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, 1999 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 executive offices) (Zip Code)
Registrant's telephone number, (615) 893-1234
including area code: --------------------
Securities registered pursuant None
to Section 12(b) of the Act: --------------------
Securities registered pursuant to Common Stock, no
Section 12(g) of the Act: par 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. X
---
The aggregate market value of the voting stock held by non-affiliates 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 22, 2000, was $90,586,213 (7,104,801 shares at $12.75 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, 1999 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders (Part III).
<PAGE>
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. At December 31, 1999, the Company had total assets
of $395.4 million, total deposits of $308.9 million and shareholders' equity of
$38.8 million. 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 17 and 18 of the
1999 Annual Report to Stockholders ("Annual Report") included herein as Exhibit
13.
LENDING ACTIVITIES
GENERAL. At December 31, 1999, the Bank's total loans receivable portfolio
amounted to $276.7 million, or 70.0% 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
$60.3 million, or 18.1% of the total loans receivable portfolio at December 31,
1999. 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.
1
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
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) $60,261 18.1% $75,554 24.8% $82,930 32.9% $81,279 33.1% $72,302 36.4%
Multi-family 780 0.2 1,125 0.4 1,338 0.5 2,847 1.2 1,705 0.9
Commercial 71,419 21.4 52,516 17.2 39,690 15.8 30,099 12.3 22,140 11.1
Construction 69,421 20.9 84,900 27.9 54,666 21.7 61,032 24.9 47,416 23.9
Land acquisition
and Development 40,645 12.2 15,367 5.1 17,011 6.8 18,799 7.7 13,816 6.8
------- ---- ------ --- ------ --- ------ --- ------ ---
Total mortgage
loans 242,526 72.8 229,462 75.4 195,635 77.7 194,056 79.2 157,379 79.1
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Consumer Loans:
Home equity
lines of credit 4,788 1.4 3,790 1.2 2,783 1.1 1,964 0.8 941 0.5
Automobile 8,632 2.6 6,788 2.2 5,028 2.0 3,716 1.5 2,735 1.4
Unsecured 1,649 0.5 1,527 0.5 1,684 0.7 1,779 0.7 1,996 1.0
Other secured 38,809 11.7 32,792 10.8 23,852 9.5 23,037 9.4 20,982 10.6
------ ---- ------ ---- ------ --- ------ --- ------ ----
Total consumer
Loans 53,878 16.2 44,897 14.7 33,347 13.3 30,496 12.4 26,654 13.5
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Commercial
business loans 36,456 11.0 30,213 9.9 22,544 9.0 20,698 8.4 14,771 7.4
------ ---- ------ --- ------ --- ------ --- ------ ----
Total loans 332,860 100.0% 304,572 100.0% 251,526 100.0% 245,250 100.0% 198,804 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed
portion of loans
in process 51,243 52,098 30,178 36,573 32,615
Net deferred
loan fees 785 773 710 701 560
Allowance for
loan losses 4,136 3,231 2,804 2,123 1,997
----- -------- -------- -------- --------
Total loans
receivable,
net $276,696 $248,470 $217,834 $205,853 $163,632
======== ======== ======== ======== ========
- -------------
(1) Includes loans held-for-sale.
</TABLE>
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, 1999, $60.3 million, or 18.1% of the Bank's total
loan portfolio, consisted of such loans. The Bank originated $121.2 million,
$159.3 million and $80.0 million of one-to-four family residential mortgage
loans during the years ended December 31, 1999, 1998 and 1997, 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.
The Bank also originates ARM loans at rates and terms competitive with
market conditions. At December 31, 1999, $50.2 million, or 15.1% 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 the 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.
2
<PAGE>
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.
At December 31, 1999, the composition of the Bank's construction loan portfolio
was as follows:
Outstanding Percent of
Balance(1) Total
---------- -------
(In thousands)
Residential:
Speculative construction $35,270 50.81%
Pre-sold construction 12,110 17.44
Construction/permanent 9,313 13.42
Commercial and multi-family 12,728 18.33
------- ------
Total $ 69,421 100.00%
======== ======
____________________
(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 pay debt service on 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 homebuilders 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, 1999, the Bank had
16 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 $1.2 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 from
0.5% 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, 1999, the largest outstanding pre-sold construction loan
had an outstanding balance of $520,000 and was performing according to its
terms.
Construction/permanent loans are originated to the homeowner rather than
the homebuilder. 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, 1999,
the largest outstanding construction/permanent loan had an outstanding balance
of $448,000 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, 1999, such construction loans amounted to $12.7 million.
3
<PAGE>
Construction loans up to $1,000,000 may be approved by combining the
lending authority of loan officers up to the required level. The maximum
lending authority for any one loan officer is $500,000. The level of each
individual loan officer s lending authority is reviewed and approved annually.
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 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, 1999, the Bank had land A&D loans with aggregate
approved commitments of $40.6 million, of which an aggregate of $23.0 million
was outstanding. At December 31, 1999, the largest land A&D loan had an
outstanding balance of $1.9 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 generally
obtains personal guarantees from the principals of its corporate borrowers. At
December 31, 1999, the Bank did not have any nonaccruing land A&D loans.
4
<PAGE>
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-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, 1999, $71.4 million, or 21.4% 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, 1999,
the largest commercial real estate loan had an outstanding balance of $2.4
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. Generally, 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, 1999, commercial business loans amounted to $36.5
million, or 11.0% of total loans.
5
<PAGE>
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 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, 1999, the largest commercial business loan to an
unaffiliated borrower was a $1.0 million line of credit secured by marketable
equity securities, with an outstanding balance of $205,000 at that date. At
December 31, 1999, the largest commercial business loan with an outstanding
balance had a balance of $503,000 and was secured by equipment and real estate.
Such loans were performing according to their terms at December 31, 1999.
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, 1999, the Bank's consumer loans
totaled $53.9 million, or 16.2%, 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
12.3%, 12.8% and 11.9% of the Bank's total loan originations in the fiscal years
ended December 31, 1999, 1998 and 1997, 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, 1999 were less than $50,000. At
December 31, 1999, approved lines of credit totaled $7.1 million, of which $4.8
million was outstanding.
At December 31, 1999, the Bank's automobile loan portfolio amounted to $8.6
million, or 2.6%, 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.
6
<PAGE>
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 $38.8 million, or 11.7% of total
loans, at December 31, 1999.
At December 31, 1999, unsecured consumer loans amounted to $1.6 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 $497,000 at December 31, 1999.
Approved credit card lines totaled $1.8 million at December 31, 1999. 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
monthly.
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, 1999, the Bank had $5,000
of consumer loans accounted for on a nonaccrual basis.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1999 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 $ 4,824 $ 4,106 $ 3,759 $ 9,799 $39,851 $ 62,339
Construction 46,249 12,484 - - 86 58,819
Commercial 17,330 15,300 31,813 5,362 277 70,082
Consumer and other loans 11,886 17,993 21,438 2,540 63 53,920
Commercial business loans 21,227 7,842 6,080 618 690 36,457
------ ------ ------ ---- ------ ------
Total $101,516 $57,725 $63,090 $18,319 $40,967 $281,617
======== ======= ======= ======= ======= ========
7
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
------- -----------------
(In thousands)
Mortgage loans:
Residential $7,808 $49,707
Construction - 12,570
Commercial 52,225 527
Consumer and other loans 37,105 4,929
Commercial business loans 14,483 747
------ ------
Total $111,621 $68,480
======== =======
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 $1,000,000 may be approved by any
combining the lending authority of loan officers up to the required level. The
maximum lending authority for any one loan officer is $500,000. The level of
each individual loan officers lending authority is reviewed and approved
annually by the Board of Directors. Loans over $1,000,000 must be approved by
the Board of Directors. One- to- four family residential 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.
8
<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, including 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 loan 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 $124.1 million at December 31, 1999. The Bank is
generally paid a fee equal to 0.25% of the outstanding principal balance for
servicing sold loans. Loan servicing income totaled $112,000, $264,000 and
$387,000 for the years ended December 31, 1999, 1998 and 1997, 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, 1999, borrowers' escrow funds amounted to $178,000.
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,
--------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family $121,159 $159,259 $ 80,021
Multi-family 2,350 - -
Commercial 21,403 19,118 9,086
Construction 87,956 80,150 74,122
Land 34,964 11,624 3,091
Consumer 46,043 49,253 28,649
Commercial business loans 59,556 65,046 46,436
------- -------- --------
Total loans originated 373,431 384,450 241,405
Loans purchased:
One- to- four family - - -
-------- ------- -------
Total loans originated and purchased 373,431 384,450 241,405
(table continued on following page)
9
<PAGE>
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loans sold:
Whole loans sold (121,735) (120,761) (70,511)
--------- --------- --------
Total loans sold (121,735) (120,761) (70,511)
Mortgage loan principal repayments (84,602) (115,563) (92,500)
Other loan principal repayments (138,930) (95,080) (70,388)
Increase (decrease) in other items, net 62 (22,410) 3,975
--------- ------- -------
Net increase (decrease) in loans, net $28,226 $30,636 $11,981
======= ======= =======
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, 1999, the Bank had no loan commitments (excluding undisbursed
portions of interim construction loans of $51.2 million) and unused lines of
credit of $36.4 million. See Note 18 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, 1999, the Bank had outstanding standby letters of
credit of $7.5 million that were issued primarily to municipalities as
performance bonds. See Note 18 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 modifications, late
payments and for miscellaneous services 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 $1.0 million,
$1.2 million and $1.1 million of deferred loan fees during the years ended
December 31, 1999, 1998 and 1997, 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, 1999 and 1998 amounted to
$112,000 and $264,000, respectively. At December 31, 1999, the Bank serviced
loans for others totaling $124.1 million. See Note 5 of Notes to the
Consolidated Financial Statements contained in the Annual Report.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a borrower 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.
10
<PAGE>
Loans are placed on non-accrual 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
non-accrual 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,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One- to- four family $328 $74 $ 73 $ 9 $ 37
Construction - - 68 - -
Commercial - - - - -
Consumer loans (automobile) - 32 9 42 70
Other 5 1 - - -
----- ---- ---- ---- ----
Total 333 107 150 51 107
Accruing loans which are
contractually past due 90 days
or more - 66 98 - -
- - - - -
Total of nonaccrual and 90 days
past due loans 333 173 248 51 107
Real estate owned 117 80 - - -
Other repossessed assets 49 - - - -
---- ---- ---- ---- ----
Total nonperforming assets $499 $253 $248 $ 51 $107
==== ==== ==== ===== ====
Restructured loans $ - $ - $ - $ - $ -
==== ==== ==== ===== ====
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, net 0.12% 0.07% 0.11% 0.02% 0.07%
Nonaccrual and 90 days or more past
Due loans as a percentage of total
assets 0.08% 0.05% 0.09% 0.02% 0.05%
Nonperforming assets as a percentage
of total assets 0.13% 0.07% 0.09% 0.02% 0.05%
Interest income that would have been recorded for the year ended December
31, 1999 had non-accruing loans been current in accordance with their original
terms would have amounted to $20,300. No interest was included in interest
income on such loans for the year ended December 31, 1999.
11
<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, 1999, the Bank had 2 properties
in real estate owned which consisted of two single family residences.
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 a borrower do not necessarily always constitute troubled debt
restructurings, however, and troubled debt restructurings do not necessarily
result in non-accrual loans. The Bank did not have any restructured loans at
December 31, 1999.
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,
------------------
1999 1998
---- ----
(In thousands)
Loss $ - $ -
Doubtful 74 8
Substandard assets 3,553 1,411
Special mention 162 -
At December 31, 1999, substandard assets consisted of six repossessed
assets totaling $166,000, ten one-to-four family mortgage loans totaling
$670,000, fifty consumer loans totaling $471,000, and eight commercial loans
totaling $2.2 million. Doubtful loans consisted of three consumer loans of
$24,000 and four commercial loans totaling $50,000. See Note 5 to the
Consolidated Financial Statements contained in the Annual Report 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.
12
<PAGE>
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 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, 1999, the Bank had an allowance for loan losses of $4.1
million. Management believes that the amount maintained in the allowances at
December 31, 1999 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.
13
<PAGE>
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $3,231 $2,804 $2,123 $1,997 $1,776
Provision for loan losses 991 452 700 120 80
Recoveries:
Mortgage loans:
One- to- four family - - - 14 8
Multi-family - - - - 68
Commercial - - - 1 101
Construction - - - - 3
Consumer loans:
Automobiles 13 8 23 - -
Unsecured - - 5 191 -
Other - 21 1 12 12
Commercial business loans 3 - 1 - -
----- ----- ---- ---- ----
Total recoveries 16 29 30 218 192
Charge-offs:
Mortgage loans:
One- to- four family 5 - - 10 -
Construction - - - - 6
Consumer loans:
Home equity lines of credit - - - - -
Automobile 35 16 40 - 4
Credit card 3 5 1 - -
Unsecured 9 - - 196 -
Other 47 33 5 6 34
Commercial business loans 3 - 3 - 7
---- ---- ---- ---- ----
Total charge-offs 102 54 49 212 51
---- ---- ---- ---- ----
Net recoveries (charge-offs) (86) (25) (19) 6 141
---- ---- ---- ---- ----
Allowance at end of period $4,136 $3,231 $2,804 $2,123 $1,997
====== ====== ====== ====== =====
Allowance for loan losses as a
percentage of total loans outstanding
at the end of the period 1.24% 1.06% 1.11% 0.87% 1.00%
Net (charge-offs)recoveries as a
percentage of average loans
outstanding during the period (0.03)% (0.01)% (0.01)% -% 0.09%
Allowance for loan losses as a
percentage of nonperforming loans
at end of period 1,242.04% 3,019.63% 1,130.65% 4,162.75% 1,866.36%
</TABLE>
14
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ------------- ------------ ----------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $ 301 18.1% $ 378 24.8% $415 32.9% $122 33.1% $108 36.4%
Multi-family 4 0.2 6 0.4 20 0.5 4 1.2 3 0.9
Commercial 1,101 21.4 788 17.2 595 15.8 301 12.3 221 11.1
Construction 740 20.9 492 27.9 367 21.7 245 24.9 148 23.9
Land. 346 12.2 231 5.1 255 6.8 188 7.7 138 6.8
Consumer loans:
Home equity
lines of credit 72 1.4 57 1.2 42 1.1 25 0.8 9 0.5
Automobile 129 2.6 102 2.2 75 2.0 46 1.5 27 1.4
Credit cards 74 0.1 6 0.1 3 0.1 - - - -
Loans secured by
deposit accounts - 0.6 - - - - - - 1 -
Unsecured 17 0.4 17 0.4 22 0.6 22 0.7 20 1.0
Other secured 582 11.1 453 10.8 358 9.5 288 9.4 209 10.6
Commercial business
loans 547 11.0 338 9.9 338 9.0 259 8.4 148 7.4
Unallocated 223 N/A 363 N/A 314 N/A 623 N/A 965 N/A
---- ---- --- --- --- --- --- --- --- ---
Total allowance
for loan losses $4,136 100.0% $3,231 100.0% $2,804 100.0% $2,123 100.0% $1,997 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
15
<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, and 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-backed and related securities, by accounting
classification and by type of security, at the dates indicated.
