**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 June 30, 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








Color logo(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 August 5, 2005 .











**CAVALRY
      BANCORP, INC.**





Table
      of
      Contents





Part
                I
            Financial
                Information
            PageItem
                1.
            Financial
                StatementsConsolidated
                Balance Sheets at June 30, 2005 (unaudited)
              and
                December 31, 2004
            1Consolidated
                Statements of Income (unaudited) for the
              Three
                Months and Six Months Ended June 30, 2005 and 2004
            2Consolidated
                Statements of Comprehensive Income (unaudited) for the
              Three
                Months and Six Months Ended June 30, 2005 and 2004
            3Consolidated
                Statements of Cash Flows (unaudited) for the
              Six
                Months Ended June 30, 2005 and 2004
            4Notes
                to Consolidated Financial Statements (unaudited)
            5-7Item
                2.
            Management’s
                Discussion and Analysis of Financial
              Condition
                and Results of Operations
            8-13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            14-15Item
                4.
            Controls
                and Procedures
            15Part
                II
            Other
                Information
            16Item
                1.
            Legal
                Proceedings
            16Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            16Item
                3.
            Defaults
                Upon Senior Securities
            16Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17Item
                5.
            Other
                Information
            17Item
                6.
            Exhibits
            17Signatures
            
            18











Part
      I.  Financial
      Information





ITEM
      1.  FINANCIAL
      STATEMENTS





**CAVALRY
      BANCORP, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**JUNE
      30, 2005 (UNAUDITED) AND DECEMBER 31, 2004**


**(DOLLARS
      IN THOUSANDS)**





**Assets**
            
            June
                30,
              2005
            
            December
                31,
              2004(Unaudited)Cash
            
            $
            13,763
            
            
            24,319Interest-bearing
                deposits with other financial institutions
            
            
            65,568
            
            
            38,816Cash
                and cash equivalents
            
            
            79,331
            
            
            63,135Time
                deposits with Federal Home Loan Bank
            
            
            4,000
            
            
            -Investment
                securities available-for-sale at fair value (amortized cost:
                $30,215and $42,376 at June 30, 2005 and December 31, 2004,
                respectively)
            
            
            29,927
            
            
            42,183Loans
                held for sale, at estimated fair value
            
            
            1,019
            
            
            2,501Loans
                receivable, net of allowances for loan losses of $4,903 at June 30,
                2005
                and $4,863 at December 31, 2004
            
            
            449,883
            
            
            430,526Accrued
                interest receivable
            
            
            2,111
            
            
            1,985Office
                properties and equipment, net
            
            
            17,531
            
            
            17,607Required
                investments in stock of Federal Home Loan Bank and Federal Reserve
                Bank,
                at cost
            
            
            3,286
            
            
            3,125Foreclosed
                assets
            
            
            37
            
            
            16Bank
                owned life insurance
            
            
            11,827
            
            
            11,604Goodwill
            
            
            1,772
            
            
            1,772Other
                assets
            
            
            3,932
            
            
            4,216Total
                assets
            
            $
            604,656
            
            
            578,670**Liabilities
                and Shareholders’ Equity**Liabilities:Deposits:Non-interest-bearing
            
            $
            100,900
            
            
            81,719Interest-bearing
            
            
            438,272
            
            
            424,815Total
                deposits
            
            
            539,172
            
            
            506,534Advances
                from Federal Home Loan Bank of Cincinnati
            
            
            2,807
            
            
            2,835Dividends
                payable
            
            
            505
            
            
            11,332Accrued
                expenses and other liabilities
            
            
            5,302
            
            
            4,136Total
                liabilities
            
            
            547,786
            
            
            524,837Commitments
                and contingenciesShareholders’
                equity:Preferred
                stock, no par value:Authorized
                - 250,000 shares; none issued or outstanding at June 30, 2005 and
                December
                31, 2004
            
            
            -
            
            
            -Common
                stock, no par value:Authorized
                - 49,750,000 shares; issued and outstanding 7,217,565 at June 30,
                2005 and
                December 31, 2004
            
            
            19,354
            
            
            19,354Retained
                earnings
            
            
            37,691
            
            
            34,598Accumulated
                other comprehensive loss, net of tax
            
            
            (175
            )
            
