UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One )
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Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2003 or |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from___________ to ___________ |
Commission File Number: 0-23605
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(Exact Name of Registrant as Specified in Its Charter) |
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Tennessee |
62-1721072 |
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer I.D. Number) |
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114 West College Street, Murfreesboro, Tennessee |
37130 |
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(Address of Principal Executive Offices) |
(Zip Code) |
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(615) 893-1234 |
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Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no 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 has been subject to such filing requirements for the past 90 days.
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Yes x |
No o |
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
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Yes x |
No o |
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 June 30, 2003, was $104,048,210 (6,127,692 shares at $16.98 per share). It is assumed for purposes of this calculation that the Registrant's directors are its affiliates.
The number of shares outstanding of Registrant's common stock as of March 12, 2004 was 6,834,873.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended December 31, 2003 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders (Part III).
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PART I
Item 1. Business
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of this safe harbor. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company’s ability to predict results or the actual effect o
f future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U. S. Government, including policies of the U. S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, implementation of new technologies, the Company’s ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
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. In January 2002, the Bank converted to a state chartered commercial bank and became a member of the Federal Reserve System. As of that date, the Company became a bank holding company registered with the Board of Governors of the Federal Reserve System ("FRB"). At December 31, 2003, the Company had total assets of $515.2 million, total deposits of $454.3 million and shareholders' equity of $54.4 million. The Company has not engaged in any significant activity ot
her than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank.
Prior to its conversion to a state bank, the Bank’s primary federal regulator was the Office of Thrift Supervision ("OTS"). The Bank's deposits have been federally insured since 1936 and are currently insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") system since 1936. As result of its conversion to a state chartered bank effective January 2002, the Bank’s primary regulators are the Tennessee Department of Financial Institutions ("TDFI") and FRB.
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 sold in the secondary market. In addition, the Bank actively makes construction and acquisition and development loans, commercial real estate loans, commercial business loans, and consumer and other non-real estate loans. The Bank also provides trust and investment services through its trust division and brokerage
and investment products through its brokerage division, Cavalry Investment Services. The Bank’s subsidiary, Miller & Loughry Insurance and Services, Inc., an independent insurance agency, offers a full line of insurance products and services and human resources management services.
Market Area
The Bank considers Rutherford, Davidson, 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. With the mortgage loan origination division, Cavalry Mortgage, the Bank has a presence in the Nashville-Davidson and Williamson County markets for residential mortgage originations.
The economy of Rutherford and Bedford Counties is 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 Distribution, among others.
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Lending Activities
General. At December 31, 2003, the Bank's loans receivable portfolio amounted to $353.1 million, or 68.5% of total assets at that date. Real estate loans including mortgage and construction loans collectively constituted $193.2 million or 53.8% of the loan portfolio at December 31, 2003. 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.
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.
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At December 31, | ||||||||||||
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2003 |
2002 |
2001 |
2000 |
1999 | ||||||||
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Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent | |||
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(Dollars in thousands) | ||||||||||||
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Commercial |
$ |
126,833 |
35.4 |
% |
104,512 |
32.2 |
130,800 |
44.1 |
118,206 |
41.0 |
107,875 |
38.3 | |
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Real Estate - construction |
69,667 |
19.4 |
66,882 |
20.7 |
48,449 |
16.4 |
51,042 |
17.7 |
58,823 |
20.9 | |||
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Real Estate - mortgage (1) |
123,575 |
34.4 |
125,259 |
38.7 |
71,226 |
24.1 |
67,295 |
23.3 |
61,041 |
21.7 | |||
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Installment and other consumer |
38,709 |
10.8 |
27,166 |
8.4 |
45,424 |
15.4 |
52,095 |
18.0 |
53,878 |
19.1 | |||
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Total loans |
358,784 |
100.0 |
% |
323,819 |
100.0 |
295,899 |
100.0 |
288,638 |
100.0 |
281,617 |
100.0 | ||
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Less: |
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Net deferred loan fees |
1,199 |
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838 |
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767 |
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742 |
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785 |
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Allowance for loan losses |
4,525 |
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4,657 |
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4,470 |
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4,235 |
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4,136 |
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Total loans receivable, net |
$ |
353,060 |
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318,324 |
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290,662 |
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283,661 |
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276,696 |
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(1) Includes loans held for sale.
As a result of the change in charter certain loans that were classified as commercial and consumer loans in prior years are now classified as real estate mortgage. For the year ended December 31, 2002, approximately $27.4 million classified as mortgage loans would have been classified as commercial and $19.3 million classified as mortgage loans would have been classified as installment and other consumer loans.