At December 31,
----------------------------------------------------------
1999 1998 1997
----------------- ------------------ -------------------
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 6.80%
U.S. Government agency
obligation - - - - 700 4.76
Mortgage-backed
securities 651 6.86 959 1.95 1,301 8.84
FHLB stock 1,878 19.78 1,751 3.56 1,631 11.09
----- ----- ----- ---- ------ ------
Total held to
maturity securities 2,529 26.64 2,710 5.51 4,632 31.49
----- ----- ----- ---- ------ ------
Available for Sale:
Debt Securities:
U.S. Treasury
obligations - - - - 3,039 20.66
U.S. Government
agency obligations 6,964 73.36 46,505 94.49 7,038 47.85
----- ----- ------ ----- ------ ------
Total available for
sale securities 6,964 73.36 46,505 94.49 10,077 68.51
----- ----- ------ ----- ------ -----
Total portfolio $9,493 100.00% $49,215 100.00% $14,709 100.00%
====== ====== ======= ====== ======= ======
(footnotes on following page)
16
<PAGE>
(1) The market value of the investment portfolio amounted to $9.5 million,
$49.3 million and $14.7 million at December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, the market value of the principal
components of the Bank's investment securities portfolio was as follows: U.S.
Government securities, $6.9 million; mortgage-backed securities, $645,000; and
FHLB, $1.9 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, 1999.
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 - - - - - - 651 6.37
FHLB stock 1,878 7.00 - - - - - -
----- ---- --- ---- ---- -- --- ----
Total held
to maturity
securities 1,878 7.00 - - - - 651 6.37
----- ---- ---- ---- ---- ---- --- ----
Available for Sale:
Debt Securities:
U.S. Government
agency obligations 6,964 5.71 - - - - - -
----- ---- --- --- --- --- --- ---
Total available-
for-sale
securities 6,964 5.71 - - - - - -
----- ---- ---- ---- ---- ---- ---- ---
Total portfolio $8,842 5.98% $ - -% $ - -% $651 6.37%
====== ==== ==== ==== ===== ==== === ====
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,
1999, 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.
17
<PAGE>
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 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, 1999.
Weighted
Average Percentage
Interest Original Minimum of Total
Rate Term Category Amount Balance Deposits
---- ------- -------- ------ ------ -------
(In thousands)
1.23% - NOW Accounts $1,000 $46,472 15.04%
1.24 - Savings Accounts 100 13,017 4.21
4.04 - Money Market Accounts 5,000 63,796 20.65
Certificates of Deposit
-------------------------
3.01 32 to 89 Days Fixed-term, Fixed Rate 1,000 153 0.05
4.25 90 to 181 Days Fixed-term, Fixed Rate 1,000 682 0.22
5.41 182 to 364 Days Fixed-term, Fixed Rate 1,000 28,452 9.21
5.99 12 Months Fixed-term, Adjustable Rate 1,000 1,701 0.55
4.79 18 Months Floating Rate IRA 250 479 0.16
5.37 12 to 18 Months Fixed-term, Fixed Rate 1,000 44,797 14.50
5.31 18 to 23 Months Fixed-term, Fixed Rate 1,000 742 0.24
4.77 18 Months Fixed Rate IRA 250 7,817 2.53
5.58 24 to 35 Months Fixed-term, Fixed Rate 1,000 12,069 3.91
5.27 36 to 47 Months Fixed-term, Fixed Rate 1,000 1,261 0.41
5.21 48 to 59 Months Fixed-term, Fixed Rate 1,000 54 0.02
5.67 60+ Months Fixed-term, Fixed Rate 1,000 10,468 3.39
5.55 2 Years Fixed-term, Adjustable Rate 1,000 2,858 0.93
5.69 3 to 60 Months Fixed-term, Fixed Rate 100,000 39,419 12.76
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of December 31, 1999. 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 $ 8,128
Over three through six months 10,723
Over six through twelve months 16,206
Over twelve months 4,362
--------
Total $39,419
=======
18
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1999 1998 1997
--------------------- ----------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------- ----- ------- ------ ----- -------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing. . . $34,692 11.23% ($4,396) $39,088 14.69% $13,237 $ 25,851 10.41%
NOW checking. . . . . . . 46,472 15.04 10,844 35,628 13.39 4,075 31,553 12.71
Passbook savings accounts 13,017 4.21 (574) 13,591 5.11 (1,648) 15,239 6.14
Money market deposit. . . 63,796 20.65 11,330 52,466 19.72 9,723 42,743 17.22
Fixed-rate certificates
which mature in the
year ending:
Within 1 year . . . . . 125,691 40.69 26,126 99,565 37.43 (9,916) 109,481 44.10
After 1 year, but
within 2 years . . . . 14,352 4.65 (1,123) 15,475 5.82 (1,063) 16,538 6.66
After 2 years, but
within 5 years . . . . 10,732 3.47 513 10,219 3.84 3,357 6,862 2.76
Thereafter. . . . . . . 177 0.06 177 - - - - -
------- ----- ------ ------ ----- ----- ----- ----
Total. . . . . . . $308,929 100.0% $42,897 $266,032 100.00% $17,765 $248,267 100.00%
======= ===== ======= ======= ====== ======= ======== ======
</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,
-----------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
0.00 - 1.99% $ 400 $ 202 $ -
2.00 - 3.99% 182 862 65
4.00 - 4.99% 24,087 31,101 3,097
5.00 - 5.99% 77,515 71,039 86,058
6.00 - 6.99% 48,657 21,724 43,305
7.00% and over 111 331 356
----------- -------- --------
Total $150,952 $125,259 $132,881
======== ======== ========
19
<PAGE>
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of
time deposits in the Bank categorized by maturities at December 31, 1999.
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% $ 400 $ - $ - $ - $ - $ 400
2.00 - 3.99% 182 - - - - 182
4.00 - 4.99% 20,774 2,350 235 242 486 24,087
5.00 - 5.99% 66,762 6,974 1,146 1,732 901 77,515
6.00 - 6.99% 37,462 5,028 2,064 3,086 1,017 48,657
7.00% and over 111 - - - - 111
------- ------ ----- ----- ----- ------
Total $125,691 $14,352 $3,445 $5,060 $2,404 $150,952
======== ======= ====== ====== ====== ========
DEPOSIT ACTIVITY. The following table set forth the savings activity of
the Bank for the periods indicated.
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Beginning balance $266,032 $248,267 $214,533
-------- -------- --------
Net deposits (withdrawals)
before interest credited 39,070 14,075 30,832
Interest credited 3,827 3,690 2,902
-------- -------- --------
Net increase (decrease)
in deposits 42,897 17,765 33,734
-------- -------- --------
Ending balance $308,929 $266,032 $248,267
======== ======== ========
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, 1999, the
Bank did not have any advances outstanding from the FHLB-Cincinnati.
At December 31, 1999, the Company had borrowings in the amount of $45.0
million payable to a commercial bank. The note dated December 16, 1999, bearing
an interest at prime rate minus 1.125%, was due on June 16, 2000. All of the
outstanding stock of the Bank was pledged as collateral on the loan. On January
19, 2000, the Company retired the outstanding debt.
20
<PAGE>
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
At or For the
Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end $45,000 $ - $ -
Approximate average borrowings
outstanding 2,005 - -
Approximate weighted average rate paid
on borrowings 7.38% -% -%
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, 1999,
trust assets under management totaled approximately $286.0 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.
21
<PAGE>
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
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 1.9 million at December 31, 1999. 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 ratio 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%. Since December 31, 1999 FICO
payments have been shared pro rata between BIF and SAIF members.
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.
22
<PAGE>
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. 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 plus
short-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 that
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 45 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, 1999, 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.
23
<PAGE>
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 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, 1999, the
Bank met the test and its QTL percentage was 65.56%.
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
including permissible activity restrictions.
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 to 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. Only those savings associations rated a composite one (the
highest rating) under the CAMEL rating system for savings associations are
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%. OTS may require higher leverage ratios if warranted by the
particular circumstances or risk profile of an association.
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.
24
<PAGE>
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 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
a 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 totaled 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.
25
<PAGE>
The following table presents the Bank's regulatory capital compliance as of
December 31, 1999.
Percent of
Adjusted Total
Amount Assets(1)
------ ---------
(Dollars in thousands)
Tangible capital $79,212 20.29%
Minimum required tangible capital 5,855 1.50
------- -----
Excess $73,357 18.79%
======= =====
Core capital $79,212 20.29%
Minimum required core capital(2) 11,712 3.00
------ -----
Excess $67,500 17.29%
======= =====
Risk-based capital(3) $83,348 23.48%
Minimum risk-based capital requirement 28,402 8.00
------ -----
Excess $54,946 15.48%
======= =====
(1) Based on adjusted total assets of $390.4 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $355.0
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. Under currently effective regulations, an application to and the
prior approval of the OTS will be required to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i. e., generally safety and soundness, compliance and
Community Reinvestment Act examination ratings in the two top categories), if
the total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, if the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to statute, regulation or agreement
with OTS. If an application is not required, the institution must still provide
prior notice to OTS of the capital distribution. In the event the Bank's
capital fell below its regulatory requirements or the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
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, 1999, the Bank's limit on loans to
one borrower was $25.0 million. At December 31, 1999, the Bank's largest
aggregate amount of loans to one borrower was $12.8 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.
26
<PAGE>
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 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.
27
<PAGE>
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.
RECENT LEGISLATION. On November 12, 1999, President Clinton signed into law
legislation that allows bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Gramm-Leach-Briley Financial Modernization Act
of 1999 (the "GLBA"), a bank holding company that elects to become a financial
holding company may engage in any activity that the FRB, in consultation with
the Secretary of the Treasury, determines by regulation or order is (1)
financial in nature, (2) incidental to any such financial activity, or (3)
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. The GLBA makes significant changes in U. S. banking law,
principally by repealing the restrictive provisions of the 1933 Glass-Steagall
Act. The GLBA specifies certain activities that are deemed to be financial in
nature, including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
or making a market in, securities; and any activity currently permitted for bank
holding companies by the FRB under section 4(c) (8) of the Bank Holding Company
Act. The GLBA does not authorize banks or their affiliates to engage in
commercial activities that are not financial in nature. A bank holding company
may elect to be treated as a financial holding company only if all depository
institutions subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by GLBA to engage, through "financial
subsidiaries", in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (1) insurance underwriting,
(2) real estate development or real estate investment activities (unless
otherwise permitted by law), (3) insurance company portfolio investments and (4)
merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from the bank's outstanding investments in financial subsidiaries).
The GLBA provides that state banks may invest in financial subsidiaries
(assuming they have the requisite investment authority under applicable state
law) subject to the same conditions that apply to national bank investments in
financial subsidiaries.
The GLBA also contains a number of other provisions that will affect Cavalry
Banking's operations and the operations of all financial institutions. One of
the new provisions relates to the financial privacy of consumers, authorizing
federal banking regulators to adopt rules that will limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. These limitations will likely require consent by
the consumer before information is allowed to be provided to a third part.
The GLBA becomes effective on March 11, 2000. In January 2000, the FRB and
the OCC issued, respectively, an interim and a proposed rule governing the
application process for becoming a financial holding company or a financial
subsidiary. These agencies are expected to adopt additional regulations this
year for implementation of the GLBA. At this time, Cavalry Banking is unable to
predict the impact the GLBA may have upon it's financial condition or results of
operations.
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.
28
<PAGE>
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 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, 1999, 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 amounts in
excess of 1% are used primarily for community, inner city and community
development projects. As of December 31, 1999, the Bank had no service
corporation subsidiaries.
29
<PAGE>
PERSONNEL
As of December 31, 1999, the Bank had 148 full-time employees and 51
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, 1999, all of which are owned except as noted.
Approximate
Location Year Opened Square Footage Deposits
- -------- ------------ --------------- --------
(In thousands)
Main Office:
114 W. College Street 1974 48,632 $187,134
Murfreesboro, Tennessee 37130
Branch Offices:
1745 Memorial Boulevard 1984 1,925 13,896
Murfreesboro, Tennessee 37129
1645 N.W. Broad Street 1995 1,500 11,035
Murfreesboro, Tennessee 37129
123 Cason Lane 1997 1,967 22,267
Murfreesboro, Tennessee 37129
(table continued on following page)
30
<PAGE>
604 N. Main Street 1958 1,500 25,730
Shelbyville, Tennessee 37160
269 S. Lowry Street 1972 3,898 29,033
Smyrna, Tennessee 37167
Hazelwood Drive & Nashville Highway 1997 1,100 1,336
Smyrna, Tennessee 37167
2604 South Church Street 1998 2,470 3,756
Murfreesboro, TN 37128
South East Broad 1997 2,038 14,742
2035 SE Broad Street
Murfreesboro, TN 37130
Approximate
Location Year Opened Square Footage Deposits
- -------- ------------ --------------- --------
(In thousands)
Servicing Operations Building:
Ebby's Square Building (1) 1998 6,000 NA
Suite 100
9255 Church Street
Murfreesboro, Tennessee 37130
____________
(1) 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 as an operation's building. Construction
has begun on this building located at 214 W College Street. The projected
completion date is August of 2000 and the estimated cost of construction is $5.5
million.
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,
1999, the Bank had 17 proprietary automated teller machines. At December 31,
1999, the net book value of the Bank's office properties and the Bank's
fixtures, furniture and equipment was $9.9 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, 1999.
31
<PAGE>
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 2000 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.
32
<PAGE>
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank.
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
Age at Position
December -----------------------------------------------------
Name 31, 1999 Company Bank
- ---- --------- ------- ----
Ed C. 57 Chairman of the Board Chairman of the Board
Loughry, Jr. and Chief Executive and Chief Executive
Officer Officer
Gary Brown 57 Vice Chairman of the Vice Chairman of the
Board Board
Ronald F. Knight 49 President and Chief President and Chief
Operating Officer Operating Officer
William S. Jones 40 Executive Vice President Executive Vice President
and Chief Administrative and Chief Administrative
Officer Officer
Hillard C. "Bud" 51 Senior Vice President Senior Vice President and
Chief Financial Officer Chief Financial Officer
David W. Hopper 56 -- Senior Vice President
and Trust Officer
Ira B. Lewis, Jr. 53 Vice President and Vice President and/CRA
Secretary Compliance Officer and
Secretary
R. Dale Floyd 49 -- Senior Vice President
M. Glenn Layne 45 -- Senior Vice President
Joy B. Jobe 55 -- Senior 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.
Ed C. Loughry, Jr. joined the Bank in 1968 and currently serves as Chairman
of the Board and Chief Executive Officer. Mr. Loughry has served on the Boards
of Directors of the Rutherford County Chamber of Commerce, United Way, Heart
Fund, Federal Home Loan Bank of Cincinnati, and the Tennessee Bankers
Association. He currently serves on the Healthnet Board and the ABA BankPac
Board. He was selected Business Person of the Year in 1993 by the Chamber of
Commerce.
