UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
|
x |
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Fiscal Year Ended December 31, 2004 |
|
OR | |
|
o |
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
 |
|
(Exact
Name of Registrant as Specified in Its
Charter) |
|
Tennessee |
62-1721072 |
|
(State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer I.D. Number) |
|
114
West College Street, Murfreesboro, Tennessee |
37130 |
|
(Address
of Principal Executive Offices) |
(Zip
Code) |
|
(615)
893-1234 |
|
Registrant’s
telephone number, including area code |
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 (2) has been subject to such filing requirements for
the past 90 days.
|
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)
|
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,
2004, was $77,995,655 (4,936,434 shares at $15.80 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 11, 2005
was 7,217,565.
DOCUMENTS
INCORPORATED BY REFERENCE
1.
Portions of Annual Report to Stockholders for the Fiscal Year Ended December 31,
2004 (“Annual Report”) (Parts I and II).
2.
Portions of Definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders (Part III).
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 of 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. (the “Company”), a Tennessee corporation, was organized on
November 5, 1997 for the purpose of becoming the holding company for Cavalry
Banking (the “Bank”) upon the Bank's conversion from a federally chartered
mutual to a federally chartered stock savings bank (the “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, 2004, the Company had total assets of $578.7 million, total deposits of
$506.5 million and shareholders' equity of $53.8 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
statements and related data, relates primarily to the Bank.
As a
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 the FRB. Prior to the Conversion, 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.
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 actively makes
construction and acquisition and development loans, commercial real estate
loans, commercial business loans, and consumer and other non-real estate loans.
In addition, 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. 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 as well as 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
and borrowers reside in, and a substantial portion of its loan portfolio is
secured by properties located in, Rutherford County.
The
economy of Rutherford County is diverse and generally stable. According to the
Rutherford Area Chamber 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.
1
Lending
Activities
General. At
December 31, 2004, the Bank's loans receivable portfolio amounted to $433.0
million, or 74.8% of total assets at that date. Real estate loans, including
mortgage and construction loans, collectively constituted $210.2 million or
47.9% of the gross loan portfolio at December 31, 2004. 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.
|
At
December 31, |
|||||||||||||||||||||||||||||||
|
2004 |
2003 |
2002 |
2001 |
2000 |
|||||||||||||||||||||||||||
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|||||||||||||
|
(Dollars
in thousands) |
|||||||||||||||||||||||||||||||
|
Commercial |
$ |
183,129 |
41.7 |
% |
126,833 |
35.4 |
104,512 |
32.2 |
130,800 |
44.1 |
118,206 |
41.0 |
|||||||||||||||||||
|
Real
Estate - construction |
95,449 |
21.7 |
69,667 |
19.4 |
66,882 |
20.7 |
48,449 |
16.4 |
51,042 |
17.7 |
|||||||||||||||||||||
|
Real
Estate -
mortgage
(1) |
114,745 |
26.2 |
123,575 |
34.4 |
125,259 |
38.7 |
71,226 |
24.1 |
67,295 |
23.3 |
|||||||||||||||||||||
|
Installment
and other consumer |
45,739 |
10.4 |
38,709 |
10.8 |
27,166 |
8.4 |
45,424 |
15.4 |
52,095 |
18.0 |
|||||||||||||||||||||
|
Total
loans |
439,062 |
100.0 |
% |
358,784 |
100.0 |
323,819 |
100.0 |
295,899 |
100.0 |
288,638 |
100.0 |
||||||||||||||||||||
|
Less: |
|||||||||||||||||||||||||||||||
|
Net
deferred loan fees |
1,172 |
1,199 |
838 |
767 |
742 |
||||||||||||||||||||||||||
|
Allowance
for loan losses |
4,863 |
4,525 |
4,657 |
4,470 |
4,235 |
||||||||||||||||||||||||||
|
Total
loans receivable, net |
$ |
433,027 |
353,060 |
318,324 |
290,662 |
283,661 |
|||||||||||||||||||||||||
(1)
Includes loans held for sale.
As a
result of the 2002 change to a state bank, 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, 2004, $114.7 million, or 26.2% 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, 2004, $50.4 million of these loans, or
11.5% 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.
2
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, 2004, the composition of the Bank's construction loan portfolio was
as follows:
|
Outstanding
Balance |
Percent
of
Total |
||||||
|
(Dollars
in thousands) |
|||||||
Residential: |
|||||||
|
Speculative
construction |
$ |
29,464 |
30.9 |
% | |||
|
Pre-sold
construction |
13,749 |
14.4 |
|||||
|
Construction/permanent |
5,147 |
5.4 |
|||||
|
Commercial
and multi-family |
12,793 |
13.4 |
|||||
|
Acquisition
and land development |
34,296 |
35.9 |
|||||
|
Total |
$ |
95,449 |
100.0 |
% | |||
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 generally 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 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.
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.
3
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 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.
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, 2004 and 2003.
|
December
31, |
|||||||||||||
|
2004 |
2003 |
||||||||||||
|
Outstanding
Balances |
Percent
of Total |
Outstanding
Balances |
Percent
of Total |
||||||||||
|
(Dollars
in thousands) | |||||||||||||
Commercial
loans: |
|||||||||||||
|
Properties
secured by farmland |
$ |
1,412 |
0.8 |
% |
1,052 |
0.8 |
|||||||
|
Properties
secured by commercial real estate |
38,827 |
21.2 |
41,407 |
32.7 |
|||||||||
|
Agricultural
loans |
70 |
- |
41 |
- |
|||||||||
|
Commercial
business loans |
142,820 |
78.0 |
84,333 |
66.5 |
|||||||||