Real Estate Lending - Mortgage. Historically, the Bank has concentrated its lending activities on the origination of loans secured by residential first mortgages located in its primary market area. At December 31, 2003, $123.6 million, or 34.4% of the Bank's total loan portfolio, consisted of such loans.
Generally, the Bank's fixed-rate 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 that 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 secured by residences at rates and terms competitive with market conditions. At December 31, 2003, $60.6 million of these loans, or 16.9% of the Bank's gross loan portfolio, were subject to periodic interest rate adjustments. The Bank originates for its portfolio ARM loans which provide for an interest rate which adjusts every year or which is fixed for one, three or five years and then adjusts every year after the initial period. Most of the Bank's one-year, three-year and five-year ARMs adjust every year after the initial fixed rate period based on the one year Treasury constant maturity index. The Bank's ARMs are typically based on a 30-year amortization schedule. The Bank's ARM loans generally provide for annual and lifetime interest rate adjustment limits
of 2% and 5% to 6%, respectively.
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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.
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. The Bank also originates construction loans for the development of multi-family and commercial properties as well as acquisition and land development loans.
At December 31, 2003, the composition of the Bank's construction loan portfolio was as follows:
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Outstanding
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Percent of
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(Dollars in thousands) | ||||||
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Residential: |
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Speculative construction |
$ |
11,298 |
16.2 |
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Pre-sold construction |
19,532 |
28.0 |
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Construction/permanent |
2,997 |
4.3 |
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Commercial and multi-family |
9,169 |
13.2 |
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Acquisition and land development |
26,671 |
38.3 |
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Total |
$ |
69,667 |
100.0 |
% | |||
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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.
Unlike speculative construction loans, pre-sold construction loans are made to homebuilders who, at the time of construction, have a signed contract with a homebuyer who has a commitment for permanent financing for the finished home with the Bank or another lender.
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 a fixed rate.
The Bank also provides construction financing for non-residential properties (i.e., multi-family and commercial properties).
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, t
he 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 concentration of 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.
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The Bank originates acquisition and development ("A&D") loans for the purpose of developing the land (i.e., installing roads, sewers, water and other utilities) for sale for residential housing construction. The majority of the Bank’s A&D loans are secured by properties located in the Bank's primary market area. A&D loans are usually repaid through the sale of the developed land. However, the Bank believes that its A&D loans are made to individuals with, or to entities the principals/guarantors of which possess, sufficient personal financial resources out of which the loans could be repaid, if necessary.
Loans secured by undeveloped land or improved lots involve greater risks than 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. 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 increas
ed 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.
Commercial Lending. Commercial loans include commercial real estate, commercial business loans, and to a lesser extent loans secured by farmland, and agricultural loans to finance agricultural production. The following table indicates the amounts of each classification of commercial loans at December 31, 2003 and 2002.
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December 31, | ||||||||||||
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2003 |
2002 | |||||||||||
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Outstanding Balances |
Percent of Total |
Outstanding Balances |
Percent of Total | |||||||||
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Commercial loans: |
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Properties secured by farmland |
$ |
1,052 |
0.8 |
% |
1,143 |
1.1 |
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Properties secured by commercial real estate |
41,407 |
32.7 |
52,913 |
50.6 |
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Agricultural loans |
41 |
- |
106 |
0.1 |
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Commercial business loans |
84,333 |
66.5 |
50,350 |
48.2 |
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Total |
$ |
126,833 |
100.0 |
% |
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104,512 |
100.0 |
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The Bank originates mortgage loans for the acquisition and refinancing of 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 average size of a commercial real estate loan in the Bank's portfolio is approximately $150,000 to $250,000.
Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from 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 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 th
e 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.
The Bank's commercial business lending activities focus primarily on small to medium size businesses owned by individuals who reside in the Bank's primary market area. 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.
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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 cash flows from the business or the creditworthiness of 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. 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.
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 appl
ication 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.
Maturity of Loan Portfolio . The following table sets forth certain information at December 31, 2003 regarding the dollar amount of loans maturing in the Bank's loan 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.
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One Year |
After One Year Through 3 Years |
After 3 Years Through 5 Years |
After 5 Years Through 10 Years |
After 10 Years |
Total | |||||||||||||
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(Dollars in thousands) | ||||||||||||||||||
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Commercial |
$ |
43,392 |
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