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.
33
<PAGE>
Ronald F. Knight joined the Bank in 1972 and currently serves as President
and Chief Operating Officer. Mr. Knight was the 1999 Chairman of the Board of
Directors of the Rutherford County Chamber of Commerce and serves on the
Rutherford County Economic development Council. He also serves on the Board of
the Tennessee Housing Development Agency, and has been 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.
William S. Jones joined the Bank in 1992 and currently serves as Executive
Vice President and Chief Administrative Officer. Mr. Jones has held the
position of 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.
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.
David W. Hopper joined the Bank in 1992 and has been Senior Vice President
and Trust Officer since that time. Mr. Hopper is a graduate of the ABA's
National Graduate Trust School and has served as Chairman of the Tennessee
Bankers Association Trust Division. Mr. Hopper has over thirty years experience
in the trust and investment management industry and has successfully started
trust departments at two banks. Mr. Hopper is a member of the Murfreesboro
Rotary Club, the Hospice of Murfreesboro, and Chairman of the Murfreesboro
School Board.
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
activities include participation in Leadership Rutherford, Habitat for Humanity,
Stones River 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 is currently Senior Vice President and Manager of Commercial and
Consumer Lending. 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 Senior 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.
Ira B. Lewis, Jr. joined the Bank in 1993 and has been Vice President/CRA
Compliance Officer. Mr. Lewis became Secretary in January 1996 and Senior Vice
President in January 2000. 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.
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.
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.
34
<PAGE>
(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**
10.12 Cavalry Bancorp, Inc. 1999 Stock Option Plan***
10.13 Cavalry Bancorp, Inc. 1999 Management Recognition 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, 1997, as filed with the Securities and
Exchange Commission on March 30, 1998.
*** Incorporated herein by reference to the Registrant's Annual Meeting
Proxy Statement dated March 15, 1999, as filed with the securities and Exchange
Commission on March 15, 1999.
(b) Reports on Form 8-K
On November 23, 1999 a Form 8-K was filed announcing that the Registrant
had declared a special cash distribution in the amount of $7.50 per share,
payable on December 23, 1999, to stockholders of record as of the close of
business on December 10, 1999.
35
<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 23, 2000 By:/s/Ed C. Loughry, Jr.
-------------------------
Ed C. Loughry, Jr.
Chairman of the Board 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 23, 2000
- --------------------------- Chairman of the Board
Ed C. Loughry, Jr. (Principal Executive Officer)
/s/Hillard C. "Bud" Gardner Senior Vice President and Chief March 23, 2000
- --------------------------- Financial Officer
Hillard C. "Bud" Gardner (Principal Financial and
Accounting Officer)
/s/Gary Brown Vice Chairman of the Board March 23, 2000
- ---------------------------
Gary Brown
/s/Ronald F. Knight Director, President March 23, 2000
- --------------------------- and Chief Operating Officer
Ronald F. Knight
Director
- ----------------------------
Frank E. Crosslin, Jr.
/s/Tim J. Durham Director March 23, 2000
- ---------------------------
Tim J. Durham
/s/Ed Elam Director March 23, 2000
- ---------------------------
Ed Elam
/s/James C. Cope Director March 23, 2000
- ---------------------------
James C. Cope
/s/Terry G. Haynes Director March 23, 2000
- ---------------------------
Terry G. Haynes
/s/William H. Huddleston, IV Director March 23, 2000
- ----------------------------
William H. Huddleston, IV
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
ANNUAL REPORT TO SHAREHOLDERS - 1999
[Picture]
CAVB
COMMUNITY
COMMITMENT
BANKING
Cavalry Bancorp, Inc.
<PAGE>
BUSINESS OF THE COMPANY
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.
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2-3
Operations Review 4-11
Locations 12
Community Board 13
Board of Directors and Officers 14-15
Corporate Information 16
Selected Financial Data 17-18
Financial Review 19-33
Independent Auditors' Report 34
Consolidated Financial Statements 35-40
Notes to Consolidated Financial Statements 41-60
<PAGE>
FINANCIAL HIGHLIGHTS
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Total assets $395,419 $364,892 $282,129 $244,964 $223,882
Loans, net 272,211 237,547 212,979 200,600 159,943
Deposits 308,929 266,032 248,267 214,533 196,734
Equity 38,765 95,181 30,447 27,250 24,436
Net income 3,469 5,697 3,202 2,814 3,201
Book value per share 5.46 13.29 N/A N/A N/A
For the year ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Return on average assets 0.92% 1.66% 1.22% 1.20% 1.50%
Total equity to assets ratio 9.80% 26.08% 10.79% 11.12% 10.91%
Total Assets [graph]
($ in millions)
95 - 224
96 - 245
97 - 282
98 - 365
99 - 395
Loans Receivable, Net [graph]
($ in millions)
95 - 160
96 - 201
97 - 213
98 - 238
99 - 272
Net Income [graph]
($ in millions)
95 - 3.20
96 - 3.80
97 - 3.20
98 - 5.70
99 - 3.47
<PAGE>
To Our Shareholders:
We are pleased to report to you the results of Cavalry Bancorp, Inc. (Nasdaq
symbol: CAVB) for the year ended December 31, 1999. We continue to be very
appreciative of the acceptance demonstrated by our customers, our employees
for their hard work and our shareholders for their support. As always, we
strive daily to seek ways to further improve upon the high levels of service
we offer our customers while operating in a financially sound manner.
At December 31, 1999, total assets were $395.4 million. Total deposits grew
to over $308.9 million. This represents a growth in deposits of 16% during
1999. Our achievement is significant since 1999 was a period when many
community-oriented financial institutions experienced difficulties in attracting
and keeping deposits.
Total loans receivable at December 31, 1999, increased 15% to $272.2
million compared with $237.5 million a year ago. We continue to execute our
strategy to achieve steady loan growth while following rigorous underwriting
standards that help insure soundness and quality. We believe asset quality is a
key to our Company's continued long-term success. Non-performing loans at
December 31, 1999, were only 0.12% of total loans outstanding. Our overall loan
portfolio is sound with our lending being almost entirely with customers in the
local markets we know and understand.
Cavalry Banking's Investment Management and Trust Department achieved
another year of solid growth. Assets grew to over $285 million. The highly
personalized level of service and ability demonstrated by our employees over the
years contributed to the success of the past year.
Net income for 1999 was $3.5 million, or $0.52 per share. This compares
with net income of $5.7 million, or $0.83 per share, earned in 1998. The
comparison to last year's results reflects the one-time expenses recognized as
part of the cash distribution paid in December 1999, higher operating expenses
associated with our growth, and increased provisions for possible loan losses
due to the increase in loans outstanding. For a more complete discussion of the
financial results for the year ended December 31, 1999, please read Management's
Discussion and Analysis of Financial Condition and Results of Operation.
Probably, the most significant events of the past year were the Board of
Directors decisions related to the capital management strategy of Cavalry
Bancorp. At the time of the Company's conversion to a stock institution in March
1998, approximately $73 million in net proceeds was raised. This addition to our
capital base resulted in a total of over $95 million in capital. While our
strong capital position has allowed us to execute and expand our lending and
investment activities in a controlled manner, we have been operating since March
1998 in an over capitalized position for a financial institution of our asset
size.
In response to this situation, the Board of Directors considered many
alternatives for the best use of the excess capital. As part of the capital
management strategy, the Company repurchased a total of 358,066 shares under two
Stock Repurchase Programs. In addition, the Board approved a special cash
distribution of $7.50 per share, which was paid on December 23, 1999. The Board
believes that returning a part of capital to shareholders in the form of a
special cash distribution was the best choice to enhance the total value of
shareholders' investment in Cavalry Bancorp, Inc. Even after the share
repurchases and return of capital, Cavalry Bancorp, Inc. still maintains a very
strong capital position.
The Board has also elected to pay quarterly cash dividends to provide
shareholders with a current cash return. Dividend payments totaling $0.20 per
share were paid to shareholders in 1999. It is the Board's stated intention to
continue to pay regular quarterly cash dividends to allow shareholders to
directly participate in the
<PAGE>
long-term success of the Company that are consistent
with its earnings and financial condition.
During the past year, the Company strengthened its executive management
team by appointing Ed C. Loughry, Jr., Chairman of the Board and Chief Executive
Officer; Ronald F. Knight, President; and William S. Jones, Executive Vice
President. While your executive management team has taken on slightly different
leadership positions, we have worked together for many years and are very
committed to achieving future growth and success.
In May 1999, William H. Huddleston, III, retired from the position of
Chairman of the Board of Cavalry Bancorp, Inc. Mr. Huddleston made numerous
contributions to the Company, and we are indeed appreciative of his 33 years of
dedication, leadership and unparalleled service to Cavalry. We wish him
continued success in his retirement.
In looking to the future, we see continued opportunity for growth. Our
local markets have some of the most desirable economic characteristics of any
market in the state of Tennessee. We have plans to offer new and added services
in the areas of e-commerce and internet banking as well as to continue to expand
and upgrade our branch locations to even better serve our customers.
Many of our local shareholders will have seen the progress we are making on
the construction of our new operations building located in downtown
Murfreesboro, across the street from our main office. The new building should
lead to improved productivity and efficiency by allowing us to consolidate
certain of our departments into one location. We will continue to operate out of
our main office location and currently expect to occupy the new facility during
the second half of 2000.
While we intend to do better those things which we have excelled
at in the past, our specific goals for the future are:
1. To continue to grow in a controlled and financially responsible manner;
2. To maintain high credit quality through prudent underwriting standards
and an overall conservative approach to business;
3. To expand our financial products and services to meet customer needs;
4. To utilize technology where feasible to improve service and increase
efficiency; and
5. To reward shareholders on a long-term basis for their investment in the
Company.
[Picture of Left to right:
William S. Jones, Ed C. Loughry, Jr.
and Ronald F. Knight]
We believe the combination of the strong markets, dedicated employees, and a
management team dedicated to accomplishing the Company's stated goals, positions
Cavalry Bancorp, Inc. well for the future. We look forward to reporting our
progress as a public company and the financial results we achieve in the future.
Sincerely,
/s/Ed C. Loughry, Jr.
Ed C. Loughry, Jr.
Chairman and Chief Executive Officer
/s/Ronald F. Knight
Ronald F. Knight
President
/s/William S. Jones
William S. Jones
Executive Vice President
3
<PAGE>
CONSUMER/COMMERCIAL LENDING
As part of Cavalry Banking's ability to offer customers a total
lending relationship, the Bank is an active consumer and commercial lender,
providing many different types of loans which may be used for a variety of
reasons. A key factor in the success the Bank has achieved is its experienced
employees who know and understand the personal situations that create the need
to borrow money. This perspective enables them to provide customers with the
best choice when the need to borrow arises. Dedicated employees provide the
vital link in effectively building customer relationships.
The Bank offers a full range of consumer and commercial loans with rates
that are competitive and terms that are flexible. Local
decision-making that emphasizes an easy application process and quick response
time leads to better service. In each of the Bank's nine local
offices, on-site personal loan officers are available to meet and discuss a
customer's needs. While consumers can apply for loans through the Bank's
Internet Banking service, applications submitted this way still receive personal
follow-up by a loan specialist. At December 31, 1999, consumer and commercial
loans totaled $ 90.4 million, or 27% of the Bank's net loans receivable.
The Bank is an active commercial business lender. Focusing on small to
medium sized businesses owned by individuals, commercial loans are customized to
provide for such needs as inventory purchases, equipment financing, real estate
or additional working capital. Commercial loans, while they may be unsecured,
are generally secured by specific business collateral and are offered at
competitive rates and flexible terms.
In addition to being a Small Business Administration lender, Cavalry
Banking can offer many other types of loans and credit services. Second mortgage
loans, automobile loans and college loans are available. The Bank's fast service
makes this type of lending easily accessible. Another extra convenience provided
are MasterCard and Visa credit cards. Application can be made at any office, and
once approval is made, customers normally receive their cards within 10 days.
The Bank's goal is to provide commercial and consumer customers with the
right loan product to meet their specific needs.
Cavalry Banking makes loans based on conditions of our local market. We
know what is affecting businesses and individuals around the corner or
down the street, and our lending decisions are made right here.
Our customers benefit from our local analysis of their banking needs and the
quick response we can give.
M. Glenn Layne
Senior VP
Consumer/Commercial
Lending
[Picture Of Glenn Layne, Senior Vice President]
TOTAL CONSUMER LOANS ($ IN MILLIONS) [graph]
95 - 27
96 - 31
97 - 33
98 - 45
99 - 54
COMMERCIAL BUSINESS LOANS ($ IN MILLIONS) [graph]
95 - 15
96 - 21
97 - 23
98 - 30
99 - 37
4
<PAGE>
[Generic photo of Auto Dealership]
In each of the Bank's nine local offices, on-site personal loan officers are
available to meet and discuss a customer's needs.
5
<PAGE>
[Generic photo of people moving]
The Bank has a strong
presence in Bedford and Williamson counties and is the largest real estate
lender in Rutherford County.
6
<PAGE>
MORTGAGE LENDING
TOTAL MORTGAGE LOANS ($ IN MILLIONS) [graph]
95 - 157
96 - 194
97 - 196
98 - 230
99 - 243
[Generic picture]
Cavalry Banking has concentrated its mortgage lending activities on the
origination of loans secured by first mortgages. The Bank's primary markets are
located in some of Tennessee's fastest growing and most desirable counties. The
Bank has a strong presence in Bedford and Williamson counties and is the largest
real estate lender in Rutherford County. Through the Bank's 9 offices,
experienced mortgage lenders offer a comprehensive range of products to help
customers finance their homes.
At December 31, 1999, the Bank's mortgage loans outstanding totaled $242.5
million, or 72.9% of its total loan portfolio. The Bank offers customers a
variety of fixed and adjustable mortgage loans at rates and terms that are
competitive with market conditions. Generally, fixed rate loans are originated
to permit the Bank to sell the loans to U.S. Government-sponsored agencies such
as the Federal Home Loan Mortgage Corporation. Adjustable rate loans, which are
subject to periodic interest rate adjustments, are generally kept in the Bank's
loan portfolio. The retention of adjustable rate loans reduces the Bank's
exposure to changes in interest rates.
Cavalry Banking offers several ways to obtain the answers customers need
for their mortgage questions. The Bank's offices have extended business hours
during the week and are open on Saturdays for added convenience. The Bank's
Mortgage Express service provides customers with loan underwriting techniques
that reduce the approval response time. The Bank also offers fast, free loan
pre-qualification; and customers can access mortgage information through the
Bank's Internet Web site, or by calling its BANKLINE services.
In addition, the Bank is a significant originator of residential
construction loans and commercial real estate loans. Its residential
construction loans are made to homebuilders that build speculative homes as well
as loans to those who have commitments for permanent financing once construction
is finished. Cavalry has lending arrangements with a large number of local
builders whom the Bank has dealt with for years.
The Bank's commercial real estate loans are made for the acquisition and
refinancing of commercial real estate properties, the majority of which are
secured by small businesses, retail properties and churches located in its
primary markets. Commercial real estate lending has provided the Bank with the
opportunity to make loans at higher rates than those typically made on
residential loans.
