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, 1998 or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from ____________ to
___________
Commission File Number: 0-23605
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CAVALRY BANCORP, INC.
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(exact name of registrant as specified in its charter)
Tennessee 62-1721072
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
114 West College Street, Murfreesboro, Tennessee 37130
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(Address of principal executive offices) (Zip Code)
(615) 893-1234
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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
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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: 7,538,250 as of August 10, 1998.
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CAVALRY BANCORP, INC.
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1998
And December 31, 1997 1
Consolidated Statements of Income for the Three and Six Month
Periods Ended June 30, 1998 and 1997 2
Consolidated Statement of Comprehensive Income for the Three and
Six Month Periods Ended June 30,1998 and 1997 3
Consolidated Statements of Cash Flows for the Three and Six Month
Periods Ended June 30, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information 16-17
Signatures 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAVALRY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
Cash $ 11,883 $ 10,695
Interest-bearing deposits with
other financial institutions 30,080 26,963
Cash and cash equivalents 41,963 37,658
Investment securities available-for-sale (note 3) 45,278 10,077
Investment securities held to maturity (note 3) 5,697 1,700
Mortgage-backed securities held to maturity (note 4) 1,094 1,301
Loans held for sale, at estimated fair value (note 5) 6,727 4,855
Loans receivable, net 224,805 212,979
Accrued interest receivable 2,279 1,724
Office properties and equipment, net 8,233 8,072
Federal Home Loan Bank of Cincinnati stock - at cost 1,690 1,631
Other assets 2,080 2,132
TOTAL ASSETS $ 339,846 $ 282,129
LIABILITIES AND EQUITY
LIABILITIES:
Deposits $234,598 $248,267
Accrued interest payable 291 328
Advance payments by borrowers for property
taxes and insurance 754 295
Other liabilities and accrued expenses 3,437 2,792
Total Liabilities 239,080 251,682
STOCKHOLDERS' EQUITY:
Preferred Stock
250,000 shares, no par value per share; authorized;
none issued and outstanding - -
Common Stock
49,750,000 shares, no par value per share,
authorized; 7,538,250 issued and outstanding 73,850 NA
Retained earnings 32,965 30,452
Unallocated ESOP Shares (6,031) NA
Unrealized loss on investment securities
available-for-sale, net of taxes (18) (5)
Total Stockholders' Equity 100,766 30,447
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $339,846 $282,129
See accompanying notes to consolidated financial statements.
1
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CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest and dividend income:
First mortgage loans $ 2,797 $3,123 $5,746 $6,085
Other loans 2,543 1,915 4,875 3,716
Investment securities 480 128 678 280
Deposits with other financial institutions 767 180 1,700 354
Mortgage-backed securities held to maturity 17 24 39 48
Total interest and dividend income 6,604 5,370 13,038 10,483
Interest expense on deposits 2,270 2,240 4,923 4,412
Net interest income 4,334 3,130 8,115 6,071
Provision for loan losses 81 75 135 150
Net interest income after provision
for loan losses 4,253 3,055 7,980 5,921
Noninterest income:
Servicing income 95 134 202 273
Gain on sale of loans 471 206 1,038 341
Gain on sale of office properties
and equipment 0 0 42 0
Deposit servicing fees and charges 382 291 714 559
Trust service fees 171 135 334 272
Other operating income 35 31 101 99
Total noninterest income 1,154 797 2,431 1,544
Noninterest expenses:
Compensation, payroll taxes and
fringe benefits 1,720 1,335 3,316 2,558
Occupancy expense 138 129 282 254
Supplies, communications and other
office expenses 210 157 378 288
Federal insurance premiums 38 34 75 42
Advertising expense 48 49 93 102
Equipment and service bureau expense 541 485 1,103 923
Other operating expenses 296 211 537 387
Total noninterest expenses 2,991 2,400 5,784 4,554
Earnings before income tax expense 2,416 1,452 4,627 2,911
Income tax expense 906 561 1,736 1,125
Net income $1,510 $891 $2,891 $1,786
Basic earnings per share $0.22 N/A $0.42 N/A
Weighted average shares outstanding (1) 6,947,754 N/A 6,941,238 N/A
Dividends declared $0.05 per share payable July 17,1998 for stockholders
of record date June 30,1998
(1) Cavalry Bancorp's initial public offering closed on March 16, 1998. For
purposes of earnings per share calculations, shares issued on March 16, 1998
have been assumed to be outstanding as of January 1, 1998.
