UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


______________________





FORM 10-Q





(Mark One)





x Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2003 or








 ̈ 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


______________________





CAVALRY BANCORP, INC.


(exact name of registrant as specified in its charter)





Tennessee
62-1721072(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)








114 West College Street


Murfreesboro, Tennessee 37130


(Address of Registrants principal executive office)





(615) 893-1234


(Registrant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 has been subject to such filing requirements for the past 90 days.





Yes x     No o




Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)


Yes x     No o


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: 6,820,179 as of May 12, 2003.








CAVALRY BANCORP, INC.Table of ContentsPart I
Financial Information
PageItem 1.
Financial StatementsConsolidated Balance Sheets at March 31, 2003 (unaudited)and December 31, 2002
1-2Consolidated Statements of Income (unaudited) for the Three MonthsEnded March 31, 2003 and 2002
3Consolidated Statements of Comprehensive Income (unaudited) for theThree Months Ended March 31, 2003 and 2002
4Consolidated Statements of Cash Flows (unaudited) for the Three MonthsEnded March 31, 2003 and 2002
5Notes to Consolidated Financial Statements (unaudited)
6-8Item 2.
Managements Discussion and Analysis of FinancialCondition and Results of Operations
8-11Item 3.
Quantitative and Qualitative Disclosures About Market Risk
11-12Item 4.
Controls and Procedures
12Part II
Other Information
13Signatures

14Certifications











Part I. Financial Information





ITEM 1. FINANCIAL STATEMENTS








CAVALRY BANCORP, INC.


CONSOLIDATED BALANCE SHEETS


MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002


(DOLLARS IN THOUSANDS)





Assets

March 31, 2003
December 31, 2002(Unaudited)Cash

$
25,631


21,200Interest-bearing deposits with other financial institutions


39,062


51,962Cash and cash equivalents


64,693


73,162Investment securities available-for-sale at fair value (amortized cost:$37,973 and $37,728 at March 31, 2003 andDecember 31, 2002, respectively)


38,112


37,926Loans held for sale, at estimated fair value


3,349


17,800Loans receivable, net of allowances for loan losses of $4,634 at March 31,2003 and $4,657 at December 31, 2002


315,785


300,524Accrued interest receivable


1,581


1,577Office properties and equipment, net


18,644


18,108Required investments in stock of Federal Home Loan Bankand Federal Reserve Bank, at cost


2,896


2,874Foreclosed assets, net


201


203Bank owned life insurance


8,018


7,921Goodwill


1,772


1,772Other assets


2,582


2,498Total assets

$
457,633


464,365Liabilities and Shareholders EquityLiabilities:Deposits:Non-interest-bearing

$
59,935


57,343Interest-bearing


337,531


350,409Total deposits


397,466


407,752Advances from Federal Home Loan Bank of Cincinnati


2,930


2,944Accrued expenses and other liabilities


6,427


3,923Total liabilities


406,823


414,619Shareholders equity:Preferred stock, no par valueAuthorized- 250,000 shares; none issued or outstanding atMarch 31, 2003 and December 31, 2002


-


-Common stock, no par valueAuthorized- 49,750,000 shares; issued and outstanding6,820,179 and 6,830,679 at March 31, 2003and December 31, 2002, respectively


9,199


9,138Retained earnings


44,413


43,543Unallocated ESOP Shares


(2,887
)

(3,057
)Accumulated other comprehensive income, net of tax


85


122Total shareholders equity


50,810


49,746Total liabilities and shareholders equity

$
457,633


464,365




1





Note: The balance sheet presented above at December 31, 2002 has been derived from the audited 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.




2





CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF INCOME


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)