As our market's number one mortgage lender, we must provide a diversified
loan program to remain number one. We back that with experienced
personnel and incomparable service, utilizing the latest technology. Blend that
with the fact that our lending decisions are made locally by
individuals who know our market, and you have a winning formula.
R. Dale Floyd
Senior VP
Mortgage Lending
[Photopraph of R. Dale Floyd]
7
<PAGE>
CONSUMER-BASED PRODUCTS
At Cavalry Banking, consumer-based products are designed with
convenience, flexibility and security in mind to make banking pleasant and easy.
The Bank provides many different types of consumer products from checking and
savings accounts to debit cards, automated teller machines and Internet Banking.
The goal is always to provide customers with "Community Banking at its Best."
Cavalry Banking also provides a full range of solutions to help
businesses get started and grow. The "Bank at Work" program gives many
businesses the opportunity to provide excellent checking account services for
their employees, and the Bank's merchant services department has developed
programs such as credit/debit card acceptance and special deposit
services. Because almost all commercial customers are located in the local
communities within the bank's primary markets, Cavalry Banking is better able to
respond with fast, reliable assistance when needs arise.
The Bank's use of technology is providing a convenient link for customers
via Internet Banking. This provides the services of the bank 24-hours a day,
seven days a week. Among the first in Tennessee to offer Internet Banking,
Cavalry's dedication to providing electronic banking for personal and business
use is highly rated among community banks.
During the past year, Cavalry Banking's consumer-based products have
experienced excellent growth. Deposit accounts increased to over $ 308 million
as of December 31, 1999, a 16% increase over the previous year.
Clearly this success is due in large part to its dedicated employees who work
closely with customers to build long-term relationships.
As a vital part of the communities it serves, Cavalry Banking is well
positioned to continue to meet the personal and business banking needs of its
customers.
Our nine convenient neighborhood full-service locations provide banking
when and where our
customers need it. We've added extended hours and Saturday banking, too, but
Cavalry Banking is so much more. For example, with our Internet Banking, we're
as close as your keyboard, 24 hours a day, seven days a week.
Joy Jobe
Senior VP
Retail Banking
[Photograph of Joy Jobe]
[Generic picture]
TOTAL DEPOSITS ($ IN MILLIONS) [graph]
95 - 197
96 - 215
97 - 248
98 - 266
99 - 309
8
<PAGE>
[Generic picture of person using Internet Banking]
The Bank's use of
technology is providing
a convenient link for
customers via Internet Banking.
9
<PAGE>
[Generic picture of office setting]
Experienced employees
who have in-depth
knowledge and unique
resourcefulness find ways
to make good things happen for
customers.
10
<PAGE>
INVESTMENT MANAGEMENT & TRUST SERVICES
ASSETS UNDER MANAGEMENT ($ MILLIONS) [graph]
95 - 285
96 - 250
97 - 182
98 - 162
99 - 144
[Generic picture]
Cavalry Banking's Investment Management and Trust department encompasses
specialized services in the areas of lifetime asset management, estate planning,
trust administration and retirement administration. The services are provided by
experienced professionals whose attention to detail help customers achieve their
financial and retirement goals.
Cavalry Banking is one of the few banks in its primary market area that
provides a broad range of investment management and trust services. The Bank
manages investments for individuals, various organizations and retirement plans.
Trust assets under management have grown to over $285 million as of
December 31, 1999. The Bank has been able to achieve steady growth in assets by
delivering personalized services that are very responsive to client needs.
Experienced employees who have in-depth knowledge and unique
resourcefulness find ways to make good things happen for customers. A genuine
interest to 'do things right' and a focus on meeting the customer's needs
separates Cavalry Banking from its competition. Whether it is $50,000 or $5
million, Cavalry Banking's investment professionals are available locally to
each customer.
Cavalry Banking's investment philosophy is to seek capital appreciation by
building portfolios of large and mid-size companies that have displayed a
consistent earnings growth pattern. Investment management services are designed
to build wealth for customers over time. The Bank has been one of the top
investment managers in the nation over the last few years. In the area of estate
planning and administration, the Bank's services are geared to helping customers
plan the preservation of wealth and minimize estate taxes.
[Photograph of David W. Hopper]
Our Investment Management and Trust department continues to grow because we meet
or exceed our customers' expectations. We provide a wide variety of investment
options and with local staff servicing of our accounts, we provide prompt
response to inquiries. Clients are pleased when you provide answers and results
quickly.
David W. Hopper
Senior VP
Investment
Management & Trust
11
<PAGE>
LOCATIONS
- ----------------------------------
114 West College Street
Murfreesboro, TN 37130
893-1234
2035 Southeast Broad Street
Murfreesboro, TN 37130
895-0905
1745 Memorial Boulevard
Murfreesboro, TN 37129
890-2919
123 Cason Lane
Murfreesboro, TN 37129
893-1812
1645 Northwest Broad Street
Murfreesboro, TN 37129
895-3380
2604 South Church Street
Murfreesboro, TN 37128
848-1966
604 North Main Street
Shelbyville, TN 37160
684-6166
269 South Lowry Street
Smyrna, TN 37167
459-2535
1300 Hazelwood Drive
Smyrna, TN 37167
459-6828
Additional ATMs
- ----------------------------
1869 Almaville Road
MTSU
Keathley University Center
WT's Phillips 66
106 Barfield/Crescent Road
WT's Phillips 66
925 Old Fort Parkway
WT's Phillips 66
2441 South Church Street
WT's/White Castle
2206 Old Fort Parkway
Murfreesboro Medical Clinic
1004 North Highland
Parsley's Market
763 Bradyville Pike
12
<PAGE>
COMMUNITY BOARD
[Picture: Cavalry Banking's Community Board includes (from left)
Ken Halliburton, Sandra Parks, Chuck Farrer, Phyllis Washington,
Greg Waldron, Bud Mitchell, John Goodman, Melanie Davenport,
Ben Jamison, Dow Smith, Tina Patel, Rick Sain, Gloria Bonner,
Miles Lane and Robbie Cleveland.]
Gloria Bonner, Ed.D.
Middle Tennessee State University
Robbie Cleveland, M.D.
Murfreesboro Medical Clinic
Melanie Davenport
Cellular Concepts, Inc.
Chuck Farrer
Farrer Construction Company
John Goodman
Bob Parks Realty
Ken Halliburton
Miller & Loughry Insurance Services, Inc.
Ben Jamison, D.D.S.
Private Dental Practice
Miles Lane, D.V.M.
Brogli Lane Weaver Animal Hospital
Bud Mitchell
Bud's Tire
Sandra Parks
Mitchell-Neilson Primary School
Tina Patel
Merck & Co.
Rick Sain
Reeves-Sain Drug Store, Inc.
Dow Smith
Dow Smith Contracting Company, Inc.
Greg Waldron
Waldron Enterprises, LLC
Phyllis Washington, Ed.D.
Rutherford County Board of Education
13
<PAGE>
BOARD OF DIRECTORS
[Photograph Left to right; James C. Cope,
Frank Crosslin, Jr. and Ed Elam]
[Photograph Left to right; Tim Durham,
Ed C. Loughry, Jr. and W. H. Huddleston, IV]
[Photograph Left to right; Gary Brown, Terry Haynes
and Ronald F. Knight]
Ed C. Loughry, Jr.
Chairman and
Chief Executive Officer
Cavalry Banking
Ronald F. Knight,
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.
W. H. Huddleston, IV
Huddleston-Steele
Engineering, Inc.
14
<PAGE>
CAVALRY BANKING CORPORATE OFFICERS
[Picture of the following Corporate Officers]
Ed C. Loughry, Jr.
Chairman &
Chief Executive Officer
Ronald F. (Ronnie) Knight President &
Chief Operating Officer
William S. (Bill) Jones
Executive Vice President &
Chief Administrative Officer
Hillard C. Gardner
Senior Vice President &
Chief Financial Officer
R. Dale Floyd
Senior Vice President
David W. Hopper
Senior Vice President &
Trust Officer
Joy B. Jobe
Senior Vice President
M. Glenn Layne
Senior Vice President
Joe W. Townsend
Vice President
Ira B. Lewis, Jr.
Vice President
Libby L. Green
Vice President
Christopher L. Kelly
Vice President & Trust Officer
James O. (Jamie) Sweeney, III
Vice President
Suzanne S. McClaran
Assistant Vice President
Peggy A. Hollandsworth
Assistant Vice President
Roger D. White
Assistant Vice President
Linda F. Eakes
Assistant Vice President
James V. (Jim) Gregory
Assistant Vice President
Mary W. Schneider
Assistant Vice President
Gary E. Green
Assistant Vice President
Rhonda P. Smith
Assistant Vice President
Doug Cate
Assistant Vice President (Smyrna)
Joe G. Sadler
Assistant Vice President
David K. Bailiff
Assistant Vice President
E. Cannon Loughry, III
Assistant Vice President
Donna K. Davis
Assistant Vice President
Jane H. Lester
Assistant Vice President
P. David Edwards
Assistant Vice President
Jonathan T. Robertson
Assistant Vice President
15
<PAGE>
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 COMPANY'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 years ended December 31,1999 and 1998 (as restated to give
retroactive recognition to the $7.50 per share capital distribution as paid on
December 23, 1999). There was no stock issued prior to March 16, 1998.
1999
- --------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Market Price:
High $ 17.25 $ 15.75 $ 18.63 $ 16.50
Low 16.25 11.06 14.25 12.38
Close 16.50 11.38 15.25 16.25
Dividends Declared $ 0.05 $ 0.05 $ 0.05 $ 0.05
1998
-------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Market Price:
High $ 17.00 $ 14.50 $ 17.25 $ 18.75
Low 10.94 10.75 14.25 12.50
Close 13.75 11.25 14.25 15.88
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, 2000 was 2,000.
Annual Meeting
The Annual Meeting of Shareholders of Cavalry Bancorp, Inc. will be held at
10:00 a.m. Central Daylight Time, April 27, 2000, 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 COMMISSION 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.
16
<PAGE>
CAVALRY BANCORP, INC. 1999 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.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets. . . . . . . . . . . . $395,419 $364,892 $282,129 $244,964 $223,882
Loans receivable, net . . . . . . . 272,211 237,547 212,979 200,600 159,943
Loans held-for-sale . . . . . . . . 4,485 10,923 4,855 5,253 3,689
Investment securities
held-to-maturity. . . . . . . . . . - - 1,700 7,705 35,550
Investment securities
available-for-sale. . . . . . . . . 6,964 46,505 10,077 - -
Mortgage-backed securities
held-to-maturity. . . . . . . . . . 651 959 1,301 1,419 1,541
Cash, federal funds sold
and overnight
interest-bearing deposits . . . . 94,422 53,188 37,658 19,519 13,935
Deposit accounts. . . . . . . . . . 308,929 266,032 248,267 214,533 196,734
Borrowings. . . . . . . . . . . . . 45,000 - - - -
Total equity. . . . . . . . . . . . 38,765 95,181 30,447 27,250 24,436
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income . . . . . . $28,008 $26,596 $21,939 $19,584 $17,222
Interest expense. . . . . . 10,130 9,594 9,289 8,268 7,696
--------------------------------------------
Net interest income . . . . 17,878 17,002 12,650 11,316 9,526
Provision for loan losses . 991 452 700 120 80
--------------------------------------------
Net interest income after
provision for loan losses 16,887 16,550 11,950 11,196 9,446
--------------------------------------------
Gains from sale of loans. . 2,245 2,266 1,126 890 882
Other income. . . . . . . . 3,403 2,960 2,535 2,268 2,082
Other expenses. . . . . . . 16,385 12,481 10,498 9,786 7,498
--------------------------------------------
Income before income taxes. 6,150 9,295 5,113 4,568 4,912
Provision for income taxes. 2,681 3,598 1,911 1,754 1,711
--------------------------------------------
Net income. . . . . . . . . $ 3,469 $ 5,697 $ 3,202 $ 2,814 $ 3,201
============================================
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans
Outstanding. . . . . . . 5,128 5,126 4,833 4,693 4,559
Deposit accounts. . . . . . 27,878 24,828 23,054 20,687 18,891
Full-service offices. . . . 9 10 9 7 7
</TABLE>
17
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
KEY FINANCIAL RATIOS:
For the Year Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets(1). . . . 0.92% 1.66% 1.22% 1.20% 1.50%
Return on average equity(2). . . . 4.05 6.63 11.09 10.94 14.21
Interest rate spread(4). . . . . . 3.92 4.01 4.55 4.48 4.14
Net interest margin(5) . . . . . . 5.10 5.29 5.21 5.15 4.78
Average interest-earning
assets to average
interest-bearing liabilities . . 140.48 142.81 117.16 117.96 116.64
Noninterest expense as a
percent of average total assets . 4.35 3.63 4.01 4.17 3.52
Efficiency ratio (6) . . . . . . . 69.65 56.15 64.36 67.61 60.03
Dividend payout ratio (7). . . . . . 38.46 18.07 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 . . . 0.12 0.07 0.11 0.02 0.07
Nonperforming assets as a percent
of total assets . . . . . . . . . 0.13 0.03 0.09 0.02 0.05
Allowance for losses as a
percent of total
loans receivable . . . . . . . . . 1.24 1.06 1.11 0.87 1.00
Allowance for losses as a
percent of nonperforming loans. . 1,242.04 3,019.63 1,130.65 4,162.75 1,866.36
Net charge-offs to average
outstanding loans . . . . . . . . 0.03 0.01 0.01 - 0.09
Capital Ratios:
Total equity-to -assets ratio. . . . 9.80 26.08 10.79 11.12 10.91
Average equity to average assets.(3) . 22.75 25.01 11.04 10.97 10.58
<FN>
(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
</TABLE>
18
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes contained in this Annual Report.
Private Securities Litigation Reform Act Safe Harbor Statement
This Annual Report contains forward-looking statements within the meaning
of federal securities laws. These statements are not historical facts, rather
statements based on the Company's expectations regarding its business strategies
and their intended results and its future performance. Forward-looking
statements are preceded by terms such as "expects," "believes," "anticipates,"
"intends," and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause the Company's actual results,
performance, and achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to these differences include, without limitation, general economic conditions,
including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; and
other factors disclosed periodically in the Company's filings with the
Securities and Exchange Commission.
Because of the risks and uncertainties in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
The Company's Business and Strategy
Cavalry Bancorp, Inc. (the "Company"), a Tennessee corporation, is the
holding company for Cavalry Banking (the "Bank"), a federal savings bank with
its main office located in Murfreesboro, Tennessee. The holding 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 at $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 and other borrowings. 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's 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.
19
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, 1999 and December 31, 1998
Consolidated total assets were $395.4 million at December 31, 1999 and
$364.9 million at December 31, 1998, an increase of $30.5 million or 8.4%. This
growth was funded by an increase in deposits and short-term borrowings offset by
a decline in capital as a result of stock repurchases, dividends and the special
cash distribution.
