SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 I.D. Number)
or organization)
114 West College Street,
Murfreesboro, Tennessee 37130
____________________________ _______________________
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code: (615) 893-1234
______________________
Securities registered pursuant
to Section 12(b) of the Act: None
______________________
Securities registered pursuant Common Stock, no par
to Section 12(g) of the Act: value per share
_______________________
(Title of Class)
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 (2) has been subject to
such filing requirements for the past 90 days. YES X NO
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
___
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the Nasdaq National Market System under the symbol "CAVB"
on March 18, 1999, was $144,121,907 (7,161,337 shares at $20.125 per share).
It is assumed for purposes of this calculation that none of the Registrant's
officers, directors and 5% stockholders (including the Cavalry Banking
Employee Stock Ownership Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III).
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PART I
Item 1. Business
_________________
General
Cavalry Bancorp, Inc. ("Company"), a Tennessee corporation, was organized
on November 5, 1997 for the purpose of becoming the holding company for
Cavalry Banking ("Bank") upon the Bank's conversion from a federally-chartered
mutual to a federally-chartered stock savings bank ("Conversion"). The
Conversion was completed on March 16, 1998. The Company has not engaged in
any significant activity other than holding the stock of the Bank.
Accordingly, the information set forth in this report, including financial
statement and related data, relates primarily to the Bank.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its
primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
the insurer of its deposits. The Bank's deposits have been federally-insured
since 1936 and are currently insured by the FDIC under the Savings Association
Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan
Bank ("FHLB") System since 1936.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds
to originate a variety of loans to individuals residing within its primary
market area, and to businesses owned and operated by such individuals. The
Bank originates both adjustable rate mortgage ("ARM") loans and fixed-rate
mortgage loans. Generally, ARM loans are retained in the Bank's portfolio and
long-term fixed-rate mortgage loans are originated for sale in the secondary
market. In addition, the Bank actively originates construction and
acquisition and development loans. The Bank also originates commercial real
estate, commercial business, and consumer and other non-real estate loans.
Market Area
The Bank considers Rutherford, Bedford and Williamson Counties in Central
Tennessee to be its primary market area. A large number of the Bank's
depositors reside, and a substantial portion of its loan portfolio is secured
by properties located, in Rutherford and Bedford Counties.
The economy of Rutherford and Bedford Counties are diverse and generally
stable. According to the Rutherford and Bedford Area Chambers of Commerce,
major employers include Nissan Motor Manufacturing Corp. USA, Rutherford
County Government, Whirlpool Corp., Bridgestone/Firestone Inc., Middle
Tennessee State University, Alvin C. York Veterans Administration Medical
Center and Ingram Book Co., among others.
Selected Financial Data
This information is incorporated by reference from pages 11 and 12 of the
1998 Annual Report to Stockholders ("Annual Report") included herein as
Exhibit 13.
Lending Activities
General. At December 31, 1998, the Bank's total loans receivable
portfolio amounted to $248.5 million, or 68.1% of total assets at that date.
The Bank has traditionally concentrated its lending activities on conventional
first mortgage loans secured by one- to- four family properties, with such
loans amounting to $75.6 million, or 24.8% of the total loans receivable
portfolio at December 31, 1998. In addition, the Bank originates construction
loans, commercial real estate loans, land loans, consumer loans and commercial
business loans. A substantial portion of the Bank's loan portfolio is secured
by real estate, either as primary or secondary collateral, located in its
primary market area.
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan
portfolio by type of loan as of the dates indicated.
At December 31,
_______________________________________________________________________________________
1998 1997 1996 1995 1994
_______________ _______________ _______________ _______________ _______________
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to- four
family(1)..... $75,554 24.8% $82,930 32.9% $81,279 33.1% $72,302 36.4% $82,793 43.5%
Multi-family... 1,125 0.4 1,338 0.5 2,847 1.2 1,705 0.9 2,285 1.2
Commercial..... 52,516 17.2 39,690 15.8 30,099 12.3 22,140 11.1 16,808 8.8
Construction... 84,900 27.9 54,666 21.7 61,032 24.9 47,416 23.9 40,261 21.1
Acquisition
and
development... 15,367 5.1 17,011 6.8 18,799 7.7 13,816 6.8 9,962 5.3
________ ____ ________ ____ ________ ____ ________ ____ ________ ____
Total
mortgage
loans....... 229,462 75.4 195,635 77.7 194,056 79.2 157,379 79.1 152,109. 79.9
Consumer Loans:
Home equity
lines of
credit........ 3,790 1.2 2,783 1.1 1,964 0.8 941 0.5 228 0.1
Automobile..... 6,788 2.2 5,028 2.0 3,716 1.5 2,735 1.4 2,144 1.1
Unsecured...... 1,527 0.5 1,684 0.7 1,779 0.7 1,996 1.0 2,129 1.1
Other secured.. 32,792 10.8 23,852 9.5 23,037 9.4 20,982 10.6 22,409 11.8
________ ____ ________ ____ ________ ____ ________ ____ ________ ____
Total
consumer
loans....... 44,897 14.7 33,347 13.3 30,496 12.4 26,654 13.5 26,910 14.1
Commercial
business loans.. 30,213 9.9 22,544 9.0 20,698 8.4 14,771 7.4 11,451 6.0
________ ____ ________ ____ ________ ____ ________ ____ ________ ____
Total loans.. 304,572 100.0% 251,526 100.0% 245,250 100.0% 198,804 100.0% 190,470 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed
portion of
loans in
process....... 52,098 30,178 36,573 32,615 21,228
Net deferred
loan fees..... 773 710 701 560 533
Allowance for
loan losses... 3,231 2,804 2,123 1,997 1,776
________ ________ ________ ________ ________
Total loans
receivable,
net.........$248,470 $217,834 $205,853 $163,632 $166,933
======== ======== ======== ======== ========
_______
(1) Includes loans held-for-sale.
</TABLE>
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One- to- Four Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by
first mortgage loans on existing one- to- four family residences located in
its primary market area. At December 31, 1998, $75.6 million, or 24.8% of the
Bank's total loan portfolio, consisted of such loans. The Bank originated
$159.3 million, $80.0 million and $73.1 million of one- to- four family
residential mortgage loans during the years ended December 31, 1998, 1997 and
1996, respectively.
Generally, the Bank's fixed-rate one- to- four family mortgage loans have
maturities ranging from 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions
and documentation which permit them to be sold to U.S. Government sponsored
agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC"). The
Bank's fixed- rate loans customarily include "due on sale" clauses, which give
the Bank the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
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The Bank also originates ARM loans at rates and terms competitive with
market conditions. At December 31, 1998, $57.5 million, or 18.9% of the
Bank's gross loan portfolio, were subject to periodic interest rate
adjustments. The Bank originates for its portfolio ARM loans which provide
for an interest rate which adjusts every year or which is fixed for one, three
or five years and then adjusts every year after the initial period. Most of
the Bank's one-year, three- year and five-year ARMs adjust every year after
the initial fixed rate period based on the one year Treasury constant maturity
index. The Bank's ARMs are typically based on a 30-year amortization
schedule. The Bank qualifies the borrowers on its nonconforming ARM loans
(i.e., loans not originated in conformity with standards that would permit the
loans to be sold in the secondary market) based on the initial rate. The Bank
qualifies the borrowers on its conforming ARM loans based on the maximum note
interest rate during the second year of the loan. A one-year ARM loan that is
originated according to FHLMC secondary market standards may be converted to a
fixed-rate loan within five years of the origination date. ARM loans that are
not saleable to the FHLMC are not permitted to be converted to fixed rate
loans. The Bank does not offer deep discount or "teaser" rates. The Bank's
current ARM loans do not provide for negative amortization. The Bank's ARM
loans generally provide for annual and lifetime interest rate adjustment
limits of 2% and 5% to 6%, respectively.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Bank to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that
yields on ARM loans will be sufficient to offset increases in the Bank's cost
of funds. The Bank believes these risks, which have not had a material
adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in portfolio during a rising interest
rate environment.
The Bank also originates one- to- four family mortgage loans under
Federal Housing Administration ("FHA") and Veterans Administration ("VA")
programs and the Tennessee Housing and Development Agency ("THDA"), an
affordable housing program. FHA and VA loans are generally sold to private
investors, servicing released (i.e., the right to collect principal and
interest payments and forward it to the purchaser of the loan, maintain escrow
accounts for payment of taxes and insurance and perform other loan
administration functions is sold with the loan). THDA loans are sold with
servicing rights retained. See "-- Loan Originations, Sales and Purchases."
The Bank generally requires title insurance insuring the status of its
lien or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
The Bank's one- to- four family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one- to- four
family residential loan; however, the Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% to 95% of
the appraised value of the security property.
Construction Lending. The Bank actively originates three types of
residential construction loans: (i) speculative construction loans, (ii)
pre-sold construction loans and (iii) construction/permanent loans. To a
substantially lesser extent, the Bank also originates construction loans for
the development of multi-family and commercial properties.
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At December 31, 1998, the composition of the Bank's construction loan
portfolio was as follows:
Outstanding Percent of
Balance(1) Total
______________ ___________
(In thousands)
Residential:
Speculative construction............ $44,230 44.11%
Pre-sold construction............... 17,447 17.40
Construction/permanent.............. 13,967 13.93
Commercial and multi-family.......... 24,623 24.56
________ ______
Total............................... $100,267 100.00%
======== ======
____________________
(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. The Bank lends
to approximately 130 local builders, many of whom may have only one or two
speculative loans outstanding from the Bank. The Bank considers approximately
25 builders as core borrowers with several speculative loans outstanding at
any one time. Rather than originating lines of credit to home builders to
construct several homes at once, the Bank originates and underwrites a
separate loan for each home. Speculative construction loans are originated
for a term of 12 months, with interest rates ranging from 0.5% to 2.0% above
the prime lending rate, and with a loan-to-value ratio of no more than 80% of
the appraised estimated value of the completed property. At December 31,
1998, the Bank had 19 borrowers each with aggregate outstanding speculative
loan balances of more than $500,000, all of which were performing according to
their respective terms and the largest of which amounted to $1.0 million.
Unlike speculative construction loans, pre-sold construction loans are
made to home builders who, at the time of construction, have a signed contract
with a home buyer who has a commitment for permanent financing for the
finished home with the Bank or another lender. Pre-sold construction loans
are generally originated for a term of 12 months, with adjustable interest
rates ranging from0.5% to 1.0% above the prime lending rate, and with
loan-to-value ratios of 80% of the appraised estimated value of the completed
property or cost, whichever is less. At December 31, 1998, the largest
outstanding pre-sold construction loan had an outstanding balance of $344,000
and was performing according to its terms.
Construction/permanent loans are originated to the home owner rather than
the home builder. The construction phase of a construction/permanent loan
generally lasts 12 months and the interest rate charged is generally 7.25% to
8.25%, fixed, and with loan-to-value ratios of 80% (or up to 95% with private
mortgage insurance) of the appraised estimated value of the completed property
or cost, whichever is less. At the completion of construction, the Bank may
either originate a fixed-rate mortgage loan or an ARM loan. See "-- Lending
Activities -- One- to- Four Family Real Estate Lending." At December 31,
1998, the largest outstanding construction/permanent loan had an outstanding
balance of $612,000 and was performing according to its terms.
To a lesser extent, the Bank also provides construction financing for
non- residential properties (i.e., multi-family and commercial properties).
At December 31, 1998, such construction loans amounted to $6.3 million.
Construction loans up to $500,000 may be approved by any two members of
the Bank's seven member Loan Committee. All construction loans over
$1,000,000 must be approved by the Board of Directors. See "-- Loan
Solicitation and Processing." Prior to preliminary approval of any
construction loan application, an appraiser approved
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by the Board of Directors inspects the site and the Bank reviews the existing
or proposed improvements, identifies the market for the proposed project,
analyzes the pro forma data and assumptions on the project. In the case of a
speculative or pre-sold construction loan, the Bank reviews the experience and
expertise of the builder. After preliminary approval has been given, the
application is processed, which includes obtaining credit reports, financial
statements and tax returns on the borrowers and guarantors, an independent
appraisal of the project, and any other expert reports necessary to evaluate
the proposed project. In the event of cost overruns, the Bank requires that
the borrower use its own funds to maintain the original loan-to-value ratio.
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are
based on periodic on-site inspections by an appraiser and/or Bank personnel
approved by the Board of Directors. The Bank regularly monitors the
construction loan portfolio and the economic conditions and housing inventory.
Property inspections are performed by the Bank's property inspector. The Bank
believes that the internal monitoring system helps reduce many of the risks
inherent in its construction lending.
Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its single-
family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, the Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Bank may be
confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices. In
addition, because the Bank's construction lending is in its primary market
area, changes in the local economy and real estate market could adversely
affect the Bank's construction loan portfolio.
Acquisition and Development Lending. The Bank originates acquisition and
development loans for the purpose of developing the land (i.e., installing
roads, sewers, water and other utilities) for sale for residential housing
construction. At December 31, 1998, the Bank had land A&D loans with
aggregate approved commitments of $15.4 million, of which an aggregate of
$11.4 million was outstanding. At December 31, 1998, the largest land A&D
loan had an outstanding balance of $1.5 million and was performing according
to its terms. All of the land A&D loans are secured by properties located in
the Bank's primary market area.
Land A&D loans are usually repaid through the sale of the developed land.
However, the Bank believes that its land A&D loans are made to individuals
with, or to corporations the principals of which possess, sufficient personal
financial resources out of which the loans could be repaid, if necessary.
Land A&D loans are secured by a lien on the property, made for a two year
term, and with an interest rate that adjusts with the prime rate. The Bank
requires monthly interest payments during the term of the land A&D loan.
After the expiration of the two year term, the loan is reevaluated, adjusted
and/or extended as a fixed or adjustable rate loan. In addition, the Bank
obtains personal guarantees from the principals of its corporate borrowers.
At December 31, 1998, the Bank did not have any nonaccruing land A&D loans.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to- four family residential mortgage loans because such loans are
more difficult to monitor and foreclose as the Bank may be confronted with a
property the value of which is insufficient to assure full repayment.
Furthermore, if the borrower defaults the Bank may have to expend its own
funds to complete development and also incur costs associated with marketing
and holding the building lots pending sale. Land A&D loans are generally
considered to involve a higher degree of risk than single-
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family permanent mortgage loans because of the concentration of principal
among relatively few borrowers and development projects, the increased
difficulty at the time the loan is originated of estimating the development
building costs, the increased difficulty and costs of monitoring the loan, the
higher degree of sensitivity to increases in market rates of interest, and the
increased difficulty of working out problem loans. A concentration of loans
secured by properties in any single area presents the risk that any adverse
change in regional economic or employment conditions may result in increased
delinquencies and loan losses. The Bank attempts to minimize this risk by
limiting the maximum loan-to-value ratio on acquisition and development loans
to 75%, although the Board of Directors has the authority to approve
acquisition and development loans with loan-to-value ratios of up to 80%.
Commercial Real Estate Lending. The Bank originates mortgage loans for
the acquisition and refinancing of commercial real estate properties. At
December 31, 1998, $52.5 million, or 17.2% of the Bank's total loan portfolio,
consisted of loans secured by existing commercial real estate properties. The
majority of the Bank's commercial real estate properties are secured by small
businesses, retail properties and churches located in the Bank's primary
market area.
The Bank requires an evaluation of all properties securing commercial
real estate loans which are $250,000 and less. Evaluations are performed by
the Bank's commercial loan officers or in-house appraiser, an outside fee
appraiser, or an employee of the Bank designated by the Board of Directors.
Appraisals are required for all properties securing commercial real estate
loans in excess of $250,000. Appraisals are performed by an independent
appraiser designated by the Bank and are reviewed by management. The Bank
considers the quality and location of the real estate, the credit of the
borrower, the cash flow of the project and the quality of management involved
with the property.
The average size of a commercial real estate loan in the Bank's portfolio
is approximately $100,000 to $200,000. Commercial real estate loans are
generally structured with fixed rates of interest and terms of three to five
years based on amortization schedules of 15 to 20 years. At December 31,
1998,the largest commercial real estate loan had an outstanding balance of
$2.0 million.
Loan-to-value ratios on the Bank's commercial real estate loans are
generally limited to 80%. As part of the criteria for underwriting commercial
real estate loans, the Bank generally imposes a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 1.2 times. It is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its commercial
real estate loans.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by multi-family and
commercial properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks
to minimize these risks by limiting the maximum loan-to-value ratio to 80% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. The Bank
also obtains loan guarantees from financially capable parties based on a
review of personal financial statements.
Commercial Business Lending. The Bank's commercial business lending
activities focuses primarily on small to medium size businesses owned by
individuals well known to the Bank and who reside in the Bank's primary market
area. At December 31, 1998, commercial business loans amounted to $30.2
million, or 9.9% of total loans.
Commercial business loans may be unsecured loans, but generally are
secured by various types of business collateral other than real estate (i.e.,
inventory, equipment, etc.). In many instances, however, such loans are often
also secured by junior liens on real estate. Commercial business loans are
generally made in amounts between $50,000 to $75,000 and may be either lines
of credit or term loans. Lines of credit are generally renewable and made for
a one-year term. Lines of credit are generally variable rate loans indexed to
the prime rate. Term loans are generally originated
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with three to five year maturities, with a maximum of seven years, on a fully
amortizing basis. As with commercial real estate loans, the Bank generally
requires annual financial statements from its commercial business borrowers
and, if the borrower is a corporation, personal guarantees from the
principals.
At December 31, 1998, the largest commercial business loan to an
unaffiliated borrower was a $1.0 million line of credit secured by marketable
securities, with no outstanding balance at that date. At December 31, 1998,
the largest commercial business loan with an outstanding balance had a balance
of $219,000 and was secured by a tour bus. Such loan was performing according
to its terms at December 31, 1998.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending
with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral is viewed as the primary
source of repayment in the event of borrower default. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often not a sufficient source of repayment
because accounts receivable may be uncollectible and inventories and equipment
may be obsolete or of limited use, among other things. Accordingly, the
repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of
collateral is a secondary and often insufficient source of repayment.
As part of its commercial business lending activities, the Bank issues
standby letters of credit or performance bonds as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."
Consumer Lending. The Bank originates a variety of consumer loans that
generally have shorter terms to maturity and higher interest rates than
residential mortgage loans. At December 31, 1998, the Bank's consumer loans
totaled $44.9 million, or 14.7%, of the Bank's loans receivable. The Bank's
consumer loans consist primarily of home equity lines of credit, automobile
loans, and a variety of other secured loans, a substantial portion of which
are secured by junior mortgages on real estate. To a substantially lesser
extent, the Bank also originates unsecured consumer loans.
The Bank anticipates that it will continue to be an active originator of
consumer loans. Factors that may affect the ability of the Bank to increase
its originations in this area include the demand for such loans, interest
rates and the state of the local and national economy. Consumer loans
accounted for 12.8%, 11.9% and 9.5% of the Bank's total loan originations in
the fiscal years ended December 31, 1998, 1997 and 1996, respectively.
The Bank offers open-ended home equity lines of credit secured by a
second mortgage on the borrower's primary residence. These lines of credit
have an interest rate that is one to two percentage points above the prime
lending rate, as published in The Wall Street Journal, which adjusts monthly.
The majority of the approved lines of credit at December 31, 1998 were less
than $50,000. At December 31, 1998, approved lines of credit totaled $8.1
million, of which $3.8 million was outstanding.
At December 31, 1998, the Bank's automobile loan portfolio amounted to
$6.8 million, or 2.2%, of total loans at such date, a substantial portion of
which were secured by used automobiles. The maximum term for the Bank's
automobile loans is 60 months. The Bank generally lends up to 80% to 90% of
the purchase price of the automobile. The Bank requires all borrowers to
maintain automobile insurance, including collision, fire and theft, with a
maximum allowable deductible and with the Bank listed as loss payee. The Bank
does not engage in indirect automobile lending.
The Bank's consumer loan portfolio also includes other consumer loans
secured by a variety of collateral, such as recreational vehicles, boats,
motorcycles, deposit accounts and, in many instances, junior mortgages on real
estate. Such other secured consumer loans were $32.8 million, or 10.8% of
total loans, at December 31, 1998.
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At December 31, 1998, unsecured consumer loans amounted to $1.5 million,
or 0.5% of total loans. Unsecured loans are made for a term up to 24 months
with fixed rates of interest and are offered primarily to existing customers
of the Bank. Included in the unsecured consumer loan portfolio are credit
card loans with an aggregate outstanding balance of $391,000 at December 31,
1998. Approved credit card lines totaled $1.7 million at December 31, 1998.
The Bank is a VISA and MASTERCARD card issuer. The Bank does not actively
solicit credit card business beyond its customer base and market area and has
not engaged in mailing of pre-approved credit cards. The rate currently
charged by the Bank on its credit card loans is the prime rate, as published
in The Wall Street Journal, plus 6.9%, and the Bank is permitted to change the
interest rate quarterly.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles. In such cases,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans. At
December 31, 1998, the Bank had $33,000 of consumer loans accounted for on a
nonaccrual basis.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds and do not reflect the deduction for unearned
discounts, unearned income and allowance for loan losses.
After After
One Year 3 Years 5 Years
Within Through Through Through After
One Year 3 Years 5 Years 10 Years 10 Years Total
________ _______ ________ ________ ________ _______
(In thousands)
Mortgage loans:
Residential......$ 8,427 $11,647 $14,521 $13,651 $28,433 $ 76,679
Construction..... 40,503 7,523 -- -- 143 48,169
Commercial....... 17,158 9,766 20,512 2,694 2,386 52,516
Consumer and
other loans..... 10,970 13,730 7,212 205 12,780 44,897
Commercial
business loans.. 12,119 6,027 3,667 202 8,198 30,213
_______ _______ _______ _______ _______ ________
Total..........$89,177 $48,693 $45,912 $16,752 $51,940 $252,474
======= ======= ======= ======= ======= ========
8
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<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
_______ _________________
(In thousands)
Mortgage loans:
Residential........................ $11,403 $56,849
Construction....................... -- 7,666
Commercial......................... 34,785 573
Consumer and other loans........... 29,788 4,139
Commercial business loans.......... 14,667 3,427
_______ _______
Total............................ $90,643 $72,654
======= =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates. Furthermore, management believes that a significant number of the
Bank's residential mortgage loans are outstanding for a period less than their
contractual terms because of the transitory nature of many of the borrowers
who reside in its primary market area.
Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, walk-in customers, referrals and
existing customers. A business development program has been implemented where
loan officers and sales personnel make sales calls on building contractors and
realtors. The Bank also advertises its loan products.
In marketing its products and services, the Bank emphasizes its community
ties, customized personal service and an efficient underwriting and approval
process. The Bank uses professional fee appraisers for most residential real
estate loans and construction loans and all commercial real estate and land
loans. The Bank requires hazard, title and, to the extent applicable, flood
insurance on all security property.
Loan approval authority varies based on loan type. Construction loans
and acquisition and development loans up to $500,000 may be approved by any
two members of the Bank's seven member Loan Committee, while loans over
$1,000,000 must be approved by the Board of Directors. One- to- four family
residential mortgage loans up to $500,000 originated to be held in portfolio
may be approved by any two members of the Loan Committee, while loans over
$1,000,000 must be approved by the Board of Directors. One- to- four family
residential mortgage loans that are originated for sale to investors and that
are underwritten to the investor's specifications may be approved by any
member of the Loan Committee up to FHLMC loan limits. Consumer and commercial
business loans may be approved by loan officers individually or in combination
with other loan officers within dollar limits specified by the Loan Committee.
These dollar limits range from $5,000 to $50,000 for unsecured loans and from
$15,000 to $1,000,000 for secured loans. The maximum approval authority for
an individual loan officer is $250,000 for unsecured loans and $500,000 for
secured loans. All unsecured consumer and commercial business loans over
$250,000, and all secured consumer and commercial business loans over
$1,000,000, must be approved by the Board of Directors. Each approved loan,
regardless of type, is reviewed by the Bank's quality control personnel to
insure that proper approval was received.