See accompanying notes to consolidated financial statements.
2
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CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net income $1,510 $891 $2,891 $1,786
Other comprehensive income, net of tax
(NOTE 6)
Unrealized losses on securities
Available for sale (18) 0 (13) 0
Comprehensive income $1,492 $891 $2,878 $1,786
See accompanying notes to consolidated financial statements.
3
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CAVALRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Operating activities:
Net income $1,510 $891 $2,891 $1,786
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for loan losses 81 75 135 150
Gain on sales of loans, net (471) (206) (1,038) (341)
Gain on sale of office properties
and equipment 0 0 (42) 0
Depreciation and amortization on
Office properties and equipment 306 258 612 495
Net amortization (accretion) of
investments and mortgage-backed
securities premiums, net (157) 2 (120) 2
Amortization of deferred loan
origination fees (271) (275) (550) (523)
Loan fees collected 273 342 578 605
Proceeds from sales of loans 27,436 12,544 40,612 27,074
Origination of loans held for sale (24,909)(12,807) (41,445) (25,708)
(Increase) decrease in accrued
interest receivable (221) 20 (555) (90)
Decrease (increase) in other assets (135) (619) 60 (563)
Increase (decrease) in accrued
interest payable (28) 16 (36) 40
Stock dividends on Federal Home
Loan Bank stock (30) (26) (59) (26)
(Decrease) increase in accrued expenses
and other liabilities 54 19 134 (158)
(Decrease) increase in income
taxes payable (567) (481) 135 20
Net cash provided (used) by operating
activities 2,871 (247) 1,312 2,763
Investing activities:
Decrease (increase) in loans
receivable, net (3,336) (12,009) (11,990) (15,840)
Principal payments on mortgage
backed securities held to maturity 69 13 199 30
Proceeds from the sales of office
properties and equipment 0 0 203 0
Purchase of investment securities
Available for sale (38,153) 0 (38,153) 0
Purchase of investment securities
held to maturity 0 0 (4,940) 0
Proceeds from maturities of investment
securities 3,000 1,000 4,000 2,000
Purchase of office properties
and equipment (294) (927) (933) (1,943)
Net cash used in investing
activities (38,714)(11,923) (51,614) (15,753)
4
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Financing activities:
Net (decrease) increase in deposits (12,089) 4,655 (13,671) 14,345
Issuance of common stock 0 0 69,352 0
Expenses of stock offering (51) 0 (1,532) 0
Net increase in advance
payments by borrowers for
property taxes and insurance 182 258 458 559
Net Cash provided (used) by
financing activities (11,958) 4,913 54,607 14,904
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (47,801) (7,257) 4,305 1,914
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 89,764 28,690 37,658 19,519
CASH AND CASH EQUIVALENTS, END OF PERIOD $41,963 21,433 41,963 21,433
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest 2,298 2,224 4,959 4,372
Income taxes 1,621 1,275 1,621 1,275
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Interest credited to deposits 892 596 2,013 1,257
Decrease (increase)in deferred tax asset related
to unrealized gain on investments (11) 0 (8) 0
See accompanying notes to consolidated financial statements.
5
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CAVALRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cavalry Bancorp, Inc. (the "Company"), was organized on November 5,
1997 under Tennessee law at the direction of Cavalry Banking (the
"Bank") to acquire all of the capital stock that the Bank would issue
upon its conversion from the mutual to stock form of ownership. The
conversion was completed on March 16, 1998 through the sale and
issuance of 7,538,250 shares of common stock by the Company at a price
of $10.00 per share. Information set forth in this report relating to
periods prior to the Conversion, including consolidated financial
statements and related data, relates to Cavalry Banking and its
subsidiaries.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods.
The results of operations for the three and six months ended June
30, 1998 are not necessarily indicative of the results to be expected for
the year ending December 31, 1998. The consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 1997.