Loans receivable net, increased to $272.2 million at December 31, 1999 from
$237.5 million at December 31, 1998, a 14.6% 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, during the period
between December 31, 1998 and December 31, 1999 consumer, commercial and land
loans increased as the Bank emphasized the origination of loans with shorter
maturities for asset and liability management purposes.
Loans held-for-sale were $4.5 million at December 31, 1999 compared to
$10.9 million at December 31, 1998. The decrease resulted primarily from
decreased lending activity and timing differences in the funding of loan sales.
Cash and cash equivalents increased $41.2 million or 77.4% from $53.2
million at December 31, 1998 to $94.4 million at December 31, 1999. The
increase was a result of structuring the balance sheet to provide for any year
2000 related cash withdrawals and to provide funds for the payment of a dividend
from the Bank to the Company. The Bank received approval from the Office of
Thrift Supervision to pay a dividend of $41.0 million to the Company on January
18, 2000. The proceeds of the dividend were then used by the Company to retire
the outstanding borrowings.
Investment securities available-for-sale decreased from $46.5 million at
December 31, 1998 to $7.0 million at December 31, 1999. This decline was a
result of reallocating funds to facilitate the payment of the special cash
distribution and Year 2000 cash considerations.
Office properties and equipment, net, were $9.9 million at December 31,
1999 compared to $8.8 million at December 31, 1998. This increase was primarily
the result of the start of construction of a new operations building located at
214 W College Street in Murfreesboro, Tennessee. Construction is anticipated to
be completed in August of 2000 at an estimated cost of $5.5 million.
Deposit accounts totaled $308.9 million and $266.0 million at December 31,
1999 and December 31, 1998, respectively. The increase was a result of a
continuing effort to aggressively solicit and promote deposit growth.
20
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Total short-term borrowings increased to $45.0 million as a result of a
loan from a commercial bank to the Company. The loan was originated on December
16, 1999 with a maturity date of June 16, 2000. The loan had an interest rate
of prime minus 1.125% or currently 7.375%. This loan was paid in its entirety
on January 19, 2000.
Total stockholders equity was $38.8 million at December 31, 1999 and $95.2
million at December 31, 1998, respectively. This decrease was primarily the
result of stock repurchases of $8.9 million, dividends paid of $1.3 million and
the special cash distribution of $53.3 million. Offsetting these charges were
the allocation of shares under the Bank's Employee Stock Ownership Plan ("ESOP")
and the Management Recognition Plan ("MRP") which totaled $3.6 million, and net
income of $3.5 million for the year ended December 31, 1999.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income was $3.5 million or $0.52 per basic share for the
year ended December 31, 1999 compared to $5.7 million or $0.83 per basic share
for the year ended December 31, 1998, a decrease of 38.6%. This decrease was a
result of increases in interest expense, provision for loan losses, and
increased employee expenses. These increased expenses were partially offset by
increased interest income and other noninterest income.
Net Interest Income. Net interest income increased 5.3% from $17.0 million
for the year ended December 31, 1998 to $17.9 million for the same period in
1999. Total interest income increased 5.3% from $26.6 million for fiscal 1998
to $28.0 million for fiscal 1999. This increase was a result of an increase in
average earning assets from $321.5 million for fiscal 1998 to $350.8 million for
fiscal 1999. This increase in volume was offset by a decrease in average yield
from 8.27% for fiscal 1998 to 7.98% for fiscal 1999. Average loans receivable
increased from $232.7 million for fiscal 1998 to $267.2 million for fiscal 1999.
This increase in volume was offset by a decline in average yield from 9.37% for
fiscal 1998 to 8.87% for fiscal 1999. Average mortgage-backed securities
declined from $1.1 million for fiscal 1998 to $775,000 for fiscal 1999. The
average yield also declined from 6.21% for fiscal 1998 to 5.03% for fiscal 1999.
Average investment securities increased from $33.6 million for fiscal 1998 to
$39.6 million for fiscal 1999. This increase in volume was offset by a decline
in average yield from 5.41% for the fiscal 1998 to 5.26% for fiscal 1999.
Federal funds sold and other interest bearing deposits decreased from $52.4
million for fiscal 1998 to $41.4 million for fiscal 1999. The average yield
declined from 5.33% for fiscal 1998 to 4.99% for fiscal 1999. Interest expense
increased 5.2% from $9.6 million for fiscal 1998 to $10.1 million for fiscal
1999. This increase was a result of increases in average deposits and
borrowings from $225.1 million for fiscal 1998 to $249.7 million for fiscal
1999. The average cost of funds declined from 4.26% for fiscal 1998 to 4.06%
for fiscal 1999. The decrease was primarily a result of lower costs for
passbook accounts, NOW accounts, and money market accounts. The cost of
certificates also declined from 5.47% for fiscal 1998 to 5.21% for fiscal 1999.
The interest rate spread decreased from 4.01% for fiscal 1998 to 3.92% for
fiscal 1999. The decline in yields and cost were attributable to lower rates on
average for fiscal 1999 as compared to fiscal 1998.
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
21
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $991,000, charge-offs were $102,000 and
recoveries were $16,000 for the year ended December 31, 1999 compared with a
provision of $452,000, charge-offs of $54,000 and recoveries of $29,000 for the
year ended December 31, 1998. The allowance for loan losses increased from $3.2
million at December 31, 1998 to $4.1 million at December 31, 1999. The
allowance for loan losses as a percentage of loans outstanding increased from
1.06% at December 31, 1998 to 1.24% at December 31, 1999. Nonaccrual loans
increased from $107,000 at December 31, 1998 to $333,000 at December 31, 1999.
Total nonaccrual loans and loans 90 days or more past due increased from
$173,000 at December 31, 1998 to $333,000 at December 31, 1999. Total
non-performing assets increased from $253,000 at December 31, 1998 to $499,000
at December 31, 1999 as a result of $166,000 in repossessed assets and other
real estate owned at December 31, 1999.
During the year ended December 31, 1999 commercial real estate, land,
consumer and commercial loans continue 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. Land loans carry the risk of the developer being able to complete
the development 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, 1999 and December 31, 1998 management believed the
provision for loan losses was adequate.
Noninterest Income. Noninterest income increased 7.7% from $5.2 million
for the year ended December 31, 1998 to $5.6 million for the year ended December
31, 1999.
Mortgage Banking. In the mortgage banking segment gain on sale of loans
decreased from $2.3 million for fiscal 1998 to $2.2 million for fiscal 1999.
This decrease was a result of decreased volume of loan sales for the year ended
December 31, 1999 compared to the year ended December 31, 1998. Loan servicing
income declined from $374,000 for fiscal 1998 to $219,000 for fiscal 1999. 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 $1.5 million for fiscal 1998 to $2.0 million for fiscal 1999.
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 $795,000 for fiscal
1998 to $936,000 for fiscal 1999. This increase was a result of increased
assets under management due to market appreciation and new business being
generated.
Noninterest Expense. Noninterest expense increased 31.2% from $12.5
million for the year ended December 31, 1998 to $16.4 million for the year ended
December 31, 1999. The increase was primarily a result of increased employee
compensation and benefits which increased to $10.5 million for the year ended
December 31, 1999 from $7.1 million for the year ended December 31, 1998. The
increase in compensation expense was primarily a result of the adoption of the
22
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Management Recognition Plan (MRP) in the year ended December 31, 1999. Total
compensation expense recognized for the MRP for fiscal 1999 was $2.4 million,
comprised of a one-time non-recurring charge for special cash distribution and
normal vesting of shares. In addition, the cost of the ESOP increased as a
result of the program being in effect for a full year in 1999. The increase in
other categories of other operating expenses generally are attributable to the
growth of the Company and to the increased cost of being a public company.
Income Tax Expense. Income tax expense was $2.7 million for the year ended
December 31, 1999 compared to $3.6 million for the year ended December 31, 1998.
This decrease was a result of lower income before taxes for the fiscal 1999.
The effective tax rate for fiscal 1999 was 43.6% compared to 38.7 % for fiscal
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 sales 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 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
23
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 nonperforming
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 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.
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.
24
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 consolidation
resulted in the closing of the Almaville office on January 30, 1999. 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 the fiscal 1998.
The effective tax rate for fiscal 1998 was 38.7% compared to 37.4 % for fiscal
1997.
25
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1999 1998 1997
(Dollars in thousands)
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) . . . . $267,176 $23,691 8.87% $232,715 $21,801 9.37% $214,020 $20,290 9.48%
Mortgage-backed
Securities. . . . 775 39 5.03 1,111 69 6.21 1,371 93 6.78
Investment
securities. . . 39,592 2,083 5.26 33,590 1,816 5.41 8,354 492 5.89
FHLB stock. . . . 1,797 127 7.07 1,675 120 7.16 1,559 112 7.18
Federal funds sold
and overnight
interest-bearing
deposits . . . . 41,431 2,068 4.99 52,378 2,790 5.33 17,704 952 5.38
------------------------------------------------------------------------
Total interest-
earning assets. . 350,771 28,008 7.98 321,469 26,596 8.27 243,008 21,939 9.03
Non-interest-
earning assets. . 26,169 22,209 18,518
------- ------- -------
Total assets. . . 376,940 343,678 261,526
------- ------- -------
Interest-bearing
liabilities:
Passbook
accounts . . . . 13,913 184 1.32 22,067 423 1.92 15,286 302 1.98
Money Market
accounts . . . . 59,090 2,382 4.03 46,377 1,924 4.15 35,250 1,475 4.18
NOW accounts. . . 41,887 503 1.20 32,276 440 1.36 28,558 480 1.68
Certificates
of Deposits. . . 132,801 6,913 5.21 124,386 6,807 5.47 128,330 7,032 5.48
-----------------------------------------------------------------------
Total deposits. . 247,691 9,982 4.03 225,106 9,594 4.26 207,424 9,289 4.48
-----------------------------------------------------------------------
Borrowings. . . . 2,005 148 7.38 - - - - - -
-----------------------------------------------------------------------
Total interest-
Bearing
liabilities. . . 249,696 10,130 4.06 225,106 9,594 4.26 207,424 9,289 4.48
Non-interest- ------ ----- -----
bearing
liabilities(2) . 41,489 32,607 25,241
Total ------- ------- -------
liabilities . . 291,185 257,713 232,665
Equity. . . . . . 85,755 85,965 28,861
------- ------- -------
Total liabilities
and Equity. . . $376,940 $343,678 $261,526
-------- -------- --------
Net interest
income . . . . . $17,878 $17,002 $12,650
Interest rate ------- ------- -------
spread . . . . . 3.92% 4.01% 4.55%
Net interest ----- ----- -----
margin . . . . . 5.10% 5.29% 5.21%
Ratio of average ----- ----- -----
interest-earning
assets to average
interest-bearing
liabilities. . . 140.48% 142.81% 117.16%
------- ------- -------
<FN>
(1) Does not include interest on loans 90 days or more past due. Includes
loans originated for sale.
(2) Includes noninterest bearing deposits of $33.5 million, $27.2 million, and $21.3
million for the years ended December 31, 1999, 1998 and 1997, respectively.
</TABLE>
26
<PAGE>
CAVALRY BANCORP, INC. 1999 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.
<TABLE>
<CAPTION>
At Year Ended December 31
December 31, ----------------------
1999 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable . . . . . . . . . . . . . 8.43% 8.87% 9.37% 9.48%
Mortgage-backed securities . . . . . . . . 6.37 5.03 6.21 6.78
Investment securities. . . . . . . . . . . 5.71 5.26 5.41 5.89
FHLB stock . . . . . . . . . . . . . . . . 7.00 7.07 7.16 7.18
Federal funds sold and overnight
interest-bearing deposits . . . . . . . . . 5.28 4.99 5.33 5.38
All interest-earning assets. . . . . . . . . 7.72 7.98 8.27 9.03
Weighted average rate paid on:
Passbook savings accounts. . . . . . . . . 1.24 1.32 1.92 1.98
NOW accounts . . . . . . . . . . . . . . . 1.23 1.20 1.36 1.68
Money market accounts. . . . . . . . . . . 4.04 4.03 4.15 4.18
Certificate accounts . . . . . . . . . . . 5.47 5.21 5.47 5.48
Borrowings . . . . . . . . . . . . . . . . 7.38 7.38 0.00 0.00
All interest-bearing liabilities . . . . . 4.72 4.06 4.26 4.48
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) . . . . . . . 3.00 3.92 4.01 4.55
Net interest margin (net interest income
(expense) as a percentage
of average interest-earning assets) . . . n/a 5.10 5.29 5.21
</TABLE>
27
<PAGE>
CAVALRY BANCORP, INC. 1999 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.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 Compared 1998 Compared 1997 Compared
to Year to Year to Year
Ended Ended Ended
December 31, 1998 December 31, 1997 December 31, 1996
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate Volume Total Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) . . $(1,339) $3,229 $1,890 $(261) $1,772 $1,511 $1,472 $1,137 $2,609
Mortgage-backed
Securities . . . . . . . (9) (21) (30) (6) (18) (24) - (8) (8)
Investments. . . . . . . (58) 325 267 (162) 1,486 1,324 (974) 230 (744)
FHLB stock . . . . . . . (2) 9 7 - 8 8 2 8 10
Federal funds sold
and overnight
interest-bearing
deposits . . . . . . . . (139) (583) (722) (27) 1,865 1,838 461) 949 488
----------------------------------------------------------------
Total net change in
income on interest-
earning assets. . . . . (1,547) 2,959 1,412 (456) 5,113 4,657 39 2,316 2,355
Interest-bearing liabilities:
Passbook accounts. . . . (82) (157) (239) (13) 134 121 (37) (12) (49)
NOW accounts . . . . . . (68) 131 63 (102) 62 (40) (98) 73 (25)
Money market
Accounts. . . . . . . . (70) 528 458 (15) 465 450 (216) 601 385
Certificate accounts . . (354) 460 106 (10) (216) (226) 195 551 746
Borrowings . . . . . . . - 148 148 - - - - (36) (36)
----------------------------------------------------------------
Total net change
in expense on
interest-bearing
liabilities. . . . . . . (574) 1,110 536 (140) 445 305 (156) 1,177 1,021
----------------------------------------------------------------
Net Change in
net interest income. . . $ (973) $1,849 876 $(316) $4,668 $4,352 $195 $1,139 $1,334
================================================================
<FN>
(1) Does not include interest on 90 days or more past due. Includes loans
originated for sale.
</TABLE>
28
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 Net
Portfolio Value (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). NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in NPV 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, 1999, 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 (In Basis Estimated Change Estimated Change in Board
Points) in in in Approved
Interest Rates Net Portfolio Value Net Portfolio Value Limits
- --------------------------------------------------------------------------------
(Dollars in thousands) (Percentage) (Percent)
300 bp 1,736 2 (30)
200 bp 1,521 2 (20)
100 bp 984 1 (10)
0 bp 0 0 0
(100) bp (1,438) (2) (10)
(200) bp (2,851) (3) (20)
(300) bp (3,925) (4) (30)
The above table illustrates, for example, that an instantaneous 200 basis
point decrease in market interest rates at December 31,1999 would reduce the
Bank's NPV by approximately $2.9 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.
