**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 **FORM
10-Q**
 
 (Mark
One **)**
 
 x
    Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
      For
      the Quarterly Period Ended March 31, 2005ORo
    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)
      893-1234Registrant’s
      telephone number, including area code
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yesx
    Noo
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2)
 
 Yesx
    Noo
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Common
Stock Issued and Outstanding: 7,217,565 shares as of May 5, 2005 .
  
  
 
 **CAVALRY
BANCORP, INC.**
 
 Table of
Contents
 
 Part
      I
    Financial
      Information
    PageItem
      1.
    Financial
      StatementsConsolidated
      Balance Sheets at March 31, 2005 (unaudited)
      and
      December 31, 2004
    1Consolidated
      Statements of Income (unaudited) for the
      Three
      Months Ended March 31, 2005 and 2004
    2Consolidated
      Statements of Comprehensive Income (unaudited) for the
      Three
      Months Ended March 31, 2005 and 2004
    3Consolidated
      Statements of Cash Flows (unaudited) for the
      Three
      Months Ended March 31, 2005 and 2004
    4Notes
      to Consolidated Financial Statements (unaudited)
    5-7Item
      2.
    Management’s
      Discussion and Analysis of Financial
      Condition
      and Results of Operations
    7-11Item
      3.
    Quantitative
      and Qualitative Disclosures About Market Risk
    11-12Item
      4.
    Controls
      and Procedures
    13Part
      II
    Other
      Information
    14Item
      1.
    Legal
      Proceedings
    14Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    14Item
      3.
    Defaults
      Upon Senior Securities
    14Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    14Item
      5.
    Other
      Information
    14Item
      6.
    Exhibits
    15Signatures
    
    16
 
 
   
 
 Part
I.  Financial
Information
 
 ITEM
1.  FINANCIAL
STATEMENTS
 
 **CAVALRY
BANCORP, INC.**
 **CONSOLIDATED
BALANCE SHEETS**
 **MARCH
31, 2005 (UNAUDITED) AND DECEMBER 31, 2004**
 **(DOLLARS
IN THOUSANDS)**
 
 **Assets**
    
    March
      31,
      2005
    
    December
      31,
      2004(Unaudited)Cash
    
    $
    15,203
    
    
    24,319Interest-bearing
      deposits with other financial institutions
    
    
    46,523
    
    
    38,816Cash
      and cash equivalents
    
    
    61,726
    
    
    63,135Time
      deposits with Federal Home Loan Bank
    
    
    16,000
    
    
    -Investment
      securities available-for-sale at fair value (amortized cost:
      $32,088and $42,376 at March 31, 2005 and December 31, 2004,
      respectively)
    
    
    31,484
    
    
    42,183Loans
      held for sale, at estimated fair value
    
    
    1,668
    
    
    2,501Loans
      receivable, net of allowances for loan losses of $4,907 at March 31, 2005
      and $4,863 at December 31, 2004
    
    
    425,917
    
    
    430,526Accrued
      interest receivable
    
    
    1,968
    
    
    1,985Office
      properties and equipment, net
    
    
    17,663
    
    
    17,607Required
      investments in stock of Federal Home Loan Bank and Federal Reserve Bank,
      at cost
    
    
    3,256
    
    
    3,125Foreclosed
      assets
    
    
    251
    
    
    16Bank
      owned life insurance
    
    
    11,717
    
    
    11,604Goodwill
    
    
    1,772
    
    
    1,772Other
      assets
    
    
    3,409
    
    
    4,216Total
      assets
    
    $
    576,831
    
    
    578,670**Liabilities
      and Shareholders’ Equity**Liabilities:Deposits:Non-interest-bearing
    
    $
    95,350
    
    
    81,719Interest-bearing
    
    
    418,292
    
    
    424,815Total
      deposits
    
    
    513,642
    
    
    506,534Advances
      from Federal Home Loan Bank of Cincinnati
    
    
    2,821
    
    
    2,835Dividends
      payable
    
    
    505
    
    
    11,332Accrued
      expenses and other liabilities
    
    
    4,535
    
    
    4,136Total
      liabilities
    
    
    521,503
    
    
    524,837Shareholders’
      equity:Preferred
      stock, no par value:Authorized
      - 250,000 shares; none issued or outstanding at March 31, 2005 and
      December 31, 2004
    
    
    -
    
    
    -Common
      stock, no par value:Authorized
      - 49,750,000 shares; issued and outstanding 7,217,565 at March 31, 2005
      and December 31, 2004
    
    
    19,354
    
    
    19,354Retained
      earnings
    
    
    36,341
    
    
    34,598Accumulated
      other comprehensive loss, net of tax
    
    
    (367
    )
    
    (119
    )Total
      shareholders’ equity
    
    
    55,328
    
    
    53,833Total
      liabilities and shareholders’ equity
    
    $
    576,831
    
    
    578,670
 
 Note: The
balance sheet presented above at December 31, 2004 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
 
 See
accompanying notes to consolidated financial statements.
  1
  **CAVALRY
BANCORP, INC.**
 **CONSOLIDATED
STATEMENTS OF INCOME**
 **(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)**
 **(UNAUDITED)**
 