2. Earnings Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per
Share, established new standards for computing and presenting earnings
per share. The standard is effective for annual and interim periods
ending after December 15, 1997. This standard had no impact on the
computation of the Company's earnings per share upon adoption.
Earnings per share has been computed for the three and six months
ended June 30, 1998 based upon weighted average common shares
outstanding of 6,947,754 and 6,941,238, respectively. For the purpose
of computing weighted average shares outstanding for the six months
ended June 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 six months ended June 30, 1997 is
not presented as there was no common stock issued or outstanding.
6
<PAGE>
3. Investment Securities Held to Maturity and Investment Securities
Available-for-Sale:
The amortized cost and estimated fair values of investment securities
held to maturity and available-for-sale at June 30, 1998 and December
31, 1997.
Investment securities held to maturity:
June 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
Obligations of U.S.
Government agencies $5,697 - 3 $5,694
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
Obligations of U.S.
Government agencies $1,700 1 1 $1,700
Investment securities available-for-sale:
June 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
Obligations of U.S.
Government agencies $45,308 4 34 $45,278
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
Obligations of U.S.
Government agencies $10,085 - 8 $10,077
4. Mortgage-backed Securities Held to Maturity:
June 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Mortgage-backed securities:
FHLMC $276 3 - 279
FNMA 818 6 2 822
Total mortgage backed
securities held to maturity $1,094 9 2 1,101
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Mortgage-backed securities:
FHLMC $420 6 - 426
FNMA 881 9 4 886
Total mortgage backed
securities held to maturity $1,301 15 4 1,312
7
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5. Loans Held-for-Sale, Net
Loans held for sale, net are summarized as follows:
June 1998 December 1997
One-to-four family loans $6,727 $4,855
Total loans held for sale, net $6,727 $4,855
The Bank originates most fixed rate loans for immediate sale to the
Federal Home Loan Mortgage Corporation (FHLMC) or other investors.
Generally, the sale of such loans is arranged at the time the loan
application is received through commitments.
8
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6. Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income," establishes standards of disclosure and
financial statement display for reporting total comprehensive income
and the individual components thereof. Comprehensive income is defined
as the change in equity(net assets) of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions
to owners. The only component of comprehensive income for Cavalry
Bancorp is unrealized holding gains/(losses) on available-for-sale
securities. Cavalry Bancorp adopted this standard beginning with the
first quarter of 1998.
COMPONENTS OF OTHER COMPREHENSIVE INCOME AND RELATED TAX
(Dollars in thousands)
Gain/(Loss) Tax effect Net-of-tax
Unrealized market adjustments $(29) 11 $(18)
for the period
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE QUARTER ENDING
JUNE 30,1998 $(29) 11 $(18)
Unrealized market adjustments $(21) 8 $(13)
For the period
TOTAL OTHER COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED
JUNE 30,1998 $(21) 8 $(13)
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets were $339.8 million at June 30, 1998 and $282.1 million
at December 31, 1997, an increase of $57.7 million or 20.5%. This
increase resulted primarily from the proceeds of the initial public
offering of stock which was completed on March 16, 1998. As a result
of this offering, the Company realized an increase in cash of
approximately $67.8 million. These funds were invested in interest
bearing deposits and short-term investments. Cash and cash equivalents
increased $4.3 million while total investments increased $39.2 million.
Mortgage-backed securities decreased $207,000 as a result of
repayments. Loans held for sale increased $1.9 million. The
variances resulted primarily from timing differences in the funding of
loans. Loans receivable, net increased from $213.0 million at December
31, 1997 to $224.8 million at June 30, 1998. Consumer, commercial, and
commercial real estate increased $22.0 million as a result of
additional loan officers, general market conditions and more aggressive
pricing. These gains were offset by declines in construction, land,
multifamily, and one-to-four family mortgage loans. The declines in
one-to-four family mortgage loans were primarily a result of refinancing
activity. Although construction and land development loans net of loans
in process decreased, the gross amount of these loans have increased $9.2
million. This increase was a result of aggressive solicitation and
competitive pricing of these products.