29
<PAGE>
CAVALRY BANCORP, INC. 1999 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
31,1999.
<TABLE>
<CAPTION>
Six After One After Three
Within Six Months to Three to Five Over
Months to One Year Years Years Five Years Total
- ------------------------------------------------------------------------------------------
[Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net. . . . . $ 59,906 $ 46,205 $ 51,640 $ 62,097 $ 56,848 $276,696
Mortgage-backed securities . . 10 10 44 50 537 651
FHLB Stock . . . . . . . . . . 1,878 - - - - 1,878
Investment securities. . . . . 5,965 999 - - - 6,964
Federal funds sold
overnight and other
interest-bearing deposits. . . 74,379 - - - - 74,379
----------------------------------------------------------
Total rate sensitive assets. . 142,138 47,214 51,684 62,147 57,385 360,568
==========================================================
Interest-bearing liabilities:
Deposits:
NOW accounts . . . . . . . . . 4,647 4,647 18,589 18,589 - 46,472
Passbook savings accounts. . . 1,302 1,302 5,207 5,206 - 13,017
Money market deposit
accounts. . . . . . . . . . . 6,380 6,380 25,519 25,517 - 63,796
Certificates of deposit. . . . 65,602 60,089 17,797 7,287 177 150,952
----------------------------------------------------------
Borrowings . . . . . . . . . . 45,000 - - - - 45,000
Total rate sensitive ----------------------------------------------------------
liabilities . . . . . . . . . 122,931 72,418 67,112 56,599 177 319,237
===========================================================
Excess (deficiency) of
interest sensitivity assets
over interest sensitivity
liabilities . . . . . . . . . 19,207 (25,204) (15,428) 5,548 57,208 41,331
Cumulative excess(deficiency) of
interest sensitivity assets . 19,207 (5,997) (21,425) (15,877) 41,331 41,331
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities . . . . . 115.62% 96.93% 91.84% 95.02% 112.95% 112.95%
Interest sensitivity gap
to total assets . . . . . . . 5.33% (6.99)% (4.28)% 1.54% 15.87% 11.46%
Ratio of interest-earning assets to
interest-bearing liabilities . 115.62% 65.20% 77.01% 109.80% 32,420.90% 112.95%
Ratio of cumulative gap
to total assets. . . . . . . 5.33% (1.66)% (5.94)% (4.40)% 11.46% 11.46%
</TABLE>
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, 1999
cash and cash equivalents totaled $94.4 million or 23.87% of total assets. At
December 31, 1999 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, 1999 the Bank's commitments to extend funds consisted of
unused lines of credit of $36.4 million, outstanding letters of credit of $7.5
million issued primarily to municipalities as performance bonds, and commitments
30
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
to originate loans of $51.2 million. The commitments to originate loans at
December 31, 1999 consisted of commitments to originate variable rate loans of
$42.6 million, and commitments to originate fixed rate loans of $8.6 million at
interest rates ranging from 6.75% 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, 1999 was 28.0%.
The Bank's primary lending activity is the origination of real estate
mortgage loans. During the years ended December 31, 1999, 1998, and 1997, the
Bank originated $244.9 million, $270.2 million, and $166.3 million of such
loans, respectively. At December 31, 1999, the Bank had loan commitments
totaling $51.2 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, 1999 totaled $125.7 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, 1999, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 20.29%, 20.29% and 23.48%, respectively.
Impact of Accounting Pronouncements and Regulatory Policies
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 25 of Notes to the Consolidated Financial Statements.
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. In June, 1999, the FASB issued SFAS 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date FASB Statement
133 an amendment of FASB Statement 133 which changed the effective date to
fiscal years beginning after June 15, 2000. The adoption of the provisions of
this statement is not expected to have a material impact on the Company.
Year 2000 Considerations.
All systems have continued to operate properly during the days, weeks, and
months of the new year and we do not anticipate any material Year 2000 problems
in the future.
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.
31
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
Quantitative Aspects of Market Risk. The principal market risk affecting
the Company is risk associated with interest rate volatility ("interest rate
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. Substantially all
of the Company's interest rate risk is derived from the Bank's lending and
deposit taking activities. This risk could result in reduced net income, loss
in fair values of assets and/or increases in fair values of liabilities due to
upward changes in interest rates.
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, 1999, 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, 1999, 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 of reinvestment of
maturing financial instruments. This presentation does not consider that all
rate changes do not 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, 1999, the Company's greatest exposure would be to rising
rates. The Company has more liabilities maturing than assets during the one
year time frame which can increase the cost of deposits faster than yields on
assets would increase.
<TABLE>
<CAPTION>
32
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
After 3
Within One Years After
One Year To To 5 5 Years To Beyond 10
Year 3 Years Years 10 Years Years Total Fair Value
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Fixed rate loans . . . . . $ 55,394 $37,045 $55,288 $ 7,504 $ 4,671 $159,902
Average Rate . . . . . . . 9.003 8.944 8.335 10.605 7.607 8.793
Adjustable rate loans. . . 50,717 14,595 6,809 8,375 36,298 116,794
Average Rate . . . . . . . 8.728 8.548 8.564 7.648 7.646 8.282
----------------------------------------------------------------
Total loans. . . . . . . . 106,111 51,640 62,097 15,879 40,969 276,696 274,739
Adjustable rate
Mortgage-backed securities 20 44 50 155 382 651 645
Average Rate . . . . . . . 6.338 6.340 6.344 6.349 6.390 6.372
Fixed rate
Investments and other
interest-earning assets. . 47,964 - - - - 47,964 47,964
Average Rate . . . . . . . 5.530 - - - - 5.530
Adjustable rate
Investments and other
interest-earning deposits. 33,379 - - - - 33,379 33,379
Average Rate . . . . . . . 4.974 - - - - 4.974
FHLB Stock . . . . . . . . 1,878 - - - - 1,878 1,878
Average Rate . . . . . . . 7.000 - - - - 7.000
--------------------------------------------------------------
Total Interest-Sensitive
Assets. . . . . . . . . . 189,352 51,684 62,147 16,034 41,351 360,568
==============================================================
Interest-Sensitive Liabilities:
Deposits with no stated maturity
Now accounts . . . . . . . 9,294 18,589 18,589 - - 46,472 46,472
Average Rate . . . . . . . 1.208 1.208 1.208 - - 1.208
Savings accounts . . . . . 2,604 5,207 5,206 - - 13,017 13,017
Average Rate . . . . . . . 1.236 1.236 1.236 - - 1.236
Money Market . . . . . . . 12,760 25,519 25,517 - - 63,796 63,796
Average Rate . . . . . . . 4.035 4.035 4.035 - - 4.035
Fixed rate
Certificate accounts . . . 123,601 17,708 7,287 80 97 148,773
Average Rate . . . . . . . 5.426 5.601 5.717 5.500 5.750 5.462
Adjustable rate
Certificate accounts . . . 2,090 89 - - - 2,179
Average Rate . . . . . . . 5.776 4.800 - - - 5.208
--------------------------------------------------------------
Total Certificate accounts 125,691 17,797 7,287 80 97 150,952 151,531
Adjustable Rate Borrowings 45,000 - - - - 45,000 45,000
7.375 - - - - 7.375
--------------------------------------------------------------
Total Interest-Rate
Liabilities . . . . . . . 195,349 67,112 56,599 80 97 319,237
==============================================================
Off-Balance Sheet Items:
Commitments to extend credit 51,243 51,243
Average Rate . . . . . . . 8.570
Unused lines of credit . . 36,360 36,360
Average Rate . . . . . . . 9.190
</TABLE>
33
<PAGE>
[Letterhead of Rayburn, Betts & Bates, P.C.]
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, 1999 and 1998, 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, 1999. 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 audits 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
January 18, 2000
34
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
- ---------------------------------------------------------------------------------------
Assets
Cash (note 2) $ 20,043 12,110
Interest-bearing deposits with other financial institutions 74,379 41,078
--------- --------
Cash and cash equivalents 94,422 53,188
Investment securities available-for-sale (note 3) 6,964 46,505
Mortgage-backed securities held to maturity (note 4) 651 959
Loans held for sale, at estimated fair value (note 5) 4,485 10,923
Loans receivable, net (notes 5 and 10) 272,211 237,547
Accrued interest receivable:
Loans, net of allowance for delinquent interest of
$10 and $3 in 1999 and 1998, respectively 1,731 1,497
Investment securities 48 872
Mortgage-backed securities held to maturity 5 7
Office properties and equipment, net (note 6) 9,892 8,782
Required investment in stock of Federal Home Loan Bank,
at cost (note 7) 1,878 1,751
Deferred tax asset, net (note 12) 1,268 1,401
Real estate acquired in settlement of loans 166 80
Other assets (note 8) 1,698 1,380
-------- --------
Total assets $395,419 364,892
========= ========
Liabilities and Equity
Liabilities:
Deposits (note 9) $308,929 266,032
Borrowings (note 11) 45,000 -
Accrued interest payable 507 285
Advance payments by borrowers for property taxes and insurance 178 237
Income taxes payable (note 12) 482 1,484
Accrued expenses and other liabilities (note 13) 1,558 1,673
--------- --------
Total liabilities 356,654 269,711
--------- --------
Equity (notes 14, 15 and 16):
Preferred stock, no par value:
Authorized - 250,000 shares; none
issued or outstanding at:
December 31, 1999 and 1998 - -
Common stock, no par value:
Authorized - 49,750,000 shares; issued and
outstanding: 7,104,801 and 7,161,337 shares
at December 31, 1999 and 1998, respectively 10,972 65,705
Retained earnings 37,194 35,037
Unearned restricted stock (4,380) -
Unallocated ESOP shares (5,019) (5,612)
Accumulated other comprehensive
income (loss), net of taxes (2) 51
--------- --------
Total equity 38,765 95,181
--------- --------
Total liabilities and equity $395,419 364,892
========= ========
Commitments and contingencies (notes 2, 13 and 21)
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---------- --------- ------
Interest and dividend income:
First mortgage loans . . . . . . . . . . . . . . . $ 11,131 11,488 12,429
Other loans. . . . . . . . . . . . . . . . . . . . 12,560 10,313 7,861
Investment securities. . . . . . . . . . . . . . . 2,210 1,936 604
Deposits with other financial institutions . . . . 2,068 2,790 952
Mortgage-backed securities held to maturity. . . . 39 69 93
---------- --------- ------
Total interest and dividend income . . . . . . . . . 28,008 26,596 21,939
---------- --------- ------
Interest expense - deposits (note 9) . . . . . . . . 9,982 9,594 9,289
Interest expense - borrowings. . . . . . . . . . . . 148 - -
---------- --------- ------
Total interest expense . . . . . . . . . . . . . . . 10,130 9,594 9,289
---------- --------- ------
Net interest income. . . . . . . . . . . . . . . . . 17,878 17,002 12,650
Provision for loan losses (note 5) . . . . . . . . . 991 452 700
---------- --------- ------
Net interest income after provision for loan losses. 16,887 16,550 11,950
---------- --------- ------
Non-interest income:
Servicing income . . . . . . . . . . . . . . . . . . 219 374 506
Gain on sale of real estate acquired in
settlement of loans. . . . . . . . . . . . . . . . 3 2 2
Gain on sale of loans, net . . . . . . . . . . . . . 2,245 2,266 1,126
Deposit servicing fees and charges . . . . . . . . . 2,002 1,512 1,173
Trust service fees . . . . . . . . . . . . . . . . . 936 795 649
Other operating income . . . . . . . . . . . . . . . 243 277 205
---------- --------- ------
Total non-interest income. . . . . . . . . . . . . . 5,648 5,226 3,661
---------- --------- ------
Non-interest expenses:
Compensation, payroll taxes and
fringe benefits (note 13). . . . . . . . . . . . . 10,539 7,094 5,808
Occupancy expense. . . . . . . . . . . . . . . . . . 728 759 550
Supplies, communications and other
office expenses. . . . . . . . . . . . . . . . . . 855 823 675
Federal insurance premiums (note 20) . . . . . . . . 153 146 112
Advertising expense. . . . . . . . . . . . . . . . . 297 229 233
Equipment and service bureau expense . . . . . . . . 2,378 2,301 2,005
Loss on sale of office properties
and equipment. . . . . . . . . . . . . . . . . . . . - 21 -
Other taxes. . . . . . . . . . . . . . . . . . . . . 393 350 402
Other operating expenses . . . . . . . . . . . . . . 1,042 758 713
---------- --------- ------
Total non-interest expenses. . . . . . . . . . . . . 16,385 12,481 10,498
---------- --------- ------
Income before income tax expense . . . . . . . . . . 6,150 9,295 5,113
Income tax expense (note 12) . . . . . . . . . . . . 2,681 3,598 1,911
---------- --------- ------
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,469 5,697 3,202
========== ========= ======
Basic earnings per share (note 17) . . . . . . . . . $ 0.52 0.83 N/A
========== ========= ======
Weighted average shares outstanding. . . . . . . . . 6,641,040 6,908,959 N/A
========== ========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
---- ---- ----
Net income $3,469 5,697 3,202
Other comprehensive income, net of tax (note 24):
Unrealized gain (loss) on investment securities
available-for-sale (53) 56 (5)
--- -- --
Comprehensive income $3,416 5,753 3,197
===== ===== =====
See accompanying notes to consolidated financial statements.