9
<PAGE>
<PAGE>
Loan Originations, Sales and Purchases. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans in its primary market
area.
The Bank sells all loans originated under FHA and VA programs, including
related servicing rights, except for those originated for the THDA. The Bank
periodically sells conventional one- to- four family loans (i.e., non-FHA/VA
loans) with servicing retained and without recourse. These sales generally
involve fixed-rate loans which help to reduce the Bank's exposure to interest
rate risk, and the proceeds of sale are used to fund continuing operations.
However, the Bank occasionally may sell ARM loans to satisfy liquidity needs.
Sellers of loans are exposed to various degrees of "pipeline risk," which
is the risk that the value of the loan will decline during the period between
the time the loan is originated and the time of sale because of changes in
market interest rates. The Bank is exposed to a relatively low degree of
pipeline risk because it generally does not fix the loan interest rate until
shortly before or on the closing date and loans are generally closed against a
mandatory purchase commitment by the FHLMC or other purchaser.
When conventional loans are sold, the Bank retains the responsibility for
servicing the loans, including collection and remitting mortgage loans
payments, accounting for principal and interest and holding and disbursing
escrow or impound funds for real estate taxes and insurance premiums. The
Bank receives a servicing fee for performing these services for others. The
Bank's servicing portfolio amounted to $124.9 million at December 31, 1998.
The Bank is generally paid a fee equal to 0.25% of the outstanding principal
balance for servicing sold loans. Loan servicing income totalled $264,000,
$387,000 and $447,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Bank earns late charges collected from delinquent customers
whose loans are serviced by the Bank. The Bank is allowed to invest escrow
impounds (funds collected from mortgage customers for the payment of property
taxes and insurance premiums on mortgaged real estate) until they are
disbursed on behalf of mortgage customers, but is not required to pay interest
on these funds. At December 31, 1998, borrowers' escrow funds amounted to
$237,000.
Historically, the Bank has not been an active purchaser of loans or
participation interests in loans.
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended December 31,
__________________________________________
1998 1997 1996
____ ____ ____
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family..........$159,259 $ 80,021 $ 73,075
Multi-family.................. -- -- --
Commercial.................... 19,118 9,086 9,700
Construction.................. 80,150 74,122 78,901
Land.......................... 11,624 3,091 10,341
Consumer....................... 49,253 28,649 22,625
Commercial business loans...... 65,046 46,436 41,222
_______ _______ _______
Total loans originated........ 384,450 241,405 235,864
Loans purchased:
One- to- four family........... -- -- 3,947
_______ _______ _______
Total loans originated
and purchased................. 384,450 241,405 239,811
(table continued on following page)
10
<PAGE>
<PAGE>
Year Ended December 31,
__________________________________________
1998 1997 1996
____ ____ ____
(In thousands)
Loans sold:
Whole loans sold.............. (120,761) (70,511) (71,235)
_______ ______ ______
Total loans sold.............. (120,761) (70,511) (71,235)
Mortgage loan principal
repayments.................... (115,563) (92,500) (81,711)
Other loan
principal repayments.......... (95,080) (70,388) (50,101)
Increase (decrease)
in other items, net........... (22,410) 3,975 5,457
______ ______ ______
Net increase (decrease) in
loans, net.................... $30,636 $11,981 $42,221
======= ======= =======
Loan Commitments and Letters of Credit. The Bank issues commitments for
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 45 days from approval, depending on the type of transaction.
At December 31, 1998, the Bank had no loan commitments (excluding undisbursed
portions of interim construction loans of $52.1 million) and unused lines of
credit of $30.6 million. See Note 16 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit or performance bonds in favor of entities, usually
municipalities, for whom the Bank's borrowers are performing work or other
services. At December 31, 1998, the Bank had an outstanding standby letter of
credit of $7.2 million that was issued primarily to municipalities as
performance bonds. See Note 16 of Notes to the Consolidated Financial
Statements contained in the Annual Report.
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modification, late
payments and for miscellaneous service related to its loan. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accreted and amortized in the same manner. The Bank
recognized $1.2 million, $1.1 million and $1.2 million of deferred loan fees
during the years ended December 31, 1998, 1997 and 1996, respectively, in
connection with loan refinancings, payoffs, sales and ongoing amortization of
outstanding loans.
The Bank also earns fee income on loans serviced for others. Loan
servicing fees for the year ended December 31, 1998 and 1997 amounted to
$264,000 and $387,000, respectively. At December 31, 1998, the Bank serviced
loans for others totalling $124.9 million. See Note 5 of Notes to the
Consolidated Financial Statements contained in the Annual Report.
Nonperforming Assets and Delinquencies. When a borrowers fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts are generally made
ten days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either
through a notice or other means and the Bank will attempt to work out a
payment schedule. While the Bank generally prefers to work with borrowers to
resolve such problems, the Bank will institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
11
<PAGE>
<PAGE>
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with
the terms of the loan agreement, or when principal or interest is past due 90
days or more. Interest accrued but not collected at the date the loan is
placed on nonaccrual status is reversed against income in the current period.
Loans may be reinstated to accrual status when payments are under 90 days past
due and, in the opinion of management, collection of the remaining past due
balances can be reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated.
At December 31,
__________________________________________
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to- four family..........$ 74 $ 73 $ 9 $ 37 $204
Construction.................. -- 68 -- -- --
Commercial.................... -- -- -- -- 61
Consumer loans (automobile)..... 32 9 42 70 108
Other......................... 1 -- -- -- --
____ ____ ____ ____ ____
Total...................... 107 150 51 107 373
Accruing loans which
are contractually
past due 90 days or more....... 66 98 -- -- --
Total of nonaccrual and 90 days
past due loans................. 173 248 51 107 373
____ ____ ____ ____ ____
Real estate owned................ 80 -- -- -- 95
____ ____ ____ ____ ____
Total nonperforming assets...$253 $248 $ 51 $107 $468
==== ==== ==== ==== ====
Restructured loans...............$ -- $ -- $ -- $ -- $ 95
==== ==== ==== ==== ====
Nonaccrual and 90 days
or more past due loans
as a percentage of loans
receivable, net................0.07% 0.11% 0.02% 0.07% 0.22%
Nonaccrual and 90 days
or more past due loans as
a percentage of total assets...0.05% 0.09% 0.02% 0.05% 0.18%
Nonperforming assets as a
percentage of total assets.....0.07% 0.09% 0.02% 0.05% 0.22%
Interest income that would have been recorded for the year ended December
31, 1998 had nonaccruing loans been current in accordance with their original
terms would have amounted to $12,400. No interest was included in interest
income on such loans for the year ended December 31, 1998.
12
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<PAGE>
Real Estate Owned. See Note 1 of Notes to the Consolidated Financial
Statements contained in the Annual Report for a discussion of the accounting
treatment of real estate owned. At December 31, 1998, the Bank had one
property included in real estate owned which consisted of a $80,000 single
family house.
Restructured Loans. Under GAAP, the Bank is required to account for
certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Bank for economic or legal
reasons related to the borrower's financial difficulties grants a concession
to the borrowers that the Bank would not otherwise consider. Debt
restructurings or loan modifications for borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans. The Bank did
not have any restructured loans at December 31, 1998.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Bank.
The aggregate amounts of the Bank's classified and special mention assets
were as follows:
At December 31,
___________________
1998 1997
_______ _______
(In thousands)
Loss..................................... $ -- $ --
Doubtful................................. 8 11
Substandard assets....................... 1,411 1,347
Special mention.......................... -- --
At December 31, 1998, substandard assets consisted of one real estate
owned property totalling $80,000, 11 one- to- four family mortgage loans
totalling $644,000, 31 consumer loans totalling $359,000, and three commercial
loans totalling $328,000. Doubtful loans consisted of one consumer loan of
$8,000. See Note 5 to the Consolidated Financial Statements for further
discussion.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general
13
<PAGE>
<PAGE>
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. Specific valuation allowances are established to
absorb losses on loans for which full collectibility cannot be reasonably
assured. The amount of the allowance is based on the estimated value of the
collateral securing the loan and other analyses pertinent to each situation.
Generally, a provision for losses is charged against income quarterly to
maintain the allowances.
At December 31, 1998, the Bank had an allowance for loan losses of $3.2
million. Management believes that the amount maintained in the allowances at
December 31, 1998 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while the Bank believes it
has established its existing allowance for loan losses in accordance with
GAAP, there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as
a result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect the Bank's financial condition
and results of operations.
14
<PAGE>
<PAGE>
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated.
Year Ended December 31,
_____________________________________________
1998 1997 1996 1995 1994
______ ______ ______ ______ ______
(Dollars in thousands)
Allowance at
beginning of period........ $2,804 $2,123 $1,997 $1,776 $1,681
Provision for loan losses... 452 700 120 80 113
Recoveries:
Mortgage loans:
One- to- four family...... -- -- 14 8 8
Multi-family.............. -- -- -- 68 26
Commercial................ -- -- 1 101 7
Construction.............. -- -- -- 3 --
Consumer loans:
Automobiles............... 8 23 -- -- --
Unsecured................. -- 5 191 -- --
Other..................... 21 1 12 12 17
Commercial business loans.. -- 1 -- -- 1
______ ______ ______ ______ ______
Total recoveries......... 29 30 218 192 59
Charge-offs:
Mortgage loans:
One- to- four family...... -- -- 10 -- 54
Construction.............. -- -- -- 6 --
Consumer loans:
Home equity lines of
credit.................. -- -- -- -- --
Automobile................ 16 40 -- 4 --
Credit card............... 5 1 -- -- --
Unsecured................. -- 196 -- --
Other..................... 33 5 6 34 23
Commercial business loans.. -- 3 -- 7 --
______ ______ ______ ______ ______
Total charge-offs........ 54 49 212 51 77
______ ______ ______ ______ ______
Net recoveries
(charge-offs).......... (25) (19) 6 141 (18)
______ ______ ______ ______ ______
Allowance at
end of period.......... $3,231 $2,804 $2,123 $1,997 $1,776
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of total loans
outstanding at the end
of the period.............. 1.06% 1.11% 0.87% 1.00% 0.93%
Net (charge-offs) recoveries
as a percentage of average
loans outstanding
during the period.......... (0.01)% (0.01)% --% 0.09% (0.01)%
Allowance for loan losses
as a percentage of
nonperforming loans at
end of period ............. 3,019.63% 1,130.65% 4,162.75% 1,866.36% 476.14%
15
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<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category at
the dates indicated. Management believes that the allowance can be allocated by category only on an
approximate basis. The allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in any other category.
At December 31,
_________________________________________________________________________________
1998 1997 1996 1995 1994
_______________ _______________ ______________ _______________ _______________
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in in in in in
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
______ _____ ______ _____ ______ _____ ______ _____ ______ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-
four family........ $ 378 24.8% $ 415 32.9% $ 122 33.1% $ 108 36.4% $ 124 43.5%
Multi-family....... 6 0.4 20 6.5 4 1.2 3 0.9 3 1.2
Commercial......... 788 17.2 595 15.8 301 2.3 221 11.1 168 8.8
Construction....... 492 27.9 367 21.7 245 24.9 148 23.9 190 21.1
Land............... 231 5.1 255 6.8 188 7.7 138 6.8 100 5.3
Consumer loans:
Home equity
lines of credit... 57 1.2 42 1.1 25 0.8 9 0.5 2 0.1
Automobile......... 102 2.2 75 2.0 46 1.5 27 1.4 21 1.1
Credit cards....... 6 0.1 3 0.1 -- -- -- -- -- --
Loans secured by
deposit accounts.. -- -- -- -- -- -- 1 -- 1 0.2
Unsecured.......... 17 0.4 22 0.6 22 0.7 20 1.0 20 1.1
Other secured...... 453 10.8 358 9.5 288 9.4 209 10.6 209 11.6
Commercial
business loans..... 338 9.9 338 9.0 259 8.4 148 7.4 148 6.0
Unallocated......... 363 N/A 314 N/A 623 N/A 965 N/A 790 N/A
______ _____ ______ _____ ______ _____ _____ _____ ______ _____
Total allowance
for loan losses. $3,231 100.0% $2,804 100.0% $2,123 100.0% $1,997 100.0% $1,776 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
16
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<PAGE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Cincinnati, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, the Bank may also invest a portion of its assets in commercial
paper and corporate debt securities. Savings institutions like the Bank are
also required to maintain an investment in FHLB stock. The Bank is required
under federal regulations to maintain a minimum amount of liquid assets. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," contained in
the Annual Report.
The Bank purchases investment securities with excess liquidity arising
when investable funds exceed loan demand. The Bank's investment securities
purchases generally have been limited to U.S. Government and agency securities
with contractual maturities of between one and five years.
The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposits,
marketable corporate debt obligations, mortgage-backed securities. The Bank's
investment policy does not permit hedging activities or the purchase of high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the
interest rate, yield, settlement date and maturity of the investment, the
Bank's liquidity position, and anticipated cash needs and sources (which in
turn include outstanding commitments, upcoming maturities, estimated deposits
and anticipated loan amortization and repayments). The effect that the
proposed investment would have on the Bank's credit and interest rate risk and
risk-based capital is also considered.
The following table sets forth the amortized cost and fair value of the
Bank's debt and mortgage-based and related securities, by accounting
classification and by type of security, at the dates indicated.
At December 31,
__________________________________________________________
1998 1997 1996
__________________ _________________ ___________________
Percent Percent Percent
Amortized of Amortized of Amortized of
Cost(1) Total Cost(1) Total Cost(1) Total
_________ _____ _________ _____ _________ _____
(In thousands)
Held to Maturity:
Debt Securities:
U.S. Treasury
obligations.........$ -- --% $ 1,000 6.8% $ 7,005 65.82%
U.S. Government
agency obligations.. -- -- 700 4.76 700 6.58
Mortgage-backed
securities.......... 959 1.95 1,301 8.84 1,419 13.33
FHLB stock............ 1,751 3.56 1,631 11.09 1,519 14.27
_______ ____ _______ _____ _______ ______
Total held to
maturity
securities.......... 2,710 5.51 4,632 31.49 10,643 100.00
_______ ____ _______ _____ _______ ______
Available
for Sale:
Debt Securities:
U.S. Treasury
obligations........ -- -- 3,039 20.66 -- --
U.S. Government
agency obligations. 46,505 94.49 7,038 47.85 -- --
_______ ______ _______ ______ _______ ______
Total available
for sale
securities....... 46,505 94.49 10,077 68.51 -- --
_______ ______ _______ ______ _______ ______
Total portfolio...... $49,215 100.00% $14,709 100.00% $10,643 100.00%
======= ====== ======= ====== ======= ======
(footnotes on following page)
17
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<PAGE>
________
(1) The market value of the investment portfolio amounted to $49.3 million,
$14.7 million and $10.6 million at December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the market value of the principal
components of the Bank's investment securities portfolio was as
follows: U.S. Government securities, $46.5 million; mortgage-backed
securities, $963,000; and FHLB, $1.8 million.
The following table sets forth the maturities and weighted average yields
of the debt and mortgage-backed securities in the Bank's investment securities
portfolio at December 31, 1998.
Less Than One to Over Five to Over Ten
One Year Five Years Ten years Years
_____________ _____________ _____________ _____________
Amount Yield Amount Yield Amount Yield Amount Yield
______ _____ ______ _____ ______ _____ ______ _____
(Dollars in thousands)
Held to Maturity:
Debt Securities:
U.S. Government
agency
obligations.......$ -- --% $ -- --% $ -- --% $ -- --%
Mortgage-backed
securities........ 23 6.95 120 6.95 202 6.96 614 6.98
FHLB stock......... 316 7.14 1,435 7.14 -- -- -- --
_______ ____ ______ ____ ____ ____ ____ ____
Total held
to maturity
securities........ 339 7.13 1,555 7.13 202 6.96 614 6.98
_______ ____ ______ ____ ____ ____ ____ ____
Available for Sale:
Debt Securities:
U.S. Government
agency
obligations...... 46,505 5.33 -- -- -- -- -- --
_______ ____ ______ ____ ____ ____ ____ ____
Total available
-for-sale
securities....... 46,505 5.33 -- -- -- -- -- --
_______ ____ ______ ____ ____ ____ ____ ____
Total portfolio.... $46,844 5.34% $1,555 7.13% $202 6.96% $614 6.98%
======= ==== ====== ==== ==== ==== ==== ====
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings from the FHLB-Cincinnati may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. At December 31, 1998, the Bank had no other borrowing arrangements.
Deposit Accounts. Most of the Bank's depositors reside in Tennessee.
The Bank's deposit products include a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts,
regular passbook savings, statement savings accounts and term certificate
accounts. Deposit account terms vary with the principal difference being the
minimum balance deposit, early withdrawal penalties and the interest rate.
The Bank reviews its deposit mix and pricing weekly. The Bank does not
utilize brokered deposits, nor has it aggressively sought jumbo certificates
of deposit.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest deposit rates but a competitive rate. The Bank determines the rates
paid based
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on a number of conditions, including rates paid by competitors, rates on U.S.
Treasury securities, rates offered on various FHLB-Cincinnati lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at December 31, 1998.
Weighted
Average Percentage
Interest Original Minimum of Total
Rate Term Category Amount Balance Deposits
____ ____ ________ ______ _______ ________
(In thousands)
1.00% -- NOW Accounts $1,000 $35,628 15.70%
1.72 -- Savings Accounts 100 13,591 5.99
4.06 -- Money Market Accounts 5,000 52,466 23.12
Certificates of Deposit
_______________________
3.21 32 to 89 Days Fixed-term, Fixed Rate 1,000 154 0.07
4.02 90 to 181 Days Fixed-term, Fixed Rate 1,000 1,158 0.51
4.73 182 to 364 Days Fixed-term, Fixed Rate 1,000 23,729 10.46
5.31 12 Months Fixed-term, Adjustable
Rate 1,000 1,800 0.79
4.76 18 Months Floating Rate IRA 250 465 0.20
5.21 12 to 18 Months Fixed-term, Fixed Rate 1,000 32,916 14.50
5.30 18 to 23 Months Fixed-term, Fixed Rate 1,000 704 0.30
5.11 18 Months Fixed Rate IRA 250 8,125 3.58
7.57 21 Months Fixed-term, Fixed Rate 1,000 4 --
5.46 24 to 35 Months Fixed-term, Fixed Rate 1,000 9,463 4.17
5.43 36 to 47 Months Fixed-term, Fixed Rate 1,000 1,511 0.67
5.46 48 to 59 Months Fixed-term, Fixed Rate 1,000 127 0.06
5.73 60+ Months Fixed-term, Fixed Rate 1,000 12,497 5.51
5.57 2 Years Fixed-term, Adjustable
Rate 1,000 5,151 2.27
5.57 3 to 60 Months Fixed-term, Fixed Rate 100,000 27,455 12.10
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The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of December 31, 1998. Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.
Maturity Period Amount
_______________ ______
(In thousands)
Three months or less....................... $ 5,423
Over three through six months.............. 10,512
Over six through twelve months............. 8,086
Over twelve months......................... 3,434
_______
Total.................................. $27,455
=======
<PAGE>
<TABLE>
Deposit Flow
The following table sets forth the balances of savings deposits in the various types of savings
accounts offered by the Bank at the dates indicated.
At December 31,
________________________________________________________________________________________
1998 1997 1996
____________________________ ____________________________ ____________________________
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
______ _____ __________ ______ _____ __________ ______ _____ __________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-
interest-
bearing........$ 39,088 14.69% $13,237 $ 25,851 10.41% $ 6,007 $ 19,844 9.25% $ (31)
NOW checking.... 35,628 13.39 4,075 31,553 12.71 3,817 27,736 12.93 3,410
Passbook
savings
accounts....... 13,591 5.11 (1,648) 15,239 6.14 (567) 15,806 7.37 (1,422)
Money market
deposit........ 52,466 19.72 9,723 42,743 17.22 14,244 28,499 13.28 8,054
Fixed-rate
certificates
which mature
in the year
ending:
Within 1 year. 99,565 37.43 (9,916) 109,481 44.10 17,377 92,104 42.93 4,453
After 1 year,
but within
2 years..... 15,475 5.82 (1,063) 16,538 6.66 (5,948) 22,486 10.48 8,654
After 2 years,
but within
5 years..... 10,219 3.84 3,357 6,862 2.76 (1,192) 8,054 3.75 (5,290)
Thereafter... -- -- -- -- -- (4) 4 0.01 (29)
________ _____ _______ ________ ______ _______ ________ ______ _______
Total..... $266,032 100.0% $17,765 $248,267 100.00% $33,734 $214,533 100.00% $17,799
======== ===== ======= ======== ====== ======= ======== ====== =======
</TABLE>
Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Bank categorized by rates at the dates indicated.
At December 31,
________________________________________
1998 1997 1996
____ ____ ____
(Dollars in thousands)
0.00 - 1.99%...... $ 202 $ -- $ 673
2.00 - 3.99%...... 862 65 93
4.00 - 4.99%...... 31,101 3,097 28,995
5.00 - 5.99%...... 71,039 86,058 59,373
6.00 - 6.99%...... 21,724 43,305 32,937
7.00% and over.... 331 356 578
________ ________ ________
Total............. $125,259 $132,881 $122,649
======== ======== ========
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Time Deposits by Maturities. The following table sets forth the amount
of time deposits in the Bank categorized by maturities at December 31, 1998.
Amount Due
___________________________________________________
After After
One to Two to Three
Less Than Two Three to Four After
One Year Years Years Years 4 Years Total
________ _____ _____ _____ _______ _____
(Dollars in thousands)
0.00 - 1.99%....$ 202 $ -- $ -- $ -- $ -- $ 202
2.00 - 3.99%.... 862 -- -- -- -- 862
4.00 - 4.99%.... 28,632 2,083 116 13 257 31,101
5.00 - 5.99%.... 56,661 10,026 1,244 1,069 2,039 71,039
6.00 - 6.99%.... 13,004 3,239 145 2,071 3,265 21,724
7.00% and over.. 204 127 -- -- -- 331
_______ ________ ________ ________ ________ ________
Total.......... $99,565 $ 15,475 $ 1,505 $ 3,153 $ 5,561 $125,259
======= ======== ======== ======== ======== ========
Deposit Activity. The following table set forth the savings activity of
the Bank for the periods indicated.
Year Ended December 31,
_________________________________________
1998 1997 1996
____ ____ ____
(In thousands)
Beginning balance.............. $248,267 $214,533 $196,734
________ ________ ________
Net deposits (withdrawals)
before interest credited..... 14,075 30,832 15,025
Interest credited.............. 3,690 2,902 2,774
________ ________ ________
Net increase (decrease)
in deposits................... 17,765 33,734 17,799
________ ________ ________
Ending balance................. $266,032 $248,267 $214,533
======== ======== ========
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business
purposes. The Bank has the ability to use advances from the FHLB-Cincinnati
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Cincinnati functions as a central reserve bank
providing credit for savings associations and certain other member financial
institutions. As a member of the FHLB-Cincinnati, the Bank is required to own
capital stock in the FHLB-Cincinnati and is authorized to apply for advances
on the security of such stock and certain of its mortgage loans and other
assets (principally securities that are obligations of, or guaranteed by, the
U.S. Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At December 31, 1998, the Bank did not have any advances
outstanding from the FHLB-Cincinnati.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
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At or For the
Year Ended December 31,
___________________________
1998 1997 1996
____ ____ ____
(Dollars in thousands)
Maximum amount of FHLB advance
outstanding at any month end..........$ -- $ -- $5,000
Approximate average FHLB advance
outstanding........................... -- -- 5,000
Approximate weighted average rate paid
on FHLB advances....................... --% --% 5.67%
Trust Department
The OTS granted trust powers to the Bank on December 13, 1991. The Bank
is one of the few banks in the Bank's primary market area providing a broad
range of trust services. These services include acting as trustee under a
living trust, a Standby Trust or Testamentary Trust; acting as personal
representative; agency services, including custody accounts, agent for the
trustee, and agent for the personal representative; and trustee and agent
services for accounts subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). In addition to providing
fiduciary and investment advisory services, the Bank provides employee benefit
services, such as Self-Directed Individual Retirement Accounts ("IRAs"). At
December 31, 1998, trust assets under management totalled approximately $242.9
million.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Bank's relationship with its depositors and borrowers is also regulated to a
great extent, especially in such matters as the ownership of deposit accounts
and the form and content of the Bank's mortgage documents. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS and the SEC.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and
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responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a
member of the FHLB-Cincinnati, is required to acquire and hold shares of
capital stock in the FHLB-Cincinnati in an amount equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (i.e., borrowings) from the
FHLB-Cincinnati. The Bank is in compliance with this requirement with an
investment in FHLB-Cincinnati stock of 1.8 million at December 31, 1998.