            (119
            )Total
                shareholders’ equity
            
            
            56,870
            
            
            53,833Total
                liabilities and shareholders’ equity
            
            $
            604,656
            
            
            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**


**THREE
      AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004**


**(DOLLARS
      IN THOUSANDS, EXCEPT PER SHARE DATA)**


**(UNAUDITED)**





Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2005
            
            2004
            
            2005
            
            2004Interest
                income:Loans
            
            $
            6,890
            
            
            5,572
            
            
            13,370
            
            
            10,844Investment
                securities:Taxable
            
            
            287
            
            
            305
            
            
            606
            
            
            647Non-taxable
            
            
            26
            
            
            31
            
            
            51
            
            
            38Other
            
            
            437
            
            
            52
            
            
            783
            
            
            142Total
                interest income
            
            
            7,640
            
            
            5,960
            
            
            14,810
            
            
            11,671Interest
                expense:Deposits
            
            
            2,105
            
            
            1,245
            
            
            3,922
            
            
            2,514Borrowings
            
            
            24
            
            
            24
            
            
            48
            
            
            48Total
                interest expense
            
            
            2,129
            
            
            1,269
            
            
            3,970
            
            
            2,562Net
                interest income
            
            
            5,511
            
            
            4,691
            
            
            10,840
            
            
            9,109Provision
                for loan losses
            
            
            50
            
            
            75
            
            
            111
            
            
            176Net
                interest income after provision for loan losses
            
            
            5,461
            
            
            4,616
            
            
            10,729
            
            
            8,933Non-interest
                income:Servicing
                income
            
            
            53
            
            
            47
            
            
            104
            
            
            93Gain
                on sale of loans, net
            
            
            316
            
            
            816
            
            
            664
            
            
            1,402Gain
                on sale of other assets
            
            
            -
            
            
            -
            
            
            -
            
            
            53Gain
                on sale of investment securities, net
            
            
            -
            
            
            12
            
            
            -
            
            
            78Deposit
                servicing fees and charges
            
            
            1,457
            
            
            1,310
            
            
            2,786
            
            
            2,535Trust
                service fees
            
            
            310
            
            
            274
            
            
            561
            
            
            566Commissions
                and other non-banking fees
            
            
            672
            
            
            594
            
            
            1,366
            
            
            1,249Other
                operating income
            
            
            259
            
            
            198
            
            
            558
            
            
            462Total
                non-interest income
            
            
            3,067
            
            
            3,251
            
            
            6,039
            
            
            6,438Non-interest
                expenses:Salaries
                and employee benefits
            
            
            3,228
            
            
            3,659
            
            
            6,399
            
            
            7,232Occupancy
                expense
            
            
            313
            
            
            329
            
            
            598
            
            
            655Supplies,
                communications and other office expenses
            
            
            247
            
            
            265
            
            
            474
            
            
            483Advertising
                expense
            
            
            129
            
            
            165
            
            
            219
            
            
            316Equipment
                and service bureau expense
            
            
            943
            
            
            845
            
            
            1,837
            
            
            1,661Professional
                fees
            
            
            175
            
            
            210
            
            
            334
            
            
            398Other
                taxes
            
            
            120
            
            
            115
            
            
            239
            
            
            230Other
                operating expense
            
            
            379
            
            
            358
            
            
            740
            
            
            732Total
                non-interest expenses
            
            
            5,534
            
            
            5,946
            
            
            10,840
            
            
            11,707Income
                before income taxes
            
            
            2,994
            
            
            1,921
            
            
            5,928
            
            
            3,664Income
                tax expense
            
            
            1,139
            
            
            754
            
            
            1,825
            
            
            1,481Net
                income
            
            $
            1,855
            
            
            1,167
            
            
            4,103
            
            
            2,183Basic
                earnings per share
            
            $
            0.26
            
            
            0.18
            
            
            0.57
            
            
            0.34Diluted
                earnings per share
            
            $
            0.25
            
            
            0.17
            
            
            0.56
            
            
            0.33Weighted
                average shares outstanding - Basic
            
            
            7,217,565
            
            
            6,463,543
            
            
            7,217,565
            
            
            6,475,265Weighted
                average shares outstanding - Diluted
            
            
            7,328,557
            
            
            6,691,848
            
            
            7,327,353
            
            
            6,713,153





Dividends
      declared: $0.07 per share payable July 15, 2005 for shareholders of record
      date
      June 30, 2005.




See
      accompanying notes to consolidated financial statements.


2


**CAVALRY
      BANCORP, INC.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**


**THREE
      AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004**


**(DOLLARS
      IN THOUSANDS)**


**(UNAUDITED)**





Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2005
            
            2004
            
            2005
            
            2004Net
                income
            
            $
            1,855
            
            
            1,167
            
            
            4,103
            
            
            2,183Other
                comprehensive income, net of tax:Unrealized
                gains (losses) on investment securities available-for-sale
            
            
            192
            
            
            (513
            )
            
            (56
            )
            
            (386
            )Reclassification
                adjustment for gains included in net income
            
            
            -
            
            
            (7
            )
            
            -
            
            
            (48
            )Comprehensive
                income
            
            $
            2,047
            
            
            647
            
            
            4,047
            
            
            1,749





See
      accompanying notes to consolidated financial statements.


3


**CAVALRY
      BANCORP, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**SIX
      MONTHS ENDED JUNE 30, 2005 AND 2004**


**(DOLLARS
      IN THOUSANDS)**


**(UNAUDITED)**








2005
            
            2004Operating
                activities:Net
                cash provided by operating activities
            
            $
            7,788
            
            
            4,093Investing
                activities:Increase
                in loans receivable, net
            
            
            (19,788
            )
            
            (59,277
            )Increase
                in time deposits with Federal Home Loan Bank
            
            
            (4,000
            )
            
            -Principal
                payments on investment securities
            
            
            2,749
            
            
            1,451Purchase
                of investment securities available-for-sale
            
            
            -
            
            
            (38,704
            )Proceeds
                from maturities of investment securities
            
            
            9,300
            
            
            13,900Proceeds
                from sales of investment securities available-for-sale
            