Deposit accounts decreased $13.7 million from December 31, 1997 to June
30, 1998. Certificates of deposit decreased $12.8 million primarily as
a result of withdrawals to fund stock purchases. The Bank's savings
account balances declined $1.6 million. Money market accounts also
declined $1.7 million for the period. These declines were partially
offset by an increase of $2.4 million in transactional accounts.
Stockholders' equity increased by $70.3 million from December 31, 1997
to June 30, 1998, as a result net proceeds received in the conversion
of $67.8 million and net income of $2.9 million for the six month
period ending June 30, 1998,reduced by dividends of $377,000 and
unrealized losses on available for sale securities of $13,000.
Nonperforming assets increased from $150,000 at December 31, 1997 to
$160,000 at June 30, 1998.
10
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Comparison of Operating Results for the Three Months Ended June 30, 1998
and June 30, 1997.
Net Income. Net income increased to $1.5 million for the three months
ended June 30, 1998 from $891,000 for the three months ended June 30,
1997 primarily as a result of increased investment and deposit income
offset partially by an increased provision for income taxes due to
increased income before taxes. The increase in investment and deposit
income is principally the result of additional funds available for
investment in the three month period ended June 30, 1998 from the
conversion.
Net Interest Income. Total interest income increased 22.0% to $6.6
million for the three months ended June 30, 1998 from $5.4 million for
the same period in 1997. Interest on loans increased from $5.0 million
for the period ended June 30,1997 to $5.3 million for the same period
in 1998. This was a result of average loans outstanding increasing from
$212.3 million in 1997 to $228.3 million for the same period in 1998.
The average yield decreased from 9.5% for the period ended June
30, 1997 compared to 9.4% for the same period in 1998. This decrease
was a result of declining rates and market competition.
Income on all other investments consisting of mortgage backed
securities, investments, FHLB stock, bank deposits and federal funds
increased from $332,000 for the period ended June 30, 1997 to $1.3
million for 1998. Average investments increased from $23.1 million for
the three months in 1997 to $91.2 million for the same period in 1998
as a result of the investment of stock subscription funds. The average
yield declined from 5.7% for the period ended June 30, 1997 to 5.6% as
a result of the conversion funds being mostly invested in overnight and
other short-term investments.
Interest Expense. Interest expense increased from $2.2 million for
the period ended June 30, 1997 to $2.3 million for the same period in
1998. Average deposits increased from $201.5 million for the period in
1997 to $209.3 million for 1998. The average cost of deposits
decreased from 4.51% in 1997 to 4.40% in 1998. This decrease was
primarily a result of the average balance in NOW accounts, a lower
cost deposit, increasing from $27.7 million in 1997 to $32.6 million in
1998 with the cost declining from 1.72% in 1997 to 1.44% in 1998.
The decrease in average costs was a result of the Bank lowering the
rate on these accounts.
Provision for Loan Loses. Provision for loan losses are charges to
earnings to bring the total allowance for loan losses to a level
considered by management as adequate to provide for estimated loan
losses based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired
loans and economic conditions. Management also considers the level of
problem assets giving greater weight to the level of classified assets
than to the level of nonperforming assets because classified assets
include not only nonperforming assets but also performing assets that
otherwise exhibit, in management's judgement, potential credit
weaknesses.
11
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The provision for loan losses was $81,000 for the period ending June
30, 1998 compared to $75,000 for the same period in 1997. Classified
assets increased from $1.3 million at December 31, 1997 to $1.5 million
at June 30, 1998. Management expects classified assets to increase
moderately, although no assurances can be given that this will in fact
occur. Management's expectation is based upon its anticipation of
continued loan growth, particularly in the areas of construction,
commercial real estate, commercial and consumer lending. Management
deemed the allowance for loan losses adequate at June 30, 1998.
Noninterest Income. Noninterest income increased to $1.2 million for
the three months ended June 30, 1998 from $797,000 for the same period
in 1997. Net gain on sale of loans increased from $206,000 for the
three months ended June 30, 1997 to $471,000 for the same period in
1998. This increase was a result of increased volume, increased
pricing spreads, and overall more favorable market conditions in 1998
than in 1997. Deposit servicing fees increased from $291,000 in 1997
to $382,000 as a result of increased volume in transactional accounts
and an increased pricing structure. Trust fees also increased from
$135,000 in 1997 to $171,000 in 1998 because of more trust assets under
management and an increase in fees charged. These gains were offset by
a decline in loan servicing income from $134,000 in 1997 to $95,000 in
1998 largely as a result of increased amortization of originated
servicing rights.