Among other benefits, the FHLB-Cincinnati provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB- Cincinnati.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 20, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Bank, to recapitalize the SAIF. As a
result of the DIF Act and the special one-time assessment, the FDIC reduced
the assessment schedule for SAIF members, effective January 1, 1997, to a
range of 0% to 0.27%, with most institutions, including the Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ration in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for
the purpose of paying interests on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits are charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013%. Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur until the earlier of
December 31, 1999, or the date the BIF and SAIF are merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OTS.
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Management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations,
mortgage-backed securities and certain other investments) equal to a monthly
average of not less than a specified percentage (currently 4.0%) of its net
withdrawable accounts plusshort-term borrowings. Monetary penalties may be
imposed for failure to meet liquidity requirements.
Prompt Corrective Action. The FDIA requires each federal banking agency
to implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of
5.0% or more and is not subject to specified requirements to meet and maintain
a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio hat is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
The FDIA also provides that a federal banking agency may, after notice
and an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution
or an undercapitalized institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 5 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1998, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. Management is aware of no conditions relating
to these safety and soundness standards which would require submission of a
plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine
24
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out of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code. Under either test, such
assets primarily consist of residential housing related loans and investments.
At December 31, 1998, the Bank met the test and its QTL percentage was 75.76%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
Bank is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after
the failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order o comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation of Savings Associations -- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments
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such as cumulative perpetual preferred stock, perpetual subordinated debt and
mandatory convertible subordinated debt, (ii) maturing capital instruments
such as subordinated debt, intermediate-term preferred stock and mandatory
convertible subordinated debt, subject to an amortization schedule, and (iii)
general valuation loan and lease loss allowances up to 1.25% of risk-weighted
assets.
The risk-based capital regulation assigns each balance sheet asset held
by savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off- balance sheet items are included
in risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital.
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The following table presents the Bank's regulatory capital compliance as
of December 31, 1998.
Percent of
Adjusted Total
Amount Assets(1)
______ _________
(Dollars in thousands)
Tangible capital........................... $72,272 21.16%
Minimum required tangible capital.......... 5,123 1.50
_______ _____
Excess..................................... $67,149 19.66%
======= =====
Core capital............................... $72,272 21.16%
Minimum required core capital(2)........... 10,245 3.00
_______ _____
Excess..................................... $62,027 18.16%
======= =====
Risk-based capital(3)...................... $75,503 24.12%
Minimum risk-based capital requirement..... 25,040 8.00
_______ _____
Excess..................................... $50,463 16.12%
======= =====
_________________
(1) Based on adjusted total assets of $341.5 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of
$313.0 million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements that would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a core capital ratio of 4% to 5% for all
other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the
27
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calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At December 31, 1998, the
Bank's limit on loans to one borrower was $29.5 million. At December 31,
1998, the Bank's largest aggregate amount of loans to one borrower was $9.0
million, all of which were performing according to their terms.
Activities of Associations and their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions. Any loan or extension of credit by the Bank to
an affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC- insured banks. The Bank has not been significantly
affected by the rules regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations generally
require that such loans be made on terms and conditions substantially the same
as those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Generally, Regulation O also places individual and
aggregate limits on the amount of loans the Bank may
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make to such persons based, in part, on the Bank's capital position, and
requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Community Reinvestment Act. Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community. The CRA does not establish specific lending
requirements or programs nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
meet all the credit needs of its delineated community. The CRA requires the
federal banking agencies, in connection with regulatory examinations, to
assess an institution's record of meeting the credit needs of its delineated
community and to take such record into account in evaluating regulatory
applications to establish a new branch office that will accept deposits,
relocate an existing office, or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received a "satisfactory" rating as a
result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under
the HOLA. If the Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
29
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Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 12, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, the Bank
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income
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method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Bank's federal income tax returns have not been audited
within the past five years.
State Taxation
Tennessee imposes franchise and excise taxes. The franchise tax ($0.25
per $100) is applied either to the Bank's apportioned net worth or the value
of property owned and used in Tennessee, whichever is greater, as of the close
of the Bank's fiscal year. The excise tax (6%) is applied to net earnings
derived from business done in Tennessee. Under Tennessee regulations, bad
debt deductions are deductible from the excise tax. There have not been any
audits of the Bank's state tax returns during the past five years.
Any cash dividends, in excess of a certain exempt amount, that are paid
with respect to the Common Stock to a shareholder (including a partnership and
certain other entities) who is a resident of the State of Tennessee will be
subject to the Tennessee income tax which is levied at a rate of six percent.
Any distribution by a corporation from earnings according to percentage
ownership is considered a dividend, and the definition of a dividend for
Tennessee income tax purposes may not be the same as the definition of a
dividend for federal income tax purposes. A corporate distribution may be
treated as a dividend for Tennessee tax purposes if it is made from funds that
exceed the corporation's earned surplus and profits under certain
circumstances.
Competition
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
has historically come from commercial banks, credit unions, other thrifts
operating in its market area, and other financial institutions such as
brokerage firms and insurance companies. As of December 31, 1998, there were
11 commercial banks and no other thrifts operating in Rutherford and Bedford
Counties, Tennessee. Particularly in times of high interest rates, the Bank
has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes from commercial banks,
thrift institutions, credit unions and mortgage bankers. Such competition for
deposits and the origination of loans may limit the Bank's growth in the
future.
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. As of December 31, 1998, the Bank had no service
corporation subsidiaries.
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Personnel
As of December 31, 1998, the Bank had 145 full-time employees and 47
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees is
good.
Item 2. Properties
___________________
The following table sets forth certain information regarding the Bank's
offices at December 31, 1998, all of which are owned except as noted.
Year Approximate
Location Opened Square Footage Deposits
________ ______ ______________ __________
Main Office: (In
thousands)
114 W. College Street 1974 32,385 $175,624
Murfreesboro, Tennessee 37130
Branch Offices:
1745 Memorial Boulevard 1984 1,925 8,841
Murfreesboro, Tennessee 37129
1645 N.W. Broad Street 1995 1,500 8,633
Murfreesboro, Tennessee 37130
123 Cason Lane (1) 1997 1,967 16,459
Murfreesboro, Tennessee 37130
604 N. Main Street 1958 1,500 18,152
Shelbyville, Tennessee 37160
269 S. Lowry Street 1972 3,898 27,935
Smyrna, Tennessee 37167
Hazelwood Drive and Nashville Highway 1997 1,100 648
Smyrna, Tennessee 37167
Almaville Road and
Interstate 24 East (2) 1997 935 261
Smyrna, Tennessee 37167
2604 South Church Street 1998 2,470 1,505
Murfreesboro, TN 37130
South East Broad 1997 2,038 7,974
2035 SE Broad Street
Murfreesboro, TN 37130
(table continued on following page)
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Year Approximate
Location Opened Square Footage Deposits
________ ______ ______________ __________
(In
thousands)
Loan Production Office:
236 Public Square (3)
Franklin, Tennessee 37604 1985 1,200 --
Servicing Operations Building:
Ebby's Square Building (4) 1998 6,000 N/A
Suite 100
9255 Church Street
Murfreesboro, Tennessee 37130
____________
(1) The Bank relocated this office from 110 John R. Rice Boulevard,
Murfreesboro, Tennessee, effective June 16, 1997.
(2) The Bank closed this office in January 1999.
(3) Leased month-to-month.
(4) Lease expires in August 2001.
The Bank owns two commercial building lots, one of which is for future
branch office development. The other lot is located across the street from
the Bank's main office and will be used for an operations building. The Bank
has contracted the services of an architectural firm and is working on a
building design and the demolition of the current structure on the lot.
The Bank uses the services of an outside service bureau for its
significant data processing applications. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Year 2000 Considerations" contained in the Annual Report.
At December 31, 1998, the Bank had 17 proprietary automated teller machines.
At December 31, 1998, the net book value of the Bank's office properties and
the Bank's fixtures, furniture and equipment was $8.8 million.
Item 3. Legal Proceedings
__________________________
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties
in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
_________________________________________________________________________
Matters
________
The information contained under the section captioned "Common Stock
Information" is included in the Company's Annual Report and is incorporated
herein by reference.
Item 6. Selected Financial Data
_______________________________
The information contained under the section captioned "Selected
Consolidated Financial Information" is included in the Company's Annual Report
and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________________
Results of Operations
_____________________
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
included in the Company's Annual Report and is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
___________________________________________________________________
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Market Risk and Asset and Liability Management" is included in the Company's
Annual Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
____________________________________________________
The information contained under the section captioned "Consolidated
Financial Statements" is included in the Company's Annual Report and is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
_______________________________________________________________________
Financial Disclosure
____________________
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
____________________________________________________________
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Definitive Proxy Statement
for the 1999 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank.
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Executive Officers of the Company and the Bank
Age at Position
December _________________________________________________
Name 31, 1998 Company Bank
____ ________ _______ ____
William H.
Huddleston, III 69 Chairman of the Board Chairman of the Board
Gary Brown 56 Vice Chairman Vice Chairman
of the Board of the Board
Ed C. President and President and
Loughry, Jr. 56 Chief Executive Chief Executive
Officer Officer
Ronald F. Knight 48 Executive Vice President Executive Vice President
and Chief and Chief
Operating Officer Operating Officer
Hillard C. "Bud"
Gardner 50 Senior Vice President Senior Vice President
and Chief and Chief
Financial Officer Financial Officer
William S. Jones 39 Senior Vice President Senior Vice President and
Trust Officer/Investor
Relations
Ira B. Lewis, Jr. 52 Vice President/ Vice President/
CRA Compliance CRA Compliance
Officer and Secretary Officer and Secretary
R. Dale Floyd 48 -- Senior Vice President
M. Glenn Layne 44 -- Vice President
Joy B. Jobe 54 -- Vice President
Biographical Information
Set forth below is certain information regarding the executive officers
of the Company and the Bank. Unless otherwise stated, each executive officer
has held his current occupation for the last five years. There are no family
relationships among or between the executive officers.
William H. Huddleston, III is a Civil Engineer and has been a part-time
employee of Huddleston-Steele Engineering, Inc., an engineering company,
Murfreesboro, Tennessee, since 1994. Prior to that time, Mr. Huddleston was
President and Chief Executive Officer of Huddleston Engineering, Inc. from
1955 until 1993. Mr. Huddleston is former Chairman of the Public Building
Authority of Rutherford County and is a director of the Christy/Houston
Foundation.
Gary Brown is the owner and manager of Roscoe Brown, Inc., a heating and
air conditioning company, Murfreesboro, Tennessee. Mr. Brown is a member of
the Murfreesboro Water Sewer Department Board, the Electrical Examining Board,
Middle Tennessee State University Foundation Board, and the Rutherford County
Chamber of Commerce.
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Ed C. Loughry, Jr. joined the Bank in 1968 and has served as President
and Chief Executive Officer of the Bank since 1982. Mr. Loughry has served on
the Boards of Directors of the Rutherford County Chamber of Commerce, United
Way, Heart Fund, and FHLB of Cincinnati, and currently serves as a director of
the Tennessee Bankers Association, Rutherford County 20/20 and the
Murfreesboro Conference Center Authority. He was selected Business Person of
the Year in 1993 by the Chamber of Commerce.
Ronald F. Knight joined the Bank in 1972 and has served as Executive Vice
President and Chief Operating Officer since 1982. Mr. Knight serves as
Chairman of the Board of Directors of the Rutherford County Chamber of
Commerce, the Rutherford County Community Economic Development Board, the
Tennessee Housing Development Agency, and is a committee member of the United
Way and is co-founder of a local charity, "Christmas For The Children." Mr.
Knight has also served as a director of the Tennessee Bankers Association.
Hillard C. "Bud" Gardner joined the Bank in 1981 and has been Senior Vice
President and Chief Financial Officer since 1982. Mr. Gardner is a member of
the Tennessee Society of Certified Public Accountants, the Security for Public
Deposit Task Force, the American Institute of Certified Public Accountants and
the Optimist International.
William S. Jones joined the Bank in 1992 and has been Senior Vice
President since January 1997. Prior to that time, Mr. Jones was Vice
President/Senior Vice President and Trust Officer of the Bank. Mr. Jones is
an executive officer and a member of the Board of Trustees of the Middle
Tennessee State University Foundation and a member of the Board of Trustees of
the Middle Tennessee Medical Center Foundation.
Ira B. Lewis, Jr. joined the Bank in 1993 and has been Vice President/CRA
Compliance Officer and Secretary since January 1996. Before joining the Bank,
Mr. Lewis was a Field Examiner and Field Manager of the OTS's Nashville Area
Office, an affiliate office of the OTS Central Regional Office, Chicago,
Illinois.
R. Dale Floyd joined the Bank in September 1987 and has been Senior Vice
President since October 1988. As Senior Vice President, he supervises the
Bank's mortgage lending activities, including originations, construction and
land development lending and mortgage loan servicing. Mr. Floyd's civic
activitiesinclude participation in Leadership Rutherford, Habitat for
Humanity, StonesRiver Ducks Unlimited and Kids Castle Volunteers. Mr. Floyd
is also a member of the Affordable Housing Advisory Council of the City of
Murfreesboro.
M. Glenn Layne joined the Bank in August 1994 with over 17 years of
banking experience and has served as Vice President and Manager of Commercial
andConsumer Lending since that time. Before joining the Bank Mr. Layne served
as Vice President and Manager of a Commercial Lending Group with Sun Trust
Bank. Mr Layne is an active member of the Murfreesboro Downtown Lions Club
and the Belle Aire Baptist Church.
Joy B. Jobe joined the Bank in May 1995 with over 24 years of banking
experience and serves as Vice President of Retail Banking and Business
Development. Before joining the Bank Ms. Jobe was a Commercial Loan Officer,
Relationship Manager and Assistant Vice President with Sun Trust Bank. Ms.
Jobe is a member of the Rotary Club and the American Red Cross. Ms. Jobe also
participated in Leadership Rutherford.
Item 11. Executive Compensation
__________________________________
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
__________________________________________________________________________
(a) Security Ownership of Certain Beneficial Owners.
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The information contained under the section captioned "Security Ownership
of Certain Beneficial Owners and Management" is included in the Company's
Proxy Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security
Ownership of Certain Beneficial Owners and Management" and "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and are
incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
__________________________________________________________
The information contained under the section captioned "Proposal I --
Election of Directors Transactions with Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
__________________________________________________________________________
(a) Exhibits
3.1 Charter of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Ed C. Loughry, Jr.**
10.2 Employment Agreement with Ronald F. Knight**
10.3 Severance Agreement with Hillard C. Gardner**
10.4 Severance Agreement with Ira B. Lewis**
10.5 Severance Agreement with R. Dale Floyd**
10.6 Severance Agreement with M. Glenn Layne**
10.7 Severance Agreement with Joy B. Jobe**
10.8 Severance Agreement with William S. Jones**
10.9 Severance Agreement with David W. Hopper**
10.10 Cavalry Banking Key Personnel Severance Compensation
Plan**
10.11 Cavalry Banking Employee Stock Ownership Plan**
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Rayburn, Betts & Bates, P.C.
27 Financial Data Schedule
___________
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, as amended (333-40057).
** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
37
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange 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: March 29, 1999 By: /s/Ed C. Loughry, Jr.
_____________________________________
Ed C. Loughry, Jr.
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
__________ _____ ____
/s/Ed C. Loughry, Jr. Chief Executive Officer, March 29, 1999
_____________________________ President and Director
Ed C. Loughry, Jr. (Principal Executive Officer)
/s/Hillard C. "Bud" Gardner Senior Vice President and March 29, 1999
_____________________________ Chief Financial Officer
Hillard C. "Bud" Gardner (Principal Financial and
Accounting Officer)
/s/William H. Huddleston, III Chairman of the Board March 29, 1999
_____________________________
William H. Huddleston, III
/s/Gary Brown Vice Chairman of the March 29, 1999
_____________________________ Board
Gary Brown
/s/Ronald F. Knight Director, Executive March 29, 1999
_____________________________ Vice President and
Ronald F. Knight Chief Operating Officer
/s/Frank E. Crosslin, Jr. Director March 29, 1999
_____________________________
Frank E. Crosslin, Jr.
/s/Tim J. Durham Director March 29, 1999
_____________________________
Tim J. Durham
/s/Ed Elam Director March 29, 1999
_____________________________
Ed Elam
/s/James C. Cope Director March 29, 1999
_____________________________
James C. Cope
/s/Terry G. Haynes Director March 29, 1999
_____________________________
Terry G. Haynes
<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
1998
ANNUAL REPORT
TO SHAREHOLDERS
[Picture]
Community banking
at its best.
Cavalry
-------------
Bancorp, Inc.
<PAGE>
<PAGE>
TABLE OF CONTENTS
Business of the Corporation
1 Financial Highlights
2-3 Letter to Shareholders
4-9 Operations Review
10 Officers and Board of Directors
11-12 Selected Financial Data
13-27 Financial Review
28 Independent Auditors' Report
29-34 Consolidated Financial Statements
35-52 Notes to Consolidated Financial Statements
IBC Corporate Information
<PAGE>
<PAGE>
Business of the Corporation
Cavalry Bancorp, Inc. ("Company"), a Tennessee corporation, was organized
on November 5, 1997 for the purpose of becoming the holding company for
Cavalry Banking ("Bank") upon the Bank's conversion from a federally-chartered
mutual to a federally-chartered stock savings bank ("Conversion"). The
Conversion was completed on March 16, 1998 with the Company issuing 7,538,250
shares of common stock for $10.00 per share.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its
primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
the insurer of its deposits. The Bank's deposits have been federally-insured
since 1936 and are currently insured by the FDIC under the Savings Association
Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan
Bank ("FHLB") System since 1936.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds
to originate a variety of loans to individuals residing within its primary
market area, and to businesses owned and operated by individuals. The Bank
originates both adjustable rate mortgage ("ARM") loans and fixed-rate mortgage
loans. Generally, ARM loans are retained in the Bank's portfolio and long-
term fixed-rate mortgages are originated for sale in the secondary market. In
addition, the Bank actively originates construction and acquisition and
development loans. The Bank also originates commercial real estate,
commercial business, and consumer and other non-real estate loans. In
addition, the Bank provides a wide range of investment and trust services
through its trust department.
1929
Chartered as a Tennessee mutual building and loan association.
1936
Federal charter granted for Murfreesboro Federal Savings and Loan Association.
1977
Total assets increased to more than $100 million.
1984
Changed name from Murfreesboro Federal to Cavalry Banking.
1991
Adopted Federal Savings Bank charter.
1992
Began to offer investment management trust services.
1998
Completed the initial public offering of 7,538,250 shares of common
Stock raising $74,000,000 in net proceeds.
1998
Total assets increased to $365 million.
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
F I N A N C I A L
highlights
- ------------------------------------------------------------------------------
At December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Total assets $364,892 $282,129 $244,964 $223,882 $208,844
Loans, net 237,547 212,979 200,600 159,943 165,481
Deposits 266,032 248,267 214,533 196,734 180,283
Equity 95,181 30,447 27,250 24,436 21,236
Net income 5,697 3,202 2,814 3,201 2,458
Book value per share 13.29 N/A N/A N/A N/A
For the year ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
Return on average assets 1.66% 1.22% 1.20% 1.50% 1.17%
Total equity to assets ratio 26.08% 10.79% 11.12% 10.91% 10.17%
TOTAL ASSETS [graph]
($ IN MILLIONS)
94 - 209
95 - 224
96 - 245
97 - 282
98 - 365
LOANS RECEIVABLE, NET [graph]
($ IN MILLIONS)
94 - 165
95 - 160
96 - 201
97 - 213
98 - 238
NET INCOME [graph]
($ IN MILLIONS)
94 - 2.75
95 - 3.20
96 - 3.80
97 - 3.20
98 - 5.00
- ------------------------------------------------------------------------------
-one-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
TO OUR SHAREHOLDERS:
[PICTURE OF ED C. LOUGHRY, JR.,
PRESIDENT (LEFT) AND RONALD F. KNIGHT,
EXECUTIVE VICE PRESIDENT]
We are pleased to report to you the results of the past year in this our
first annual report as a public company. The year ended December 31, 1998, was
truly one of significant accomplishment. We are very appreciative of the
strong support demonstrated by the communities we serve, our employees and our
new shareholders.
On March 16, 1998, Cavalry Bancorp, Inc. (Nasdaq Symbol CAVB) completed
one of the most successful conversions from a mutual to a stock institution.
The Company's initial public offering of 7.5 million shares of common stock
raised approximately $74 million in net proceeds to the Company. The new
equity raised has been invested during the year and used to further our
long-term strategies.
This past year was a record year from a financial perspective. Net income
for 1998 increased $2.5 million to $5.7 million, or $0.83 per share, compared
with $3.2 million in 1997. Since there were no shares outstanding in 1997,
earnings per share is not relevant for 1997. The increase in net income was
primarily attributable to an increase in net interest income due to higher
average balances of interest-earning assets offset by increases in average
interest-bearing liabilities.
Net interest income after the provision for loan losses rose to $16.6
million from $12.0 million in 1997. Noninterest income for 1998 increased by
$1.5 million to $5.2 million from $3.7 million in 1997. This was primarily a
result of increased profits on the sale of loans and other operations
including trust and investment management services. Noninterest expense rose
to $12.5 million in 1998 from $10.5 million in 1997, primarily as a result of
increased personnel costs and other operating expenses.
As a result of our public offering and increased earnings for the year,
total shareholders' equity at December 31, 1998, increased $64.8 million to
$95.2 million and book value per share was $13.29. Our strong capital position
will allow us to continue to expand our lending and investment activities, to
diversify our operations, and to more effectively access the capital markets
in the future.
At December 31, 1998, total assets were $364.9 million, and annualized
return on assets increased to 1.66% from 1.22% in 1997. A return on assets of
1% has generally been considered an above average level for banks in our asset
size.
Total deposits at December 31, 1998, increased to $266.0 million and
total loans receivable increased $24.5 million to $237.5 million compared with
$213.0 million a year ago. Total loans originated in 1998 increased to $384.5
million from $241.4 million in 1997. We accomplished the increase
-two-
<PAGE>
<PAGE>
in loans while at the same time maintaining strict policy on underwriting. Our
overall loan portfolio is strong with our lending directed almost entirely to
customers in our primary markets. By following these policies, we are able to
minimize the risk inherent in loan growth and have avoided many of the credit
risk problems associated with other types of lending practices. Nonperforming
loans at December 31, 1998, were only .07% of total loans outstanding.
Our tenth office, located at 2604 South Church Street in Murfreesboro,
opened in December 1998. This new office is the largest of our branches. In
addition, we completed the expansion of our office located at 1745 Memorial
Boulevard in Murfreesboro. Both branches expand the service area and offer our
customers great convenience in meeting their banking needs.
In June 1998, the Board of Directors announced the first Cavalry Bancorp,
Inc. cash dividend. The dividend payment of $0.05 per share was paid to
shareholders in July. It is the Board's stated intention to pay regular
quarterly cash dividends to allow shareholders to directly participate in the
success the Company achieves.