            
            -
            
            
            36,510Purchase
                of Federal Reserve Stock
            
            
            (104
            )
            
            (18
            )Purchase
                of office properties and equipment
            
            
            (793
            )
            
            (439
            )Proceeds
                from sale of foreclosed assets
            
            
            271
            
            
            -Proceeds
                from sale of assets
            
            
            -
            
            
            11Net
                cash used in investing activities
            
            
            (12,365
            )
            
            (46,566
            )Financing
                activities:Net
                increase in deposits
            
            
            32,638
            
            
            6,682Retirement
                of common stock
            
            
            -
            
            
            (1,651
            )Proceeds
                from exercise of stock options
            
            
            -
            
            
            98Dividends
                paid
            
            
            (11,837
            )
            
            (777
            )Net
                decrease in borrowings
            
            
            (28
            )
            
            (27
            )Net
                cash provided by financing activities
            
            
            20,773
            
            
            4,325Increase
                (decrease) in cash and cash equivalents
            
            
            16,196
            
            
            (38,148
            )Cash
                and cash equivalents, beginning of period
            
            
            63,135
            
            
            70,913Cash
                and cash equivalents, end of period
            
            $
            79,331
            
            
            32,765**Supplement
                Disclosures of Cash Flow Information:**Payments
                during the period for:Interest
            
            $
            3,809
            
            
            2,550Income
                taxes
            
            $
            1,722
            
            
            1,405**Supplemental
                Disclosures of Noncash Investing and Financing
                Activities**:Increase
                in deferred tax asset related to unrealized gains on
                investments
            
            $
            39
            
            
            255Net
                unrealized losses on investment securities available for
                sale
            
            $
            (95
            )
            
            (689
            )Dividends
                declared and payable
            
            $
            505
            
            
            404





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. All material intercompany accounts and transactions
      have been eliminated in consolidation.





The
      accompanying consolidated financial statements have been prepared in accordance
      with the 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 and six months ended June 30, 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 included in the Company’s
      Annual Report on Form 10-K 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 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
              June
                30,
            
            Six
                Months Ended
              June
                30,2005
            
            
            2004
            
            
            2005
            
            
            2004(Dollars
                in thousands, except per share data)Net
                income:As
                reported
            
            $
            1,855
            
            
            1,167
            
            
            4,103
            
            
            2,183Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value methods for all awards granted, net of related tax
                effects
            
            
            -
            
            
            (98
            )
            
            -
            
            
            (201
            )Pro
                forma net income
            
            $
            1,855
            
            
            1,069
            
            
            4,103
            
            
            1,982Earnings
                per share:Basic
                - as reported
            
            $
            0.26
            
            
            0.18
            
            
            0.57
            
            
            0.34Basic
                - pro forma
            
            $
            0.26
            
            
            0.17
            
            
            0.57
            
            
            0.31Diluted
                - as reported
            
            $
            0.25
            
            
            0.17
            
            
            0.56
            
            
            0.33Diluted
                - pro forma
            
            $
            0.25
            
            
            0.16
            
            
            0.56
            
            
            0.30






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 and six
      months ended June 30, 2005 and 2004. Diluted common shares arise from the
      potentially dilutive effect of the Company’s stock options
      outstanding.





Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2005
            
            2004
            
            2005
            
            2004Basic
                EPS:Net
                income
            
            $
            1,855,000
            
            
            1,167,000
            
            
            4,103,000
            
            
            2,183,000Average
                common shares outstanding
            
            
            7,217,565
            
            
            6,463,543
            
            
            7,217,565
            
            
            6,475,265Earnings
                per share - basic
            
            $
            0.26
            
            
            0.18
            
            
            0.57
            
            
            0.34Diluted
                EPS:Net
                income
            
            $
            1,855,000
            
            
            1,167,000
            
            
            4,103,000
            
            
            2,183,000Average
                common shares outstanding
            
            
            7,217,565
            
            
            6,463,543
            
            
            7,217,565
            
            
            6,475,265Dilutive
                effect of stock options
            
            
            110,992
            
            
            228,305
            
            
            109,788
            
            
            237,888Average
                dilutive shares outstanding
            
            
            7,328,557
            
            
            6,691,848
            
            
            7,327,353
            
            
            6,713,153Earnings
                per share - diluted
            
            $
            0.25
            
            
            0.17
            
            
            0.56
            
            
            0.33





4.  Business
      Segments





The
      Company and its subsidiaries provide community oriented financial services
      to
      individuals and businesses primarily within 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
            
            (Dollars
                in thousands)June
                30, 2005:Interest
                revenue
            
            $
            7,635
            
            
            -
            
            
            -
            
            
            5
            
            
            -
            
            
            7,640Other
                income-external customers
            
            
            1,920
            
            
            2
            
            
            315
            
            
            556
            
            
            (42
            )
            
            2,751Interest
                expense
            
            
            2,129
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,129Depreciation
                and amortization
            
            
            408
            
            
            20
            
            
            13
            
            
            6
            
            
            -
            
            
            447Other
                significant items:Provision
                for loan losses
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            50Gain
                on sales of assets
            
            
            -
            
            
            316
            
            
            -
            
            
            -
            
            
            -
            
            
            316Segment
                profit
            
            
            2,794
            
            
            18
            
            
            70
            
            
            137
            
            
            (25
            )
            
