cost of
deposits decreased from 4.52% for the three months ended June 30, 2001, to 2.23%
for the same period in 2002. Average borrowings decreased from $1.0 million at
an average cost of 1.95% for the three months ended June 30, 2001 to $976,000 at
an average cost of 2.05% for the same period in 2002. The total cost of funds
decreased from 4.51% for the three months ended June 30, 2001, to 2.23% for the
same period in 2002. Average interest-bearing liabilities increased from $308.6
million for the three months ended June 30, 2001, to $320.0 million for the same
period in 2002.
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets, giving greater weight to the level of classified assets than to
the level of nonperforming assets because classified assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses.
The provision for loan losses decreased from $63,000 for the three months ended
June 30, 2001 to $54,000 for the same period in 2002. Management deemed the
allowance for loan losses adequate at June 30, 2002.
Non-interest Income. Non-interest income increased from $2.1 million for the
three months ended June 30, 2001, to $2.7 million for the same period in 2002.
In the mortgage banking segment, net gain on sale of loans decreased from
$609,000 for the three months ended June 30, 2001, to $581,000 for the same
period in 2002. The lower gain in 2002 was a result of decreased production.
Loan servicing fees decreased slightly from $62,000 for the three months ended
June 30, 2001, to $55,000 for the same period in 2002. In the banking segment,
deposit fees and other operating incomes decreased from $1.0 million for the
three months ended June 30, 2001, to $921,000 for the same period in 2002. This
decline was a result of the implementation of a new checking account program
with a third party vendor. These fees began in the third quarter of 2001 and
extend through the third quarter of 2003 with a reduction of the fee percentages
in the third quarter of 2002. In the trust segment, trust fees increased from
$292,000 for the three months ended June 30, 2001, to $296,000 for the same
period in 2002. The acquisition of Miller & Loughry contributed commissions and
related income during the three months June 30, 2002.
9
Non-interest Expense. Non-interest expense increased from $4.1 million for the
three months ended June 30, 2001, to $4.9 million for the same period in 2002.
Salaries and employee benefits increased from $2.5 million for the three months
ended June 30, 2001 to $3.0 million for the same period in 2002. This increase
was a result of the purchase of Miller & Loughry, increased commissions, and
costs of medical insurance. The increase in occupancy expense was primarily a
result of the opening of the new operations building and increases in the cost
of utilities. The increases in other expenses were primarily due to increased
loan and deposit activity.
Income taxes. The provision for income taxes was $676,000 for the three months
ended June 30, 2002, compared to $717,000 for the same period in 2001.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and June
30, 2001.
Net Income. Net income was $2.2 million for the six months ended June 30, 2002
compared to $1.9 million for the six months ended June 30, 2001. Return on
average assets increased from 0.99% for the six months ended June 30, 2001, to
1.09% for the same period in 2002. Return on average equity also increased from
8.59% for the six months ended June 30, 2001, to 9.29% for the same period in
2002. Earnings per share increased from $0.30 per diluted share for the six
months ended June 30, 2001, to $0.34 per diluted share for the same period in
2002. This increase was primarily a result of higher net interest income, a
lower provision for loan losses and higher non-interest income. These increases
were partially offset by higher non-interest expenses.
Net Interest Income. Net interest income increased $527,000 from $7.6 million
for the six months ended June 30, 2001, to $8.1 million for the same period in
2002. Interest rate spread increased from 3.66% for the six months ended June
30, 2001, to 4.08% for the same period in 2002. Net interest margin increased
from 4.26% for the six months ended June 30, 2001, to 4.44% for the same period
in 2002. The ratio of average interest-earning assets to average
interest-bearing liabilities increased from 116.37% for the six months ended
June 30, 2001, to 118.75% for the same period in 2002.
Interest income decreased 19.73% to $11.8 million for the six months ended June
30, 2002, from $14.7 million for the same period in 2001. Interest on loans
decreased from $12.7 million for the six months ended June 30, 2001, to $10.5
million for the same period in 2002. Average loans outstanding increased from
$283.1 million for the six months ended June 30, 2001, to $289.0 million for the
same period in 2002. The average yield decreased from 9.03% for the six months
ended June 30, 2001, to 7.35% for the same period in 2002, as a result of
declining interest rates. Income on all other investments consisting of
mortgage backed securities, other investments, Federal Home Loan Bank and
Federal Reserve Bank stock, bank deposits and federal funds decreased from $2.0
million for the six months ended June 30, 2001, to $1.3 million for the same
period in 2002. Average investments increased from $72.4 million for the six
months ended June 30, 2001, to $78.5 million for the same period in 2002. The
average yield decreased from 5.59% for the six months ended June 30, 2001, to
3.27% for the same period in 2002.