Three Months EndedMarch 31,2003
2002Interest and dividend income:Loans

$
5,024


5,226Investment securities


283


520Other


126


172Total interest and dividend income


5,433


5,918Interest expense - deposits


1,519


1,924Interest expense - borrowings


24


5Total interest expense


1,543


1,929Net interest income


3,890


3,989Provision for loan losses


56


109Net interest income after provisionfor loan losses


3,834


3,880Non-interest income:Servicing income


71


69Gain on sale of loans, net


1,322


569Gain on sale of investment securities, net


11


-Deposit servicing fees and charges


1,055


879Trust service fees


246


256Commissions and other non-banking fees


616


459Other operating income


298


239Total non-interest income


3,619


2,471Non-interest expenses:Salaries and employee benefits


3,659


2,792Occupancy expense


315


270Supplies, communications and otheroffice expenses


253


259Federal insurance premiums


15


16Advertising expense


101


87Equipment and service bureau expense


695


624Other operating expense


520


456Total non-interest expenses


5,558


4,504Income before income taxes


1,895


1,847Income tax expense


727


778Net income

$
1,168


1,069Basic earnings per share

$
0.18


0.16Diluted earnings per share

$
0.18


0.16Weighted average shares outstanding -Basic


6,365,767


6,495,260Weighted average shares outstanding -Diluted


6,579,436


6,643,655


Dividends declared $0.05 per share payable April 11, 2003 for shareholders of record date March 31, 2003.





See accompanying notes to consolidated financial statements.





3




CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(DOLLARS IN THOUSANDS)


(UNAUDITED)


Three Months EndedMarch 31,2003
2002Net income

$
1,168


1,069Other comprehensive income, net of tax:Unrealized losses on investment securitiesavailable-for-sale


(30
)

(142
)Reclassification adjustment forgains included in net income


(7
)

-Comprehensive income

$
1,131


927  See accompanying notes to consolidated financial statements.


4





CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


THREE MONTHS ENDED MARCH 31, 2003 AND 2002


(DOLLARS IN THOUSANDS)


(UNAUDITED)


2003
2002Operating activities:Net cash provided by operating activities

$
19,088


3,259Investing activities:Increase in loans receivable, net


(15,604
)

(4,842
)Principal payments on investment securities


3,473


742Purchase of investment securitiesavailable-for-sale


(18,880
)

-Purchase of Federal Reserve Stock


-


(1,240
)Proceeds from maturities of investment securities


12,550


7,000Proceeds from sales of investment securitiesavailable-for-sale


2,511


-Purchase of office properties and equipment


(965
)

(2,052
)Proceeds from sale of foreclosed assets


93


81Cash paid in acquisition of Miller & Loughry


-


(1,964
)Net cash used in investing activities


(16,822
)

(2,275
)Financing activities:Net decrease in deposits


(10,286
)

(12,731
)Retirement of common stock


(137
)

(1,150
)Dividends paid


(298
)

(307
)Net decrease in borrowings


(14
)

(14
)Net cash used infinancing activities


(10,735
)

(14,202
)Decrease in cash and cash equivalents


(8,469
)

(13,218
)Cash and equivalents, beginning of period


73,162


69,281Cash and cash equivalents, end of period

$
64,693


56,063Supplement Disclosures of CashFlow Information:Payments during the period for:Interest

$
1,544


1,870Income taxes

$
-


-Supplemental Disclosures of NoncashInvesting and Financing Activities :Increase in deferred tax asset relatedto unrealized loss on investments

$
23


89Net unrealized losses on investmentsecurities available for sale

$
(60
)

(231
)Dividends declared and payable

$
298


307





See accompanying notes to consolidated financial statements.




5


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 Miller & Loughry, the Bank and the Company. All material intercompany accounts and transactions have been eliminated in consolidation.





The accompanying consolidated financial statements of the Company have been prepared in accordance with Instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods.





The results of operations for the three months ended March 31, 2003, are not necessarily indicative of the results to be expected for the year ending December 31, 2003. 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, 2002.





2. Stock Options





The Company accounts for its stock option plans 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 Accounting Principles Board Opinion No.25 (APB), Accounting for Stock Issued to Employees, and related interpretations in accounting for the 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. 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, Accounting for Stock-Based Compensation, as amended:





Three Months EndedMarch 31,2003
2002Net income:As reported

$
1,168


1,069Deduct: Total stock-based employeecompensation expense determined underfair value methods for all awardsgranted, net of related tax effects


(33
)

(33
)Pro forma net income

$
1,135


1,036  6
   Earnings per share:Basic - as reported

$
0.18


0.16Basic  pro forma

$
0.18


0.16Diluted  as reported

$
0.18


0.16Diluted  pro forma

$
0.17


0.16








3. Acquisitions





On January 4, 2002, Cavalry Banking, a wholly owned subsidiary of Cavalry Bancorp, Inc., completed the acquisition of 100% of the capital stock issued and outstanding of Miller & Loughry Insurances and Services, Inc., for a cash purchase price of approximately $2.0 million.