            2,994Segment
                assets
            
            
            601,802
            
            
            1,055
            
            
            270
            
            
            3,437
            
            
            (1,908
            )
            
            604,656







Banking
            
            Mortgage
                Banking
            
            Trust
            
            Insurance
            
            Eliminations
            
            ConsolidatedFor
                the three months ended
            
            (Dollars
                in thousands)June
                30, 2004:Interest
                revenue
            
            $
            5,960
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,960Other
                income-external customers
            
            
            1,606
            
            
            47
            
            
            274
            
            
            496
            
            
            -
            
            
            2,423Interest
                expense
            
            
            1,269
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,269Depreciation
                and amortization
            
            
            341
            
            
            42
            
            
            18
            
            
            7
            
            
            -
            
            
            408Other
                significant items:Provision
                for loan losses
            
            
            75
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            75Gain
                on sales of assets
            
            
            12
            
            
            816
            
            
            -
            
            
            -
            
            
            -
            
            
            828Segment
                profit
            
            
            1,849
            
            
            -
            
            
            47
            
            
            42
            
            
            (17
            )
            
            1,921Segment
                assets
            
            
            517,840
            
            
            4,054
            
            
            396
            
            
            3,215
            
            
            (1,924
            )
            
            523,581







Banking
            
            Mortgage
                Banking
            
            Trust
            
            Insurance
            
            Eliminations
            
            ConsolidatedFor
                the six months ended
            
            (Dollars
                in thousands)June
                30, 2005:Interest
                revenue
            
            $
            14,805
            
            
            -
            
            
            -
            
            
            6
            
            
            (1
            )
            
            14,810Other
                income-external customers
            
            
            3,743
            
            
            3
            
            
            585
            
            
            1,129
            
            
            (85
            )
            
            5,375Interest
                expense
            
            
            3,971
            
            
            -
            
            
            -
            
            
            -
            
            
            (1
            )
            
            3,970Depreciation
                and amortization
            
            
            786
            
            
            43
            
            
            27
            
            
            13
            
            
            -
            
            
            869Other
                significant items:Provision
                for loan losses
            
            
            111
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            111Gain
                on sales of assets
            
            
            -
            
            
            664
            
            
            -
            
            
            -
            
            
            -
            
            
            664Segment
                profit
            
            
            5,514
            
            
            85
            
            
            107
            
            
            272
            
            
            (50
            )
            
            5,928Segment
                assets
            
            
            601,802
            
            
            1,055
            
            
            270
            
            
            3,437
            
            
            (1,908
            )
            
            604,656







Banking
            
            Mortgage
                Banking
            
            Trust
            
            Insurance
            
            Eliminations
            
            ConsolidatedFor
                the six months ended
            
            (Dollars
                in thousands)June
                30, 2004:Interest
                revenue
            
            $
            11,671
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,671Other
                income-external customers
            
            
            3,232
            
            
            93
            
            
            566
            
            
            1,014
            
            
            -
            
            
            4,905Interest
                expense
            
            
            2,562
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,562Depreciation
                and amortization
            
            
            701
            
            
            87
            
            
            35
            
            
            17
            
            
            -
            
            
            840Other
                significant items:Provision
                for loan losses
            
            
            176
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            176Gain
                on sales of assets
            
            
            131
            
            
            1,402
            
            
            -
            
            
            -
            
            
            -
            
            
            1,533Segment
                profit (loss)
            
            
            3,641
            
            
            (154
            )
            
            114
            
            
            94
            
            
            (31
            )
            
            3,664Segment
                assets
            
            
            517,840
            
            
            4,054
            
            
            396
            
            
            3,215
            
            
            (1,924
            )
            
            523,581


7


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 June 30, 2005 and June 30,
      2004





Net
      income increased from $1.2 million or $0.17 per diluted share for the quarter
      ended June 30, 2004 to $1.9 million or $0.25 per diluted share for the quarter
      ended June 30, 2005. The increase in earnings was a result of increased net
      interest income as well as decreased non-interest expenses, particularly
      compensation expense associated with the Company’s Employee Stock Ownership Plan
      (“ESOP”). These increases were partially offset by increased interest expense
      and a decline in gain on sale of loans .
      These
      items are discussed in further detail below.





Overview
      of Operating Results for the Six Months Ended June 30, 2005 and June 30,
      2004





Net
      income increased from $2.2 million or $0.33 per diluted share for the six months
      ended June 30, 2004 to $4.1 million or $0.56 per diluted share for the same
      period ended June 30, 2005. As in the second quarter, the increase in earnings
      for the six month period was a result of increased net 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
      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
      participants 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.





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.