 Three
      Months Ended
      March
      31,2005
    
    2004Interest
      income:Loans
    
    $
    6,480
    
    
    5,273Investment
      securities:Taxable
    
    
    320
    
    
    341Non-taxable
    
    
    25
    
    
    7Other
    
    
    346
    
    
    90Total
      interest income
    
    
    7,171
    
    
    5,711Interest
      expense:Deposits
    
    
    1,818
    
    
    1,269Borrowings
    
    
    24
    
    
    24Total
      interest expense
    
    
    1,842
    
    
    1,293Net
      interest income
    
    
    5,329
    
    
    4,418Provision
      for loan losses
    
    
    61
    
    
    101Net
      interest income after provision for loan losses
    
    
    5,268
    
    
    4,317Non-interest
      income:Servicing
      income
    
    
    50
    
    
    45Gain
      on sale of loans, net
    
    
    348
    
    
    586Gain
      on sale of other assets
    
    
    -
    
    
    53Gain
      on sale of investment securities, net
    
    
    -
    
    
    66Deposit
      servicing fees and charges
    
    
    1,329
    
    
    1,224Trust
      service fees
    
    
    252
    
    
    292Commissions
      and other non-banking fees
    
    
    694
    
    
    655Other
      operating income
    
    
    298
    
    
    264Total
      non-interest income
    
    
    2,971
    
    
    3,185Non-interest
      expenses:Salaries
      and employee benefits
    
    
    3,171
    
    
    3,573Occupancy
      expense
    
    
    284
    
    
    320Supplies,
      communications and other office expenses
    
    
    226
    
    
    219Advertising
      expense
    
    
    90
    
    
    151Equipment
      and service bureau expense
    
    
    894
    
    
    816Professional
      fees
    
    
    159
    
    
    188Other
      taxes
    
    
    119
    
    
    115Other
      operating expense
    
    
    363
    
    
    377Total
      non-interest expenses
    
    
    5,306
    
    
    5,759Income
      before income taxes
    
    
    2,933
    
    
    1,743Income
      tax expense
    
    
    685
    
    
    727Net
      income
    
    $
    2,248
    
    
    1,016Basic
      earnings per share
    
    $
    0.31
    
    
    0.16Diluted
      earnings per share
    
    $
    0.31
    
    
    0.15Weighted
      average shares outstanding - Basic
    
    
    7,217,565
    
    
    6,486,988Weighted
      average shares outstanding - Diluted
    
    
    7,326,051
    
    
    6,732,839
 
 Dividends
declared $0.07 per share payable April 15, 2005 for shareholders of record date
March 31, 2005.
 
 See
accompanying notes to consolidated financial statements.
  2
  **CAVALRY
BANCORP, INC.**
 **CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME**
 **(DOLLARS
IN THOUSANDS)**
 **(UNAUDITED)**
 
 Three
      Months Ended
      March
      31,2005
    
    2004Net
      income
    
    $
    2,248
    
    
    1,016Other
      comprehensive income, net of tax:Unrealized
      gains (losses) on investment securities available-for-sale
    
    
    (248
    )
    
    127Reclassification
      adjustment for gains included in net income
    
    
    -
    
    
    (41
    )Comprehensive
      income
    
    $
    2,000
    
    
    1,102
 
 See
accompanying notes to consolidated financial statements.
  3
  **CAVALRY
BANCORP, INC.**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **THREE
MONTHS ENDED MARCH 31, 2005 AND 2004**
 **(DOLLARS
IN THOUSANDS)**
 **(UNAUDITED)**
 
 
 2005
    
    2004Operating
      activities:Net
      cash provided by operating activities
    
    $
    4,806
    
    
    6,358Investing
      activities:Decrease
      (increase) in loans receivable, net
    
    
    4,311
    
    
    (28,007
    )Increase
      in time deposits with Federal Home Loan Bank
    
    
    (16,000
    )
    
    -Principal
      payments on investment securities
    
    
    1,252
    
    
    405Purchase
      of investment securities available-for-sale
    
    
    -
    
    
    (26,619
    )Proceeds
      from maturities of investment securities
    
    
    9,000
    
    
    10,650Proceeds
      from sales of investment securities available-for-sale
    
    
    -
    
    
    29,541Purchase
      of Federal Reserve Stock
    
    
    (104
    )
    
    (18
    )Purchase
      of office properties and equipment
    
    
    (465
    )
    
    (168
    )Proceeds
      from sale of foreclosed assets
    
    
    29
    
    
    -Proceeds
      from sale of assets
    
    
    -
    
    
    32Net
      cash used in investing activities
    
    
    (1,977
    )
    
    (14,184
    )Financing
      activities:Net
      increase (decrease) in deposits
    
    
    7,108
    
    
    (13,464
    )Retirement
      of common stock
    
    
    -
    
    
    (22
    )Dividends
      paid
    
    
    (11,332
    )
    
    (389
    )Net
      decrease in borrowings
    
    
    (14
    )
    
    (13
    )Net
      cash used in financing activities
    
    
    (4,238
    )
    
    (13,888
    )Increase
      (decrease) in cash and cash equivalents
    
    
    (1,409
    )
    
    (21,714
    )Cash
      and cash equivalents, beginning of period
    
    
    63,135
    
    
    70,913Cash
      and cash equivalents, end of period
    
    $
    61,726
    
    
    49,199**Supplement
      Disclosures of Cash Flow Information:**Payments
      during the period for:Interest
    