4. Earnings Per Share





The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the three months ended March 31, 2003 and 2002. Diluted common shares arise from the potentially dilutive effect of the Companys stock options outstanding.





Quarter Ended March 312003
2002Basic EPS:Net income

$
1,168,000


1,069,000Average common shares outstanding


6,365,767


6,495,260Earnings per share - basic

$
0.18


0.16Diluted EPS:Net income

$
1,168,000


1,069,000Average common shares outstanding


6,365,767


6,495,260Dilutive effect of stock options


213,669


148,395Average dilutive shares outstanding


6,579,436


6,643,655Earnings per share - diluted

$
0.18


0.16





5. Business Segments





The Company and its subsidiary provide community oriented financial services to individuals and businesses primarily within Davidson, Rutherford and Bedford counties in Middle Tennessee.





The Companys segments are identified by the products and services offered, principally distinguished as banking, trust, insurance, and mortgage banking operations. The majority of loans originated for sale are sold with the servicing rights attached.





Segment information is derived from the internal reporting system utilized by management with accounting policies and procedures consistent with those described in Note 1 of the 2002 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.




7





MortgageFor the quarter ended

Banking
Banking
Trust
Insurance
Eliminations
ConsolidatedMarch 31, 2003:Interest revenue

$
5,433


-


-


-


-


5,433Other income-external customers


1,378


71


246


591


-


2,286Interest expense


1,543


-


-


-


-


1,543Depreciation and amortization


301


90


16


15


-


422Other significant items:Provision for loan losses


56


-


-


-


-


56Gain on sales of assets


11


1,322


-


-


-


1,333Segment profit


1,699


89


25


100


(18
)

1,895Segment assets


453,497


3,542


379


3,078


(2,863
)

457,633MortgageFor the quarter ended


Banking


Banking


Trust


Insurance


Eliminations


ConsolidatedMarch 31, 2002:Interest revenue

$
5,918


-


-


-


-


5,918Other income-external customers


1,123


69


256


454


-


1,902Interest expense


1,929


-


-


-


-


1,929Depreciation and amortization


246


44


11


9


-


310Other significant items:Provision for loan losses


109


-


-


-


-


109Gain on sales of assets


-


569


-


-


-


569Segment profit (loss)


1,724


(5
)

73


76


(21
)

1,847Segment assets


409,343


11,047


332


2,722


(2,471
)

420,973








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, rather 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.





The Companys critical accounting policies are set forth in the Managements Discussion an Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K, which is incorporated herein by reference.





Comparison of Financial Condition at March 31, 2003 and December 31, 2002





Total assets were $457.6 million at March 31, 2003, compared to $464.4 million at December 31, 2002, a decrease of $6.8 million or 1.46%. This decline was primarily a result of a decline in total deposits reflecting a seasonal decline in public deposits. As a result of the decline in deposits, cash and cash equivalents decreased from $73.2 million at December 31, 2002, to $64.7 million at March 31, 2003. Investment securities available-for-sale increased from $37.9 million at December 31, 2002, to $38.1 million at March 31, 2003. Loans receivable, net increased $15.3 million from $300.5 million at December 31, 2002, to $315.8 million at March 31, 2003 as a result of continued loan demand. Loans available for sale declined from $17.8 million at December 31, 2002 to $3.3 million at March 31, 2003. This decline was a result of faster funding by purchasers of these loans. Office properties and equipment increased from $18.1 million at December 31, 2002 to $18.6 million at March 31, 2003. This increase was primarily a result of construction in progress on the branch office on Sam Ridley Parkway in Smyrna, Tennessee in Rutherford County. This location is expected to be open for business in June of 2003.






8





Deposit accounts decreased $10.3 million from $407.8 million at December 31, 2002, to $397.5 million at March 31, 2003. Certificates of deposit decreased $2.6 million from $151.8 million at December 31, 2002 to $149.2 million at March 31, 2003. Savings deposits increased $2.0 million from $16.6 million at December 31, 2002 to $18.6 million at March 31, 2003. Interest-bearing demand deposits decreased $12.2 million from $181.9 million at December 31, 2002 to $169.7 million at March 31, 2003. Non-interest bearing accounts increased $2.6 million from $57.3 million at December 31, 2002 to $59.9 million at March 31, 2003. Management feels that these declines are temporary, and will continue to market deposit relationships.