8


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 June 30, 2005 and December 31, 2004





*Total
      Assets* .
      Total
      assets increased 4.49%, from $578.7 million at December 31, 2004 to $604.7
      million at June 30, 2005. Changes in total assets include a $19.4 million or
      4.50% increase in net loans receivable and a $30.8 million or 79.23% increase
      in
      interest-bearing deposits with other financial institutions (“IBDs”). IBDs
      include overnight funds as well as short-term and long-term deposits with other
      financial institutions. Offsets to these increases include a $10.6 million
      or
      43.41% decrease in cash and a $12.3 million or 29.05% decrease in investment
      securities available-for-sale. The decrease in cash is primarily due to dividend
      payments totaling $11.8 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
      two quarters 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 the increase in IBDs. Additionally, the Bank experienced
      significant growth in deposits during the first half of 2005. This growth led
      to
      excess funds that were invested in short-term deposits with the Federal
      Home Loan Bank (“FHLB”)
      of Cincinnati in order to lock in higher short-term interest rates and to
      maintain adequate liquidity to fund loans.





*Deposits* .
      Total
      deposits increased $32.7 million or 6.46%, from $506.5 million at December
      31,
      2004 to $539.2 million at June 30, 2005. Transaction accounts increased $8.6
      million, from $313.8 million at December 31, 2004 to $322.4 million at June
      30,
      2005. Savings accounts increased $1.0 million, from $23.1 million at December
      31, 2004 to $24.1 million at June 30, 2005. Certificates of deposit (“CDs”)
      increased $23.1 million, from $169.6 million at December 31, 2004 to $192.7
      million at June 30, 2005. Although the Bank has experienced growth in all
      deposit categories, CDs have experienced the largest growth. This is primarily
      due to an increase in CD interest rates, resulting in customers locking in
      higher interest rates over longer periods in term deposits, which has negatively
      impacted the Company’s cost of funds and resulted in increased interest expense. Management
      expects to continue to actively solicit deposit relationships at all
      locations.





*Shareholders’
      Equity* .
      Shareholders’ equity increased $3.1 million, from $53.8 million at December 31,
      2004 to $56.9 million at June 30, 2005. This increase was the result of net
      income of $4.1 million, which was partially offset by dividends of $1.0 million
      and a $56,000 increase in unrealized losses on available-for-sale investment
      securities.





*Non-Performing
      Assets* .
      Non-performing assets totaled $1.1 million and $764,000 at June 30, 2005 and
      December 31, 2004, respectively. The allowance for loan losses remained constant
      at $4.9 million at December 31, 2004 and June 30, 2005. Non-performing assets
      have continued to be a very small portion of the Bank’s portfolio, with the
      balance equal to 0.24% of total loans and 0.18% of total assets at June 30,
      2005. Management feels that the allowance for loan losses is adequate as of
      June
      30, 2005.





Comparison
      of Operating Results for the Three Months Ended June 30, 2005 and June 30,
      2004





*Net
      Income* .
      Net
      income was $1.9 million for the three months ended June 30, 2005 compared to
      $1.2 million for the three months ended June 30, 2004. Diluted earnings per
      share increased $0.08, from $0.17 for the three months ended June 30, 2004
      to
      $0.25 for the same period in 2005. Annualized return on average assets increased
      from 0.92% for the three months ended June 30, 2004 to 1.28% for the same period
      in 2005. Annualized return on average equity also increased, from 8.48% for
      the
      three months ended June 30, 2004 to 13.17% 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 second quarter of 2005 to the same period in 2004. These
      increases were offset in part by increased interest expense resulting from
      an
      increase in both interest-bearing deposits and the cost of funds associated
      with
      these deposits. Additionally, non-interest expense decreased $412,000 or 6.93%,
      primarily due to a decrease in employee benefits expense.





9


*Net
      Interest Income* .
      When
      comparing the quarter ended June 30, 2004 to the same period in 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 $71.5 million or 15.58% and average interest-bearing liabilities
      increased $50.9 million or 13.47%. These increases led to a 17.02% increase
      in
      net interest income, which increased from $4.7 million for the three months
      ended June 30, 2004 to $5.5 million for the same period in 2005. Interest rate
      spread decreased from 3.89% for the three months ended June 30, 2004 to 3.80%
      for the same period in 2005. Net interest margin increased from 4.13% for the
      three months ended June 30, 2004 to 4.18% for the same period in 2005. Interest
      rate spread and net interest margin are both stated on a tax equivalent basis.
      The ratio of average interest-earning assets to average interest-bearing
      liabilities increased from 121.39% for the three months ended June 30, 2004
      to
      123.64% for the same period in 2005.





*Interest
      Income* .
      Interest income increased $1.7 million or 28.19% for the three months ended
      June
      30, 2005 as compared to the same period in 2004, primarily due to an increase
      of
      $1.3 million or 23.65% in loan interest income. This increase is the result
      of
      an increase of $42.7 million or 10.86% 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 5.70% for
      the
      three months ended June 30, 2004 to 6.34% 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 FHLB
      stock, Federal Reserve stock, and interest-bearing deposits with other financial
      institutions, increased by $362,000 or 93.30%. The average tax equivalent yield
      for these investments increased from 2.47% for the three months ended June
      30,
      2004 to 3.24% 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 $860,000 or 67.77%, due to an increase in both the
      average cost of deposits and the average volume of deposits. Average cost of
      interest-bearing deposits increased from 1.33% for the three months ended June
      30, 2004 to 1.98% for the same period in 2005. Average interest-bearing deposits
      increased $51.0 million or 13.60%, from $375.1 million for the three months
      ended June 30, 2004 to $426.1 million for the same period in 2005. The total
      cost of funds increased from 1.35% for the three months ended June 30, 2004
      to
      1.99% for the same period in 2005. This increase is primarily due to rising
      market interest rates as well as an increase in higher-costing term
      deposits.