While the Company has continued to effectively utilize its capital, The
Board of Directors approved a stock repurchase program to repurchase up to
376,913, or approximately 5% of the 7.5 million shares outstanding in October
1998. The Board believes that periodic repurchase of its shares in open market
transactions represents a sound long-term investment and a good use of
available capital. As of December 31, 1998, the Company had completed the
repurchase.
Much has been written lately about the challenges associated with the
Year 2000 date change. We have been diligently working to properly prepare for
this challenge. Since 1996, we have spent in excess of $1 million on equipment
and software upgrades and are well along in the testing and implementation
phase of our plan. We anticipate that all our computer systems will be Year
2000 compliant well in advance of the end of this year.
As we look toward the future, we believe the Company is well positioned
to achieve future growth. Our local knowledge and leading share in our primary
markets provide tremendous opportunity to utilize our expertise, expand our
financial products and services, and improve productivity by continuing to
invest in people and technology.
Our strategy is to continue to grow in a sound manner while at the same
time maintaining high credit quality, prudent underwriting standards and an
overall conservative approach to business. The strong economic activity in the
markets we serve provides an excellent opportunity to achieve these goals.
We also intend to continue to work hard to deliver increased long-term
value to our shareholders and maintain our Bauer's five-star rating for
superior performance. With a significant amount of ownership among directors,
executive management and employees, the Company truly thinks like
shareholders. By following a controlled expansion strategy, offering even
greater levels of satisfaction to our customers, providing our employees with
a challenging place to work and helping make the communities we serve better
places to live, we believe we can achieve our goals.
We appreciate the support and confidence our shareholders have placed in
us and thank our employees for all their efforts to make this past year such a
success. We are enthusiastic about the prospects for the future and in our
ability to continue to assist customers with their financial needs.
Sincerely,
/s/ Ed C. Loughry, Jr. /s/ Ronald F. Knight
Ed C. Loughry, Jr. Ronald F. Knight
President and Chief Executive Officer Executive Vice President
-three-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
[PICTURE OF JOHN & JO MORRIS WITH WENDY TOMPKINS]
"By getting to know us and our business, Cavalry Banking has been able to
provide us with solutions to our banking needs.
John Morris"
[picture] Rutherford County was first settled near the end of the
Revolutionary War as part of the new "Western Frontier" of the United States.
The county is remembered by its many historical sights.
-four-
<PAGE>
<PAGE>
Relationship
oriented
---------------------------------------------
[picture]
Bedford County enjoys a strong agricultural
Sector. The climate is ideal almost year
round and supports hay and silage
production, corn and small grains,
livestock and cotton.
Cavalry Banking's focus is on developing "total relationships" with its
customers who are primarily local individuals, small-to-medium businesses, and
professionals. Its primary markets are the counties of Rutherford, Bedford
and Williamson in Middle Tennessee. The Bank has six offices in Murfreesboro,
two offices in Smyrna, and one each in Shelbyville and Franklin.
The reason behind a clear focus on building local relationships is
simple: local bankers who are very familiar with their own markets can
operate more effectively than can bankers whose headquarters are elsewhere. A
community-oriented, "total relationship" approach to banking emphasizes
management involvement with customers and provides for faster decisions and
easier interaction with customers. Cavalry Banking has the flexibility to
make and implement timely decisions.
Cavalry Banking also has a strong commitment to making sure its employees
have the necessary resources to deliver services and meet the ever-changing
needs of customers. The Bank offers a broad array of services and financial
products to its customers, from traditional checking and savings products to
innovative lending and trust services. Cavalry Banking can meet all the
banking needs of its customers. This capability is, however, only part of the
commitment to provide "total relationship" banking for its customers.
Through the use of technology, Cavalry Banking employees are better able
to deliver needed information in a timely and accurate way which allows for
better, faster and easier service for customers. The success of the Bank is a
direct reflection of the quality of its employees, their expertise,
professionalism, and their genuine interest in developing a relationship with
the customer -- not just a transaction-approach to meeting a customer's total
financial needs.
-five-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
Convenient
locations
----------------------------------------------------------------------
[picture]
Endowed with a sound and
diversified local economy,
Rutherford County is home
to more than 150,000
people and 150 industries
While other financial institutions have been closing branch locations and
consolidating operations, Cavalry Banking has been steadily expanding the
number of its branch locations. Cavalry Banking has sought to bring more
banking directly to the neighborhoods where customers live and work. By being
close to its customers, Cavalry Banking is better able to meet their specific
needs.
In addition to the four new branch offices opened in Rutherford County in
1997, Cavalry Banking opened an office at 2604 South Church Street in
Murfreesboro and expanded its office located on Memorial Boulevard to
accommodate customer needs. All branches of Cavalry Banking offer services and
products that stress convenience.
During the past year, Cavalry Banking upgraded its PC banking service to
make it easier for customers to conduct their banking business on their own
schedule. The new service called Internet Banking (www.cavalrybanking.com)
provides faster response time, more reliable service and greater flexibility.
By using the world wide web, customers can access information about many of
Cavalry Banking's services, specific data concerning their accounts and even
make transactions on-line. It is another example of using technology to make
banking more convenient.
With Cavalry Banking's strong capital base, new ways are being developed
to leverage its position as the largest locally owned financial institution in
its markets. Additional branch locations and other opportunities to make
banking even more convenient are under consideration. Cavalry Banking's
strategic vision is to continue to do those things it does best and to
capitalize on opportunities as they present themselves. While Cavalry Banking
has had a remarkable history, the future appears full of opportunity to
further expand upon "Community Banking at its Best."
-six-
<PAGE>
<PAGE>
"Cavalry Banking's many convenient locations including several ATM locations
allow me to choose when I do my banking.
Jill Kelton"
[picture of Jill Kelton]
[picture] With an estimated 25% growth in population since the 1990 census,
Williamson and Rutherford Counties rank as two of the fastest growing counties
in the United States.
-seven-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
[picture Eddie Crosslin,
Crosslin
Supply Co. Inc.]
"I have been a long-standing customer of Cavalry banking and have been very
pleased with their friendliness and financial services they provide.
Eddie Crosslin"
Retail sales growth, another sign of the local economy's strength, has
averaged over 12% annually for the last three years in Rutherford County.
[picture]
-eight-
<PAGE>
<PAGE>
[picture] Murfreesboro is the center of the state of Tennessee and home of the
International Grand Championship Walking Horse Show held in August of each
year.
CUSTOMER
satisfaction
-------------------------------------------
Since its founding 70 years ago, Cavalry Banking has sought to meet not
only the financial needs of its customers, but also the needs of the local
communities it serves. Today the Bank is the largest real estate lender and
manages more trust assets than any other financial institution in Rutherford
County. Cavalry Banking is focused on providing a broad range of services to
existing customers in order to increase market share while at the same time
building new customer relationships.
Over the years the Bank has continually offered innovation in the
services and products it provides. An example of this innovation is the fact
that Cavalry Banking was the first local institution to offer a debit card. It
has developed a corporate culture to look for better ways to meet the needs of
customers and thereby increase their satisfaction.
In today's challenging financial services environment, quality employees
are a prerequisite to building total relationships with customers. Dedicated
employees provide the vital link in the successful delivery of financial
products and services. Cavalry Banking is indeed fortunate to have experienced
employees with in-depth knowledge of its markets and the financial services
available to enable the Bank to offer even greater satisfaction to customers.
Providing high levels of customer satisfaction is not the only way
Cavalry Banking is meeting local needs. Through the support of many civic,
charitable activities and worthy causes, Cavalry Banking is helping the
communities it serves achieve a better quality of life. One of the special
ways Cavalry Banking serves the community in Rutherford County is its
co-sponsorship of "Christmas for the Children." A series of three fund-raising
events provides funds directly to benefit children with special needs. This
past year, over $40,000 was raised for this cause.
-nine-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
OFFICERS AND BOARD OF DIRECTORS
[picture]
Board of Directors
FRONT ROW: ED C. LOUGHRY, JR, RONALD F. KNIGHT, JAMES C. COPE AND FRANK
CROSSLIN, JR. BACK ROW: GARY BROWN, TERRY G. HAYNES, W.H. HUDDLESTON, III, ED
ELAM AND TIM DURHAM
Cavalry Bancorp, Inc. Officers
Ed C. Loughry, Jr., President
Ronald F. Knight, Executive Vice President
William S. Jones, Senior Vice President
Hillard C. Gardner, Senior Vice President
Ira B. Lewis, Jr., Vice President
Cavalry Bancorp, Inc. Board of Directors
W. H. Huddleston, III, Chairman of the Board
Huddleston-Steele Engineering, Inc.
Ed C. Loughry, Jr., President Cavalry Banking
Ronald F. Knight, Executive Vice President Cavalry Banking
Gary Brown, Vice-Chairman of the Board Roscoe Brown, Inc.
James C. Cope, Murfree, Cope, Hudson & Scarlett
Frank Crosslin, Jr., Crosslin Supply Co., Inc.
Tim Durham, Durham Realty & Auction, Inc.
Ed Elam, Rutherford County Clerk
Terry G. Haynes, Haynes Bros. Lumber Co.
Cavalry Banking Corporate Officers
Ed C. Loughry, Jr., President
Ronald F. Knight, Executive Vice President
William S. Jones, Senior Vice President
Hillard C. Gardner, Senior Vice President
R. Dale Floyd, Senior Vice President
David W. Hopper, Senior Vice President
Libby L. Green, Vice President
Joy B. Jobe, Vice President
M. Glenn Layne, Vice President
Ira B. Lewis, Jr., Vice President
James O. Sweeney, III, Vice President
Joe W. Townsend, Vice President
David K. Bailiff, Assistant Vice President
Doug Cate, Assistant Vice President
Linda F. Eakes, Assistant Vice President
Gary E. Green, Assistant Vice President
James V. Gregory, Assistant Vice President
Peggy A. Hollandsworth, Assistant Vice President
Christopher L. Kelly, Assistant Vice President
Suzanne S. McClaran, Assistant Vice President
Joe G. Sadler, Assistant Vice President
Mary W. Schneider, Assistant Vice President
Rhonda P. Smith, Assistant Vice President
Roger D. White, Assistant Vice President
-ten-
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<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
SELECTED FINANCIAL DATA
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Company at the dates and
for the periods indicated.
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands)
FINANCIAL CONDITION DATA:
Total assets $364,892 $282,129 $244,964 $223,882 $208,844
Loans receivable, net 237,547 212,979 200,600 159,943 165,481
Loans held-for-sale 10,923 4,855 5,253 3,689 1,452
Investment securities held-
to-maturity - 1,700 7,705 35,550 19,898
Investment securities available-
for-sale 46,505 10,077 - - -
Mortgage-backed securities
held-to-maturity 959 1,301 1,419 1,541 1,665
Cash, federal funds sold and
overnight interest-bearing
deposits 53,188 37,658 19,519 13,935 11,978
Deposit accounts 266,032 248,267 214,533 196,734 180,283
Borrowings - - - - 5,000
Total equity 95,181 30,447 27,250 24,436 21,236
For the Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING DATA:
Interest income $ 26,596 $ 21,939 $ 19,584 $ 17,222 $ 15,394
Interest expense 9,594 9,289 8,268 7,696 6,299
----------------------------------------------
Net interest income 17,002 12,650 11,316 9,526 9,095
Provision for loan losses 452 700 120 80 113
----------------------------------------------
Net interest income after
provision for loan losses 16,550 11,950 11,196 9,446 8,982
----------------------------------------------
Gains from sale of loans 2,266 1,126 890 882 530
Other income 2,960 2,535 2,268 2,082 1,485
Other expenses 12,481 10,498 9,786 7,498 7,001
----------------------------------------------
Income before income taxes 9,295 5,113 4,568 4,912 3,996
Provision for income taxes
(benefit) 3,598 1,911 1,754 1,711 1,538
----------------------------------------------
Net income $ 5,697 $ 3,202 $ 2,814 $ 3,201 $ 2,458
==============================================
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
OTHER DATA:
Number of:
Real estate loans
outstanding 5,126 4,833 4,693 4,559 4,690
Deposit accounts 24,828 23,054 20,687 18,891 17,812
Full-service offices 10 9 7 7 6
-eleven-
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<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
SELECTED FINANCIAL DATA (CONTINUED)
KEY FINANCIAL RATIOS:
----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Performance Ratios:
Return on average assets(1) 1.66% 1.22% 1.20% 1.50% 1.17%
Return on average equity(2) 6.63 11.09 10.94 14.21 11.53
Interest rate spread(4) 4.01 4.55 4.48 4.14 4.11
Net interest margin(5) 5.29 5.21 5.15 4.78 4.59
Average interest-earning
assets to average interest-
bearing liabilities 142.81 117.16 117.96 116.64 115.31
Noninterest expense as a
percent of average
total assets 3.63 4.01 4.17 3.52 3.34
Efficiency ratio (6) 56.15 64.36 67.61 60.03 63.02
Dividend payout ratio (7) 18.07 N/A N/A N/A N/A
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of total loans, net 0.07 0.11 0.02 0.07 0.22
Nonperforming assets as a
percent of total assets 0.03 0.09 0.02 0.05 0.22
Allowance for losses as a
percent of total loans
receivable 1.06 1.11 0.87 1.00 0.93
Allowance for losses as a
percent of nonperforming
loans 3,019.63 1,130.65 4,162.75 1,866.36 476.14
Net charge-offs to average
outstanding loans 0.01 0.01 - 0.09 (0.01)
Capital Ratios:
Total equity-to-assets ratio 26.08 10.79 11.12 10.91 10.17
Average equity to average
assets(3) 25.01 11.04 10.97 10.58 10.17
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average total equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses divided by the sum of net interest income and other
income.
(7) Dividends per share divided by net income per share.
-twelve-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the
holding company for Cavalry Banking ("Cavalry Banking or the Bank"), a
federal savings bank with its main office located in Murfreesboro, Tennessee.
The Company was chartered to acquire the stock of Cavalry Banking in its
conversion from mutual to stock form. This conversion was completed in March
of 1998 with the Company issuing 7,538,250 shares of common stock for $10.00
per share.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds
to originate a variety of loans to individuals residing within its primary
market area, and to businesses owned and operated by such individuals. The
Bank originates one- to- four family mortgage loans, construction loans,
commercial real estate loans, consumer loans, commercial business loans, and
land acquisition and development loans. In addition, the Bank invests in U.S.
Government and federal agency obligations. The Bank continues to fund its
assets primarily with retail deposits, although FHLB-Cincinnati advances can
be used as an additional source of funds. The Bank also offers investment
management and trust services.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-
earning assets equal or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. The level of other
income and expenses also affects the Bank profitability. Other income, net,
includes income associated with the origination and sale of mortgage loans,
loan servicing fees, other deposit-related fees and trust fees. Other expenses
include compensation and benefits, occupancy and equipment expenses, deposit
premiums, data servicing expenses and other operating costs. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
Management of the Company views its operation as three distinct operating
segments. These three segments are the banking, mortgage banking and trust
services. The banking segment's profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolios and its cost of funds, which consists of
interest paid on deposits. The banking segment also depends on deposit and
other fee income. The mortgage banking segment originates loans for sale in
the secondary market and services residential mortgage loans for other
investors. These loans are sold either with or without the rights to service
these loans. The mortgage banking segment relies on the net gains on the sale
of these loans for its profitability. Other fees related to secondary
marketing activities also include any pricing concessions that may be offered,
as well as mortgage servicing rights. Servicing rights permit the collection
of fees for gathering and processing monthly payments for the owner of the
mortgage loans. The trust segment relies on the fees collected for services
related to a line of investment and trust products. These products include a
line of investment management accounts, personal trusts, employee benefits,
custodial and corporate trust services.
The consolidated financial statements and financial data include the
accounts of the Company and the Bank. Since the Company was inactive from
incorporation through March 16, 1998, the information contained in the
financial statements and financial data prior to that date relates to the Bank
and its subsidiaries.
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Consolidated total assets were $364.9 million at December 31, 1998 and
$282.1 million at December 31, 1997 an increase of $82.8 million or 29.4%.
This growth resulted from an increase in the loan and investment portfolio
funded by increases in deposits and shareholder's equity.
Loans receivable net, were $237.5 million at December 31, 1998 compared
to $213.0 million at December 31, 1997, an 11.5% increase. A substantial
portion of the loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market areas. In addition,
between December 31, 1997 and December 31, 1998 consumer, commercial and
construction loans increased as the Bank emphasized the origination of loans
with shorter maturities for asset and liability management purposes.
Loans held-for-sale were $10.9 million at December 31, 1998 compared to
$4.9 million at December 31, 1997. The increase resulted primarily from
increased lending activity and timing differences in the funding of loan
sales.
Cash and cash equivalents increased $15.5 million or 41.1% from $37.7
million at December 31, 1997 to $53.2 million at December 31, 1998. The
increase primarily reflects the increase in deposits and shareholder's equity
resulting from the $67.8 million in conversion proceeds temporarily invested
in short term assets.
There were no investment securities classified as held to maturity at
December 31, 1998 compared to $1.7 million at December 31, 1997. This was a
result of the maturity of such securities.
Office properties and equipment, net, were $8.8 million at December 31,
1998 compared to $8.1 million at December 31, 1997. This increase was
primarily the result of the construction of a new branch on South Church
-thirteen-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Street in Murfreesboro, Tennessee. Construction was completed in December of
1998 and the office was open for business that same month.
Deposit accounts totaled $266.0 million and $248.3 million at December
31, 1998 and December 31, 1997, respectively. The increase was a result of a
continuing effort to aggressively solicit and promote transaction accounts.
Total equity was $95.2 million at December 31, 1998 and $30.4 million at
December 31, 1997, respectively. This increase was primarily the result of
$67.8 million received in the public stock offering completed in March 1998
and increased earnings for the year ended December 31, 1998.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income was $5.7 million for the year ended December 31,
1998 compared to $3.2 million for the year ended December 31, 1997, a 78.1%
increase. This increase was a result of increases in net interest income, net
gain on sale of loans available for sale, and other income. Increased
operating expenses and increased provisions for income taxes offset these
positive increases.
Net Interest Income. Net interest income increased 33.9% from $12.7
million for the year ended December 31, 1997 to $17.0 million for the same
period in 1998. Total interest income increased 21.5% from $21.9 million for
fiscal 1997 to $26.6 million for fiscal 1998. This increase was a result of an
increase in average earning assets from $243.0 million for fiscal 1997 to
$321.5 million for fiscal 1998. This increase in volume was offset by a
decrease in average yield from 9.03% for fiscal 1997 to 8.27% for fiscal 1998.
The increase in average earning assets was attributable to the funds raised in
the initial public offering and an increase in average deposits during the
year ended December 31,1998. Average loans receivable increased from $214.0
million for fiscal 1997 to $232.7 million for fiscal 1998. This increase in
volume was offset by a decline in average yield from 9.48% for fiscal 1997 to
9.37% for fiscal 1998. Average mortgage-backed securities declined from $1.4
million for fiscal 1997 to $1.1 million for fiscal 1998. The average yield
also declined from 6.78% for fiscal 1997 to 6.21% for fiscal 1998. Average
investment securities increased from $8.4 million for fiscal 1997 to $33.6
million for fiscal 1998. This volume increase was a result of a portion of the
proceeds of the conversion being initially being invested in these
instruments. This increase in volume was offset by a decline in average yield
from 5.89% for fiscal 1997 to 5.41% for fiscal 1998. Federal funds sold and
other interest bearing deposits increased from $17.7 million for fiscal 1997
to $52.4 million for fiscal 1998. The average yield declined slightly from
5.38% for fiscal 1997 to 5.33% for fiscal 1998. Interest expense increased
3.2% from $9.3 million for fiscal 1997 to $9.6 million for fiscal 1998. This
increase was a result of increases in average deposits from $207.4 million for
fiscal 1997 to $225.1 million for fiscal 1998. The average cost of funds
declined from 4.48% for fiscal 1997 to 4.26% for fiscal 1998. The decrease was
primarily a result of lower costs for passbook accounts, NOW accounts, and
money market accounts. The cost of certificates also declined slightly from
5.48% for fiscal 1997 to 5.47% for fiscal 1998. The interest rate spread
decreased from 4.55% for fiscal 1997 to 4.01% for fiscal 1998. This decrease
was a result of lower interest rates and the receipt of additional cash from
the mutual to stock conversion being invested in shorter-term investment
securities and interest-bearing deposits.
Provision for Loan Losses. Provisions 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 losses based on
concentrations, trends in historical loss experience, specific impaired loans
and economic conditions. In determining the adequacy of the allowance for loan
losses, management periodically reviews the loan portfolio and considers such
factors as delinquency status, past performance problems, historical loss
experience, adverse situations that may affect the ability of the borrowers to
repay, known and inherent risks in the portfolio, assessments of economic
conditions, regulatory policies, and the estimated value of underlying
collateral. The Bank's credit management systems have resulted in low loss
experience, however there can be no assurances that such experience will
continue. The allowance for loan losses is based principally on the risks
associated with the type of loans in the portfolio with greater emphasis
placed on higher risk assets. This requires a heavier weight being assigned to
internally identified problem assets, repossessed assets, and non-performing
assets that otherwise exhibit, in management's judgement, potential credit
weaknesses. The required level of allowances is then calculated based upon the
outstanding balances in each loan category and the risk weight assigned to
each category.
The provision for loan losses was $452,000, charge-offs were $54,000 and
recoveries were $29,000 for the year ended December 31, 1998 compared with a
provision of $700,000, charge-offs of $49,000 and recoveries of $30,000 for
the year ended December 31, 1997. The allowance for loan losses increased from
$2.8 million at December 31, 1997 to $3.2 million. However the percentage of
allowance for losses as a percent of gross loans outstanding decreased from
1.11% at December 31, 1997 to 1.06% at December 31, 1998. Nonaccrual loans
decreased from $150,000 at December 31,1997 to $107,000 at December 31,1998.
Total nonaccrual loans and loans 90 days or more past due decreased from
$248,000 at December 31,1997 to $173,000 at December 31,1998. Total
nonperforming assets increased from $248,000 at December 31,1997 to $253,000
at December 31,1998 as a result of $80,000 in real estate owned at December
31, 1998.
-fourteen-
<PAGE>
<PAGE>
During the year ended December 31, 1998 construction, consumer and
commercial loans continued to increase as well as the percentages of these
loans to the total portfolio. Although these types of loans are normally of
shorter maturity management feels that there is greater risk inherent in these
loans than the typical 1- to- 4 family home loan. Therefore management assigns
these types of loans a higher risk weighting in the analysis of the loan loss
reserve. Construction loans carry the risk of the contractor being able to
complete the construction within budget and on a timely basis. There is market
risk associated with speculative construction and development loans that the
project will sell to the public. Consumer loans by nature are dependent on the
ability and willingness of the borrower to pay the loan. These credits are
greatly influenced by the unemployment rate in an area, bankruptcy and other
changes in life status. Commercial loans are loans made to businesses to
either manufacture a product, sell a product, or provide a service. These
loans are also influenced by economic factors. Some of these factors include
the economic environment, the ability of the business to compete and generate
a profit and other similar types of risks. Since it is the intention of the
Bank to continue with this strategy the provision will continue to reflect the
added risk factors associated with this type of lending.
At December 31, 1998 and December 31, 1997 management believed the
provision for loan losses was adequate.
Noninterest Income. Noninterest income increased 40.5% from $3.7 million
for the year ended December 31, 1997 to $5.2 million for the year ended
December 31, 1998.
Mortgage Banking. In the mortgage banking segment, gain on sale of loans
increased from $1.1 million for fiscal 1997 to $2.3 million for fiscal 1998.
This increase was a result of increased volume of loan sales for the year
ended December 31, 1998 compared to the year ended December 31, 1997.