37
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Unearned Unal- Other
Re- located Compre-
Common Common Retained stricted ESOP hensive Total
Shares Stock Earnings Stock Shares Income(Loss) Equity
------- ------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996. - $ - 27,250 - - - 27,250
Net income. . . . . . . . . - - 3,202 - - - 3,202
Change in valuation
allowance for
investment securities
available-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
investment securities
available- 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 (note 14). . . - 467 - - 419 - 886
Purchase and
retirement of
common stock (note 15) . . (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
Net income. . . . . . . . . - - 3,469 - - - 3,469
Change in valuation
allowance for
investment securities
available-for-sale,
net of income
taxes of $32 . . . . . . - $ - - - - (53) (53)
Issuance of common
stock for MRP (note 14). 301,530 6,747 - (6,747) - - -
ESOP shares committed
for release (note 14). . - 671 - - 593 - 1,264
Purchase and
retirement of common
stock (note 15). . . . . (358,066) (8,865) - - - - (8,865)
Dividends
($0.20 per share) . . . . - - (1,312) - - - (1,312)
Deferred MRP shares
earned (note 14). . . . . - - - 2,367 - - 2,367
Cash distribution
($7.50 per share) . . . . - (53,286) - - - - (53,286)
-------- ------- -------- ------- ------- ------ ------
Balance, December 31, 1999. 7,104,801 $10,972 37,194 (4,380) (5,019) (2) 38,765
========= ====== ======== ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 3,469 5,697 3,202
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . 991 452 700
Gain on sales of real estate acquired
in settlement of loans, net . . . . . . . . . (3) (2) (2)
Gain on sales of loans, net . . . . . . . . . . (2,245) (2,266) (1,126)
Loss on sale of office properties
and equipment . . . . . . . . . . . . . . . . . - 21 -
Depreciation and amortization on
office properties and equipment . . . . . . . . 1,101 1,207 1,078
Allocation of ESOP shares at fair value . . . . 1,264 886 -
Compensation expense recognized
on restricted stock . . . . . . . . . . . . . . 2,367 - -
Net amortization (accretion) of
investment and mortgage-backed
securities premiums and discounts . . . . . . . (112) (96) 42
Amortization of deferred loan
origination fees. . . . . . . . . . . . . . . . (1,035) (1,209) (1,090)
Loan fees collected . . . . . . . . . . . . . . 1,047 1,272 1,097
Deferred income tax expense (benefit). . . . . . 133 (233) (413)
Proceeds from sales of loans . . . . . . . . . . 121,735 120,761 70,511
Origination of loans held for sale . . . . . . . (113,052) (124,563) (68,987)
Decrease (increase) in accrued
interest receivable . . . . . . . . . . . . . . 592 (652) (278)
Increase in other assets . . . . . . . . . . . . (318) (416) (416)
(Decrease) increase in accrued interest payable. 222 (43) 64
Stock dividends on Federal Home
Loan Bank stock . . . . . . . . . . . . . . . . (127) (120) (112)
(Decrease) increase in accrued expenses
and other liabilities . . . . . . . . . . . . . (81) (508) 293
Increase (decrease) in income taxes payable . . (1,002) 485 (90)
------------------------------
Net cash provided by operating activities . . . 14,946 673 4,473
------------------------------
Investing activities:
Increase in loans receivable, net . . . . . . . . (35,750) (25,195) (13,084)
Principal payments on mortgage
backed securities held to maturity . . . . . . . 297 331 117
Proceeds from the sales of branch and
office properties and equipment . . . . . . . . - 203 82
Purchases of investment securities
available-for-sale. . . . . . . . . . . . . . . (41,920) (70,295) (10,121)
Purchases of investment securities
held to maturity. . . . . . . . . . . . . . . . - (3,940) -
Proceeds from maturities of investment securities 81,500 39,700 6,000
Purchases of office properties and equipment. . . (2,211) (2,141) (3,029)
Proceeds from sale of real estate acquired
through foreclosure . . . . . . . . . . . . . . - 34 -
------------------------------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . . . . 1,916 (61,303) (20,035)
------------------------------
See accompanying notes to consolidated financial statements.
39
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
- ----------------------------------------------------------------------------------
Financing activities:
Net increase in deposits. . . . . . . . . . . . . 42,897 17,765 33,734
Borrowing . . . . . . . . . . . . . . . . . . . . 45,000 - -
Net decrease in advance payments by borrowers
for property taxes and insurance . . . . . . . . (59) (58) (33)
Issue of common stock . . . . . . . . . . . . . . - 69,352 -
Cash distribution . . . . . . . . . . . . . . . . (53,286) - -
Retirement of common stock. . . . . . . . . . . . (8,865) (8,578) -
Stock issuance costs. . . . . . . . . . . . . . . - (1,567) -
Dividends paid. . . . . . . . . . . . . . . . . . (1,315) (754) -
------------------------------
Net cash provided by financing activities . . . . 24,372 76,160 33,701
------------------------------
Increase in cash and cash equivalents . . . . . . . 41,234 15,530 18,139
Cash and cash equivalents, beginning of year. . . . 53,188 37,658 19,519
------------------------------
Cash and cash equivalents, end of year. . . . . . . $94,422 53,188 37,658
==============================
Supplemental Disclosures of Cash
Flow Information:
Payments during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . $ 9,908 9,637 9,225
==============================
Income taxes. . . . . . . . . . . . . . . . . . . $ 3,550 3,608 2,535
==============================
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Foreclosures and in substance
foreclosures of loans during year . . . . . . . $ 86 112 -
==============================
Interest credited to deposits . . . . . . . . . . $ 3,827 3,690 2,902
==============================
Net unrealized gains (losses) on investment
securities available for sale . . . . . . . . . $ (85) 86 (8)
==============================
Increase in deferred tax asset (liability) related
to unrealized gain (loss) on investments . . . . $ 32 (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 -
==============================
Issue of common stock to MRP. . . . . . . . . . . . $ 6,747 - -
==============================
Dividends declared and payable. . . . . . . . . . . $ 355 358 -
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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.
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.
41
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(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.
42
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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 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.
Advertising
The Company expenses the production cost of advertising as incurred.
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. All taxes are accrued 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
43
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
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 balance sheet
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.
44
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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 15, 1999. In June, 1999, the FASB issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133
which changed the effective date to fiscal years beginning after June 15, 2000.
The adoption of the provisions of this statement is not expected to have a
material impact on the Company.
Reclassification
Certain December 31, 1998 and 1997 amounts have been reclassified to conform to
the December 31, 1999 presentation.
(2) Cash:
The Company is required to maintain cash on hand or in the Federal Reserve Bank
account for various regulatory purposes. During 1999 and 1998, such required
cash averaged approximately $4,189,000 and $2,654,000, respectively.
(3) Investment Securities Available-for-Sale:
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31, 1999 and 1998, are as follows:
December 31, 1999
---------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government agencies $ 6,968 $ 4 $ 8 $ 6,964
========================================
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
=======================================
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1999, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $ 6,968 6,964
======================
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1998, by contractual maturity, are shown
below.
Estimated
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $ 46,424 46,505
========================
45
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
At December 31, 1999 and 1998, investment securities with amortized cost values
of $1,999,000 and $2,008,000, 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, 1999, 1998, and 1997.
(4) Mortgage-backed Securities Held to Maturity:
The amortized cost and estimated fair values of mortgage-backed securities held
to maturity at December 31, 1999 and 1998, are as follows:
December 31, 1999
---------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC $ 210 - 1 209
FNMA 441 - 5 436
----------------------------------------
Total mortgage-backed securities
held to maturity $ 651 - 6 645
========================================
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
========================================
As of December 31, 1999, mortgage-backed securities held to maturity had
contractual maturity dates of greater than ten years.
There were no sales of mortgage-backed securities held to maturity in the years
ended December 31, 1999, 1998, and 1997.
(5) Loans Held-for-Sale, Net and Loans Receivable, Net:
Loans held for sale, net are summarized as follows:
1999 1998
- --------------------------------------------------------------------------------
One-to-four family loans $ 4,485 $ 10,923
=====================
Total loans held for sale, net $ 4,485 $ 10,923
=====================
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.
46
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Loans receivable, net at December 31, 1999 and 1998, consisted of the following:
Loans secured by first mortgages on real estate:
1999 1998
- --------------------------------------------------------------------------------
One-to-four family $ 60,261 75,554
Multi-family 780 1,125
Land 40,645 15,367
Commercial real estate 71,419 52,516
Construction and development 69,421 84,900
------- -------
Total first mortgage loans 242,526 229,462
Second mortgage loans 4,788 3,790
Commercial loans 36,456 30,213
Consumer loans 49,090 41,107
------- -------
332,860 304,572
Less:
Loans in process 51,243 52,098
Allowance for loan losses 4,136 3,231
Deferred loan fees, net 785 773
Loans held for sale 4,485 10,923
------- -------
Loans receivable, net $ 272,211 237,547
====================
Loans are presented net of loans serviced for the benefit of others totaling
approximately $124.1 million, $124.9 million and $116.0 million at December 31,
1999, 1998 and 1997, 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, 1999 and
1998 were as follows:
1999 1998
- --------------------------------------------------------------------------------
Recorded investment $ 3,623 1,340
Valuation allowance $ 553 204
The average recorded investment in impaired loans for the years ended December
31, 1999 and 1998 was $1,492,000 and $700,000, respectively.
Activity in the allowance for loan losses, consisted of the following:
1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of period $ 3,231 2,804 2,123
Provision for loan losses 991 452 700
Recoveries 16 29 30
Charge-offs (102) (54) (49)
------------------------------------------
Balance at end of period $ 4,136 3,231 2,804
==========================================
Non-accrual loans totaled approximately $333,000 and $107,000 at December 31,
1999 and 1998, respectively. Interest income foregone on such loans was
approximately $20,300, $12,400 and $9,500 during the years ended December 31,
1999, 1998 and 1997, respectively. The Company is not committed to lend
additional funds to borrowers whose loans have been placed on a non-accrual
basis.
Loans in arrears three months or more were as follows:
Amount % of loans
----------------------------------------------------------
December 31, 1999 $ - 0.00%
===========================
December 31, 1998 $ 66 0.02%
===========================
47
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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, 1999 and 1998 were approximately
$3,155,000 and $1,753,000, respectively. At December 31, 1999 funds committed
that were undisbursed to officers and directors approximated $2,100,000.
The following summarizes activity of these loans for the year ended December 31,
1999:
Balance at beginning of period $1,753
New loans 9,291
Principal repayments (7,889)
------
Balance at end of period $3,155
=====
(6) Office Properties and Equipment, Net:
Office properties and equipment, less accumulated depreciation, consisted of the
following at December 31, 1999 and 1998:
1999 1998
- --------------------------------------------------------------------------------
Land $ 2,904 2,904
Office buildings 4,897 4,891
Furniture, fixtures, and equipment 6,547 6,037
Leasehold improvements 293 286
Automobiles 176 138
Construction in process 1,654 4
---------------------------
16,471 14,260
Less accumulated depreciation 6,579 5,478
---------------------------
Office properties and equipment, net $ 9,892 8,782
===========================
(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, 1999, 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, 1997 $ 212
Originations 664
Amortization (207)
-----
Balance, December 31, 1998 669
Originations 323
Amortization (321)
-----
Balance, December 31, 1999 $ 671
======
(9) Deposits:
Savings, demand, and time deposit account balances are summarized as follows:
December 31, 1999
-------------------
Weighted
Type of Account Average Rate Amount
- --------------------------------------------------------------------------
Personal accounts - % $ 34,692
NOW accounts 1.23 46,472
Savings accounts 1.24 13,017
Certificates of deposit 5.47 150,952
Money market accounts 4.04 63,796
--------
$308,929
========
48
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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
========
Scheduled maturities of certificates of deposit are as follows:
December 31, 1999
-------------------------------------
Weighted
Type of Account Average Rate Amount Percent
- --------------------------------------------------------------------------------
1 year or less 5.44% $125,691 83.27%
Greater than 1 year through 2 years 5.56 14,352 9.51
Greater than 2 years through 3 years 5.76 3,445 2.28
Greater than 3 years through 4 years 5.51 5,060 3.35
Greater than 4 years through 5 years 5.52 2,227 1.48
Thereafter 5.64 177 0.11
------------------
$150,952 100.00%
==================
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%
===================
Certificates of deposit in excess of $100,000 were approximately $39.4 million
and $27.5 million at December 31, 1999 and 1998, 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 20). At December 31, 1999, 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:
1999 1998 1997
- --------------------------------------------------------------------------------
Savings accounts $ 184 423 302
Money market and NOW accounts 2,885 2,364 1,955
Certificates of deposit 6,913 6,807 7,032
-------------------------------
$9,982 9,594 9,289
===============================
(10) Advance from the Federal Home Loan Bank:
---------------------------------------------
As of December 31, 1999 and 1998, no funds are owed to the Federal Home Loan
Bank of Cincinnati (FHLB). Available advances were $15,000,000 at December 31,
1999 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 $37,562,000 at December 31, 1999.
49
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(11) Short-Term Borrowings:
At December 31, 1999, the Company had outstanding a $45 million note payable to
a commercial bank. The note, dated December 16, 1999, bearing interest at prime
rate minus 1.125%, was due on June 16, 2000. All of the outstanding stock of
the Bank was pledged as collateral on the loan. The note was paid in full on
January 19, 2000.
(12) Income Taxes:
The components of income tax expense (benefit) are as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Current income tax expense:
Federal $ 2,139 3,286 1,991
State 409 545 333
----------------------------------------
Total current income tax expense 2,548 3,831 2,324
----------------------------------------
Deferred income tax expense (benefit):
Federal 119 (193) (392)
State 14 (40) (21)
----------------------------------------
Total deferred income tax
expense (benefit) 133 (233) (413)
----------------------------------------
Income tax expense $ 2,681 3,598 1,911
=========================================
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.
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rates $2,091 34.0% $3,160 34.0% $1,738 34.0%
Increases (decrease) in taxes
resulting from:
State income tax, net of
federal effect 279 4.5 333 3.6 206 4.0
Nondeductible ESOP compensation 228 3.7 160 1.7 - -
Other, net 83 1.4 (55) (0.6) (33) (0.6)
--- --- ---- ----- ---- -----
Total income tax expense $2,681 43.6% $3,598 38.7% $1,911 37.4%
====== ==== ====== ==== ====== ====
</TABLE>
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.
50
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The tax effects of temporary differences that give rise to the significant
portions of deferred tax asset and liabilities at December 31, 1999 and 1998,
are as follows:
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Loans receivable, allowance for loan losses $ 1,541 1,224
Deferred loan fees 298 290
Office properties and equipment - 238
Other 1 13
------------------------
Total deferred tax asset 1,840 1,765
------------------------
Deferred tax liabilities:
FHLB stock $ 410 362
Other 162 2
------------------------
Total deferred tax liability 572 364
------------------------
Net deferred tax asset $ 1,268 1,401
========================
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 Company 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, 1999, 1998 or 1997.
(13) 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 $213,000, $174,000 and $91,000 in the years ended
December 31, 1999, 1998 and 1997, respectively.
Employee Stock Ownership Plan - The Cavalry Banking Employee Stock Ownership
Plan "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.
In connection with the cash distribution (discussed in note 15), the ESOP
received approximately $4.5 million on its shares of the Corporation's common
stock. The ESOP purchased an additional 321,305 shares with the proceeds.
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 value of the released shares at cost is recorded as a deduction to
common stock and the value of the released shares at market is recorded as an
addition or deduction to unallocated ESOP shares. The Company recognized
approximately $1,255,000 and $886,000 in compensation expense in the year ended
December 31, 1999 and 1998, respectively, related to the ESOP of which
approximately $593,000 and $419,000 reduced the cost of unallocated ESOP shares
and $671,000 and $467,000 increased common stock on the balance sheet.
51
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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 for allocation during the years
ended December 31, 1999 and 1998 totaled 59,335 and 41,844, respectively.
Shares remaining not released or committed to be released for allocation at
December 31, 1999 and 1998 totaled 501,881 and 561,216, and had a market value
of approximately $8,281,000 and $11,926,000, respectively.
(14) Stock Compensation Plans:
Management Recognition Plan - On April 22, 1999, the Corporation's stockholders
approved the Cavalry Bancorp, Inc. 1999 Management Recognition Plan ("MRP"). A
maximum of 301,530 shares may be awarded under the MRP. The objective of the
MRP is to reward performance and build the participant's equity interest in the
Company by providing long-term incentives and rewards to officers, key employees
and other persons who provide services to the Company and its subsidiaries.