Noninterest Expense. Noninterest expense was $3.0 million for the
period ending June 30, 1998 compared to $2.4 million in 1997.
Compensation and other employee benefits increased from $1.3 million at
June 30, 1997 to $1.7 million at June 1998 primarily as a result of
increases in commission expenses,compensation and other employee
benefits. These increases were a result of increased staffing to
service the increased volumes in deposits and lending and normal annual
salary increases. The increases in other categories of operating
expenses generally are attributable to the growth of the Company.
The Company anticipates that other operating expenses will continue
to increase in subsequent periods as a result of increased cost
associated with operating a public company.
Income taxes. The provision for income taxes was $906,000 for the
period ended June 30, 1998 compared to $561,000 for the same period in
1997. This was a result of higher income before income taxes for the
period ended June 30, 1998.
12
<PAGE>
Comparison of Operating Results for the Six Months Ended June 30, 1998 and
June 30,1997.
Net Income. Net income increased to $2.9 million for the six months
ended June 30, 1998 from $1.8 million for the six months ended June
30, 1997 primarily as a result of increased investment and deposit income
offset partially by an increased provision for income taxes due to
increased income before taxes. The increase in investment and deposit
income is principally the result of additional funds available for
investment in the six month period ended June 30, 1998 from the
conversion.
Net Interest Income. Total interest income increased 23.8% to $13.0
million for the six months ended June 30, 1998 from $10.5 million for the
same period in 1997. Interest on loans increased from $9.8 million for
the period ended June 30, 1997 to $10.6 million for the same period in
1998. This was a result of average loans outstanding increasing from
$209.0 million for the six months ended June 30, 1997 to $226.2 for the
same period in 1998. The yields between the two periods were comparable
at 9.38% for the six months ended June 30, 1997 and 9.39% for the same
period in 1998. Income on all other investments consisting of mortgage
backed securities, investments, FHLB stock, bank deposits and federal
funds sold increased from $682,000 for the six months ended June 30, 1997
to $2.4 million for the same period in 1998. Average investments
increased from $23.4 million for the six months ended June 30, 1997 to
$89.2 million for the same period in 1998 as a result of the investment
of the conversion. The average yield declined from 5.8% for the six
months ended June 30,1997 to 5.4% for the same period in 1998 as a
result of conversion funds being mostly invested in overnight and other
short-term investments.
Interest Expense. Interest expense increased from $4.4 million for the
six month period ended June 30, 1997 to $4.9 million for the six month
period ended June 30, 1998. Average deposits increased from $199.4
million for the six months ended June 30, 1997 to $235.7 million for the
same period in 1998. The average cost of funds declined from 4.4% for
the six months ended June 30, 1997 to 4.2% for the same period in 1998.
This increase in average deposits was primarily a result of the stock
subscription process. Passbook savings increased from $15.4 million
for the six months ended June 30, 1997 to $30.9 million for the same
period in 1998. The average cost of passbook deposits declined from 2.0%
for the six months ended June 30, 1997 to 1.9% for the same period in 1998
Money market accounts also increased from $31.4 million for the six months
ended June 30, 1997 to $47.4 million for the same period in 1998. The
average cost of the money market accounts for both was 4.2%.
Provision for Loan Losses. The provision for loan losses was $135,000
for the six month period ended June 30, 1998 compared to $150,000 for the
same period in 1997. See "Comparison of Operating Results for the Three
Months Ended June 30, 1998 and June 30,1997 - Provision for Losses"
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Noninterest Income. Noninterest income increased to $2.4 million for
the six months ended June 30 ,1998 compared to $1.5 million for the same
period in 1997. Gain on sale of loans increased from $341,000 for the
six months ended June 30, 1997 to $1.0 million for the same period in
1998 as a result of increased volume, increased pricing spreads, and
overall more favorable market conditions in 1998 than in 1997. Deposit
servicing fees increased from $559,000 for the six months ended June 30,
1997 to $714,000 for the same period in 1998 as a result of increased
volume in transactional accounts and an increased pricing structure.