Shareholders equity increased by $1.1 million from $49.7 million at December 31, 2002, to $50.8 million at March 31, 2003. This increase was a result of net income of $1.2 million and the release of ESOP shares of $367,000. These increases were partially offset by common stock repurchases of $137,000 in Company common stock, a decrease in unrealized gains on available-for-sale securities of $37,000, net of taxes, and dividends of $298,000.





Non-performing assets were $733,000 at December 31, 2002 and $672,000 at March 31, 2003. Reflecting this reduction in non-performing assets, the allowance for loan losses was $4,634,000 at March 31, 2003, down slightly from $4,657,000 at December 31, 2002.





Comparison of Operating Results for the Three Months Ended March 31, 2003 and March 31, 2002.





Net Income. Net income was $1.2 million for the three months ended March 31, 2003 compared to $1.1 million for the three months ended March 31, 2002. Return on average assets increased from 1.04% for the three months ended March 31, 2002, to 1.06% for the same period in 2003. Return on average equity also increased from 9.00% for the three months ended March 31, 2002, to 9.44% for the same period in 2003. Earnings per share increased from $0.16 per diluted share for the three months ended March 31, 2002, to $0.18 per diluted share for the same period in 2003. This increase was primarily a result of higher non-interest income and a lower provision for loan losses. These increases were partially offset by higher non-interest expenses and a lower net interest income.





Net Interest Income. Net interest income decreased $100,000 from $4.0 million for the three months ended March 31, 2002, to $3.9 million for the same period in 2003. Interest rate spread decreased from 4.18% for the three months ended March 31, 2002, to 3.73% for the same period in 2003. Net interest margin decreased from 4.44% for the three months ended March 31, 2002, to 3.98% for the same period in 2003. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 111.75% for the three months ended March 31, 2002, to 115.89% for the same period in 2003.





Interest income decreased 8.5% to $5.4 million for the three months ended March 31, 2003, from $5.9 million for the same period in 2002. Interest on loans decreased from $5.2 million for the three months ended March 31, 2002, to $5.0 million for the same period in 2003. Average loans outstanding increased from $281.8 million for the three months ended March 31, 2002, to $314.9 million for the same period in 2003. The average yield decreased from 7.52% for the three months ended March 31, 2002, to 6.47% for the same period in 2003, as a result of declining interest rates. Income on all other investments consisting of mortgage backed securities, other investments, Federal Home Loan Bank and Federal Reserve Bank stock, bank deposits and federal funds decreased from $692,000 for the three months ended March 31, 2002, to $409,000 for the same period in 2003. Average investments decreased from $82.8 million for the three months ended March 31, 2002, to $81.7 million for the same period in 2003. The average yield decreased from 3.39% for the three months ended March 31, 2002, to 2.03% for the same period in 2003.




9




Interest expense decreased from $1.9 million for the three months ended March 31, 2002, to $1.5 million for the same period in 2003. Average interest-bearing deposits increased from $325.3 million for the three months ended March 31, 2002, to $339.3 million for the same period in 2003. This increase was a result of continuing efforts to increase market share of deposits. The average cost of deposits decreased from 2.40% for the three months ended March 31, 2002, to 1.82% for the same period in 2003. Average borrowings increased from $989,000 at an average cost of 2.05% for the three months ended March 31, 2002 to $2.9 million at an average cost of 3.32% for the same period in 2003. The total cost of funds decreased from 2.40% for the three months ended March 31, 2002, to 1.83% for the same period in 2003. Average interest-bearing liabilities increased from $326.3 million for the three months ended March 31, 2002, to $342.2 million for the same period in 2003.





Provision for Loan Losses. Provision for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated loan losses based on managements evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans and economic conditions. Management also considers the level of problem assets, giving greater weight to the level of classified assets than to the level of nonperforming assets because classified assets include not only nonperforming assets but also performing assets that otherwise exhibit, in managements judgment, potential credit weaknesses.





The provision for loan losses decreased from $109,000 for the three months ended March 31, 2002 to $56,000 for the same period in 2003. Management deemed the allowance for loan losses adequate at March 31, 2003.