    $
    1,804
    
    
    1,287Income
      taxes
    
    $
    -
    
    
    -**Supplemental
      Disclosures of Noncash Investing and Financing
      Activities**:Increase
      (decrease) in deferred tax asset (liability) related to unrealized gains
      (losses) on investments
    
    $
    162
    
    
    (54
    )Net
      unrealized gains (losses) on investment securities available for
      sale
    
    $
    (410
    )
    
    140Dividends
      declared and payable
    
    $
    505
    
    
    410
 
 See
accompanying notes to consolidated financial statements.
  4
  **Cavalry
Bancorp, Inc.**
 **Notes
to Consolidated Financial Statements**
 1.  Basis of
Presentation
 
 Cavalry
Bancorp, Inc. (the “Company”), a Tennessee corporation, is the holding company
for Cavalry Banking (the "Bank"), a state chartered Federal Reserve member
commercial bank. Miller & Loughry Insurance and Services, Inc. (“Miller
& Loughry”), an independent insurance agency, is a wholly-owned subsidiary
of the Bank.
 
 The
unaudited consolidated financial statements include the accounts of the Company,
the Bank and its wholly-owned subsidiary Miller & Loughry, and other
insignificant subsidiaries (collectively the Company). All material intercompany
accounts and transactions have been eliminated in consolidation.
 
 The
accompanying consolidated financial statements of the Company have been prepared
in accordance with Instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
 
 The
results of operations for the three months ended March 31, 2005, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2005. The consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2004.
 
 2. Stock
Options
 
 The
Company accounts for its stock option plan in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations, as permitted by Statement of
Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based
Compensation.” As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. SFAS 123 requires entities which continue to apply the provisions of APB
Opinion No. 25 to provide pro-forma earnings per share disclosure for stock
option grants made in 1995 and subsequent years as if the fair value based
method defined in SFAS 123 had been applied. SFAS 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB No.
123,” provides that an entity that has transitioned to the accounting treatment
prescribed by SFAS 123 may use the intrinsic value method in lieu of the fair
value based method for determining the fair value of stock options at the date
of grant. SFAS 148 requires disclosure in addition to SFAS 123 if APB Opinion
No. 25 is currently being applied.
 
 The
Company applies APB Opinion No. 25 and related interpretations in accounting for
the stock option plan. No compensation cost has been recognized for the plan
because the stock option price is equal to or greater than the fair value at the
grant date. As of December 31, 2004, all remaining stock options were vested,
resulting in no compensation expense for future periods until more stock options
are awarded. Following is a reconciliation of reported and pro forma net income
and earnings per share had compensation cost for the plan been determined based
on the fair value of SFAS 123, as amended:
 Three
      Months Ended
      March
      31,2005
    
    
    2004(Dollars
      in thousands, except per share data)Net
      income:As
      reported
    
    $
    2,248
    
    
    1,016Deduct:
      Total stock-based employee compensation expense determined under fair
      value methods for all awards granted, net of related tax
      effects
    
    
    -
    
    
    (103
    )Pro
      forma net income
    
    $
    2,248
    
    
    913Earnings
      per share:Basic
      - as reported
    
    $
    0.31
    
    
    0.16Basic
      - pro forma
    
    $
    0.31
    
    
    0.14Diluted
      - as reported
    
    $
    0.31
    
    
    0.15Diluted
      - pro forma
    
    $
    0.31
    
    
    0.14


5
 
 3.  Earnings
Per Share
 
 The
following schedule reconciles the numerators and denominators of the basic and
diluted earnings per share (EPS) computations for the three months ended March
31, 2005 and 2004. Diluted common shares arise from the potentially dilutive
effect of the Company’s stock options outstanding.
 
 Three
      Months Ended
      March
      31,2005
    
    2004Basic
      EPS:Net
      income
    
    $
    2,248,000
    
    
    1,016,000Average
      common shares outstanding
    
    
    7,217,565
    
    
    6,486,988Earnings
      per share - basic
    
    $
    0.31
    
    
    0.16Diluted
      EPS:Net
      income
    
    $
    2,248,000
    
    
    1,016,000Average
      common shares outstanding
    
    
    7,217,565
    
    
    6,486,988Dilutive
      effect of stock options
    
    
    108,486
    
    
    245,851Average
      dilutive shares outstanding
    
    
    7,326,051
    
    
    6,732,839Earnings
      per share - diluted
    
    $
    0.31
    
    
    0.15
 
 4. Business
Segments
 
 The
Company and its subsidiaries provide community oriented financial services to
individuals and businesses primarily within Davidson, Rutherford and Bedford
counties in Middle Tennessee.
 
 The
Company’s segments are identified by the products and services offered,
principally distinguished as banking, trust, insurance, and mortgage banking
operations. The majority of loans originated for sale are sold with the
servicing rights attached.
 