Trust fees also increased from $272,000 for the six months end June 30,
1997 to $334,000 for the six months ended June 30, 1998 as a result of
increases in trust assets under management and an increase in fees
charged. These gains were offset by a decline in loan servicing income
from $273,000 for the six month period ended June 30 ,1997 to $202,000
for the same period in 1998 largely as a result of increased
amortization of originated servicing rights.
Noninterest expense. Noninterest expense was $5.8 million for the six
month period ended June 30, 1998 compared to $4.6 million for the same
period in 1997. Compensation, payroll taxes and fringe benefits
increased from $2.6 million for the six month period ended June 30, 1997
to $3.3 million for the same period in 1998. This increase was
primarily a result of increased staffing to service the increased
volumes in deposits and lending and normal annual salary increases. The
increases in other categories of operating expenses generally are
attributable to the growth of the Company. The Company anticipates that
operating expenses will continue to increase in subsequent periods as
a result of increased costs associated with operating a public company.
Income taxes. The provision for income taxes was $1.7 million for the
six month period ended June 30 ,1998 compared to $1.1 million for the
same period in 1997. This increase was a result of increased income
before taxes for the six months ended June 30, 1998.
14
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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 June 30, 1998, cash and cash
equivalents totaled $42.0 million or 12.4% of total assets, and
investments available for sale totaled $45.3 million. At June 30,
1998, the Bank also maintained, but did not draw upon, a line of credit
with the FHLB of Cincinnati in the amount of $15.0 million.
As of June 30, 1998, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At June 30, 1998, under
regulations of the OTS, the Bank's tangible, core and risk-based
capital ratios were 22.9%, 22.9% and 25.0%, respectively, compared to
requirements of 1.5%, 3.0% and 8.0%, respectively.
At June 30, 1998, the Bank had loan commitments (excluding undisbursed
portions of construction loans) of approximately $14.4 million. In
addition, at June 30, 1998, the unused portion of lines of credit
extended by the Bank was approximately $6.5 million for consumer lines
of credit and $22.8 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 June 30, 1998, the Bank had $7.1 million
of letters of credit outstanding.
15
<PAGE>
Year 2000
Cavalry Banking continues to follow the comprehensive Action Plan
which was developed using the guidelines established by the Federal
Financial Institutions Examination Council's Interagency Statement
entitled "Year 2000 Project Management Awareness". The Awareness
and assessment phases of the plan have been completed and we are
deeply involved in the Renovation and Validation stages of the plan.
Cavalry Banking is on target to meet the March 31, 1999, goal set by the
Audit Committee for having all systems, data bases and utilities fully
tested, in production and Year 2000 ready. Cavalry Banking's
various vendors are also on track to be fully tested during the fourth
quarter of 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of June 30, 1998 from that presented
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
On July 15, 1998, the Company announced that Cavalry Banking plans
to establish a new branch office in Rutherford County, Tennessee.
Cavalry Banking intends to open a branch office on land owned by
the Bank on U.S. Highway 231 South. Construction is to begin
immediately. The branch is scheduled to be completed in the fourth
quarter of 1998.
16
<PAGE>
Item 6. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C Loughry, Jr.**
10.2 Employment Agreement with Ronald F Knight**
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis**
10.5 Severance Agreement with R Dale Floyd**
10.6 Severance Agreement with M. Glenn Layne**
10.7 Severance Agreement with Joy B Jobe**
10.8 Severance Agreement with William S Jones**
10.9 Severance Agreement with David W Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
21 Subsidiaries of the Registrant**
27 Financial Data Schedule
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30,
1998.
17
<PAGE>
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 10, 1998 By: /s/ Ed C. Loughry, Jr.
-----------------------------
Ed C. Loughry, Jr.
President and Chief Executive
Officer
Date: August 10, 1998 By: /s/ Hillard C. Gardner
-----------------------------
Hillard C. Gardner
Senior Vice President and
Chief Financial Officer
18
<PAGE>
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