Offsetting these increases, servicing income declined from $506,000 for fiscal
1997 to $374,000 for fiscal 1998. This decline was primarily a result of
increased amortization of the originated servicing asset.
Banking. In the banking segment deposit servicing fees and charges
increased from $1.2 million for fiscal 1997 to $1.5 million for fiscal 1998.
This increase was a result of increased transaction account volume and
increased deposit fees charged for services.
Trust. In the trust segment trust fees increased from $649,000 for
fiscal 1997 to $795,000 for fiscal 1998. This increase was a result of
increased assets under management due to market appreciation and new business
being generated.
Noninterest Expense. Noninterest expense increased 19.0% from $10.5
million for the year ended December 31, 1997 to $12.5 million for the year
ended December 31, 1998. This increase was primarily a result of increased
volume of loans, investments, and deposits, and the increased cost of being a
public company. Compensation, payroll taxes and fringe benefits increased from
$5.8 million for fiscal 1997 to $7.1 million for fiscal 1998. This increase
was a result of increased commission expense due to increased origination
volumes, increased compensation cost due to normal salary increases and
increased staffing due to volumes of business. Benefits increased primarily as
a result of the establishment of an Employee Stock Ownership Plan (ESOP). This
plan was instituted in place of the defined benefits pension plan which was
terminated in the year ended December 31, 1997. Occupancy expense increased
from $550,000 for fiscal 1997 to $759,000 for fiscal 1998. This increase was
primarily a result of the completion of the South Church Street branch and the
announced consolidation of the Almaville Road location with the Hazelwood
location in Smyrna, Tennessee during the fourth quarter of 1998. This
transaction resulted in the recognition of lease expense of $121,000.
Supplies, communications and other office expenses increased from $675,000 for
fiscal 1997 to $823,000 for fiscal 1998 primarily as a result of increased
loan production and increases in deposits. Equipment and service bureau
expense increased from $2.0 million for fiscal 1997 to $2.3 million for fiscal
1998 also as a result of increased volume. The net loss on the sale of office
properties was primarily the result of the closing of the Almaville Road
branch previously discussed.
Income Tax Expense. Income tax expense was $3.6 million for the year
ended December 31, 1998 compared to $1.9 million for the year ended December
31, 1997. This increase was a result of higher income before taxes for fiscal
1998. The effective tax rate for fiscal 1998 was 38.7% compared to 37.4 % for
fiscal 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Net Income. Net income was $3.2 million for the year ended December 31,
1997 compared to $2.8 million for the year ended December 31, 1996, a 14.3%
increase. This increase was a result of increases in net interest income, net
gain on sale of loans available for sale, and other income. These positive
increases were offset by increases in the provision for loan losses, increased
operating expenses and increased provision for income taxes.
Net Interest Income. Net interest income increased 12.4% from $11.3
million for the year ended December 31, 1996 to $12.7 million for the same
period in 1997. Total interest income increased 11.7% from $19.6 million for
the year ended December 31, 1996 to $21.9 million for the year ended December
31, 1997. This increase was a result of an increase in average earning assets
from $219.6 million for the year ended December 31, 1996 to $243.0 million for
the same period in 1997 a 10.7% increase. This increase in volume was
accompanied by a slight increase in average
-fifteen-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
yield from 8.92% for the year ended December 31, 1996 to 9.03% for the same
period in 1997. Average loans receivable increased from $186.4 million for the
year ended December 31, 1996 to $214.0 million for the same period in 1997
representing a 14.8% increase in volume. This increase was offset slightly by
a decline in average yield from 9.49% for the year ending December 31, 1996 to
9.48% for the year ending December 31, 1997. Average mortgage-backed
securities declined from $1.5 million in fiscal 1996 to $1.4 million for
fiscal 1997 offset by a slight increase in average yields from 6.75% for
fiscal 1996 to 6.78% for fiscal 1997. Average investment securities declined
from $21.9 million for fiscal1996 to $8.4 million for fiscal 1997. This
decline in volumes was attributed to investment securities maturing and the
proceeds being used for lending, operations, and other interest-bearing
deposits. This decline was partially offset by an increase in average yield
from 5.64% for fiscal 1996 to 5.89% for fiscal 1997. Average investments in
federal funds sold and other deposits increased from $8.3 million for the year
ending December 31, 1996 to $17.7 million for the same period in 1997. This
increase in volume was partially offset by a decline in average yield from
5.60% for 1996 to 5.38% for 1997. Interest expense increased 12.05% from $8.3
million for the year ended December 31, 1996 to $9.3 for the period ended
December 31, 1997. This increase was a result of increases in average deposits
from $185.5 million for the year ending December 31, 1996 to $207.4 million
for the same period in 1997. The average cost of funds increased from 4.44%
for the year ending December 31, 1996 to 4.48% for the same period in 1997 as
a result of higher certificate of deposit costs. Interest rate spread
increased from 4.48% for the year ended December 31, 1996 to 4.55% for the
year ended December 31, 1997 as a result of the increased yield on
interest-earning assets between December 31, 1996 and December 31, 1997
resulting primarily from increases in loans outstanding and decreases in
investments outstanding.
Provision for Loan Losses. The provision for loan losses was $700,000 for
the year ended December 31,1997 compared to $120,000 for the same period in
1996. The Bank believes that its operations more closely resembles those of a
traditional commercial bank than a traditional thrift institution. The Bank's
one- to- four family mortgage loan portfolio as a percent of the total loan
portfolio, has decreased from 42.2% at December 31, 1993 to 32.9% at December
31, 1997. Commercial mortgage loans have increased from 9.7% at December 31,
1993 to 15.8% at December 31, 1997. Construction loans as a percentage of the
total loan portfolio increased from 19.8% to 21.7% from December 31, 1993 to
December 31, 1997. Commercial business loans also have increased from 4.9% at
December 31, 1993 to 9.0% at December 31, 1997. Management deemed the
increased level in the provision for loan losses necessary in light of the
relative level of estimated losses inherent in the increased levels of higher
risk loans (construction, commercial real estate, land, commercial business
and consumer loans).
Noninterest Income. Noninterest income increased from $3.2 million for
the year ended December 31, 1996 to $3.7 million for the year ended December
31, 1997, primarily as a result of the increases in service charges, trust
fees, and net gains on sale of loans available for sale offset by declines in
servicing fees and other income.
Mortgage Banking. In the mortgage banking segment net gain on loans
available for sale increased from $890,000 in fiscal 1996 to $1.1 million in
fiscal 1997 as a result of more favorable market conditions, particularly in
the fourth quarter of fiscal 1997 and increased originated servicing asset.
These increases were partially offset by a decline in servicing income from
$548,000 in fiscal 1996 to $506,000 in fiscal 1997 as a result of increased
amortization of the originated servicing asset.
Banking. In the banking segment service charges and fees increased from
$973,000 for the year ended December 31, 1996 to $1.2 million for the year
ended December 31, 1997 as a result of increased income deposit account fees,
particularly on the increased number of transaction accounts.
Trust. In the trust segment fees increased from $483,000 for fiscal 1996
to $649,000 in fiscal 1997 as a result of increases in trust assets under
management.
Noninterest Expenses. Noninterest expenses were $10.5 million for the
year ended December 31, 1997 compared to $9.8 million for the same period in
fiscal 1996. Personnel expenses increased from $4.7 million for the year ended
December 31, 1996 to $5.8 million for the year ended December 31, 1997 as a
result of additional expenses associated with the termination of the defined
benefit plan (effective December 31, 1997), opening new branch offices and
increased loan and deposit activity. The branch openings and increased
activity resulted in increased staffing, higher commission and incentive
expenses, increased compensation, overtime and benefits. Occupancy expenses
increased from $493,000 for the year ended December 1996 to $550,000 for the
same period in 1997 primarily as a result of branch openings. This increased
activity also contributed to general increases in most other noninterest
expense categories in fiscal 1997 compared to fiscal 1996. These increases
were offset by a decline in federal deposit insurance premiums from $1.7
million for the year ended December 31, 1996 to $112,000 for the year ended
December 31, 1997. This decrease resulted primarily from the FDIC special
assessment on all SAIF-insured institutions to recapitalize the SAIF. The
Bank's assessment amounted to $1.2 million. Prior to the SAIF
recapitalization, the Bank's total deposit insurance amounted to 0.23% of
assessable deposits. Effective January 1, 1997 the rate decreased to 0.065% of
assessable deposits.
-sixteen-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Income Tax Expense. Income tax expense was $1.9 million for the year
ended December 31, 1997 compared to $1.8 million for the year ended December
31, 1996 as a result of higher income before taxes. The effective tax rate for
the year ended December 31, 1997 was 37.4% compared to 38.4% for the year
ended December 31, 1996.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are derived
by dividing income or expense by the average balances of assets or liabilities
respectively, for the periods presented. Average balances are derived from
daily balances for the years ended.<PAGE>
<TABLE>
Years ended December 31,
------------------------------------------------------------------------------------
- ---
1998 1997 1996
--------------------------- ---------------------------- -------------------------
- ---
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and
Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends
Cost
- ---------------------------------------------------------------------------------------------------------
- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable,
net(1) $232,715 $21,801 9.37% $214,020 $20,290 9.48% $186,393 $17,681
9.49%
Mortgage-backed
securities 1,111 69 6.21 1,371 93 6.78 1,497 101
6.75
Investment
securities 33,590 1,816 5.41 8,354 492 5.89 21,933 1,236
5.64
FHLB stock 1,675 120 7.16 1,559 112 7.18 1,454 102
7.02
Federal funds sold
and overnight
interest-bearing
deposits 52,378 2,790 5.33 17,704 952 5.38 8,293 464
5.60
Total interest- ------------------------------------------------------------------------------------
- -
earning assets 321,469 26,596 8.27 243,008 21,939 9.03 219,570 19,584
8.92
Non-interest-
earning assets 22,209 18,518 15,028
-------- -------- --------
Total assets 343,678 261,526 234,598
======== ======== ========
Interest-bearing
liabilities:
Passbook accounts 22,067 423 1.92 15,286 302 1.98 16,581 350
2.11
Money Market
accounts 46,377 1,924 4.15 35,250 1,475 4.18 25,851 1,090
4.22
NOW accounts 32,276 440 1.36 28,558 480 1.68 26,257 505
1.92
Certificates of
Deposits 124,386 6,807 5.47 128,330 7,032 5.48 116,828 6,287
5.38
------------------------------------------------------------------------------------
- -
Total deposits 225,106 9,594 4.26 207,424 9,289 4.48 185,517 8,232
4.44
------------------------------------------------------------------------------------
- -
FHLB advances - - - - - - 628 36
5.73
------------------------------------------------------------------------------------
- -
Total interest-
bearing liabili-
ties 225,106 9,594 4.26 207,424 9,289 4.48 186,145 8,268
4.44
Non-interest- ------- ------- --------
bearing liabili-
ties(2) 32,607 25,241 22,726
-------- -------- --------
Total liabilities 257,713 232,665 208,871
Equity 85,965 28,861 25,727
-------- -------- --------
Total liabilities
and equity $343,678 $261,526 $234,598
======== ======== ========
Net interest income $17,002 $12,650 $11,316
======= ======= =======
Interest rate spread 4.01% 4.55%
4.48%
====== ======
======
Net interest margin 5.29% 5.21%
5.15%
====== ======
======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 142.81% 117.16%
117.96%
====== ======
======
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
(2) Includes noninterest bearing deposits of $27.2 million, $21.3 million, and $18.0 million for the
years
ended December 31, 1998, 1997 and 1996, respectively.
-seventeen-
</TABLE>
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Yields Earned and Rates Paid
The following table sets forth for the periods and at the dates indicated
the weighted average yields earned on the Company's assets and the weighted
average interest rates paid on the Company's liabilities, together with the
interest rate spread and net interest margin on interest-earning assets.
At
December 31, Year Ended December 31,
------------ ---------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------
Weighted average yield on:
Loans receivable 8.45% 9.37% 9.48% 9.49%
Mortgage-backed securities 6.98 6.21 6.78 6.75
Investment securities 4.96 5.41 5.89 5.64
FHLB stock 7.14 7.16 7.18 7.02
Federal funds sold and
overnight interest-bearing
deposits 4.66 5.33 5.38 5.60
All interest-earning assets 7.69 8.27 9.03 8.92
Weighted average rate paid on:
Passbook savings accounts 1.72 1.92 1.98 2.11
NOW accounts 1.00 1.36 1.68 1.92
Money market accounts 4.06 4.15 4.18 4.22
Certificate accounts 5.27 5.47 5.48 5.38
FHLB advances - - - 5.73
All interest-bearing liabilities 4.11 4.26 4.48 4.44
Interest rate spread (spread
between weighted average rate on
all interest-earning assets and
all interest-bearing liabilities) 3.59 4.01 4.55 4.48
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) N/A 5.29 5.21 5.15
-eighteen-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Company. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes
in volume multiplied by prior rate): and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
The net change attributable to the combined impact of volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.<PAGE>
<TABLE>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1998 Compared to Year 1997 Compared to Year 1996 Compared to Year
Ended December 31, 1997 Ended December 31, 1996 Ended December 31, 1995
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due
to
-------------------------- -------------------------- ---------------------------
- --
Rate Volume Total Rate Volume Total Rate Volume Total
- ---------------------------------------------------------------------------------------------------------
- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $(261) $1,772 $1,511 $1,472 $1,137 $2,609 $(1,200) $3,981 $
2,781
Mortgage-backed
securities (6) (18) (24) - (8) (8) - (8)
(8)
Investments (162) 1,486 1,324 (974) 230 (744) 1,212 (1,484)
(272)
FHLB stock 0 8 8 2 8 10 2 7
9
Federal funds sold
and overnight
interest-bearing
deposits (27) 1,865 1,838 (461) 949 488 (366) 218
(148)
--------------------------------------------------------------------------------
- -
Total net change in
income on interest-
earning assets (456) 5,113 4,657 39 2,316 2,355 (352) 2,714
2,362
Interest-bearing
liabilities:
Passbook accounts (13) 134 121 (37) (12) (49) (15) (32)
(47)
NOW accounts (102) 62 (40) (98) 73 (25) 113 (72)
41
Money market
accounts (15) 465 450 (216) 601 385 74 335
409
Certificate accounts (10) (216) (226) 195 551 746 (229) 418
189
FHLB advances - - - - (36) (36) (20) -
(20)
--------------------------------------------------------------------------------
- -
Total net change
in expense on
interest-bearing
liabilities (140) 445 305 (156) 1,177 1,021 (77) 649
572
--------------------------------------------------------------------------------
- -
Net Change in
net interest income $(316) $4,668 $4,352 $ 195 $1,139 $1,334 $(275) $2,065
$1,790
=================================================================================
(1) Does not include interest on 90 days or more past due. Includes loans originated for sale.
</TABLE>
<PAGE>
Asset and Liability Management
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the OTS, the Bank receives a
report which measures interest rate risk by modeling the changes in NPV over a
variety of interest rate scenarios. The assets and liabilities at the parent
company level are not considered in the analysis. The exclusion of holding
company assets and liabilities does not have a significant effect on the
analysis of NPV sensitivity. This procedure for measuring interest rate risk
was developed by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature within a
specific time period). NVP is the present value of
-nineteen-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
expected cash flows from assets, liabilities and off-balance sheet contracts.
The calculation is intended to illustrate the change in NVP that will occur in
the event of an immediate change in interest rates of at least 200 basis
points with no effect given to any steps that management might take to counter
the effect of that interest rate movement.
The following table is provided by the OTS and sets forth the change in
the Bank's NPV at December 31, 1998, based on OTS assumptions, that would
occur in the event of an immediate change in interest rates, with no effect
given to any steps that management might take to counteract that change.
Changes Estimated Estimated Board
(In Basis Points) Change in Net Change in Net Approved
in Interest Rates Portfolio Value Portfolio Value Limits
- --------------------------------------------------------------------
(Dollars in Thousands) (Percentage) (Percent)
400 bp $ (5,868) (7)% (50)%
300 bp (3,930) (5) (30)
200 bp (2,255) (3) (20)
100 bp (919) (1) (10)
0 bp 0 0 0
(100) bp 565 1 (10)
(200) bp 758 1 (20)
(300) bp 1,706 2 (30)
(400) bp 3,075 4 (50)
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31,1998 would reduce the
Bank's NPV by approximately $2.3 million, or 3.0%.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
-twenty-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table presents the Company's interest sensitivity gap at
December 31, 1998.
After After
Within Six One to Three
Six Months to Three to Five Over
Months One Year Years Years Five Years Total
- ------------------------------------------------------------------------------
Interest-earning
assets:
Loans receivable,
net $ 52,376 $41,053 $42,145 $45,184 $67,712 $248,470
Mortgage-backed
securities 12 13 55 63 816 959
FHLB Stock 172 172 688 719 - 1,751
Investment
securities 31,469 15,012 24 - - 46,505
Federal funds
sold overnight
and other interest-
bearing deposits 41,078 - - - - 41,078
Total rate ---------------------------------------------------------
sensitive assets 125,107 56,250 42,912 45,966 68,528 338,763
=========================================================
Interest-bearing
liabilities:
Deposits:
NOW accounts 3,563 3,563 14,251 14,251 - 35,628
Passbook savings
accounts 1,359 1,359 5,437 5,437 - 13,592
Money market
deposit accounts 5,247 5,247 20,986 20,986 - 52,466
Certificates of
deposit 59,813 39,749 16,982 8,631 85 125,260
Total rate ---------------------------------------------------------
sensitive
liabilities 69,982 49,918 57,656 49,305 85 226,946
=========================================================
Excess (deficiency)
of interest
sensitivity
assets over
interest
sensitivity
liabilities 55,125 6,332 (14,744) (3,339) 68,443 111,817
Cumulative excess
(deficiency) of
interest
sensitivity
assets 55,125 61,457 46,713 43,374 111,817 111,817
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities 178.77% 151.26% 126.31% 119.12% 149.27% 149.27%
Interest sensitivity
gap to total assets 16.27% 1.87% (4.35)% (0.99)% 20.20% 33.01%
Ratio of interest-
earning assets to
interest-bearing
liabilities 178.77% 112.68% 74.43% 93.23% 80621.18% 149.27%
Ratio of cumulative
gap to total assets 16.27% 18.14% 13.79% 12.80% 33.01% 33.01%
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predicable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
1998, cash and cash equivalents totaled $53.2 million or 14.6% of total
assets. At December 31, 1998, the Bank also maintained an available line of
credit of $15.0 million with the FHLB-Cincinnati that may be used as an
additional source of liquidity.
At December 31, 1998, the Bank's commitments to extend funds consisted of
unused lines of credit of $30.6 million, outstanding letters of credit of $7.2
million issued primarily to municipalities as performance bonds, and
commitments to originate loans of $52.1 million. The commitments to originate
loans at December 31, 1998 consisted of commitments to originate variable rate
loans of $40.2 million, and commitments to originate fixed rate loans of $11.9
million at interest rates ranging from 5.98% to 8.50%.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
4.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. The Bank's liquidity ratio at December 31, 1998 was
28.1%.
The Bank's primary lending activity is the origination of real estate
mortgage loans. During the years ended
-twenty one-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
December 31, 1998, 1997, and 1996, the Bank originated $270.2 million, $166.3
million, and $172.0 million of such loans, respectively. At December 31, 1998,
the Bank had loan commitments totaling $52.1 million which was made up
completely of undisbursed loans in process. The Bank anticipates that it will
have sufficient funds available to meet current loan commitments. Certificates
of deposit that are scheduled to mature in less than one year from December
31, 1998 totaled $94.2 million. Historically, the Bank has been able to retain
a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of
regulatory capital. As of December 31, 1998, the Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 21.16%, 21.16% and 24.12%, respectively.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting by Creditors for Impairment of a Loan. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of Statements of
Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment
of a Loan-Income recognition and Disclosures." The Bank adopted SFAS No. 114
and SFAS No. 118 effective January 1, 1995, and their adoption did not have a
material effect on the Bank's financial condition or results of operation.
Accounting for Employee Stock Ownership Plans. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effects of SOP 93-6 on net income and book value cannot be
predicted due to the uncertainty of the fair value of the shares at the time
they will be committed to be released. See Note 12 of Notes to the
Consolidated Financial Statements.
Disclosure of Certain Significant Risks and Uncertainties. In December
1994 the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure
of Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities.
The disclosure requirements in SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near-term functioning of the reporting entity. The
risks and uncertainties discussed in SOP 94-6 stem from the nature of the
entity's operations, from the necessary use of estimates in the preparation of
the entity's financial statements and from significant concentrations in
certain aspects of the entity's operation. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Bank.
Accounting for Mortgage Servicing Rights. See Note 1 of Notes to the
Consolidated Financial statements for a discussion of SFAS No. 122,
"Accounting for Mortgage Servicing Rights." The Bank implemented SFAS No. 122,
prospectively, effective January 1, 1996 and its implementation did not have a
material impact on the Bank's financial condition or results of operations.
Effective January 1, 1997, SFAS No. 122 was superseded by SFAS No. 125
discussed below.
Accounting for Stock-Based Compensation. SFAS No. 123,"Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement
encourages all entities to adopt a new method of accounting to measure
compensation costs of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies that
elect to remain with the existing accounting method are required to disclose
in a footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this statement had been adopted. The
accounting requirements of this statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995; however,
companies are required to disclose information for awarded granted in their
first fiscal year beginning after December 15, 1994. Management of the Bank
has not completed an analysis of the potential effects of SFAS No. 123 on its
financial condition or results of operations, but expects to use the intrinsic
value method following the should these plans be adopted.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. See Note 1 of Notes to the Consolidated
Financial Statements for a discussion of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," and of SFAS No. 127, "Deferral of the effective Date of Certain
Provisions of FASB No. 125 until January 1, 1998. The adoption of the
provisions of SFAS No. 125 and SFAS No. 127 did not have a material impact on
the Bank's financial condition or results of operations.
-twenty two-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in
February 1997, establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with public-held common stock or
potential common stock. It replaces the current presentation of primary EPS
with a presentation of basic EPS and requires the dual presentation of basic
and diluted EPS on the face of the income statement. This statement is
effective for financial statements issued for periods ending after December
15, 1997 including interim periods; earlier application not permitted. This
statement requires restatement of all prior period EPS data presented.
Disclosure of Information about Capital Structure. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board ("APB") Opinion No. 10, "Omnibus Opinion - 1966," and No. 15, "Earnings
Per Share," and SFAS No. 47, "Disclosure of Long-Term Obligations," for
entities that were subject to those standards. SFAS No. 129 is effective for
financial statements for periods ending after December 15, 1997. SFAS No. 129
contains no change in disclosure requirements for entities that were
previously subject to the requirements of APB Opinions Nos. 10 and 15 and SFAS
No. 47. The adoption of the provisions of SFAS 129 did not have a material
impact on the Company.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, established standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification is required.
Disclosure About Segments. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," issued in June 1997 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 became
effective for the Company's fiscal year ended December 31, 1998, and requires
that comparative information from earlier years be restated to conform to its
requirements. The adoption of the provision of SFAS No. 131 did not have a
material impact on the company. See Note 23 of Notes to the Consolidated
Financial Statements.
Employers' Disclosure About Pension and Other Post-Retirement Benefits.
SFAS No. 132, "Employers' Disclosure about Pensions and other Post-Retirement
Benefits," issued in February 1998 provides new disclosure requirements
regarding pension plans and other postretirement plans. The disclosures called
for in SFAS No. 132 concerning pension and other postretirement benefits
supersede the disclosure requirements in SFAS Nos. 87, 88, and 106. SFAS No.
132 does not address measurement or recognition. The statement is effective
for fiscal years beginning after December 15, 1997, with earlier application
encouraged. Restatement of disclosures for earlier periods is required unless
the information is not readily available.
Accounting for Derivative Instruments and Hedging Activities. SFAS No
133,"Accounting for Derivative Instruments and Hedging Activities" issued in
June 1998 establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and requires
those instruments to be measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative.