*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 borrowers’ sensitivity to interest
      rate movements and other relevant factors.





The
      provision for loan losses totaled $50,000 for the three months ended June 30,
      2005 compared to $75,000 for the same period in 2004. Net charge-offs increased
      slightly, from $51,000 for the quarter ended June 30, 2004 to $54,000 for the
      same period in 2005. Management feels that their evaluations and estimations
      were reasonable for determining the provision and that the allowance for loan
      losses is deemed to be adequate as of June 30, 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 $184,000 or 6.06%, from $3.3 million for the
      three
      months ended June 30, 2004 to $3.1 million for the same period in 2005. This
      overall decrease is primarily due to a $500,000 or 61.27% 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 June 30, 2005,
      compared to the same period ended June 30, 2004. The decline is primarily
      attributable to a decrease in the volume of mortgage loans closed during the
      second quarter of 2005 when compared to the second quarter of 2004, as a result
      of a reduction in demand for mortgage loans. This decrease was partially offset
      by an increase of $147,000 or 11.22% in deposit-related service fees and
      charges, resulting from an increase in the Bank’s service fee schedule as well
      as an increase in the number of deposit accounts. Commissions and other
      non-banking fees increased $78,000 or 13.13%, primarily due to an increase
      in
      premium volume at Miller & Loughry. Additionally, other operating income
      increased $61,000 or 30.81%, primarily due to an increase in income earned
      on
      bank owned life insurance (“BOLI”) attributed to an increase in the policy
      amount that occurred during the fourth quarter of 2004.





10


*Non-Interest
      Expense* .
      Non-interest expense decreased $412,000 or 6.78%, from $5.9 million for the
      three months ended June 30, 2004 to $5.5 million for the same period in 2005.
      This is primarily due to a $431,000 or 11.78% decrease in salaries and employee
      benefit expense. This decrease is attributable to a $463,000 decrease in expense related
      to the ESOP, which was offset in part by increases in other compensation
      expenses. 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. This decrease was
      partially offset by a $98,000 or 11.60% increase in equipment and service bureau
      expense, which primarily is a result of increased depreciation expense,
      equipment rental and lease expense, and computer and electronic processing
      expense.





Comparison
      of Operating Results for the Six Months Ended June 30, 2005 and June 30,
      2004





*Net
      Income* .
      Net
      income was $4.1 million for the six months ended June 30, 2005 compared to
      $2.2
      million for the six months ended June 30, 2004. Diluted earnings per share
      increased $0.23, from $0.33 for the six months ended June 30, 2004 to $0.56
      for
      the same period in 2005. Annualized return on average assets increased from
      0.86% for the six months ended June 30, 2004 to 1.43% for the same period in
      2005. Annualized return on average equity also increased, from 7.94% for the
      six
      months ended June 30, 2004 to 14.83% 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 six months of 2005 to the same period in 2004. These
      increases were offset in part by increased interest expense resulting from
      an
      increase in both interest-bearing deposits and the cost of funds associated
      with
      these deposits. Additionally, non-interest expense decreased $867,000 or 7.41%,
      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 $427,000 tax benefit, for the six
      months ended June 30, 2005, net income would have been $3.7 million, diluted
      earnings per share would have been $0.50, and for the six months ended June
      30,
      2005, annualized return on average assets would have been 1.28% and annualized
      return on average equity would have been 13.29%.





The
      Company believes it is appropriate to provide investors with information
      regarding its results of operations and certain performance ratios for the
      first
      six months of 2005 without giving effect to the tax benefit of the cash
      dividends paid to participants in the ESOP. This tax benefit is not expected
      to
      be recurring and the Company believes that removing the effect of this tax
      benefit from its year to date 2005 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 six months 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 six months ended June 30, 2004 to the same period ended June
      30,
      2005, there was an overall increase in market interest rates which caused both
      higher yields and higher costs. In addition, for the six months ended June
      30,
      2005, average interest-earning assets increased $71.2 million or 15.64% and
      average interest-bearing liabilities increased $46.7 million or 12.26% when
      compared to the same period ended 2004. These increases led to an 18.68%
      increase in net interest income, which increased from $9.1 million for the
      six
      months ended June 30, 2004 to $10.8 million for the same period in 2005.
      Interest rate spread remained constant at 3.81% for the six months ended June
      30, 2004 and 2005. Net interest margin increased from 4.03% for the six months
      ended June 30, 2004 to 4.16% for the same period in 2005. Interest rate spread
      and net interest margin are both stated on a tax equivalent basis. The ratio
      of
      average interest-earning assets to average interest-bearing liabilities
      increased from 119.41% for the six months ended June 30, 2004 to 123.01% for
      the
      same period in 2005.