Interest expense decreased from $7.1 million for the six months ended June 30,
2001, to $3.7 million for the same period in 2002. Average interest-bearing
deposits increased from $304.2 million for the six months ended June 30, 2001,
to $308.5 million for the same period in 2002. The average cost of deposits
decreased from 4.70% for the six months ended June 30, 2001, to 2.41% for the
same period in 2002. Average borrowings decreased from $1.3 million at an
average cost of 2.99% for the six months ended June 30, 2001 to $982,000 at an
average cost of 2.26% for the same period in 2002. The total cost of funds
decreased from 4.67% for the six months ended June 30, 2001, to 2.40% for the
same period in 2002. Average interest-bearing liabilities increased from $305.5
million for the six months ended June 30, 2001, to $309.5 million for the same
period in 2002.
Provision for Loan Losses. Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets, giving greater weight to the level of classified assets than to
the level of nonperforming assets because classified assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses.
10
The provision for loan losses decreased from $166,000 for the six months ended
June 30, 2001 to $163,000 for the same period in 2002. Management deemed the
allowance for loan losses adequate at June 30, 2002.
Non-interest Income. Non-interest income increased from $3.9 million for the
six months ended June 30, 2001, to $5.2 million for the same period in 2002. In
the mortgage banking segment, net gain on sale of loans increased from $1.0
million for the six months ended June 30, 2001, to $1.2 million for the same
period in 2002. The higher gain in 2002 was a result of increased production
during the first quarter. Loan servicing fees decreased slightly from $137,000
for the six months ended June 30, 2001, to $124,000 for the same period in 2002.
In the banking segment, deposit fees and other operating incomes was constant at
$1.8 million for the six months ended June 30, 2001 and 2002. In the trust
segment, trust fees decreased from $585,000 for the six months ended June 30,
2001, to $552,000 for the same period in 2002. The acquisition of Miller &
Loughry contributed commissions and related income during the six months ended
June 30, 2002.
Non-interest Expense. Non-interest expense increased from $8.0 million for the
six months ended June 30, 2001, to $9.4 million for the same period in 2002.
Salaries and employee benefits increased from $4.8 million for the six months
ended June 30, 2001 to $5.8 million for the same period in 2002. This increase
was a result of the purchase of Miller & Loughry, increased commissions, and
costs of medical insurance. The increase in occupancy expense was primarily a
result of the opening of the new operations building and increases in the cost
of utilities. The increases in other expenses were primarily due to increased
loan and deposit activity.
Income taxes. The provision for income taxes was $1.5 million for the six
months ended June 30, 2002, compared to $1.4 million for the same period in
2001.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from loan
principal and interest payments, sale of loans, maturing securities and Federal
Home Loan Bank (FHLB) of Cincinnati advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are influenced greatly by general interest rates, other
economic conditions, and competition. The Company and the Bank generally
maintain sufficient cash and short-term investments to meet short-term liquidity
needs. At June 30, 2002, cash and cash equivalents totaled $54.0 million or
12.88% of total assets, and investment securities available-for-sale totaled
$33.5 million. At June 30, 2002, the Bank also maintained, but did not draw
upon, a line of credit with the FHLB of Cincinnati in the amount of $10.0
million.
As of June 30, 2002, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 2002, under the regulations of
the Federal Reserve Board, the Bank's actual leverage, Tier 1 risk-based, and
risked-based capital ratios were 9.01%, 12.20% and 13.43%, respectively,
compared to requirements of 3.0%, 4.0% and 8.0%, respectively.
At June 30, 2002, the Bank had loan commitments of approximately $35.3 million.
In addition, at June 30, 2002, the unused portion of lines of credit extended by
the Bank was approximately $9.6 million for consumer loans and $20.8 million for
commercial loans. Standby letters of credit and financial guarantees are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most guarantees extend from one to two
years. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. At June 30,
2002, the Bank had $6.4 million of letters of credit outstanding.
11
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with U.S.GAAP,
which require the measurement of financial condition and operating results in
terms of historical dollars without considering the change in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
financial. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, the Company's primary component of market risk is
interest rate risk. Ultimately, fluctuations in interest rates will impact
liquidity, the level of income and expense recorded on most of the Company's
assets and liabilities, and the market value of interest-earning assets and
interest-bearing liabilities. The company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.
Interest rate risk is managed by management in accordance with policies approved
by the Bank's Board of Directors. Management formulates strategies based on
appropriate levels of interest rate risk. In determining the appropriate level
of interest rate risk, management considers the impact on earnings and capital
of the current outlook on interest rates, potential changes in interest rates,
regional economy, liquidity, business strategies and other factors. Management
meets regularly to review, among other things, the sensitivity of assets and
liabilities to interest rate changes, the book and market value of assets and
liabilities, unrealized gains and losses, purchase and sales activities,
commitments to originate loans and the maturities of investments. Management
uses an analysis of relationships between interest-earning assets and
interest-bearing liabilities to manage interest rate risk.