SFAS No. 133 is effective for all fiscal quarters and fiscal years beginning
after June 15, 1998. Initial application must be as of the beginning of a
fiscal quarter or year. The adoption of the provisions of this statement is
not expected to have a material impact on the Company.
Accounting for Mortgage-Backed Securities Retained after Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134
"Accounting for Mortgage-Backed Securities Retained After the Securitization
of Loans Held for Sale by a Mortgage Banking Enterprise," was issued in
October of 1998, amends SFAS No. 65 to permit classification as trading,
available-for-sale, or held-to-maturity mortgage-backed securities retained
after the securitization of mortgage loans held for sale. This statement is
effective for the first fiscal quarter beginning after December 15, 1998.
Earlier application is encouraged and is permitted. The adoption of the
provisions of this statement is not expected to have a material impact on the
Company.
-twenty three-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Considerations.
The Bank began working on its Year 2000 conversion process in 1996 as
part of a project to update our information systems to a level that would
allow us to compete in the 21st century. As a result, the Bank began a
comprehensive review to identify all systems that would be affected, estimate
cost projections, and compile a schedule or plan of action. The Bank is on
schedule by having all internal mission critical systems tested and/or
certified as Year 2000 compliant.
The Bank's plan of action follows the FFIEC's suggested steps of
Awareness, Assessment, Renovation, Validation, and Implementation. The Bank's
progress toward completion of each step is as follows:
Awareness Phase
Starting in 1996, senior management assigned Year 2000 responsibility to
a team of employees that developed a strategy to address all internal and
external systems. Routine periodic reports were furnished to the board of
directors and requests to purchase the necessary hardware and software to
completely upgrade all systems were approved by the Board of Directors. In
early 1998 the Board of Directors appointed the Audit Committee, composed
completely of outside directors, to monitor the Bank's Year 2000 efforts. The
Audit Committee meets quarterly or more often if necessary. This step has been
completed by the Bank.
Assessment Phase
By August of 1997, management believed that all business processes and
elements of the Bank's internal information systems and embedded chip systems
had been identified and priorities set. Resource needs were identified, time
frames established, and contingency plans were reviewed. This step has been
completed by the Bank.
Renovation Phase
This phase includes hardware and software upgrades, system replacements,
vendor certification and associated changes. This phase also encompasses
discussions with and monitoring of outside servicers and third-party software
providers.
In 1996, the Bank began replacing all internal hardware and software as
necessary to upgrade to a Windows based operating system that would be Year
2000 compliant and meet the perceived technological challenges of the future.
In 1997 the Bank also started to actively monitor our primary critical systems
provider's efforts to renovate their systems to be Year 2000 compliant. The
Bank has also made efforts to monitor other third party non-mission critical
vendors' progress in attaining Year 2000 compliance.
Internal Hardware - Since 1996, the Bank has replaced in excess of 95% of
its internal hardware. The 20 units that have not been replaced have been
renovated, validated and implemented. Management feels that all internal
hardware is Year 2000 compliant as of December 31, 1998.
Internal Software - The Bank has received certification by the
appropriate vendors that all critical software utilized by our Wide Area
Network as well as the consumer/commercial lending, the tellering, the general
ledger, the trust, and the FedLine areas are Year 2000 compliant. The Bank has
scheduled some additional upgrades to the consumer/commercial loan application
software, the trust posting software and our mortgage lending application
software. Vendor certified Year 2000 software to operate the check processing
system has been installed and will be implemented upon completion of testing.
Management feels that all internal software is Year 2000 compliant.
Any additional hardware or software acquisitions or replacements will be
vendor certified Year 2000 compliant before purchase.
As is our practice with all mission critical system upgrades we will test
the upgrades prior to replacement of current Year 2000 compliant hardware or
software. Management considers this phase complete but ongoing.
Validation/Testing Phase
Starting in June of 1998 a systematic testing of all internal computer
hardware and software has been conducted by the Bank. Testing is completed by
performing extensive testing with the computer dates converted to potentially
troublesome dates such as January 1, 2000 or February 29, 2000. As noted above
internal testing of upgrades will continue through June 30, 1999. This testing
schedule allows time to correct any discovered deficiencies before the end of
1999. Many third party vendors have been tested and others are scheduled for
testing prior to June 30, 1999. This phase is approximately 90% complete as of
December 31, 1998.
-twenty four-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Implementation Phase
Systems successfully tested will be certified as Year 2000 compliant. For
any system failing validation testing, the business impact must be assessed
and a contingency plan implemented. This phase is scheduled for completion by
June 30, 1999.
Third Party Providers - BISYS provides the Bank with mainframe services
in its teller, general ledger, consumer, commercial, and mortgage lending
areas. BISYS has certified that its systems are Year 2000 compliant. The Bank
is 75% complete with the 90-day testing period 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. The Bank is
currently reviewing test results for all deposit and loan transactions and
additional testing will be conducted if necessary. All testing will be
completed by June 30, 1999.
In addition to BISYS, the other third party providers that the Bank
believes would impact mission critical systems are the Federal Reserve's
FedLine System and the telecommunications and electric utilities. The FedLine
System has been renovated, tested and implemented and management believes it
is Year 2000 compliant. While both of the electric and telecommunications
utilities have indicated that they are working to achieve Year 2000
compliance, neither has provided assurances that service will not be
interrupted at the beginning of the new millennium. The Bank can only monitor
the efforts of the utilities to become Year 2000 compliant. While loss of
power or telephone/data line service would have a major impact on the Bank's
operations and customers, it should not have a material effect on the Bank's
results of operations, liquidity and financial condition unless the Bank is
the only financial institution in the area without service. However, the Bank
will be addressing contingency plans for these worse case scenarios starting
upon completion of testing with all testable third party providers in the
second quarter of 1999.
Cost - The Bank believes that the Year 2000 issue will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operations in any given year. Year 2000 costs
are not always easy to separate from upgrades or changes in hardware/software
for other reasons. Therefore, the Company believes some costs disclosed as
Year 2000 costs could just as easily have been excluded as replacement costs
unrelated to Year 2000 issues. The Company's estimated Year 2000 related cost
for fiscal 1996 was $700,000. The Company's estimated Year 2000 related cost
for fiscal 1997 was $250,000 and the Company's estimated Year 2000 cost for
fiscal 1998 has been $150,000. The Bank currently believes that all major year
2000 expenditures have been made and therefore, estimates that only an
additional $150,000 in Year 2000 cost will be incurred over the remaining 12
months. This cost will relate primarily to personnel cost incurred in the
validation and implementation phases.
Customer Awareness - The last three quarterly newsletters, which have
been distributed to all customers, included articles to assist customers in
understanding Year 2000 issues and to inform them of the Bank's Year 2000
preparation. The Bank intends to continue to use the newsletters, plus FDIC
brochures, internally generated handouts and other venues to keep the
customers informed.
Contingency Planning - A formal Year 2000 contingency plan has been
developed and approved by the board of directors. However, the plan will be
reviewed and its focus narrowed to more definitively address worse case
scenarios based upon the results of internal and third party provider testing
which will be completed by June 30, 1999.
The costs and completion dates for testing and corrections of Year 2000
problems are based on management's best estimates which were derived utilizing
numerous forward looking assumptions. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the ability to locate and correct
all relevant computer programs, failure of a key third party to meet
expectations, availability and cost of key personnel.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have
a more significant impact on a financial institution's performance than do
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.
-twenty five-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Aspects of Market Risk. The Company does not maintain a
trading account for any class of financial instrument nor does it engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Company is not subject to foreign currency exchange rate risk or commodity
price risk.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the
exposure of its earnings to changes in market interest rates by attempting to
manage the mismatch between assets and liability maturities and interest
rates. The principal element in achieving this objective is to increase the
interest-rate sensitivity of the Company's interest-earning assets by
retaining for its portfolio loans with interest rates subject to periodic
adjustment to market conditions and the selling of fixed-rate one- to- four
family mortgage loans. In addition, the Company maintains an investment
portfolio of U.S. Government and agency securities with contractual maturities
of between zero and two years. The Company relies on retail deposits as its
primary source of funds. Management believes retail deposits, compared to
brokered deposits, reduce the effects of its interest rate fluctuations
because they generally represent a more stable source of funds. As part of its
interest rate risk management strategy, the Bank promotes transaction accounts
and certificates of deposit with primarily terms of up to four years.
Interest Rate Sensitivity The table below provides information about the
Company's financial instruments at December 31, 1998 that are sensitive to
changes in interest rates including off-balance sheet items. For financial
instruments the table presents principle cash flows and related average
interest rates by expected maturity dates with estimated fair values.
Since this presentation is a snapshot of the financial instruments as of
December 31, 1998 there are material limitations in not fully reflecting
market risk exposures. The table does not consider the effects of interest
rate changes on the embedded options on loans and deposit liabilities.
Changes in interest rates may cause borrowers to exercise the option to prepay
loans before the scheduled maturity. Depositors have the option to withdraw
deposits before maturity which is the case with certificate accounts or to
withdraw funds anytime from accounts with no stated maturity such as savings
accounts. This table also does not take into consideration the effects on
reinvestment of maturing financial instruments. This presentation does not
consider that all rate changes affect assets or liabilities in the same
maturity range by equal amounts. When interest rates change, all rates do not
change in equal amounts nor do they change at the same time. Some financial
instruments have indefinite maturities. That is to say that some assets and
some significant liabilities do not have clear maturities.
As of December 31, 1998, the Company's greatest exposure would be to
declining rates. The Company has more assets maturing than liabilities during
the one year time frame which reduce the yield on assets faster than the cost
of deposits would decline.
-twenty six-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
After 3
Within One Years After 5 Beyond
One Year to To 5 Years to 10
Year 3 Years Years 10 Years Years Total Fair Value
- ------------------------------------------------------------------------------
Interest-
Sensitive
Assets:
Fixed rate
loans $ 48,385 $32,879 $38,286 $ 7,051 $ 9,837 $136,438
Average Rate 8.802 9.037 8.789 10.137 6.870 8.785
Adjustable
rate loans 39,378 15,042 6,898 9,435 41,279 112,032
Average Rate 8.399 8.212 8.335 7.782 7.666 8.048
Total loans 87,763 47,921 45,184 16,486 51,116 248,470 248,970
Adjustable rate
Mortgage-
backed
securities 23 57 63 202 614 959 963
Average Rate 6.950 6.952 6.955 6.959 6.987 6.976
Fixed rate
Investments
and other
interest-
earning
assets 56,505 - - - - 56,505 56,505
Average Rate 5.370 - - - - 5.370
Adjustable rate
Investments
and other
interest-
earning
deposits 31,078 - - - - 31,078 31,078
Average Rate 4.974 - - - - 4.974
FHLB Stock 316 716 719 - - 1,751 1,751
Average Rate 7.135 7.135 7.135 - - 7.135
Total
Interest-
Sensitive
Assets 175,685 48,694 45,966 16,688 51,730 338,763
Interest-
Sensitive
Liabilities:
Deposits with
no stated
maturity
Now accounts 6,532 14,845 14,251 - - 35,628 35,628
Average Rate 1.000 1.000 1.000 - - 1.000
Savings
accounts 2,492 5,663 5,437 - - 13,592 13,592
Average Rate 1.720 1.720 1.720 - - 1.720
Money Market 9,619 21,861 20,986 - - 52,466 52,466
Average Rate 4.060 4.060 4.060 - - 4.060
Fixed rate
Certificate
accounts 92,622 21,657 8,631 30 55 122,995
Average Rate 5.184 5.405 5.822 5.000 5.000 5.267
Adjustable
rate
Certificate
accounts 1,538 727 - - - 2,265
Average Rate 5.153 5.326 - - - 5.208
Total
Certificate
accounts 94,160 22,384 8,631 30 55 125,260 126,701
Total
Interest-
Rate Lia-
bilities 112,803 64,753 49,305 30 55 226,946
Off-Balance
Sheet Items:
Commitments
to extend
credit 52,098 52,098
Average Rate 8.260
Unused lines
of credit 30,645 30,645
Average Rate 8.550
-twenty seven-
<PAGE>
<PAGE>
RAYBURN, BETTS & BATES, P.C.
-----Certified Public Accountants-----
Suite 420
3310 West End Avenue
Nashville, Tennessee 37203
Independent Auditors' Report
----------------------------
Board of Directors
Cavalry Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the accompanying consolidated balance sheets of Cavalry
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, comprehensive income,
changes in equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Rayburn, Betts & Bates, P.C.
RAYBURN, BETTS & BATES, P.C.
Nashville, Tennessee
January 22, 1999
-twenty eight-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1998 1997
- ------------------------------------------------------------------------------
Assets
Cash (note 2) $ 12,110 $ 10,695
Interest-bearing deposits with other financial
institutions 41,078 26,963
---------------------
Cash and cash equivalents 53,188 37,658
Investment securities available-for-sale (note 3) 46,505 10,077
Investment securities held to maturity (note 3) - 1,700
Mortgage-backed securities held to maturity (note 4) 959 1,301
Loans held for sale, at estimated fair value (note 5) 10,923 4,855
Loans receivable, net (notes 5 and 10) 237,547 212,979
Accrued interest receivable:
Loans, net of allowance for delinquent interest of
$3 and $3 in 1998 and 1997, respectively 1,497 1,400
Investment securities 872 314
Mortgage-backed securities held to maturity 7 10
Office properties and equipment, net (note 6) 8,782 8,072
Required investment in stock of Federal Home Loan
Bank, at cost (note 7) 1,751 1,631
Deferred tax asset, net (note 11) 1,401 1,168
Real estate acquired in settlement of loans 80 -
Other assets 1,380 964
---------------------
Total assets $364,892 $282,129
=====================
Liabilities and Equity
Liabilities:
Deposits (note 9) $266,032 $248,267
Accrued interest payable 285 328
Advance payments by borrowers for property
taxes and insurance 237 295
Income taxes payable (note 11) 1,484 999
Accrued expenses and other liabilities (note 12) 1,673 1,793
---------------------
Total liabilities 269,711 251,682
---------------------
Equity:
Preferred stock, no par value:
Authorized - 250,000 shares; none issued or
outstanding at December 31, 1998 and 1997 - -
Common stock, no par value:
Authorized - 49,750,000 shares; issued and
outstanding: 7,161,337 shares at
December 31, 1998 (none issued or outstanding
at December 31, 1997) (note 13) 65,705 -
Retained earnings (note 13) 35,037 30,452
Unallocated ESOP shares (5,612) -
Accumulated other comprehensive income, net of taxes 51 (5)
---------------------
Total equity 95,181 30,447
---------------------
Total liabilities and equity $364,892 $282,129
=====================
Commitments and contingencies (notes 2, 12 and 19)
See accompanying notes to consolidated financial statements.
-twenty nine-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
- ------------------------------------------------------------------------------
Interest and dividend income:
First mortgage loans $ 11,488 $ 12,429 $ 11,516
Other loans 10,313 7,861 6,165
Investment securities 1,936 604 1,338
Deposits with other financial
institutions 2,790 952 464
Mortgage-backed securities held to maturity 69 93 101
--------------------------------
Total interest and dividend income 26,596 21,939 19,584
--------------------------------
Interest expense - deposits (note 9) 9,594 9,289 8,232
Interest expense - advances from Federal
Home Loan Bank - - 36
--------------------------------
Total interest expense 9,594 9,289 8,268
--------------------------------
Net interest income 17,002 12,650 11,316
Provision for loan losses (note 5) 452 700 120
--------------------------------
Net interest income after provision
for loan losses 16,550 11,950 11,196
--------------------------------
Noninterest income:
Servicing income 374 506 548
Gain on sale of real estate acquired in
settlement of loans, net 2 2 11
Gain on sale of loans, net 2,266 1,126 890
Gain on sale of office properties and
equipment - - 40
Deposit servicing fees and charges 1,512 1,173 973
Trust service fees 795 649 483
Other operating income 277 205 213
--------------------------------
Total noninterest income 5,226 3,661 3,158
--------------------------------
Noninterest expenses:
Compensation, payroll taxes and fringe
benefits (note 12) 7,094 5,808 4,661
Occupancy expense 759 550 493
Supplies, communications and other
office expenses 823 675 567
Federal insurance premiums (note 18) 146 112 1,654
Advertising expense 229 233 201
Equipment and service bureau expense 2,301 2,005 1,466
Loss on sale of office properties and
equipment 21 - -
Other taxes 350 402 200
Other operating expenses 758 713 544
--------------------------------
Total noninterest expenses 12,481 10,498 9,786
--------------------------------
Income before income tax expense 9,295 5,113 4,568
Income tax expense (note 11) 3,598 1,911 1,754
--------------------------------
Net income $ 5,697 $ 3,202 $ 2,814
================================
Basic earnings per share (note 15) $ 0.83 N/A N/A
================================
Weighted average shares outstanding 6,908,959 N/A N/A
================================
See accompanying notes to consolidated financial statements.
-thirty-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
- ------------------------------------------------------------------------------
Net income $ 5,697 $ 3,202 $ 2,814
Other comprehensive income, net of tax
(note 22):
Unrealized gain (loss) on investment
securities available-for-sale 56 (5) -
--------------------------------
Comprehensive income $ 5,753 $ 3,197 $ 2,814
================================
See accompanying notes to consolidated financial statements.
-thirty one-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Unallo-
cated Compre-
Common Common Retained ESOP hensive Total
Shares Stock Earnings Shares Income Equity
- ------------------------------------------------------------------------------
Balance, December
31, 1995 - $ - 24,436 - - 24,436
Net income - - 2,814 - - 2,814
Balance, December -----------------------------------------------------
31, 1996 - - 27,250 - - 27,250
Net income - - 3,202 - - 3,202
Change in valuation
allowance for invest-
ment securities avail-
able-for-sale, net
of income taxes of $3 - - - - (5) (5)
Balance December -----------------------------------------------------
31, 1997 - - 30,452 - (5) 30,447
Net income - - 5,697 - - 5,697
Change in valuation
allowance for invest-
ment securities avail-
able-for-sale, net of
income taxes of $30 - - - - 56 56
Issuance of common
stock 7,538,250 73,816 - (6,031) - 67,785
ESOP shares committed
for release - 467 - 419 - 886
Purchase and retirement
of common stock
(note 13) (376,913) (8,578) - - - (8,578)
Dividends ($0.15 per
share) - - (1,112) - - (1,112)
Balance, December -----------------------------------------------------
31, 1998 7,161,337 $65,705 35,037 (5,612) 51 95,181
=====================================================
See accompanying notes to consolidated financial statements.
-thirty two-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
- ------------------------------------------------------------------------------
Net income $ 5,697 $ 3,202 $ 2,814
Operating activities:
Net income $ 5,697 $ 3,202 $ 2,814
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 452 700 120
Gain on sales of real estate acquired
in settlement of loans, net (2) (2) (11)
Gain on sales of loans, net (2,266) (1,126) (890)
Loss (gain) on sale of office
properties and equipment 21 - (40)
Depreciation and amortization on
office properties and equipment 1,207 1,078 733
Allocation of ESOP shares at fair value 886 - -
Net amortization (accretion) of investment
and mortgage-backed securities premiums
and discounts (96) 42 102
Amortization of deferred loan origination
fees (1,209) (1,090) (1,152)
Loan fees collected 1,272 1,097 1,294
Deferred income tax benefit (233) (413) (231)
Proceeds from sales of loans 120,761 70,511 71,235
Origination of loans held for sale (124,563) (68,987) (71,909)
Decrease (increase) in accrued interest
receivable (652) (278) 167
Increase in other assets (416) (416) (162)
Decrease (increase) in accrued interest
payable (43) 64 (7)
Stock dividends on Federal Home
Loan Bank stock (120) (112) (102)
(Decrease) increase in accrued expenses
and other liabilities (508) 293 170
Increase (decrease) in income taxes payable 485 (90) 469
--------------------------------
Net cash provided by operating activities 673 4,473 2,600
Investing activities: --------------------------------
Increase in loans receivable, net (25,195) (13,084) (40,962)
Principal payments on mortgage backed
securities held to maturity 331 117 116
Proceeds from the sales of branch and
office properties and equipment 203 82 153
Purchases of investment securities
available-for-sale (70,295) (10,121) -
Purchases of investment securities held
to maturity (3,940) - (2,002)
Proceeds from maturities of investment
securities 39,700 6,000 29,750
Purchases of office properties and
equipment (2,141) (3,029) (1,763)
Proceeds from sale of real estate
acquired through foreclosure 34 - 51
--------------------------------
Net cash used in investing activities (61,303) (20,035) (14,657)
================================
See accompanying notes to consolidated financial statements.
-thirty three-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
- ------------------------------------------------------------------------------
Financing activities:
Net increase in deposits $ 17,765 $ 33,734 $ 17,800
Net decrease in advance payments by
borrowers for property taxes and
insurance (58) (33) (159)
Issue of common stock 69,352 - -
Retirement of common stock (8,578) - -
Stock issuance costs (1,567) - -
Dividends paid (754) - -
Net cash provided by financing --------------------------------
activities 76,160 33,701 17,641
--------------------------------
Increase in cash and cash equivalents 15,530 18,139 5,584
Cash and cash equivalents, beginning of year 37,658 19,519 13,935
--------------------------------
Cash and cash equivalents, end of year $ 53,188 $ 37,658 $ 19,519
================================
Supplemental Disclosures of Cash Flow
Information:
Payments during the period for:
Interest $ 9,637 $ 9,225 $ 5,500
================================
Income taxes $ 3,608 $ 2,535 $ 1,591
================================
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Foreclosures and in substance
foreclosures of loans during year $ 112 $ - $ 44
================================
Interest credited to deposits $ 3,690 $ 2,902 $ 2,775
================================
Net unrealized gains (losses) on
investment securities available
for sale $ 86 $ (8) $ -
================================
Increase in deferred tax asset
(liability) related to unrealized
gain (loss) on investments $ (30) $ 3 $ -
================================
Issue of common stock funded by
subscription escrow accounts $ 36,532 $ - $ -
================================
Issue of common stock funded by
deposit accounts $ 32,820 $ - $ -
================================
Issue of common stock to ESOP $ 6,031 $ - $ -
================================
See accompanying notes to consolidated financial statements.
-thirty four-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies:
Change in Reporting Entity
On August 7, 1997, the Board of Directors of Cavalry Banking (the "Bank")
adopted a Plan of Conversion to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank (the
"Conversion"). The Conversion was accomplished through the formation of
Cavalry Bancorp, Inc. (the "Corporation") on November 5, 1997, the adoption of
a federal stock charter on February 26, 1998, the sale of all of the Bank's
stock to the Corporation on March 16, 1998, and the sale of the Corporation's
stock to the public on March 16, 1998.
A subscription offering ("offering") of the shares of common stock of the
Corporation was conducted whereby the shares were offered initially to
eligible account holders, Cavalry Banking Employee Stock Ownership Plan
("ESOP"), supplemental eligible account holders and other members of the Bank
(collectively "Subscribers"). During the offering, subscribers submitted
orders for common stock along with full payment for the order in either cash,
by an authorization to withdraw funds for payment from an existing deposit
account at the Bank upon issuance of stock, or a combination of cash and
account withdrawal. The offering began January 21, 1998 and concluded on
February 25, 1998. Subscription funds received in connection with the offering
were placed in special escrow accounts in the Bank. For those orders that were
to be funded through account withdrawals, the Bank placed "holds" on those
accounts, restricting the withdrawal of any amount which would reduce the
account balance below the amount of the order.
On March 16, 1998, the Corporation issued approximately 7,538,000 shares
of common stock for gross proceeds of approximately $75,383,000. The aggregate
purchase price was determined by an independent appraisal. As the Corporation
received subscriptions in excess of shares available, shares were allocated in
accordance with the Plan of Conversion. Sources of gross proceeds were as
follows (in thousands of dollars):
Subscription escrow accounts $ 36,532
Deposit account withdrawals 32,820
Note receivable from ESOP 6,031
--------
Gross proceeds $ 75,383
========
All excess subscription funds were refunded to subscribers and holds on
deposit accounts were released after the stock was issued.