 Segment
information is derived from the internal reporting system utilized by management
with accounting policies and procedures consistent with those described in Note
1 of the 2004 Annual Report to Shareholders. 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.
  6
  
 
 Banking
    
    Mortgage
      Banking
    
    Trust
    
    Insurance
    
    Eliminations
    
    ConsolidatedFor
      the three months ended
      March
      31, 2005:
    
    (Dollars
      in thousands)Interest
      revenue
    
    $
    7,171
    
    
    -
    
    
    -
    
    
    1
    
    
    (1
    )
    
    7,171Other
      income-external customers
    
    
    1,822
    
    
    1
    
    
    270
    
    
    573
    
    
    (43
    )
    
    2,623Interest
      expense
    
    
    1,843
    
    
    -
    
    
    -
    
    
    -
    
    
    (1
    )
    
    1,842Depreciation
      and amortization
    
    
    378
    
    
    23
    
    
    14
    
    
    7
    
    
    -
    
    
    422Other
      significant items:Provision
      for loan losses
    
    
    61
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    61Gain
      on sales of assets
    
    
    -
    
    
    348
    
    
    -
    
    
    -
    
    
    -
    
    
    348Segment
      profit
    
    
    2,719
    
    
    67
    
    
    37
    
    
    135
    
    
    (25
    )
    
    2,933Segment
      assets
    
    
    573,271
    
    
    1,708
    
    
    279
    
    
    3,476
    
    
    (1,903
    )
    
    576,831
 
 
 Banking
    
    Mortgage
      Banking
    
    Trust
    
    Insurance
    
    Eliminations
    
    ConsolidatedFor
      the three months ended
      March
      31, 2004:
    
    (Dollars
      in thousands)Interest
      revenue
    
    $
    5,711
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    5,711Other
      income-external customers
    
    
    1,624
    
    
    45
    
    
    292
    
    
    519
    
    
    -
    
    
    2,480Interest
      expense
    
    
    1,293
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,293Depreciation
      and amortization
    
    
    360
    
    
    45
    
    
    17
    
    
    10
    
    
    -
    
    
    432Other
      significant items:Provision
      for loan losses
    
    
    101
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    101Gain
      on sales of assets
    
    
    119
    
    
    586
    
    
    -
    
    
    -
    
    
    -
    
    
    705Segment
      profit (loss)
    
    
    1,792
    
    
    (154
    )
    
    67
    
    
    52
    
    
    (14
    )
    
    1,743Segment
      assets
    
    
    503,066
    
    
    1,868
    
    
    357
    
    
    3,063
    
    
    (1,930
    )
    
    506,424
 
 
 ITEM
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations
 
 This
Quarterly Report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, but rather
are statements based on the Company's current expectations regarding its
business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as “expects,” “feels,”
“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; changes in market conditions in the Company’s principal
market area; adverse changes in the financial condition of the loan loss
reserves; competitive pressures on loan or deposit terms; 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 inherent 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.
 
 Overview
of Operating Results for the Three Months Ended March 31, 2005 and March 31,
2004
 
 Net
income increased from $1.0 million or $0.15 per diluted share for the quarter
ended March 31, 2004 to $2.2 million or $0.31 per diluted share for the quarter
ended March 31, 2005. The increase in earnings was a result of increased loan
interest income as well as decreased non-interest expenses. Additionally, the
Company recognized a federal tax benefit due to payment of cash dividends to
participants in the Employee Stock Ownership Plan (“ESOP”). The Company is
entitled to a deduction for dividends on its stock held by an ESOP that are paid
to the ESOP and subsequently distributed to the participant in cash no later
than ninety days after the end of the plan year in which the dividends are paid
to the ESOP. The above factors were partially offset by increased interest
expense and a decline in gain on sale of loans . These
items are discussed in further detail below.
   7
 
 Critical
Accounting Policies
 
 The
Company’s consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America and
follow general practices within the industries in which it operates. The
Company’s accounting policies are fundamental to understanding these financial
statements. Certain accounting policies involve significant judgments and
complex assumptions by management which may have a material impact on the
carrying value of certain assets and liabilities; management considers these
accounting policies to be critical accounting policies. Based on this
definition, management considers the allowance for loan losses to be its most
critical accounting policy. The Company’s allowance for loan losses methodology
incorporates a variety of risk considerations, both quantitative and
qualitative, in establishing an allowance that management believes to be
appropriate for each reporting date. Quantitative factors include the Company’s
historical loss experience, delinquency and charge-off trends, collateral
values, and changes in non-performing loans. The Company also incorporates known
information about individual loans, including borrower’s sensitivity to interest
rate movements and other relevant factors. Qualitative factors include the
general economic environment in the Company’s markets, including economic
conditions throughout the Southeast and the state of industries predominant in
the Middle Tennessee area.
  Management
also considers its policy on non-accrual loans to be a critical accounting
policy. Loans are classified as non-accrual loans when principal or interest is
delinquent for 90 days or more. Once a loan is categorized as non-accrual, all
previously recorded earned income is reversed and income is no longer accrued on
an on-going basis. When the deficiency is cured, the loan is taken out of
non-accrual status, the related income is recorded on the books, and interest
income will start accruing again as usual.
  The final
critical accounting policy identified by management relates to the sale of
loans. The Bank 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. The gain (or loss) on sales includes any fees received for
release of servicing.
 