12
The following table presents the Company's repricing gap at June 30, 2002. The
table indicates that at June 30, 2002 the Company was liability sensitive up to
six months and had a negative cumulative GAP for the time periods up to and
including one to three year time horizon This would indicate a decline in
earnings in a rising rate environment. However, management does not consider
NOW accounts and savings accounts rate sensitive and if those amounts are
excluded from the six-month time frame, the Company would be slightly liability
sensitive.
Six After After
Within Months One to Three Over
Six To One Three to Five Ten
Months Year Years Years Years Total
------ ---- ----- ----- ----- -----
(in thousands)
Interest-earning assets:
Loans receivable, net $ 106,622 $ 43,970 $ 74,535 $60,086 $ 11,208 $296,421
Investment securities held-to-maturity 300 238 - - - 538
FHLB & FRB stock 3,449 - - - - 3,449
Investment securities available-for-sale 17,216 6,973 5,938 2,496 862 33,485
Federal funds sold overnight and other
interest-bearing deposits 33,632 - - - - 33,632
---------- ---------- ---------- -------- ---------- ---------
Total rate sensitive assets $ 161,219 $ 51,181 $ 80,473 $62,582 $ 12,070 $367,525
========== ========== ========== ======== ========== =========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 62,683 $ - $ - $ - $ - $ 62,683
Savings accounts 15,922 - - - - 15,922
Money market accounts 90,196 - - - - 90,196
Certificates of deposit 71,011 42,388 29,104 7,243 - 149,746
Borrowings 26 26 104 104 711 971
---------- ---------- ---------- -------- ---------- ---------
Total rate sensitive liabilities $ 239,838 $ 42,414 $ 29,208 $ 7,347 $ 711 $319,518
========== ========== ========== ======== ========== =========
Excess (deficiency) of interest sensitive
assets over interest sensitive liabilities ($78,619) $ 8,767 $ 51,265 $55,235 $ 11,359 $ 48,007
Cumulative excess (deficiency) of
interest sensitive assets ($78,619) ($69,852) ($18,587) $36,648 $ 48,007 $ 48,007
Cumulative ratio of interest-earning assets
to interest-bearing liabilities 67.22% 75.25% 94.03% 111.50% 115.02% 115.02%
Interest sensitivity gap to total rate sensitive assets (21.39)% 2.39% 13.95% 15.03% 3.09% 13.06%
Ratio of interest-earning assets to
interest -bearing liabilities 67.22% 120.67% 275.52% 851.80% 1,697.61% 115.02%
Ratio of cumulative gap to total rate sensitive assets (21.39)% (19.01)% (5.06)% 9.97% 13.06% 13.06%
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
On April 25, 2002 at the annual meeting of shareholders of Cavalry Bancorp,
Inc. the following Directors were elected for three-year terms:
Name For Withhold
Terry G. Haynes 5,700,818 19,413
William H. Huddleston IV 5,720,231 26,527
Gary Brown 5,701,604 18,627
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**
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 ***
10.31 Director Supplemental Retirement Plan
10.32 Executive Supplemental Retirement Plan
13 Annual Report to Stockholders****
21 Subsidiaries of the Registrant****
99.1 CEO Certification Pursuant To 18U.S.C. section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes -Oxley Act Of 2002
99.2 CFO Certification Pursuant To 18U.S.C. section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes -Oxley Act Of 2002
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission on March 30, 1998.
*** Incorporated herein by reference to the Registrant's Annual Meeting
Proxy Statement dated March 15, 1999, as filed with the Securities and
Exchange Commission on March 15, 1999.
**** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission on March 27, 2002.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 2002.
..
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: August 12, 2002 by: /s/Ronald F. Knight
-----------------------
Ronald F. Knight
President and
Chief Operating Officer
Date: August 12, 2002 by: /s/ Hillard C. Gardner
----------------------
Hillard C. Gardner
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
15
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cavalry Bancorp, Inc., (the
"Company") on Form 10-Q for the period ending June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ed C.
Loughry, Jr., Chairman of the Board of Directors and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
Date: August 12, 2002 by: /s/ Ed C. Loughry, Jr.
--------------------------
Ed C. Loughry, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cavalry Bancorp, Inc., (the
"Company") on Form 10-Q for the period ending June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Hillard
C. Gardner, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
Date: August 12, 2002 by: /s/ Hillard C. Gardner
-------------------------
Hillard C. Gardner
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)