*Interest
      Income* .
      Interest income increased $3.1 million or 26.90%, primarily due to an increase
      of $2.5 million or 23.29% in loan interest income. This increase is the result
      of an increase of $53.1 million or 14.03% 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 5.76%
      for the six months ended June 30, 2004 to 6.25% 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 FHLB stock, Federal Reserve stock, and interest-bearing deposits
      with
      other financial institutions, increased by $613,000 or 74.12%. The average
      tax
      equivalent yield for these investments increased from 2.22% for the six months
      ended June 30, 2004 to 3.12% 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.





11


*Interest
      Expense* .
      Total
      interest expense increased $1.4 million or 54.96%, due to an increase in both
      the average cost of deposits and the average volume of deposits. Average cost
      of
      interest-bearing deposits increased from 1.34% for the six months ended June
      30,
      2004 to 1.86% for the same period in 2005. Average interest-bearing deposits
      increased $46.8 million or 12.37%, from $378.3 million for the six months ended
      June 30, 2004 to $425.1 million for the same period in 2005. The total cost
      of
      funds increased from 1.35% for the six months ended June 30, 2004 to 1.87%
      for
      the same period in 2005. This increase is primarily due to rising market
      interest rates as well as an increase in higher-costing term
      deposits.





*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 borrowers’ sensitivity to interest
      rate movements and other relevant factors.





The
      provision for loan losses totaled $111,000 for the six months ended June 30,
      2005 compared to $176,000 for the same period ended June 30, 2004. This 36.93%
      decrease is primarily due to lower net charge-offs during the first six months
      of 2005 when compared to the same period in 2004. Net charge-offs decreased,
      from $101,000 for the six months ended June 30, 2004 to $71,000 for the same
      period ended June 30, 2005. Management feels that their evaluations and
      estimations were reasonable for determining the provision and that the allowance
      for loan losses is deemed to be adequate as of June 30, 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 $399,000 or 6.25%, from $6.4 million for the
      six
      months ended June 30, 2004 to $6.0 million for the same period in 2005. This
      overall decrease is primarily due to a $738,000 or 52.64% 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 six months ended June 30, 2005, compared to
      the
      same period ended June 30, 2004. The decline is primarily attributable to a
      decrease in the volume of mortgage loans closed during the first half of 2005
      when compared to the same period of 2004, as a result of a reduction in demand
      for mortgage loans. This decrease was partially offset by an increase of
      $251,000 or 9.90% in deposit-related service fees and charges, resulting from
      an
      increase in the Bank’s service fee schedule as well as an increase in the number
      of deposit accounts. Commissions and other non-banking fees increased $117,000
      or 9.37%, primarily due to an increase in premium volume at Miller &
      Loughry.





*Non-Interest
      Expense* .
      Non-interest expense decreased $867,000 or 7.69%, from $11.7 million for the
      six
      months ended June 30, 2004 to $10.8 million for the same period in 2005. This
      is
      primarily due to an $833,000 or 11.52% decrease in salaries and employee benefit
      expense. This decrease is attributable to a $956,000 decrease in expense related
      to the ESOP, which was offset in part by increases in other compensation
      expenses. 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. Advertising expense
      decreased $97,000 or 30.70%, primarily due to the Bank celebrating its
      75 th anniversary during the second quarter of 2004. This celebration resulted in
      numerous promotional activities aimed at recognizing current customers and
      attracting new prospects. These decreases were partially offset by a $176,000
      or
      10.60% increase in equipment and service bureau expense, which primarily is
      a
      result of increased depreciation expense as well as increased computer and
      electronic processing 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 $3.7 million, diluted
      earnings per share would have been $0.50, and the effective tax rate would
      have
      been 38.0%. Including the tax benefit, the effective tax rate for the period
      ending June 30, 2005 was 30.8%, compared with 40.4% for the period ending June
      30, 2004.





12


The
      Company believes it is appropriate to provide investors with information
      regarding its results of operations and certain performance ratios for the
      first
      six months of 2005 without giving effect to the tax benefit of the cash
      dividends paid to participants in the ESOP. This tax benefit is not expected
      to
      be recurring and the Company believes that removing the effect of this tax
      benefit from its year to date 2005 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 six months 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.





Liquidity
      and Capital Resources




The
      Company’s primary sources of funds are customer deposits, proceeds from loan and
      security principal and interest payments, sale of loans, maturing securities,
      term deposits and 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 June 30, 2005, cash and cash equivalents totaled $79.3 million or
      13.12% of total assets, and investment securities available-for-sale totaled
      $29.9 million. At June 30, 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
      June 30, 2005, the Company and the Bank’s regulatory capital ratios were in
      excess of all applicable regulatory requirements. At June 30, 2005, under the
      regulations of the Federal Reserve Board, the Bank’s actual leverage, Tier 1
      risk-based, and risked-based capital ratios were 8.49%, 10.12% and 11.14%,
      respectively,  compared
      to requirements of 4.0%, 4.0% and 8.0%, respectively.  At
      June
      30, 2005, under the regulations of the Federal Reserve Board, the Company’s
      actual leverage, Tier 1 risk-based, and risked-based capital ratios were 9.51%,
      11.43%, and 12.44%, respectively. The Company’s Board has authorized a share
      repurchase program. The maximum number of shares that remain to be repurchased
      under the plan is 275,261 shares. The Company has not repurchased any shares
      during 2005 under this program.