 Comparison
of Financial Condition at March 31, 2005 and December 31, 2004
 
 *Total
Assets* . Total
assets decreased slightly, from $578.7 million at December 31, 2004 to $576.8
million at March 31, 2005. Changes in total assets include a $10.7 million or
25.36% decrease in investment securities available-for-sale, a $9.1 million or
37.49% decrease in cash, and a $4.6 million or 1.07% decrease in net loans
receivable. The decrease in cash is primarily due to dividend payments totaling
$11.3 million as a result of the special dividend declared in the fourth quarter
of 2004 being paid in 2005. The decrease in investment securities is primarily
due to several maturities that occurred during the first quarter of 2005. In
addition, the funds received for these maturities were re-invested into
short-term certificates of deposit. This re-allocation was the primary reason
for a $7.7 million or 19.86% increase in interest-bearing deposits with other
financial institutions, as well as contributing to the $16.0 million increase in
time deposits with Federal Home Loan Bank.
 
 *Deposits* . Total
deposits increased $7.1 million or 1.40%, from $506.5 million at December 31,
2004 to $513.6 million at March 31, 2005. Transaction accounts decreased $5.2
million, from $313.8 million at December 31, 2004 to $308.6 million at March 31,
2005. Savings accounts increased $1.7 million, from $23.1 million at December
31, 2004 to $24.8 million at March 31, 2005. Certificates of deposit (“CDs”)
increased $10.6 million, from $169.6 million at December 31, 2004 to $180.2
million at March 31, 2005. This re-allocation of deposit accounts is primarily
due to an increase in CD interest rates, resulting in customers locking in
higher interest rates over longer periods in term deposits. Management
expects to continue to actively solicit deposit relationships at all
locations.
 
 *Shareholders’
Equity* .
Shareholders’ equity increased $1.5 million, from $53.8 million at December 31,
2004 to $55.3 million at March 31, 2005. This increase was the result of net
income of $2.2 million, which was partially offset by dividends of $505,000 and
a $248,000 increase in unrealized losses on available-for-sale investment
securities.
 
 *Non-Performing
Assets* .
Non-performing assets totaled $567,000 and $764,000 at March 31, 2005 and
December 31, 2004, respectively. The allowance for loan losses remained
relatively constant at $4.9 million at December 31, 2004 and March 31, 2005.
Non-performing assets have continued to be a very small portion of the Bank’s
portfolio, with the balance equal to 0.13% of total loans and 0.10% of total
assets at March 31, 2005. Management feels that the allowance for loan losses is
adequate as of March 31, 2005.
 
 8
 
 Comparison
of Operating Results for the Three Months Ended March 31, 2005 and March 31,
2004
 
 *Net
Income* . Net
income was $2.2 million for the three months ended March 31, 2005 compared to
$1.0 million for the three months ended March 31, 2004. Diluted earnings per
share increased $0.16, from $0.15 for the three months ended March 31, 2004 to
$0.31 for the same period in 2005. Annualized return on average assets increased
from 0.81% for the three months ended March 31, 2004 to 1.58% for the same
period in 2005. Annualized return on average equity also increased, from 7.44%
for the three months ended March 31, 2004 to 16.56% for the same period in 2005.
These increases are mainly attributable to higher interest income on loans, due
to both an increase in interest rates as well as an increase in the loan
portfolio when comparing the first quarter of 2005 to the same period in 2004.
Additionally, non-interest expense decreased $453,000 or 7.87%, primarily due to
a decrease in employee benefits expense. The Company also recognized a federal
tax benefit of $427,000 as a result of cash dividends paid to participants in
the ESOP. Without this tax benefit, net income would have been $1.8 million,
diluted earnings per share would have been $0.25, and for the 2005 quarter,
annualized return on average assets would have been 1.28% and annualized return
on average equity would have been 13.42%.
 
 The
Company believes it is appropriate to provide investors with information
regarding its results of operations and certain performance ratios for the 2005
first quarter without giving effect to the tax benefit of the cash dividends
paid to participants in the ESOP as this tax benefit is not expected to be
recurring and the Company believes that removing the effect of this tax benefit
from its 2005 first quarter results of operations and performance ratios
provides investors with a more comparable comparison to the Company’s results of
operations and performance ratios for the first quarter of 2004. Further,
management of the Company reviews the Company’s results of operations net of the
tax benefit to assess the performance of the Company’s business in comparison to
comparable periods.
 
 *Net
Interest Income* . When
comparing the quarter ended March 31, 2004 to the same period ended March 31,
2005, there was an overall increase in market interest rates which caused both
higher yields and higher costs. In addition, in the 2005 quarter average
interest-earning assets increased $71.0 million or 15.71% and average
interest-bearing liabilities increased $41.8 million or 10.85%. These increases
led to a 20.45% increase in net interest income, which went from $4.4 million
for the three months ended March 31, 2004 to $5.3 million for the same period in
2005. Interest rate spread increased from 3.74% for the three months ended March
31, 2004 to 3.82% for the same period in 2005. Net interest margin increased
from 3.94% for the three months ended March 31, 2004 to 4.14% for the same
period in 2005. The ratio of average interest-earning assets to average
interest-bearing liabilities increased from 117.21% for the three months ended
March 31, 2004 to 122.36% for the same period in 2005.
 