Non-interest Income. Non-interest income increased from $2.5 million for the three months ended March 31, 2002, to $3.6 million for the same period in 2003. In the mortgage banking segment, net gain on sale of loans increased from $569,000 for the three months ended March 31, 2002, to $1.3 million for the same period in 2003. The higher gain in 2003 was a result of increased volume. Loan servicing fees increased slightly from $69,000 for the three months ended March 31, 2002, to $71,000 for the same period in 2003. In the banking segment, deposit fees and other operating incomes increased from $879,000 for the three months ended March 31, 2002, to $1.1 million for the same period in 2003. This increase was a result of growth in the number of transaction accounts and increased charges. In the trust segment, trust fees decreased from $256,000 for the three months ended March 31, 2002, to $246,000 for the same period in 2003 as a result of declines in market values of trust assets under management. Commissions and other non-banking fees increased from $459,000 for the three months ended March 31, 2002 to $616,000 for the same period in 2003 as result of increased volumes.





Non-interest Expense. Non-interest expense increased from $4.5 million for the three months ended March 31, 2002, to $5.6 million for the same period in 2003. Salaries and employee benefits increased from $2.8 million for the three months ended March 31, 2002 to $3.6 million for the same period in 2003 primarily as a result of increased staffing. Increased mortgage loan production and insurance sales resulted in increased commissions and related benefits. The increases in other expenses were primarily due to increased loan and deposit activity.





Income taxes. The provision for income taxes was $727,000 for the three months ended March 31, 2003, compared to $778,000 for the same period in 2002.








Liquidity and Capital Resources





The Companys primary sources of funds are customer deposits, proceeds from loan principal and interest payments, sale of loans, maturing securities and Federal Home Loan Bank (FHLB) of Cincinnati advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are influenced greatly by general interest rates, other economic conditions, and competition. The Company and the Bank generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2003, cash and cash equivalents totaled $64.7 million or 14.14% of total assets, and investment securities availableforsale totaled $38.1 million. At March 31, 2003, the Bank also maintained, but did not draw upon, a line of credit with the FHLB of Cincinnati in the amount of $10.0 million.





As of March 31, 2003, the Company and the Banks regulatory capital ratios were in excess of all applicable regulatory requirements. At March 31, 2003, under the regulations of the Federal Reserve Board, the Banks actual leverage, Tier 1 risk-based, and risked-based capital ratios were 9.22%, 12.72% and 13.97%, respectively, compared to requirements of 3.0%, 4.0% and 8.0%, respectively. At March 31, 2003, under the regulations of the Federal Reserve Board, the Companys actual leverage, Tier 1 risk-based, and risked-based capital ratios were 10.95%, 15.31%, and 16.56%, respectively.




10




At March 31, 2003, the Bank had loan commitments of approximately $39.7 million. In addition, at March 31, 2003, the unused portion of lines of credit extended by the Bank was approximately $6.8 million for consumer loans and $22.4 million for commercial loans. Standby letters of credit and financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2003, the Bank had $5.5 million of letters of credit outstanding. The adoption of the requirements of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, did not have a material impact on the consolidated financial statements as of or for the quarter ended March 31, 2003.





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 U.S. GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering the change in relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial. As a result, interest rates have a greater impact on the Companys performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.





Item 3. Quantitative and Qualitative Disclosures About Market Risk





As a financial institution, the Companys primary component of market risk is interest rate risk. Ultimately, fluctuations in interest rates will impact liquidity, the level of income and expense recorded on most of the Companys assets and liabilities, and the market value of interest-earning assets and interest-bearing liabilities. The Company is not subject to foreign exchange or commodity price risk. The Company does not own any trading assets.





Interest rate risk is managed by management in accordance with policies approved by the Banks Board of Directors. Management formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, management considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economy, liquidity, business strategies and other factors. Management meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market value of assets and liabilities, unrealized gains and losses, purchase and sales activities, commitments to originate loans and the maturities of investments. Management uses an analysis of relationships between interest-earning assets and interest-bearing liabilities to manage interest rate risk.





The following table presents the Company's repricing gap at March 31, 2003. The table indicates that at March 31, 2003 the Company was asset sensitive up to six months and had a positive cumulative GAP for the time periods up to and including one year. This would indicate an increase in earnings in a rising rate environment.