Conversion expenses totaled approximately $1,567,000 and were deducted
from gross proceeds to result in net proceeds of approximately $73,816,000. As
of December 31,1997, Conversion costs were approximately $192,000 and are
included in the balance sheet caption "Other assets".
The Bank issued all of its outstanding capital stock to the Corporation
in exchange for one-half of the net proceeds from the sale of the
Corporation's capital stock. The Corporation accounted for the purchase in a
manner similar to a pooling of interests whereby assets and liabilities of the
Bank maintain their historical cost basis in the consolidated financial
statements of the Company.
Accounting
The accounting and reporting policies of the Company are in accordance
with generally accepted accounting principles and conform to general practices
in the banking industry.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Bank, collectively the Company. Since the Corporation was
inactive from incorporation through March 16, 1998, the information contained
in the financial statements prior to that date relates to the Bank and its
subsidiaries. During December 1997, all subsidiaries of the Bank were
dissolved. Significant intercompany balances and transactions have been
eliminated in consolidation under the equity method.
Estimates
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheet and
revenues and expenses for the year. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the allowances for loan losses and foreclosed real estate, management
obtains independent appraisals for significant properties.
-thirty five-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Business
The Company's principal business activities are conducted through the
Bank, which is a federally chartered stock bank engaged in the business of
attracting deposits from the general public and originating residential
property loans (one-to-four family home mortgage, cooperative apartment and
multi-family property loans) as well as commercial real estate loans and
consumer loans. The Bank is subject to competition from other financial
institutions. Deposits at the Bank are insured up to applicable limits by the
Federal Deposit Insurance Corporation (FDIC). The Bank is subject to
comprehensive regulation, examination and supervision by the OTS and the FDIC.
A substantial portion of the Company's loans are secured by real estate
in the Middle Tennessee market. In addition, foreclosed real estate is located
in this same market. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate is susceptible to
changes in local market conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Cash Equivalents
Cash equivalents include cash and demand and time deposits at other
financial institutions with remaining maturities of three months or less.
Investment Securities
In accordance with Statement of Financial Accounting Standards No. (SFAS)
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company is required to report debt, readily-marketable equity, mortgage-backed
and mortgage related securities in one of the following categories: (i)
"held-to-maturity" (management has a positive intent and ability to hold to
maturity) which are to be reported at amortized cost adjusted, in the case of
debt securities, for the amortization of premiums and accretion of discounts;
(ii) "trading" (held for current resale) which are to be reported at fair
value, with unrealized gains and losses included in earnings; and (iii)
"available for-sale" (all other debt, equity, mortgage-backed and mortgage
related securities) which are to be reported at fair value, with unrealized
gains and losses reported net of tax as a separate component of equity. At the
time of new securities purchases, a determination is made as to the
appropriate classification. Realized and unrealized gains and losses on
trading securities are included in net income. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases
in equity, net of any tax effect. Cost of securities sold is recognized using
the specific identification method.
Mortgage-backed Securities Held to Maturity
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at the unpaid principal
balances, adjusted for unamortized premiums and unearned discounts. Premiums
and discounts are amortized using methods approximating the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Management intends and has the ability to hold such securities to
maturity. The Company has classified all mortgage-backed securities in its
portfolio as held to maturity. Should any be sold, cost of securities sold is
determined using the specific identification method.
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan fees and unearned discounts. Unearned
discounts on installment loans are recognized as income over the term of the
loans using the interest method.
Loan origination and commitment fees, as well as certain origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans adjusted for estimated prepayments based on the Company's
historical prepayment experience, using the interest method. Loans are placed
on nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on these loans is reversed from income and an allowance for
accrued interest is recorded.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss
-thirty six-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to impaired
loans are charged or credited to the provision for loan losses.
Loans are considered to be impaired when, in management's judgement,
principal or interest is not collectible according to the contractual terms of
the loan agreement. When conducting loan evaluations, management considers
various factors such as historical loan performance, the financial condition
of the borrower and adequacy of collateral to determine if a loan is impaired.
The measurement of impaired loans generally is based on the present value
of future cash flows discounted at the historical effective interest rate,
except that collateral-dependent loans generally are measured for impairment
based on the fair value of the collateral. When the measured amount of an
impaired loan is less than the recorded investment in the loan, the impairment
is recorded as a charge to income and a valuation allowance which is included
as a component of the allowance for loan losses.
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate basis.
Net unrealized losses are recognized in a valuation allowance through charges
to income. Gains and losses on the sale of loans held for sale are determined
using the specific identification method.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans includes property acquired
through foreclosure and deeds in lieu of foreclosure. Property acquired by
deed in lieu of foreclosure results when a borrower voluntarily transfers
title to the Company in full settlement of the related debt in an attempt to
avoid foreclosure. Real estate acquired in settlement of loans is valued at
the date of acquisition and thereafter at the lower of fair value less costs
to sell or the Company's net investment in the loan and subsequent
improvements to the property. Certain costs relating to holding the
properties, and gains or losses resulting from the disposition of properties
are recognized in the current period's operations.
Office Properties and Equipment
Depreciation and amortization are provided over the estimated useful
lives of the respective assets which range from 3 to 40 years. All office
properties and equipment are recorded at cost and are depreciated on the
straight-line method.
Income Taxes
Under the asset and liability method of SFAS 109, Accounting for Income
Taxes, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance
must be established. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Corporation and the Bank file separate federal income and combined
state franchise and excise tax returns. Each tax return accrues tax expense on
a separate entity basis.
Fair Values of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized in the consolidated balance sheets for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Fair value estimates are made at a point in
time, based on relevant market information and information about the financial
instrument. Accordingly, such estimates involve uncertainties and matters of
judgment and therefore cannot be determined with precision. SFAS 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
-thirty seven-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The following are the more significant methods and assumptions used by
the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those assets'
fair values, because they mature within 90 days or less and do not present
credit risk concerns.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans receivable: The fair values for loans receivable are estimated
using discounted cash flow analysis which considers future repricing dates and
estimated repayment dates, and further using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics.
Loans held for sale: Fair value is based on investor commitments, or in
the absence of such commitments, on current investor yield requirements.
Accrued interest receivable: Fair value is estimated to approximate the
carrying amount because such amounts are expected to be received within 90
days or less and any credit concerns have been previously considered in the
carrying value.
Deposits: The fair values disclosed for deposits with no stated maturity
such as demand deposits, interest-bearing checking accounts and passbook
savings accounts are, by definition, equal to the amount payable on demand at
the reporting date (that is, their carrying amounts). The fair values for
certificates of deposit and other fixed maturity time deposits are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on such type accounts to a schedule of aggregated contractual
maturities on such time deposits.
Accrued interest payable: The carrying amount will approximate fair value
as the majority of such interest will be paid within 90 days or less.
Commitments to extend credit: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates.
Sale and Servicing of Mortgage Loans
The Company sells mortgage loans for cash proceeds equal to the principal
amount of the loans sold but with yield rates which reflect the current market
rate. Gain or loss is recorded at the time of sale in an amount reflecting the
difference between the contractual interest rates of the loans sold and the
current market rate. Certain loans are sold with the servicing retained by the
Company. Servicing income is recognized as collected and is based on the
normal agency servicing fee as defined by GNMA, FNMA, or FHLMC. For mortgage
servicing rights that are created through the origination of mortgage loans,
and where the loans are subsequently sold or securitized with servicing rights
retained, the Company allocates the total cost of the mortgage loans to the
mortgage servicing rights and the loans based on their relative fair values.
The Company periodically makes an assessment of capitalized mortgage servicing
rights for impairment based on the current fair value of those rights.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights (MSRs) are
amortized, as a reduction to loan service fee income, using the interest
method over the estimated remaining life of the underlying mortgage loans. MSR
assets are carried at fair value and impairment, if any, is recognized through
a valuation allowance. The Company primarily sells its mortgage loans on a
non-recourse basis.
Effect of New Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative. The statement is
effective for fiscal years beginning after June 19, 1998. The adoption of the
provisions of this statement is not expected to have a material impact on the
Company.
In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise. This statements is an amendment of SFAS 65,
Accounting for Certain Mortgage Banking Activities. This statement is
effective for the first fiscal quarter beginning after December 15, 1998.
Earlier application is encouraged and is permitted. The adoption of the
provisions of this statement is not expected to have a material impact on the
Company.
-thirty eight-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(2) Cash:
The Company is required to maintain cash on hand or in the Federal
Reserve Bank account for various regulatory purposes. During 1998 and 1997,
such required cash averaged approximately $2,654,000 and $2,100,000,
respectively.
(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 December 31, 1998 and 1997, are as
follows:
Investment securities held to maturity:
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 $ 2 $ 2 $ 1,700
============================================
Investment securities
available-for-sale:
December 31, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government agencies $46,424 $ 88 $ 7 $46,505
============================================
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
============================================
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1998, by contractual maturity, are shown
below.
Investment securities
available-for-sale:
Estimated
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government agencies:
Maturing within one year $46,424 $46,505
------------------
$46,424 $46,505
==================
The amortized cost and estimated fair value of investment securities held
to maturity and available-for-sale at December 31, 1997, by contractual
maturity, are shown below.
Investment securities held
to maturity:
Estimated
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government agencies:
Maturing within one year $ 1,000 $ 1,002
Maturing from one to five years 700 698
------------------
$ 1,700 $ 1,700
==================
-thirty nine-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Investment securities held
to maturity:
Estimated
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government agencies:
Maturing within one year $ 8,063 $ 8,057
Maturing from one to five years 2,022 2,020
------------------
$10,085 $10,077
==================
At December 31, 1998 and 1997, investment securities with amortized cost
values of $2,008,000 and $2,027,000, respectively, were pledged as collateral
as permitted or required by law.
There were no sales of investment securities available-for-sale in the
years ended December 31, 1998, 1997, and 1996.
(4) Mortgage-backed Securities Held to Maturity:
The amortized cost and estimated fair values of mortgage-backed
securities held to maturity at December 31, 1998 and 1997, are as follows:
December 31, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC $ 254 $ 2 $ 1 $ 255
FNMA 705 5 2 708
Total mortgage-backed --------------------------------------------
securities held to maturity $ 959 $ 7 $ 3 $ 963
============================================
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
============================================
There were no sales of mortgage-backed securities held to maturity in the
years ended December 31, 1998, 1997, and 1996.
(5) Loans Held-for-Sale, Net and Loans Receivable, Net:
Loans held for sale, net are summarized as follows:
1998 1997
- ------------------------------------------------------------------------------
One-to-four family loans $10,923 $ 4,855
==================
Total loans held for sale, net $10,923 $ 4,855
==================
The Company 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.
-forty-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Loans receivable, net at December 31, 1998 and 1997, consisted of the
following:
1998 1997
- ------------------------------------------------------------------------------
Loans secured by first mortgages on real estate:
One-to-four family $ 75,554 $ 82,930
Multi-family 1,125 1,338
Land 15,367 17,011
Commercial real estate 52,516 39,690
Construction and development 84,900 54,666
-------------------
Total first mortgage loans 229,462 195,635
Second mortgage loans 3,790 2,783
Commercial loans 30,213 22,544
Consumer loans 41,107 30,564
-------------------
304,572 251,526
Less:
Loans in process 52,098 30,178
Allowance for loan losses 3,231 2,804
Deferred loan fees, net 773 710
Loans held for sale 10,923 4,855
-------------------
Loans receivable, net $237,547 $212,979
===================
Loans are presented net of loans serviced for the benefit of others
totaling approximately $124.9 million, $116.0 million and $123.3 million at
December 31, 1998, 1997 and 1996, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
amounts, disbursing payments to investors and foreclosure processing.
Impaired loans and related valuation allowance amounts at December 31,
1998 and 1997 were as follows:
1998 1997
- ------------------------------------------------------------------------------
Recorded investment $ 1,340 $ -
Valuation allowance $ 204 $ -
The average recorded investment in impaired loans for the years ended
December 31, 1998 and 1997 was $700,000 and $0, respectively.
Activity in the allowance for loan losses, consisted of the following:
1998 1997 1996
- ------------------------------------------------------------------------------
Balance at beginning of period $ 2,804 $ 2,123 $ 1,997
Provision for loan losses 452 700 120
Recoveries 29 30 218
Charge-offs (54) (49) (212)
-------------------------------
Balance at end of period $ 3,231 $ 2,804 $ 2,123
===============================
Nonaccrual loans totaled approximately $107,000 and $150,000 at December
31, 1998 and 1997, respectively. Interest income foregone on such loans was
approximately $12,400, $9,500 and $10,300 during the years ended December 31,
1998, 1997 and 1996, respectively. The Company is not committed to lend
additional funds to borrowers whose loans have been placed on a nonaccrual
basis.
Loans in arrears three months or more were as follows:
Amount % of loans
-----------------------------------------------------------------------
December 31, 1998 $ 66 0.02%
===================
December 31, 1997 $ 98 0.05%
===================
The Company originates loans to officers and directors at terms
substantially identical to those available to other borrowers. Mortgage and
consumer loans to officers and directors at December 31, 1998 and 1997 were
approximately $1,567,000 and $461,000, respectively.
-forty one-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(6) Office Properties and Equipment, Net:
Office properties and equipment, less accumulated depreciation, consisted
of the following at December 31, 1998 and 1997:
1998 1997
- ------------------------------------------------------------------------------
Land $ 2,904 $ 2,525
Office buildings 4,891 4,190
Furniture, fixtures, and equipment 6,037 5,918
Leasehold improvements 286 224
Automobiles 138 107
Construction in process 4 1
--------------------
14,260 12,965
Less accumulated depreciation 5,478 4,893
--------------------
Office properties and equipment, net $ 8,782 $ 8,072
====================
(7) Required Investment in Stock of Federal Home Loan Bank:
The Bank is a member of the Federal Home Loan Bank (FHLB). As a member of
this system, the Bank is required to maintain an investment in capital stock
of the Federal Home Loan Bank of Cincinnati in an amount equal to the greater
of 1% of residential mortgage loans and mortgage-backed securities, or .3% of
total assets of the Bank. At December 31, 1998, no additional investments are
required. No ready market exists for the stock, and it has no quoted market
value, but may be redeemed for face value by the FHLB if the Bank withdraws
its membership. Accordingly, this investment is carried at the Bank's
historical cost.
(8) Mortgage Servicing Rights:
An analysis of the activity for originated mortgage servicing rights is
as follows:
Balance, December 31, 1996 $ 23
Originations 257
Amortization (68)
---------
Balance, December 31, 1997 212
Originations 664
Amortization (207)
---------
Balance, December 31, 1998 $ 669
=========
(9) Deposits:
Savings, demand, and time deposit account balances are summarized as
follows:
December 31, 1998
------------------------------
Weighted
Type of Account Average Rate Amount
- ------------------------------------------------------------------------------
Personal accounts - % $ 39,088
NOW accounts 1.00 35,628
Savings accounts 1.72 13,591
Certificates of deposit 5.27 125,259
Money market accounts 4.06 52,466
---------
$ 266,032
=========
December 31, 1997
------------------------------
Weighted
Type of Account Average Rate Amount
- ------------------------------------------------------------------------------
Personal accounts - % $ 25,851
NOW accounts 1.67 31,553
Savings accounts 1.99 15,239
Certificates of deposit 5.30 132,881
Money market accounts 4.19 42,743
---------
$ 248,267
=========
-forty two-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Scheduled maturities of certificates of deposit are as follows:
December 31, 1998
------------------------------------
Weighted
Type of Account Average Rate Amount Percent
- ------------------------------------------------------------------------------
1 year or less 5.18% $ 99,565 79.49%
Greater than 1 year through 2 years 5.48 15,475 12.35
Greater than 2 years through 3 years 5.37 1,505 1.20
Greater than 3 years through 4 years 5.87 3,153 2.52
Greater than 4 years through 5 years 5.78 5,561 4.44
------------------
$ 125,259 100.00%
==================
December 31, 1997
------------------------------------
Weighted
Type of Account Average Rate Amount Percent
- ------------------------------------------------------------------------------
1 year or less 5.48% $ 109,481 82.39%
Greater than 1 year through 2 years 5.63 16,538 12.45
Greater than 2 years through 3 years 6.17 2,654 2.00
Greater than 3 years through 4 years 5.57 816 0.61
Greater than 4 years through 5 years 5.88 3,392 2.55
------------------
$ 132,881 100.00%
==================
Certificates of deposit in excess of $100,000 were approximately $27.5
million and $28.9 million at December 31, 1998 and 1997, respectively.
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Bank must pay a risk-based
annual assessment which considers the financial soundness of the institution
and capitalization level (note 18). At December 31, 1998, the Bank was
assessed at the FDIC's lowest assessment level, as a well capitalized
institution.
Interest expense on deposit balances for the years ended is summarized as
follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Savings accounts $ 423 $ 302 $ 350
Money market and NOW accounts 2,364 1,955 1,595
Certificates of deposit 6,807 7,032 6,287
------------------------------
$ 9,594 $ 9,289 $ 8,232
==============================
(10) Advance from the Federal Home Loan Bank:
As of December 31, 1998 and 1997, no funds are owed to the Federal Home
Loan Bank of Cincinnati (FHLB). Available advances were $15,000,000 and
$12,100,000 at December 31, 1998 and 1997, respectively, and are secured by a
blanket agreement to maintain residential first mortgage loans with a
principal value of 150% of the outstanding advances and has a variable
interest rate.
By pledging additional residential first mortgage loans, the Company can
increase its borrowings from the FHLB to $50,026,000 at December 31, 1998.
(11) Income Taxes:
The components of income tax expense (benefit) are as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Current income tax expense:
Federal $ 3,286 $ 1,991 $ 1,775
State 545 333 210
------------------------------
Total current income tax expense 3,831 2,324 1,985
Deferred income tax expense (benefit): ------------------------------
Federal (193) (392) (215)
State (40) (21) (16)
------------------------------
Total deferred income tax benefit (233) (413) (231)
------------------------------
Income tax expense $ 3,598 $ 1,911 $ 1,754
==============================
-forty three-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated statements of income with that which would
be computed by applying the statutory federal income tax rate of 34% to
earnings before income taxes.
1998 1997 1996
- ------------------------------------------------------------------------------
Tax expense at statutory
rates $ 3,160 34.0% $ 1,738 34.0% $ 1,553 34.0%
Increases (decrease) in
taxes resulting from:
State income tax, net
of federal effect 333 3.6 206 4.0 128 2.8
Nondeductible ESOP
compensation 160 1.7 - - - -
Other, net (55) (0.6) (33) (0.6) 73 1.6
Total income tax ----------------------------------------------
expense $ 3,598 38.7% $ 1,911 37.4% $ 1,754 38.4%
==============================================
During 1996, legislation was passed which repealed the percentage of
taxable income reserve method of accounting for bad debts being utilized by
the Company, effective for tax years beginning after 1995. The new law
required that, prospectively, the Company account for bad debts utilizing the
experience reserve method beginning in tax year 1996.
The law also required that the Company would be taxed on "applicable
excess reserves" which is determined by calculating the difference between the
balance of reserves as of the tax year ended 1995 and pre-1988 reserves. These
"applicable excess reserves" will be taxed over a six-taxable year period
beginning in 1996 unless a residential loan requirement is met. If the
residential loan requirement is met in 1996 and 1997, the payment of the tax
will commence in 1998. The Company met the requirement in 1997 and 1996.
The Company's computed "applicable excess reserves" totaled $1,956,670
and, based on an effective tax rate of 34%, would render additional tax of
$665,268. This computed tax is recorded as income taxes payable as of December
31, 1998 and 1997.
The tax effects of temporary differences that give rise to the
significant portions of deferred tax asset and liabilities at December 31,
1998 and 1997, are as follows:
1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets:
Loans receivable, allowance for loan losses $ 1,224 $ 1,065
Deferred loan fees 290 266
Office properties and equipment 238 201
Other 13 40
----------------------
Total deferred tax asset 1,765 1,572
----------------------
Deferred tax liabilities:
FHLB stock $ 362 $ 317
Other 2 87
----------------------
Total deferred tax liability 364 404
----------------------
Net deferred tax asset $ 1,401 $ 1,168
======================
SFAS 109, Accounting for Income Taxes, requires that the tax benefit of
deductible temporary differences be recorded as an asset to the extent that
management assesses the utilization of such temporary differences to be "more
likely than not." In accordance with SFAS 109, the realization of tax benefits
of deductible temporary differences depends on whether the Bank has sufficient
taxable income within the carryback and carryforward period permitted by tax
law to allow for utilization of the deductible amounts. Taxable income in the
carryback period and estimates of taxable income in the carryforward period
were expected to be sufficient to utilize such differences. As such, no
valuation allowance was established at December 31, 1998, 1997 or 1996.
(12) Employee Benefit Plans:
401(k) Plan - The Company sponsors a 401(k) plan which is available to
all employees who meet minimum eligibility requirements. Management has
contributed 2% of employees' earnings to the Plan on the employees' behalf.
Participants may generally contribute up to 15% of earnings, and, in addition,
management will match employee contributions up to 3%. Expense related to
Company contributions amounted to $174,000, $91,000 and $143,000 in the years
ended December 31, 1998, 1997 and 1996, respectively.
-forty four-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
ESOP - The ESOP is a noncontributory retirement plan adopted by the
Company effective January 1, 1998 which includes all employees who meet
minimum eligibility requirements. The ESOP acquired 603,060 shares of the
Corporation's common stock in the Conversion at a price of $10 per share with
proceeds of a loan from the Corporation in the amount of approximately
$6,031,000. The Bank makes periodic cash contributions to the ESOP in an
amount sufficient for the ESOP to make the scheduled payments under the note
payable to the Corporation.
The note payable has a term of 12 years, bears interest at 8.5% and
requires a level quarterly payment of principal and interest of approximately
$202,000. The note is collateralized by the shares of common stock held by the
ESOP.
As the note is repaid, shares are released from collateral based on the
proportion of the payment in relation to total payments required to be made on
the loan. The shares released from collateral are then allocated to
participants based upon compensation. Compensation expense is determined by
multiplying the per share market price of the Corporation's stock at the time
the shares are committed to be released by the number of shares to be
released. The Company recognized approximately $886,000 in compensation
expense in the year ended December 31, 1998 related to the ESOP of which
approximately $419,000 reduced the cost of unallocated ESOP shares and
$467,000 increased common stock on the balance sheet.
The cost of the unallocated shares is reflected as a reduction of equity.
Unallocated shares are considered neither outstanding shares for computation
of basic earnings per share nor potentially dilutive securities for
computation of diluted earnings per share. Dividends on unallocated ESOP
shares are reflected as a reduction in the note payable.
Shares released or committed to be released during the year ended
December 31, 1998 totaled 41,844. Shares remaining not released or committed
to be released for allocation at December 31, 1998 totaled 561,216 and had a
market value of approximately $11,926,000.
Defined Benefit Plan - The Company sponsored a defined benefit pension
plan to eligible participants. Under the defined benefit plan, the Company
contributed actuarially determined amounts necessary to fund plan benefits of
at least the minimum amount required by the Employee Retirement Income
Security Act of 1974, as amended. No contributions were required or allowed by
employees.
On October 9, 1997, the Board of Directors of the Bank elected to
terminate the defined benefit pension plan, effective December 31, 1997. The
termination of the plan resulted in the Company realizing a pre-tax
curtailment loss of $36,000 and a minimum liability adjustment of $348,000
during the last quarter of 1997.
The final disclosures of the defined benefit plan at December 31, 1997
have been prepared in accordance with SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits.