 *Interest
Income* .
Interest income increased $1.5 million or 25.56%, primarily due to an increase
of $1.2 million or 22.89% in loan interest income. This increase is the result
of an increase of $63.5 million or 17.44% in average loans receivable, net,
which is partially attributable to a healthy lending environment in the growing
middle Tennessee area. The average yield on loans increased as well, from 5.82%
for the three months ended March 31, 2004 to 6.15% for the same period in 2005.
This increase in yield is due to an increase in the prime rate, which has a
direct impact on rates charged for construction, acquisition and development
loans, as well as certain commercial and consumer loans. Management is actively
soliciting these types of loans. Interest income on all other investments,
including Federal Home Loan Bank stock, Federal Reserve stock, and
interest-bearing deposits with other financial institutions, increased by
$253,000 or 57.76%. The average yield for these investments increased from 2.01%
for the three months ended March 31, 2004 to 2.95% for the same period in 2005.
These increases in other investments are primarily due to an increase in average
interest-bearing deposits, including certificates of deposit, at the Federal
Home Loan Bank.
 
 *Interest
Expense* . Total
interest expense increased $549,000 or 42.46%, due to an increase in both the
average cost of deposits and the average volume of deposits. Average cost
increased from 1.33% for the three months ended March 31, 2004 to 1.74% for the
same period in 2005. Average deposits increased $41.9 million or 10.96%, from
$382.3 million for the three months ended March 31, 2004 to $424.2 million for
the same period in 2005. The total cost of funds increased from 1.35% for the
three months ended March 31, 2004 to 1.75% for the same period in 2005. This
increase is primarily due to rising market interest rates.
 
 
 9
 
 *Provision
for Loan Losses* . The
provision for loan losses is a charge to earnings to bring the total allowance
for loan losses to a level management considers adequate to provide for inherent
losses in the loan portfolio. Management examines a variety of factors on a
monthly basis to determine the estimated charge or credit necessary to bring the
allowance to an acceptable level. These factors include the nature of the
portfolio, collateral values, credit concentrations, historical loss experience
along with delinquency and charge-off trends, and economic conditions.
Management also identifies specific impaired loans by incorporating known
information about individual loans, including borrower’s sensitivity to interest
rate movements and other relevant factors.
 
 The
provision for loan losses totaled $61,000 for the three months ended March 31,
2005 compared to $101,000 for the same period ended March 31, 2004. This 39.60%
decrease is primarily due to less net charge-offs during the first quarter of
2005 when compared to the same period in 2004. Net charge-offs declined $33,000,
from $50,000 for the quarter ended March 31, 2004 to $17,000 for the same period
ended March 31, 2005. Management feels that their evaluations and estimations
were reasonable for determining the provision and the allowance for loan losses
is deemed to be adequate as of March 31, 2005. However, a decline in economic
conditions or other factors beyond management’s control could significantly
alter the amount of losses the Company recognizes in the future.
 
 *Non-Interest
Income* .
Non-interest income decreased $214,000 or 6.25%, from $3.2 million for the three
months ended March 31, 2004 to $3.0 million for the same period in 2005. This
overall decrease is primarily due to a $238,000 or 40.61% decrease in net gain
on sale of loans. The decrease in net gain on sale of loans is the result of a
decline in loans sold during the three month period ended March 31, 2005,
compared to the same period ended March 31, 2004. The decline is primarily
attributable to a decrease in the volume of mortgage loans closed during the
first quarter of 2005 when compared to the first quarter of 2004, as a result of
a reduction in demand for mortgage loans. In addition, gain on sale of other
assets and investment securities decreased $119,000, as no assets or investment
securities were sold during the first quarter of 2005. These decreases are
partially offset by an increase of $105,000 or 8.58% in deposit-related service
fees and charges. This is due to an increase in the Bank’s service fee schedule
as well as an increase in the number of deposit accounts.
 
 *Non-Interest
Expense* .
Non-interest expense decreased $453,000 or 8.62%, from $5.8 million for the
three months ended March 31, 2004 to $5.3 million for the same period in 2005.
This is primarily due to a $402,000 or 11.25% decrease in salaries and employee
benefit expense. This decrease is attributable to a $493,000 decrease in expense
related to the ESOP. During the fourth quarter of 2004, the remaining
unallocated shares of the ESOP were released as a result of the repayment of a
note payable which encumbered these shares. Any remaining expense of the ESOP
was recognized in 2004 as a result of the repayment of the note payable. Other
changes in non-interest expense include a $61,000 or 40.40% decrease in
advertising costs, primarily due a change in marketing strategy which has
changed the timing of specific advertising campaigns when comparing the three
months ended March 31, 2004 and 2005. Additionally, equipment and service bureau
expense increased $78,000 or 9.56%, which primarily is a result of increased
equipment maintenance expense, equipment rental and lease expense, and computer
expense.
 
 *Income
Taxes* . Federal
income taxes were reduced as a result of a cash distribution of dividends to
participants in the ESOP. T he
Company recognized a tax benefit in the amount of $427,000 on this transaction.
Without this tax benefit, net income would have been $1.8 million, diluted
earnings per share would have been $0.25, and the effective tax rate would have
been 37.9%. Including the tax benefit, the effective tax rate for the period
ending March 31, 2005 was 23.4%, compared with 41.7% for the period ending March
31, 2004.
 