Six
After
AfterWithin
Months
One to
Three
OverSix
to One
Three
to Five
TenMonths
Year
Years
Years
Years
Total(in thousands)Interest-earning assets:Loans receivable, net

$
110,916


34,143


61,023


85,303


27,749


319,134FHLB & FRB stock


2,283


-


-


-


613


2,896  11
   Investment securities available-for-sale


23,031


8,286


1,071


5,536


188


38,112Interest-bearing deposits with otherfinancial institutions


39,062


-


-


-


-


39,062Total rate sensitive assets

$
175,292


42,429


62,094


90,839


28,550


399,204Interest-bearing liabilities:Deposits:Savings deposits

$
1,856


1,856


7,425


7,425


-


18,562Demand deposits


101,700


7,561


30,244


30,243


-


169,748Certificates of deposit


65,648


34,899


30,035


18,619


20


149,221Borrowings


27


27


1,109


1,109


658


2,930Total rate sensitive liabilities

$
169,231


44,343


68,813


57,396


678


340,461Excess (deficiency) of interest sensitiveassets over interest sensitive liabilities

$
6,061


(1,914
)

(6,719
)

33,443


27,872


58,743Cumulative excess (deficiency) ofinterest sensitive assets

$
6,061


4,147


(2,572
)

30,871


58,743


58,743Cumulative ratio of interest-earning assetsto interest-bearing liabilities


103.58
%

101.94
%

99.09
%

109.09
%

117.25
%

117.25
%Interest sensitivity gap to total rate sensitive assets


1.52
%

(0.48)
%

(1.68)
%

8.38
%

6.98
%

14.72
%Ratio of interest-earning assets tointerest -bearing liabilities


103.58
%

95.68
%

90.24
%

158.27
%

4,210.91
%

117.25
%Ratio of cumulative gap to total rate sensitive assets


1.52
%

1.04
%

(0.64)
%

7.73
%

14.72
%

14.72
%








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 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 growth conditions would be a decline of 13 basis points.





Item 4. Controls and Procedures





Within the ninety days prior to the filing of this report, the Companys management, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures, as defined in Rule 13a-14 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were adequate. There were no significant changes (including corrective actions with regard to significant deficiencies of material weaknesses) in the Companys internal controls or in other factors subsequent to the date of the evaluation that could significantly affect these controls.





12





Part II. Other Information





Item 1. Legal Proceedings





None





Item 2. Changes in Securities and use of Proceeds





Not applicable





Item 3. Defaults Upon Senior Securities





Not applicable





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





None





Item 5. Other Information





None





Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K





(a)  Exhibits





10.33 Agreement dated March 31, 2003 between the Company, the Bank and Edward Elam.


99.1 CEO Certification Pursuant 18 U.S.C. Section 1350, Sarbanes  Oxley Act 2002


99.2 CFO Certification Pursuant 18 U.S.C. Section 1350, Sarbanes  Oxley Act 2002








(b) Reports on Form 8-K





No reports on Form 8-K were filed during the quarter ended March 31, 2003.





13





Pursuant to the requirements of section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CAVALRY BANCORP, INC.Date: May 12, 2003
by:
/s/ Ed C. Loughry, Jr.Ed C. Loughry, Jr.Chairman of the Board andChief Executive Officer ****Date: May 12, 2003
by:
/s/ Hillard C. GardnerHillard C. GardnerSenior Vice President and ChiefFinancial Officer(Principal Financial andAccounting Officer)





14








Certification of Principal Executive Officer


CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q





I, Ed C. Loughry, Jr., certify that:





1)             I have reviewed this quarterly report on Form 10-Q of Cavalry Bancorp, Inc.;





2)             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3)             Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4)             The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)      evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and





c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5)             The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):





a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and





b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and





6)            The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: May 12, 2003by:
/s/ Ed C. Loughry, Jr.Ed C. Loughry, Jr.Chairman of the Board andChief Executive Officer





15


Certification of Principal Financial Officer


CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q





I, Hillard C. Gardner, certify that:





1)             I have reviewed this quarterly report on Form 10-Q of Cavalry Bancorp, Inc.;
 
 2)             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 3)             Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 4)             The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 a)      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 b)      evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
 
 c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 5)             The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
 a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
 
 b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
 
 6)            The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


****Date: May 12, 2003
by:
/s/ Hillard C. GardnerHillard C. GardnerSenior Vice President and ChiefFinancial Officer(Principal Financial andAccounting Officer)




16