The following table sets forth the reconciliation of the benefit
obligation and plan asset value of the defined benefit pension plan for the
year ended December 31, 1997:
Change in Benefit Obligation:
Benefit obligation at January 1, 1997 $ 1,644
Service cost 167
Interest cost 121
Actuarial loss 125
Benefits paid (25)
Curtailment (105)
Settlement (1,927)
--------
Benefit obligation at December 31, 1997 $ -
========
Plan Asset Value:
Plan assets at January 1, 1997 $ 1,312
Actual return on plan assets 178
Employer contributions 462
Benefits paid (25)
Settlement (1,927)
--------
Plan assets at December 31, 1997 $ -
========
-forty five-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The following table sets forth the rates utilized by the actuaries to
determine assumptions at December 31, 1997:
Weighted - Average Assumptions:
Discount rate 4.00%
Expected return on plan assets 8.00
Rate of compensation increase 0.00 (due to plan termination)
Net periodic benefit cost included the following components for the year
ended December 31, 1997:
Service cost $ 167
Interest cost 121
Expected return on plan assets (119)
Amortization of transition obligation (asset) (11)
Amortization of prior service costs 4
Amortization of net (gain) or loss 21
Curtailment loss 36
Settlement loss 348
--------
Net periodic benefit cost $ 567
========
(13) Equity
Liquidation Account
At the time of the Conversion, the Bank established a liquidation account
for the benefit of eligible account holders who continue to maintain their
accounts at the Bank after the Conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held before any distribution may be made to the Corporation with respect to
the Bank's capital stock.
Dividends
The Corporation's sources of income and funds for dividends to its
shareholders are earnings on its investments and dividends from the Bank. The
Bank's primary regulator, the Office of Thrift Supervision ("OTS"), has
regulations that impose certain restrictions on payment of dividends to the
Corporation. Current regulations of the OTS allow the Bank (based upon its
current capital level and supervisory status assigned by the OTS) to pay a
dividend of up to 100% of net income to date during the calendar year plus 50%
of its surplus capital existing at the beginning of the calendar year.
Supervisory approval is not required, but 30 days prior notice to the OTS is
required. Any capital distribution in excess of this amount would require
supervisory approval. Capital distributions are further restricted should the
Bank's capital level fall below the fully phased-in capital requirements of
the OTS. In no case will the Bank be allowed to make a capital distribution
reducing equity below the required balance of the liquidation account. The
Bank did not declare or pay dividends to the Corporation in the year ended
December 31, 1998.
OTS regulations also place restrictions after the Conversion on the
Corporation with respect to repurchases of its common stock. With prior notice
to the OTS, the Corporation is allowed to repurchase its outstanding shares.
During 1998, the Corporation requested and received regulatory approval to
acquire 376,913 shares of its outstanding common stock. The shares were
acquired for $8,578,000.
(14) Regulatory Matters:
The amounts for retained earnings and net income reported to the OTS
agree to the amounts per the accompanying consolidated financial statements at
December 31, 1998 and 1997, and for the years then ended.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established a capital based supervisory system of Prompt Corrective
Action (PCA) for all insured depository institutions. The regulations adopted
pursuant to FDICIA and effective December 19, 1992, established capital
categories that determine the degree of supervisory PCA to which a depository
institution could be subjected. The categories consist of "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized". An institution is deemed to be "well
capitalized" if (a) its risk-based capital ratio is 10% or greater, (b) its
Tier 1 risk-based capital ratio is 6% or greater, and (c) its leverage ratio
is 5% or greater. At December 31, 1998, the Bank was "well-capitalized."
-forty six-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
When an insured depository institution's capital ratios fall below the
"well-capitalized" level it becomes subject to a series of increasingly
restrictive supervisory actions, to the point where a conservator or receiver
must be designated for a "critically undercapitalized" institution unless
certain certifications are made by the appropriate regulatory agencies. An
institution is deemed to be "critically undercapitalized" if its ratio of
Tier 1 capital to total assets is 2% or less. The following table presents the
Bank's equity capital and regulatory capital ratios as of December 31, 1998
and December 31, 1997:
December 31, 1998
-----------------------------------------------------------
Tier 1 Total
Core 1 risk- risk
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
- ------------------------------------------------------------------------------
Equity capital $ 72,306 $ 72,306 $ 72,306 $ 72,306 $ 72,306 $ 72,306
Unrealized gain
on investment
securities
available-for-
sale - (34) (34) (34) (34) (34)
General valuation
allowances - - - - - 3,231
Regulatory capital ----------------------------------------------------------
measure $ 72,306 $ 72,272 $ 72,272 $ 72,272 $ 72,272 $ 75,503
==========================================================
Total assets $342,461
Adjusted total ========
assets $342,461 $341,487 $341,487
============================
Risk-weighted assets $312,987 $312,987
==================
Capital ratio 21.11% 21.10% 21.16% 21.16% 23.09% 24.12%
==========================================================
December 31, 1997
-----------------------------------------------------------
Tier 1 Total
Core 1 risk- risk
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
- ------------------------------------------------------------------------------
Equity capital $ 30,447 $ 30,447 $ 30,447 $ 30,447 $ 30,447 $ 30,447
Unrealized loss
on investment
securities
available-for-
sale - 5 5 5 5 5
General valuation
allowances - - - - - 2,804
Regulatory capital ----------------------------------------------------------
measure $ 30,447 $ 30,452 $ 30,452 $ 30,452 $ 30,452 $ 33,256
==========================================================
Total assets $282,129
========
Adjusted total
assets $282,129 $279,985 $279,985
============================
Risk-weighted
assets $245,482 $245,482
==================
Capital ratio 10.79% 10.79% 10.88% 10.88% 12.40% 13.55%
==========================================================
The Bank's management believes that at December 31, 1998, that the Bank
meets all capital requirements to which it is subject.
(15) Earnings Per Share
Earnings per share ("EPS") for the years ended December 31, 1997 and 1996
are not presented because no shares were issued or outstanding during those
periods.
For purposes of EPS calculations, shares issued in connection with the
Conversion have been assumed to be outstanding as of January 1, 1998.
The Company had no potentially dilutive securities outstanding during the
year ended December 31, 1998; therefore, diluted EPS is the same as basic EPS.
For the year ended December 31, 1998, 6,908,959 weighted average shares were
outstanding.
(16) Financial Instruments with Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
-forty seven-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented
by the contractual notional amount of those instruments. The Company uses the
same credit policies in making these commitments and conditional obligations
as it does for on-balance-sheet instruments.
At December 31, 1998 and 1997, unused lines of credit were approximately
$30,645,000 and $25,287,000, respectively, with the majority having terms of
one year for commercial and two to five years for consumer; outstanding
letter of credit balances were approximately $7,184,000 and $7,345,000,
respectively; and commitments to originate or purchase loans were
approximately $52,098,000 and $42,270,000, respectively. The commitments to
originate loans at December 31, 1998 were composed of variable rate loans of
approximately $40,210,000 and fixed rate loans of approximately $11,888,000.
The fixed rate loans had interest rates ranging from 5.98% to 8.50%. The
commitments to originate loans at December 31, 1997 were composed of variable
rate loans of approximately $41,981,000 and fixed rate loans of approximately
$289,000. The fixed rate loans had interest rates ranging from 5.125% to
8.50%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counter-party. Collateral held
varies but may include property, plant, and equipment and income-producing
commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company 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.
(17) Fair Value of Financial Instruments:
Information about the fair value of the financial instruments in the
consolidated balance sheets, which should be read in conjunction with Note 1
and certain other notes to the consolidated financial statements presented
elsewhere herein, is set forth as follows:
1998 1997
------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 53,188 $ 53,188 $ 37,658 $ 37,658
Investment securities available-
for-sale 46,505 46,505 10,077 10,077
Investment securities held to
maturity - - 1,700 1,700
Mortgage-backed securities held
to maturity 959 963 1,301 1,312
Loans receivable, net 237,547 238,047 212,979 215,759
Loans available for sale 10,923 10,923 4,855 4,855
Accrued interest receivable 2,376 2,376 1,724 1,724
Required investment in stock of
the Federal Home Loan Bank 1,751 1,751 1,631 1,631
Financial liabilities:
Deposits with no stated maturity 140,773 140,773 115,386 115,386
Certificates of deposits 125,259 126,701 132,881 133,549
Off-balance sheet assets
(liabilities):
Unused lines of credit - -
Standby letters of credit - -
Commitments to extend credit - -
(18) Federal Insurance Premiums:
During 1996, all Savings Association Insurance Fund (SAIF) members were
required to pay a one-time special assessment to the FDIC on SAIF-assessable
deposits to capitalize the SAIF at its target Designated Reserve Ratio of
1.25% of insured deposits effective October 1, 1996. The assessment was
required to be applied against SAIF-
-forty eight-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
assessable deposits as of March 31, 1995 with an assessment rate of 67.5 basis
points. The expense incurred by the Bank for the years ended December 31,
1998, 1997 and 1996 was $146,000, $112,000 and $1,654,000, respectively.
(19) Commitments and Contingencies:
In the normal course of the Company's business, there are outstanding
various commitments and contingent liabilities that have not been reflected in
the consolidated statements. In the opinion of management, the financial
position of the Company will not be affected materially as a result of such
commitments and contingent liabilities.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position of the Company will not be affected materially
by the outcome of such legal proceedings.
The Company's profitability depends to a large extent on its net interest
income, which is the difference between interest income on loans and
investments and interest expense on deposits. Like most financial
institutions, the Company's interest income and interest expense are
significantly affected by changes in market interest rates and other economic
factors beyond its control. The Company's interest earning assets consist
primarily of mortgage loans and investments which adjust more slowly to
changes in interest rates than its interest-bearing deposits. Accordingly, the
Company's earnings would be adversely affected during periods of rising
interest rates.
The Corporation and the Bank have agreed to enter into Employment
Agreements with two of the Bank's executive officers, which provide certain
benefits in the event of their termination following a change in control of
the Corporation or the Bank. The employment agreements provide for an initial
term of three years. On each anniversary of the commencement date of the
Employment Agreements, the term of each agreement may be extended for an
additional year at the discretion of the Board. In the event of a change in
control of the Corporation or the Bank, as defined in the agreement, each
executive officer will be entitled to a package of cash and/or benefits with a
maximum value each to 2.99 times their average annual compensation during the
five-year period preceding the change in control.
The Corporation and the Bank have also agreed to enter into Severance
Agreements with seven of the Bank's senior officers, none of whom are covered
by an Employment Agreement. Each agreement has an initial term of two years.
On each anniversary of the commencement due date of the Severance Agreements,
the term of each agreement may be extended for an additional year at the
discretion of the Board. In the event of a change in control of the
Corporation or the Bank, as defined in the agreement, each senior officer will
be entitled to a package of cash and/or benefits with a maximum value equal to
2.99 times their average annual compensation during the five-year period
preceding the change in control.
The Corporation and the Bank have entered into a Key Employee Severance
Compensation Plan to provide benefits to eligible key employees in the event
of a change in control of the Corporation or the Bank. In general all officers
except those who have entered into separate Employment or Severance Agreements
with the Bank will be eligible to participate in the Severance Plan. In the
event of a change in control of the Corporation or the Bank, eligible key
employees who are terminated or who terminate employment within 12 months of
the effective date of a change in control will be entitled to a payment based
on years of service with the Bank, not to exceed an amount equal to three
months of their then current compensation.
-forty nine-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(20) Condensed Parent Company Only Financial Statements:
The following table presents the condensed balance sheet of the
Corporation at December 31, 1998 and the condensed statements of income and
cash flows for the year ended (the Corporation was inactive from its inception
on November 5, 1997 through the Conversion on March 16, 1998):
Condensed Balance Sheet:
Assets:
Cash and cash equivalents $ 8,941
Investments available-for-sale 13,526
Investment in Bank 35,348
Note receivable from Bank 5,767
Other assets 130
----------
Total assets $ 63,712
==========
Liabilities and Shareholders' Equity:
Other liabilities $ 344
Shareholders' equity 63,368
----------
Total liabilities and shareholders' equity $ 63,712
==========
Condensed Income Statement:
Interest income $ 1,656
Noninterest expense 294
Income before income taxes and equity in ----------
undistributed earnings of the Bank 1,362
Provision for income taxes 575
----------
Net income before equity in undistributed earnings of Bank 787
Equity in undistributed earnings of Bank 3,549
----------
Net income $ 4,336
==========
Condensed Statement of Cash Flows:
Cash flows from operating activities:
Net income $ 4,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bank (3,549)
Net accretion of investments available-for-sale
and held to maturity (113)
Net change in other assets and liabilities (154)
----------
Net cash provided by operating activities $ 520
==========
Cash flows from investing activities:
Investment in Bank $ (36,910)
Purchases of investments available-for-sale (27,446)
Purchase of investments held to maturity (3,940)
Maturities of investments available-for-sale 14,000
Maturities of investments held to maturity 4,000
Collection on notes receivable from Bank 264
----------
Net cash used in investing activities $ (50,032)
==========
Cash flows from financing activities:
Issue of common stock $ 69,352
Retirement of common stock (8,578)
Stock issuance costs (1,567)
Dividends paid (754)
----------
Net cash provided by financing activities 58,453
Net increase in and ending balance of cash ----------
and cash equivalents $ 8,941
==========
-fifty-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(21) Quarterly Results of Operations (Unaudited)
Summarized unaudited quarterly operating results for the years ended
December 31, 1998 and 1997 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
December 31, 1998:
Interest income $ 6,434 $ 6,604 $ 6,698 $ 6,860
Interest expense 2,653 2,270 2,310 2,361
---------------------------------------------
Net interest income 3,781 4,334 4,388 4,499
Provision for loan losses 54 81 173 144
Net interest income after ---------------------------------------------
provision for loan losses 3,727 4,253 4,215 4,355
Noninterest income 1,277 1,154 1,293 1,502
Noninterest expense 2,793 2,991 3,262 3,435
---------------------------------------------
Income before income taxes 2,211 2,416 2,246 2,422
Income taxes 830 906 842 1,020
---------------------------------------------
Net income $ 1,381 $ 1,510 $ 1,404 $ 1,402
=============================================
Basic earnings per share
(note 15) $ 0.20 $ 0.22 $ 0.20 $ 0.21
=============================================
Weighted average shares
outstanding (note 15) 6,935,190 6,947,754 6,960,318 6,805,995
=============================================
December 31, 1997:
Interest income $ 5,113 $ 5,370 $ 5,677 $ 5,779
Interest expense 2,172 2,240 2,403 2,474
---------------------------------------------
Net interest income 2,941 3,130 3,274 3,305
Provision for loan losses 75 75 550 -
Net interest income after
provision for loan losses 2,866 3,055 2,724 3,305
Noninterest income 747 797 971 1,146
Noninterest expense 2,154 2,400 2,800 3,144
---------------------------------------------
Income before income taxes 1,459 1,452 895 1,307
Income taxes 564 561 423 363
---------------------------------------------
Net income $ 895 $ 891 $ 472 $ 944
=============================================
Basic earnings per share
(note 15) N/A N/A N/A N/A
=============================================
Weighted average shares
outstanding (note 15) N/A N/A N/A N/A
=============================================
(22) Comprehensive Income
SFAS No. 130, (SFAS 130), Reporting Comprehensive Income, was adopted by
the Company on January 1, 1998. SFAS 130 established standards for reporting
comprehensive income. Comprehensive income includes net income and other
comprehensive net income which is defined as non-owner related transactions in
equity. Prior periods have been reclassified to reflect the application of the
provisions of SFAS 130. The following table sets forth the amounts of other
comprehensive income included in equity along with the related tax effect for
the years ended December 31, 1998 and 1997:
Pre-Tax (Expense) Net of Tax
Amount Benefit Amount
- ------------------------------------------------------------------------------
December 31, 1998:
Unrealized holding gains for the period $ 86 $ ( 30) $ 56
----------------------------
$ 86 $ ( 30) $ 56
============================
December 31, 1997:
Unrealized holding losses for the period $ (8) $ 3 $ (5)
----------------------------
$ (8) $ 3 $ (5)
============================
(23) 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 are derived each
year from transactions with agencies of the U.S. government. In addition, one
unrelated entity purchased approximately 50% of mortgage loans sold in 1998,
1997 and 1996.
-fifty one-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Segment information is derived from the internal reporting system
utilized by management with accounting policies and procedures consistent with
those described in note 1. 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
1998 Banking Banking Trust Consolidated
- ------------------------------------------------------------------------------
Interest revenue $ 26,596 $ - $ - $ 26,596
Other income-external customers 1,791 374 795 2,960
Interest expense 9,594 - - 9,594
Depreciation and amortization 927 245 35 1,207
Other significant items:
Provisions for loan losses 452 - - 452
Gain on sale of assets - 2,266 - 2,266
Segment profit 8,430 631 234 9,295
Segment assets $353,020 $11,719 $153 $364,892
Mortgage
1997 Banking Banking Trust Consolidated
- ------------------------------------------------------------------------------
Interest revenue $ 21,939 $ - $ - $ 21,939
Other income-external customers 1,380 506 649 2,535
Interest expense 9,289 - - 9,289
Depreciation and amortization 826 214 38 1,078
Other significant items:
Provisions for loan losses 700 - - 700
Gain on sale of assets - 1,126 - 1,126
Segment profit 4,895 93 125 5,113
Segment assets $276,943 $ 5,137 $ 49 $282,129
Mortgage
1996 Banking Banking Trust Consolidated
- ------------------------------------------------------------------------------
Interest revenue $ 19,584 $ - $ - $ 19,584
Other income-external customers 1,237 548 483 2,268
Interest expense 8,268 - - 8,268
Depreciation and amortization 639 76 18 733
Other significant items:
Provisions for loan losses 120 - - 120
Gain on sale of assets - 890 - 890
Segment profit 4,026 513 29 4,568
Segment assets $239,580 $ 5,339 $ 45 $244,964
-fifty two-
<PAGE>
<PAGE>
CAVALRY BANCORP, INC. 1998 ANNUAL REPORT
CORPORATE INFORMATION
CORPORATE ADDRESS
114 West College Street
Murfreesboro, Tennessee 37130
(615)893-1234
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, NJ 07660
INDEPENDENT AUDITORS
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
MARKET PRICE OF THE CORPORATION'S
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Common stock of Cavalry Bancorp, Inc. is listed on the Nasdaq
National Market System under the symbol "CAVB". The following table
discloses on a quarterly basis the high, low and closing price and dividends
declared for the stock for the year ended December 31, 1998. There was no
stock issued prior to March 16, 1998.
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------
Market Price:
High $ 24.50 $ 22.00 $ 24.75 $ 26.25
Low 18.44 18.25 21.75 20.00
Close 21.25 18.75 21.75 23.38
Dividends Declared $ 0.05 $ 0.05 $ 0.05 $ 0.00
The Company may not declare or pay a cash dividend on any of its
stock if the effect thereof would cause the Company's regulatory capital to
be reduced below the amount required for the liquidation account
established in connection with the mutual to stock conversion.
The approximate number of shareholders of the Company's
common stock as of March 1, 1999 was 2,900.
ANNUAL MEETING
The Annual Meeting of Shareholders of Cavalry Bancorp, Inc.
will be held at 10:00 a.m. Central Daylight Time, April 22, 1999, in the
Fifth Floor Meeting Room of the main office of Cavalry Banking,
114 West College Street, Murfreesboro, Tennessee.
A COPY OF THE FORM 10-K, INCLUDING CONSOLIDATED FINANCIAL
STATEMENTS, AS FILED WITH THE SECURITIES AND EXCHANGE COM-
MISSION WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE
ANNUAL MEETING OF SHAREHOLDERS UPON WRITTEN REQUEST TO
IRA B. LEWIS, JR., SECRETARY, CAVALRY BANCORP, INC., 114 WEST
COLLEGE STREET, MURFREESBORO, TENNESSEE 37130.
<PAGE>
Cavalry
- -------------
Bancorp, Inc.
114 West College Street
Murfreesboro, Tennessee 37130
(615)893-1234
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
______
Cavalry Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
________________ ____________ ______________________
Cavalry Banking 100% United States
______________
(a) The operation of the Company's wholly owned subsidiaries are
included in the Company's Financial Statements contained in Item
8 of this Form 10-K.
<PAGE>
<PAGE>
Exhibit 23
Consent of Rayburn, Betts & Bates, P.C.
<PAGE>
<PAGE>
[Letterhead of Rayburn, Betts & Bates, P.C.]
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in Registration Statement
No. 333-48007 of Cavalry Bancorp, Inc. on Form S-8, of our report dated
January 22, 1999, included in the Annual Report to Shareholders of Cavalry
Bancorp, Inc. for the year ended December 31, 1998 incorporated by reference
in this Form 10-K.
/s/Rayburn, Betts & Bates, P.C.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
March 18, 1999
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule (in thousands)
This schedule contains financial information extracted from the consolidated
financial statements of Cavalry Bancorp, Inc. for the year ended December 31,
1998 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for
the year ended
Item Number December 31, 1998 Item Description
___________ _________________ ________________
9-03 (1) $ 12,110 Cash and Due from Banks
9-03 (2) 41,078 Interest - bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 46,505 Investment and mortgage backed
securities held for sale
9-03 (6) 959 Investment and mortgage backed
securities held to maturity -
carrying value
9-03 (6) 963 Investment and mortgage backed
securities held to maturity -
market value
9-03 (7) 248,470 Loans
9-03 (7)(2) 3,231 Allowance for loan losses
9-03 (11) 364,892 Total assets
9-03 (12) 266,032 Deposits
9-03 (13) -- Short - term borrowings
9-03 (15) 3,679 Other liabilities
9-03 (16) -- Long - term debt
9-03 (19) -- Preferred stock - mandatory redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 65,705 Common stocks
9-03 (22) 29,476 Other stockholders' equity
9-03 (23) 364,892 Total liabilities and stockholders'
equity
9-04 (1) 21,801 Interest and fees on loans
9-04 (2) 1,936 Interest and dividends on investments
9-04 (4) 2,859 Other interest income
9-04 (5) 26,596 Total interest income
9-04 (6) 9,594 Interest on deposits
9-04 (9) 9,594 Total interest expense
9-04 (10) 17,002 Net interest income
9-04 (11) 452 Provision for loan losses
9-04 (13)(h) -- Investment securities gains/(losses)
9-04 (14) 12,481 Other expenses
9-04 (15) 9,295 Income/loss before income tax
9-04 (17) 9,295 Income/loss before extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 5,697 Net income or loss
9-04 (21) 0.83 Earnings per share - primary
9-04 (21) 0.83 Earnings per share - fully diluted
I.B. 5 5.29 Net yield - interest earnings - actual
III.C.1. (a) 107 Loans on non - accrual
III.C.1. (b) 66 Accruing loans past due 90 days or more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 2,804 Allowance for loan loss - beginning of
period
IV.A.2 54 Total chargeoffs
IV.A.3 29 Total recoveries
IV.A.4 3,231 Allowance for loan loss - end of period
IV.B.1 2,868 Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 363 Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12110
<INT-BEARING-DEPOSITS> 41078
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46505
<INVESTMENTS-CARRYING> 959
<INVESTMENTS-MARKET> 963
<LOANS> 248470
<ALLOWANCE> 3231
<TOTAL-ASSETS> 364892
<DEPOSITS> 266032
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3679
<LONG-TERM> 0
0
0
<COMMON> 65705
<OTHER-SE> 29476
<TOTAL-LIABILITIES-AND-EQUITY> 364892
<INTEREST-LOAN> 21801
<INTEREST-INVEST> 1936
<INTEREST-OTHER> 2859
<INTEREST-TOTAL> 26596
<INTEREST-DEPOSIT> 9594
<INTEREST-EXPENSE> 9594
<INTEREST-INCOME-NET> 17002
<LOAN-LOSSES> 452
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12481
<INCOME-PRETAX> 9295
<INCOME-PRE-EXTRAORDINARY> 9295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5697
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 5.29
<LOANS-NON> 107
<LOANS-PAST> 66
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2804
<CHARGE-OFFS> 54
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 3231
<ALLOWANCE-DOMESTIC> 2868
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 363
</TABLE>