 Liquidity
and Capital Resources
  The
Company’s primary sources of funds are customer deposits, proceeds from loan
principal and interest payments, sale of loans, maturing securities, term
deposits and Federal Home Loan Bank (FHLB) of Cincinnati advances. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are influenced greatly by general
interest rates, other economic conditions, and competition. The Company and the
Bank generally maintain sufficient cash and short-term investments to meet
short-term liquidity needs. At March 31, 2005, cash and cash equivalents totaled
$61.7 million or 10.70% of total assets, and investment securities
available-for-sale totaled $31.5 million. At March 31, 2005, the Bank also
maintained, but did not draw upon, a line of credit with the FHLB of Cincinnati
in the amount of $50.0 million.
 
 As of
March 31, 2005, the Company and the Bank’s regulatory capital ratios were in
excess of all applicable regulatory requirements. At March 31, 2005, under the
regulations of the Federal Reserve Board, the Bank’s actual leverage, Tier 1
risk-based, and risked-based capital ratios were 8.28%, 10.36% and 11.44%,
respectively,  compared
to requirements of 3.0%, 4.0% and 8.0%, respectively.  At March
31, 2005, under the regulations of the Federal Reserve Board, the Company’s
actual leverage, Tier 1 risk-based, and risked-based capital ratios were 9.38%,
11.86%, and 12.94%, respectively. The Company is currently involved in a share
repurchase program. The Company
has not repurchased any shares during 2005. The maximum number of shares that
may yet be repurchased under the plan is 275,261 shares.
 
 
 10
 
 At March
31, 2005, the Bank had loan commitments of approximately $60.9 million. In
addition, at March 31, 2005, the unused portion of lines of credit extended by
the Bank was approximately $9.3 million for consumer loans and $55.2 million for
commercial loans. Standby letters of credit and financial guarantees are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most guarantees 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. At March 31,
2005, the Bank had $9.5 million of letters of credit outstanding.
 
 Impact of
Inflation and Changing Prices
 
 The
consolidated financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial condition and operating results in terms of historical
dollars without considering the change in relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company’s operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company’s performance than do the
effects of 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.
 
 Item
3.    Quantitative and Qualitative Disclosures About Market
Risk
 
 As a
financial institution, the Company’s primary component of market risk is
interest rate risk. Ultimately, fluctuations in interest rates will impact
liquidity, the level of income and expense recorded on most of the Company’s
assets and liabilities, and the market value of interest-earning assets and
interest-bearing liabilities. The Company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.
 
 Interest
rate risk is managed in accordance with policies approved by the Bank’s Board of
Directors. Management formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of interest rate risk,
management considers the impact on earnings and capital of the current outlook
on interest rates, potential changes in interest rates, regional economy,
liquidity, business strategies and other factors. Management meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market value of assets and liabilities,
unrealized gains and losses, purchase and sales activities, commitments to
originate loans and the maturities of investments. Management uses an analysis
of relationships between interest-earning assets and interest-bearing
liabilities to manage interest rate risk.
 
 The
following table presents the Company's repricing gap at March 31, 2005. The
table indicates that at March 31, 2005 the Company was asset sensitive up to six
months and had a positive cumulative gap for up to one year. This would
generally indicate an increase in net interest income in a rising rate
environment.
   11
   Within
      Six
      Months
    
    Six
      Months
      to
      One
      Year
    
    After
      One
      to
      Three
      Years
    
    After
      Three
      to
      Five
      Years
    
    Over
      Five
      Years
    
    Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable, net
    
    $
    143,092
    
    
    37,704
    
    
    72,181
    
    
    158,883
    
    
    15,725
    
    
    427,585FHLB
      and FRB stock
    
    
    3,256
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    3,256Investment
      securities available-for-sale
    
    
    7,257
    
    
    1,093
    
    
    4,546
    
    
    5,218
    
    
    13,370
    
    
    31,484Interest-bearing
      deposits with other financial institutions
    
    
    58,523
    
    
    4,000
    
    
    -
    
    
    -
    
    
    -
    
    
    62,523Total
      rate sensitive assets
    
    $
    212,128
    
    
    42,797
    
    
    76,727
    
    
    164,101
    
    
    29,095
    
    
    524,848Interest-bearing
      liabilities:Deposits:Savings
      deposits
    
    $
    2,477
    
    
    2,477
    
    
    9,910
    
    
    9,909
    
    
    -
    
    
    24,773Demand
      deposits
    
    
    69,705
    
    
    69,705
    
    
    36,932
    
    
    36,932
    
    
    -
    
    
    213,274Certificates
      of deposit
    
    
    52,434
    
    
    41,117
    
    
    65,424
    
    
    20,989
    
    
    281
    
    
    180,245Borrowings
    
    
    27
    
    
    27
    
    
    2,109
    
    
    109
    
    
    549
    
    
    2,821Total
      rate sensitive liabilities
    
    $
    124,643
    
    
    113,326
    
    
    114,375
    
    
    67,939
    
    
    830
    
    
    421,113Excess
      (deficiency) of interest sensitive assets over interest sensitive
      liabilities
    
    $
    87,485
    
    
    (70,529
    )
    
    (37,648
    )
    