At
      June
      30, 2005, the Bank had loan commitments of approximately $68.0 million. In
      addition, at June 30, 2005, the unused portion of lines of credit extended
      by
      the Bank was approximately $10.1 million for consumer loans and $48.6 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 June 30,
      2005, the Bank had $9.8 million of letters of credit outstanding.





Tennessee
      law provides that a state bank may not declare dividends in any calendar year
      that exceeds the total of its net income of that year combined with its retained
      net income of the preceding two years without the prior approval of the
      Commissioner of the Tennessee Department of Financial Institutions. In no case
      will the Bank be allowed to make a capital distribution reducing equity below
      the required balance of the liquidation account. For further discussion of
      the
      liquidation account, please see Note 14 of the 2004 Annual Report to
      Shareholders.





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.


13


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 June 30, 2005. The
      table
      indicates that at June 30, 2005 the Company was asset sensitive up to six
      months. This would generally indicate an increase in net interest income in
      a
      rising rate environment.




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
            
            $
            158,631
            
            
            50,903
            
            
            80,534
            
            
            148,513
            
            
            12,321
            
            
            450,902FHLB
                and FRB stock
            
            
            3,286
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,286Investment
                securities available-for-sale
            
            
            7,177
            
            
            1,724
            
            
            5,649
            
            
            4,789
            
            
            10,588
            
            
            29,927Interest-bearing
                deposits with other financial institutions
            
            
            69,568
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            69,568Total
                rate sensitive assets
            
            $
            238,662
            
            
            52,627
            
            
            86,183
            
            
            153,302
            
            
            22,909
            
            
            553,683Interest-bearing
                liabilities:Deposits:Savings
                deposits
            
            $
            2,411
            
            
            2,411
            
            
            9,648
            
            
            9,648
            
            
            -
            
            
            24,118Demand
                deposits
            
            
            71,083
            
            
            71,083
            
            
            39,647
            
            
            39,647
            
            
            -
            
            
            221,460Certificates
                of deposit
            
            
            55,398
            
            
            39,169
            
            
            77,075
            
            
            20,768
            
            
            284
            
            
            192,694Borrowings
            
            
            27
            
            
            27
            
            
            2,109
            
            
            109
            
            
            535
            
            
            2,807Total
                rate sensitive liabilities
            
            $
            128,919
            
            
            112,690
            
            
            128,479
            
            
            70,172
            
            
            819
            
            
            441,079Excess
                (deficiency) of interest sensitive assets over interest sensitive
                liabilities
            
            $
            109,743
            
            
            (60,063
            )
            
            (42,296
            )
            
            83,130
            
            
            22,090
            
            
            112,604Cumulative
                excess of interest sensitive assets
            
            $
            109,743
            
            
            49,680
            
            
            7,384
            
            
            90,514
            
            
            112,604
            
            
            112,604Cumulative
                ratio of interest-earning assets to interest-bearing
                liabilities
            
            
            185.13
            %
            
            120.56
            %
            
            102.00
            %
            
            120.56
            %
            
            125.53
            %
            
            125.53
            %Interest
                sensitivity gap to total rate sensitive assets
            
            
            19.82
            %
            
            (10.85
            )%
            
            (7.64
            )%
            
            15.01
            %
            
            3.99
            %
            
            20.34
            %Ratio
                of interest-earning assets to interest-bearing liabilities
            
            
            185.13
            %
            
            46.70
            %
            
            67.08
            %
            
            218.47
            %
            
            2,797.19
            %
            
            125.53
            %Ratio
                of cumulative gap to total rate sensitive assets
            
            
            19.82
            %
            
            8.97
            %
            
            1.33
            %
            
            16.35
            %
            
            20.34
            %
            
            20.34
            %





14


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 23 basis points in net interest
      margin.





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 June 30, 2005 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.








15


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 June 30, 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
                programsApril
                1, 2005 through April 30, 2005
            -
            $
                -
            -
            275,261May
                1, 2005 through May 31, 2005
            -
            -
            -
            275,261June
                1, 2005 through June 30, 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.





16


Item
      4.
      Submission of Matters to a Vote of Security Holders





On
      April
      28, 2005 at the annual meeting of shareholders of Cavalry Bancorp, Inc. the
      following Directors were elected for three-year terms:


Name
              For
              WithholdGary
                  Brown
              6,201,410
              8,696Terry
                  G. Haynes
              6,201,560
              8,546William
                  H. Huddleston
              6,192,009
              18,097
 
 In
        addition, the following directors continue in office until the annual meeting
        of
        shareholders for the year indicated:
 
 Name
              Term
                  Expires
              Name
              Term
                  ExpiresTim
                  Durham
              2006
              William
                  Kent Coleman
              2007Ronald
                  F. Knight
              2006
              Ed
                  C.
                  Loughry, Jr.
              2007James
                  C. Cope
              2007




Item
      5.
      Other Information





None.





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




17





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:
                August 4, 2005
            by:
            Loughry SignatureEd
                C. Loughry, Jr.Chairman
                of the Board and Chief Executive
                Officer











Date:
                August 4, 2005
            by:
            Gardner SignatureHillard
                C. GardnerSenior
                Vice President and Chief Financial Officer(Principal
                Financial and Accounting Officer)





18