Shares of common stock awarded under the MRP vest in equal amounts over a five
year period. In the event of a change in control of the Company, all shares
will become fully vested at the election of the participant that is made within
60 days following such event. Compensation expense is determined by the value
of the stock on the award date, recognized on a straight-line basis over the
vesting period. Upon the granting of shares under the MRP, participants will be
entitled to all voting and other stockholder rights related to the shares,
including unvested shares. Participants may also receive dividends and other
distributions with respect to such stock. Also, all such shares will be
included in outstanding shares for the computation of basic earnings per share.
On April 22, 1999, 301,530 shares of stock were awarded and the closing price of
the stock on that date was $22.375 per share which became the basis of
recognizing compensation over the five-year period ending April 30, 2004. Total
compensation expense recognized for the MRP during 1999 was $2.4 million,
comprised of a one-time nonrecurring charge for the special cash distribution
(discussed in note 15) and vesting of shares.
Stock Option Plan - On April 22, 1999, the Corporation's stockholders approved
the Cavalry Bancorp, Inc. 1999 Stock Option Plan ("SOP"). The SOP allows the
granting to management and directors the option to purchase common stock of the
Corporation ("options") aggregating to 753,825 shares. All employees and
non-employee directors are eligible to participate in the SOP. Each option will
have a term of 10 years and the exercise price of each option will not be less
than the fair market value of the shares on the date of the grant. Options will
vest in equal installments over a five-year period. In the event of a change in
control of the Company, all options will become fully vested and immediately
exercisable. If provision is not made for the assumption of the options in
connection with the change of control, the SOP provides for cash settlement of
any outstanding options.
No options had been granted as of December 31, 1999.
(15) 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 stockholders
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 the retained income for the
preceding two years. 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
52
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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, 1999. On December 23, 1999, the
Corporation paid a cash distribution of $7.50 per share to its stockholders.
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 1999,
the Corporation requested and received regulatory approval to acquire 358,066
shares of its outstanding common stock. The shares were acquired for
$8,865,000. 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.
(16) 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, 1999 and 1998, 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, 1999 the Bank was "well-capitalized."
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, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Equity capital $ 79,210 79,210 79,210 79,210 79,210 79,210
Unrealized loss on
investment securities
available-for-sale - 2 2 2 2 2
General valuation
allowances - - - - - 4,136
---------------------------------------------------------------
Regulatory capital
measure $ 79,210 79,212 79,212 79,212 79,212 83,348
===============================================================
Total assets $390,357
=======
Adjusted total assets $390,357 $390,361 $390,361
==============================
Risk-weighted assets $355,026 355,026
==================
Capital ratio 20.29% 20.29% 20.29% 20.29% 22.31% 23.48%
===============================================================
</TABLE>
53
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(16) Regulatory Matters: (continued)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
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%
==========================================================
</TABLE>
The Bank's management believes that at December 31, 1999, that the Bank meets
all capital requirements to which it is subject.
(17) Earnings Per Share:
Earnings per share ("EPS") for the year ended December 31, 1997 is not presented
because no shares were issued or outstanding during that period.
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 years
ended December 31, 1999 and 1998; therefore, diluted EPS is the same as basic
EPS.
(18) 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.
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, 1999 and 1998, unused lines of credit were approximately
$36,360,000 and $30,645,000, 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 $7,520,000 and $7,184,000, respectively;
and commitments to originate or purchase loans were approximately $51,243,000
and $52,098,000, respectively. The commitments to originate loans at December
31, 1999 were composed of variable rate loans of approximately $42,629,000 and
fixed rate loans of approximately $8,614,000. The fixed rate loans had interest
rates ranging from 6.75% to 8.50%. 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%.
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
54
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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.
(19) 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 :
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents . . . . . . . 94,422 94,422 53,188 53,188
Investment securities available-
for-sale . . . . . . . . . . . . . . 6,964 6,964 46,505 46,505
Mortgage-backed securities held
to maturity. . . . . . . . . . . . . 651 645 959 963
Loans receivable, net . . . . . . . . . 272,211 270,254 237,547 238,047
Loans held for sale . . . . . . . . . . 4,485 4,485 10,923 10,923
Accrued interest receivable . . . . . . 1,784 1,784 2,376 2,376
Required investment in stock of
the Federal Home Loan Bank . . . . . 1,878 1,878 1,751 1,751
Financial liabilities:
Deposits with no stated maturity. . . . 157,977 157,977 140,773 140,773
Certificates of deposits. . . . . . . . 150,952 151,531 125,259 126,701
Borrowings. . . . . . . . . . . . . . . 45,000 45,000 - -
Off-balance sheet assets (liabilities):
Unused lines of credit. . . . . . . . . - - - -
Standby letters of credit . . . . . . . - - - -
Commitments to extend credit. . . . . . - - - -
</TABLE>
(20) Federal Insurance Premiums:
The expense incurred by the Bank for the years ended December 31, 1999, 1998 and
1997 was $153,000 and $146,000 and $112,000, respectively.
(21) 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
55
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
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.
56
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(22) Condensed Parent Company Only Financial Statements:
The following table presents the condensed balance sheets of the Corporation at
December 31, 1999 and 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):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
Condensed Balance Sheet
<S> <C> <C>
Assets:
Cash and cash equivalents. . . . . . . . . . . . . . 4,950 8,941
Investments available-for-sale . . . . . . . . . . . - 13,526
Investment in Bank . . . . . . . . . . . . . . . . . 42,081 35,348
Note receivable from Bank. . . . . . . . . . . . . . 5,316 5,767
Other assets . . . . . . . . . . . . . . . . . . . . 112 130
-------------------
Total assets. . . . . . . . . . . . . . . . . . . . $52,459 63,712
===================
Liabilities and Stockholders' Equity:
Borrowings . . . . . . . . . . . . . . . . . . . . . $45,000 -
Other liabilities. . . . . . . . . . . . . . . . . . 507 344
Stockholders' equity . . . . . . . . . . . . . . . . 6,952 63,368
-------------------
Total liabilities and stockholders' equity . . . . . $52,459 63,712
===================
Condensed Income Statement:
Interest income . . . . . . . . . . . . . . . . . . . $ 1,343 1,656
Interest expense. . . . . . . . . . . . . . . . . . . 148 -
-------------------
Net interest income . . . . . . . . . . . . . . . . . 1,195 1,656
Noninterest expense . . . . . . . . . . . . . . . . . 476 294
-------------------
Income before income taxes and equity in
undistributed earnings of the Bank . . . . . . . . . 719 1,362
Provision for income taxes. . . . . . . . . . . . . . . 277 575
-------------------
Net income before equity in undistributed
earnings of Bank . . . . . . . . . . . . . . . . . . 442 787
Equity in undistributed earnings of Bank. . . . . . . . 3,027 3,549
-------------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,469 4,336
===================
Condensed Statement of Cash Flows:
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,469 4,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of Bank . . . . (3,027) (3,549)
Net accretion of investments available-
for-sale and held to maturity. . . . . . . . (1) (113)
Net change in other assets and liabilities. . . 194 (154)
-------------------
Net cash provided by operating activities. . . . . 635 520
Cash flows from investing activities:
Investment in Bank . . . . . . . . . . . . . . . . . (111) (36,910)
Purchases of investments available-for-sale. . . . . - (27,446)
Purchase of investments held to maturity . . . . . . - (3,940)
Maturities of investments available-for-sale . . . . 13,500 14,000
Maturities of investments held to maturity . . . . . - 4,000
Collection on notes receivable from Bank . . . . . . 451 264
-------------------
Net cash provided by (used in) investing activities 13,840 (50,032)
-------------------
Cash flows from financing activities:
Borrowings . . . . . . . . . . . . . . . . . . . . . 45,000 -
Issue of common stock. . . . . . . . . . . . . . . . - 69,352
Retirement of common stock . . . . . . . . . . . . . (8,865) (8,578)
Stock issuance costs . . . . . . . . . . . . . . . . - (1,567)
Dividends paid . . . . . . . . . . . . . . . . . . . (1,315) (754)
Cash distribution. . . . . . . . . . . . . . . . . . (53,286) -
-------------------
Net cash (used in) provided by financing activities. (18,466) 58,453
-------------------
Net (decrease) increase in cash and cash equivalents (3,991) 8,941
Cash and cash equivalents at beginning of year . . . 8,941 -
-------------------
Cash and cash equivalents at end of year . . . . . . $ 4,950 8,941
===================
</TABLE>
57
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(23) Quarterly Results of Operations: (Unaudited)
----------------------------------
Summarized unaudited quarterly operating results for the years ended December
31,1999 and 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
December 31, 1999:
Interest income . . . . . . . $ 6,813 $ 6,785 $ 7,087 $ 7,323
Interest expense. . . . . . . 2,337 2,362 2,532 2,899
----------------------------------------------
Net interest income . . . . . 4,476 4,423 4,555 4,424
Provision for loan losses . . 89 423 132 347
----------------------------------------------
Net interest income after
provision for loan losses . 4,387 4,000 4,423 4,077
Noninterest income. . . . . . 1,218 1,306 1,607 1,517
Noninterest expense . . . . . 3,514 3,815 3,774 5,282
----------------------------------------------
Income before income taxes. . 2,091 1,491 2,256 312
Income taxes. . . . . . . . . 863 626 918 274
----------------------------------------------
Net income. . . . . . . . . . $ 1,228 $ 865 $ 1,338 $ 38
==============================================
Basic earnings per
share (note 17) . . . . . . $ 0.19 $ 0.13 $ 0.20 $ 0.01
==============================================
Weighted average shares
outstanding (note 17). . . 6,607,533 6,781,294 6,580,643 6,595,487
==============================================
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. . . $ 0.20 $ 0.22 $ 0.20 $ 0.21
(note 17)
==============================================
Weighted average shares
outstanding (note 17). . . 6,935,190 6,947,754 6,960,318 6,805,995
==============================================
</TABLE>
58
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
(24) Comprehensive Income:
SFAS No. 130, Reporting Comprehensive Income, (SFAS 130),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, 1999 and 1998 and 1997:
<TABLE>
<CAPTION>
Pre-Tax (Expense) Net of Tax
Amount Benefit Amount
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
December 31, 1999:
Unrealized holding losses for the period $ (85) $ 32 $ (53)
-----------------------------------
$ (85) $ 32 $ (53)
===================================
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)
===================================
</TABLE>
(25) Business Segments
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 1999, 1998 and
1997.
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.
<TABLE>
<CAPTION>
Mortgage
1999. . . . . . . . . . . . . . Banking Banking Trust Consolidated
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Interest revenue. . . . . . . . $ 28,008 - - $ 28,008
Other income-external customers 2,245 219 936 3,400
Interest expense. . . . . . . . 10,130 - - 10,130
Depreciation and amortization . 859 198 44 1,101
Other significant items:
Provisions for loan losses . 991 - - 991
Gain on sale of assets . . . 3 2,245 - 2,248
Segment profit. . . . . . . . . 6,075 (49) 124 6,150
Segment assets. . . . . . . . . $390,648 $ 4,596 $ 175 $ 395,419
59
<PAGE>
CAVALRY BANCORP, INC. 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Mortgage
1998. . . . . . . . . . . . . . Banking Banking Trust Consolidated
- --------------------------------------------------------------------------------
Interest revenue. . . . . . . . $ 26,596 - - $ 26,596
Other income-external customers 1,789 374 795 2,958
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 2,266 - 2,268
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 1,378 506 649 2,533
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 . . . 2 1,126 - 1,128
Segment profit. . . . . . . . . 4,895 93 125 5,113
Segment assets. . . . . . . . . $276,943 5,137 49 282,129
</TABLE>
60
<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>
EXHIBIT 23
CONSENT OF RAYBURN, BETTS & BATES, P.C.
<PAGE>
[Letterhead of Rayburn, Betts & Bates, P.C.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-48007) of Cavalry Bancorp, Inc. ("Company"), of
our report dated January 18, 2000 included in the Company's 1999 Annual Report
to Stockholders.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
March 18, 2000
<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,
1999 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, 1999 Item Description
- ------------ ----------------- -----------------
9-03 (1) 20,043 Cash and Due from Banks
9-03 (2) 74,379 Interest - bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 6,964 Investment and mortgage backed securities
held for sale
9-03 (6) 651 Investment and mortgage backed securities held
to maturity - carrying value
9-03 (6) 645 Investment and mortgage backed securities
held to maturity - market value
9-03 (7) 276,696 Loans
9-03 (7)(2) 4,136 Allowance for loan losses
9-03 (11) 395,419 Total assets
9-03 (12) 308,929 Deposits
9-03 (13) 45,000 Short - term borrowings
9-03 (15) 2,725 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) 10,972 Common stocks
9-03 (22) 27,793 Other stockholders' equity
9-03 (23) 395,419 Total liabilities and stockholders' equity
9-04 (1) 23,691 Interest and fees on loans
9-04 (2) 2,249 Interest and dividends on investments
9-04 (4) 2,068 Other interest income
9-04 (5) 28,008 Total interest income
9-04 (6) 9,982 Interest on deposits
9-04 (9) 10,130 Total interest expense
9-04 (10) 17,878 Net interest income
9-04 (11) 991 Provision for loan losses
9-04 (13)(h) Investment securities gains/(losses)
9-04 (14) 16,385 Other expenses
9-04 (15) 6,150 Income/loss before income tax
9-04 (17) 6,150 Income/loss before extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting principles
9-04 (20) 3,469 Net income or loss
9-04 (21) 0.52 Earnings per share - primary
9-04 (21) 0.52 Earnings per share - fully diluted
I.B. 5 5.10 Net yield - interest earnings - actual
III.C.1. (a) 333 Loans on non - accrual
III.C.1. (b) -- Accruing loans past due 90 days or more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 3,231 Allowance for loan loss - beginning of period
IV.A.2 101 Total chargeoffs
IV.A.3 15 Total recoveries
IV.A.4 4,136 Allowance for loan loss - end of period
IV.B.1 3,913 Loan loss allowance allocated to domestic loans
IV.B.2 -- Loan loss allowance allocated to foreign loans
IV.B.3 223 Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-01-1999
<CASH> 20043
<INT-BEARING-DEPOSITS> 74379
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6964
<INVESTMENTS-CARRYING> 651
<INVESTMENTS-MARKET> 645
<LOANS> 276696
<ALLOWANCE> 4136
<TOTAL-ASSETS> 395419
<DEPOSITS> 308929
<SHORT-TERM> 45000
<LIABILITIES-OTHER> 2725
<LONG-TERM> 0
0
0
<COMMON> 10972
<OTHER-SE> 27793
<TOTAL-LIABILITIES-AND-EQUITY> 395419
<INTEREST-LOAN> 23691
<INTEREST-INVEST> 2249
<INTEREST-OTHER> 2068
<INTEREST-TOTAL> 28008
<INTEREST-DEPOSIT> 9982
<INTEREST-EXPENSE> 10130
<INTEREST-INCOME-NET> 17878
<LOAN-LOSSES> 991
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16385
<INCOME-PRETAX> 6150
<INCOME-PRE-EXTRAORDINARY> 6150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3469
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 5
<LOANS-NON> 333
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3231
<CHARGE-OFFS> 101
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 4136
<ALLOWANCE-DOMESTIC> 3913
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 223
</TABLE>