    96,162
    
    
    28,265
    
    
    103,735Cumulative
      excess (deficiency) of interest sensitive assets
    
    $
    87,485
    
    
    16,956
    
    
    (20,692
    )
    
    75,470
    
    
    103,735
    
    
    103,735Cumulative
      ratio of interest-earning assets to interest-bearing
      liabilities
    
    
    170.19
    %
    
    107.13
    %
    
    94.13
    %
    
    117.96
    %
    
    124.63
    %
    
    124.63
    %Interest
      sensitivity gap to total rate sensitive assets
    
    
    16.67
    %
    
    (13.44
    )%
    
    (7.17
    )%
    
    18.32
    %
    
    5.39
    %
    
    19.76
    %Ratio
      of interest-earning assets to interest -bearing
liabilities
    
    
    170.19
    %
    
    37.76
    %
    
    67.08
    %
    
    241.54
    %
    
    3,505.42
    %
    
    124.63
    %Ratio
      of cumulative gap to total rate sensitive assets
    
    
    16.67
    %
    
    3.23
    %
    
    (3.94
    )%
    
    14.38
    %
    
    19.76
    %
    
    19.76
    %
 
 The gap
analysis provides the basis for more detailed analysis in a simulation model.
Also gap results are popular rate risk indicators. However, to truly evaluate
the impact of rate change on income, simulation is the best technique because
variables are changed for various rate conditions. Each category’s interest
change is calculated as rates ramp up and down. In addition the prepayment
speeds and repricing speeds are changed.
 
 “Rate
shock” is a method for stress testing the net interest margin (NIM) over the
next four quarters under several rate change levels. These levels span four 100
basis point increments up and down, as applicable, from the current interest
rates. In order to simulate activity, maturing balances are replaced with new
balances at the new rate level and repricing balances are adjusted to the new
rate shock level. The interest is recalculated for each level along with the new
average yield. NIM is then calculated and a margin risk profile is developed.
This simulation reveals that the Bank will experience a loss in net interest
income if rates decline in the next year. The magnitude and severity of
potential loss for a 100 basis point decline in rates under projected asset
growth conditions would be a decline of 21 basis points in net interest
margin.
   12
   Item
4.    Controls and Procedures
 
 Evaluation
of disclosure controls and procedures.
 
 In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), an evaluation was carried out with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon their evaluation of these disclosure controls and procedures,
the Chief Executive Officer and the Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of the end of the period
covered by this report to ensure that material information relating to the
Company, including its consolidated subsidiaries, was made known to them by
others within those entities, particularly during the period in which this
quarterly report on Form 10-Q was being prepared.
 
 Changes
in internal control over financial reporting.
 
 There
were no changes in the Company’s internal control over financial reporting
during the Company’s fiscal quarter ended March 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
 
 
  13
  Part II.
Other Information
 
 Item 1.
Legal Proceedings
 
 None.
 
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  (a)
    Not
      applicable.
  (b)
    Not
      applicable.
  (c)
    The
      following table provides information about purchases by the Company during
      the quarter ended March 31, 2005 of equity securities that are registered
      by the Company pursuant to Section 12 of the Exchange
  Act:
 
 ISSUER
      PURCHASES OF EQUITY SECURITIESPeriod
    Total
      number of shares purchased
    Average
      price paid per share
    Total
      number of shares purchased as part of publicly announced plans or
      programs
    Maximum
      number of shares that may yet be purchased under the plans or
      programsJanuary
      1, 2005 through January 31, 2005
    -
    $       
      -
    -
    275,261February
      1, 2005 through February 28, 2005
    -
    -
    -
    275,261March
      1, 2005 through March 31, 2005
    -
    -
    -
    275,261Total
    -
    $       
      -
    -
 
 On
September 26, 2001, the Company announced its plans to implement a program to
repurchase 710,480 shares of its common stock outstanding (“stock repurchase
program”). The stock repurchase program does not have an expiration date and
unless terminated earlier by resolution of the Company’s Board of Directors,
will expire when the Company has repurchased all shares authorized for
repurchase thereunder. The Company has no other programs to repurchase common
stock at this time.
 
 Item
3.    Defaults Upon Senior Securities
 
 Not
applicable.
 
 Item
4.    Submission of Matters to a Vote of Security
Holders
 
 None.
 
 Item
5.    Other Information
 
 None.
 
  14
  Item
6.    Exhibits
 
 (a)  Exhibits
 
 31.1  CEO
Certification Pursuant Rule 13a-14(a)/15d-14(a)
 31.2  CFO
Certification Pursuant Rule 13a-14(a)/15d-14(a)
 32.1  CEO
Certification Pursuant 18 U.S.C. Section 1350, Sarbanes - Oxley Act 2002
 32.2  CFO
Certification Pursuant 18 U.S.C. Section 1350, Sarbanes - Oxley Act 2002
  15
  
 SIGNATURES
 
 Pursuant
to the requirements of section 13 or 15(d) of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
 
 
 CAVALRY
      BANCORP, INC.Date:
      May 5, 2005
    by:Ed
      C. Loughry, Jr.Chairman
      of the Board and Chief Executive Officer
 
 
 
 Date:
      May 5, 2005
    by:Hillard
      C. GardnerSenior
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)
   16