**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 September 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 Identification No.)








114
                West College Street, Murfreesboro, Tennessee
            37130(Address
                of principal executive offices)
            (Zip
                Code)





(615)
                893-1234(Registrant’s
                telephone number, including area
                code)





Not
                Applicable(Former
                name, former address and former fiscal year if changes since last
                report)





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
      Rule
      12b-2 of the Exchange Act).





Yesx
            Noo





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yeso
            Nox





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 November 7,
      2005 .





**CAVALRY
        BANCORP, INC.**
 
 Table
        of
        Contents
 
 Part
                  I
              Financial
                  Information
              PageItem
                  1.
              Financial
                  StatementsConsolidated
                  Balance Sheets at September 30, 2005 (unaudited)
                and
                  December 31, 2004
              1Consolidated
                  Statements of Income (unaudited) for the
                Three
                  Months and Nine Months Ended September 30, 2005 and 2004
              2Consolidated
                  Statements of Comprehensive Income (unaudited) for the
                Three
                  Months and Nine Months Ended September 30, 2005 and 2004
              3Consolidated
                  Statements of Cash Flows (unaudited) for the
                Nine
                  Months Ended September 30, 2005 and 2004
              4Notes
                  to Consolidated Financial Statements (unaudited)
              5-8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                Condition
                  and Results of Operations
              8-18Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              18-19Item
                  4.
              Controls
                  and Procedures
              20Part
                  II
              Other
                  Information
              21Item
                  1.
              Legal
                  Proceedings
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  3.
              Defaults
                  Upon Senior Securities
              21Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                  5.
              Other
                  Information
              22Item
                  6.
              Exhibits
              22Signatures
              
              23
 
 
  
   Part
        I.  Financial
        Information
 
 ITEM
        1.  FINANCIAL
        STATEMENTS
 
 **CAVALRY
        BANCORP, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **SEPTEMBER
        30, 2005 (UNAUDITED) AND DECEMBER 31, 2004**
 **(DOLLARS
        IN THOUSANDS)**
 
 **Assets**
              
              September
                  30,
                2005
              
              December
                  31,
                2004(Unaudited)Cash
              
              $
              16,648
              
              
              24,319Interest-bearing
                  deposits with other financial institutions
              
              
              50,810
              
              
              38,816Cash
                  and cash equivalents
              
              
              67,458
              
              
              63,135Time
                  deposits with Federal Home Loan Bank
              
              
              4,000
              
              
              -Investment
                  securities available-for-sale at fair value (amortized cost:
                  $43,672and $42,376 at September 30, 2005 and December 31, 2004,
                  respectively)
              
              
              42,934
              
              
              42,183Loans
                  held for sale, at estimated fair value
              
              
              1,067
              
              
              2,501Loans
                  receivable, net of allowances for loan losses of $4,955 at September
                  30,
                  2005 and $4,863 at December 31, 2004
              
              
              476,354
              
              
              430,526Accrued
                  interest receivable
              
              
              2,448
              
              
              1,985Office
                  properties and equipment, net
              
              
              17,202
              
              
              17,607Required
                  investments in stock of Federal Home Loan Bank and Federal Reserve
                  Bank,
                  at cost
              
              
              3,317
              
              
              3,125Foreclosed
                  assets
              
              
              119
              
              
              16Bank
                  owned life insurance
              
              
              11,933
              
              
              11,604Goodwill
              
              
              1,772
              
              
              1,772Other
                  assets
              
              
              3,402
              
              
              4,216Total
                  assets
              
              $
              632,006
              
              
              578,670**Liabilities
                  and Shareholders’ Equity**Liabilities:Deposits:Non-interest-bearing
              
              $
              112,360
              
              
              81,719Interest-bearing
              
              
              451,695
              
              
              424,815Total
                  deposits
              
              
              564,055
              
              
              506,534Advances
                  from Federal Home Loan Bank of Cincinnati
              
              
              2,794
              
              
              2,835Dividends
                  payable
              
              
              577
              
              
              11,332Accrued
                  expenses and other liabilities
              
              
              6,416
              
              
              4,136Total
                  liabilities
              
              
              573,842
              
              
              524,837Commitments
                  and contingenciesShareholders’
                  equity:Preferred
                  stock, no par value:Authorized
                  - 250,000 shares; none issued or outstanding at September 30, 2005
                  and
                  December 31, 2004
              
              
              -
              
              
              -Common
                  stock, no par value:Authorized
                  - 49,750,000 shares; issued and outstanding 7,217,565 at September
                  30,
                  2005 and December 31, 2004
              
              
              19,354
              
              
              19,354Retained
                  earnings
              
              
              39,259
              
              
              34,598Accumulated
                  other comprehensive loss, net of tax
              
              
              (449
              )
              
              (119
              )Total
                  shareholders’ equity
              
              
              58,164
              
              
              53,833Total
                  liabilities and shareholders’ equity
              
              $
              632,006
              
              
              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 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**
 **(DOLLARS
        IN THOUSANDS, EXCEPT PER SHARE DATA)**
 **(UNAUDITED)**
 
 Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Interest
                  income:Loans
              
              $
              7,711
              
              
              5,994
              
              
              21,081
              
              
              16,839Investment
                  securities:Taxable
              
              
              308
              
              
              332
              
              
              916
              
              
              979Non-taxable
              
              
              33
              
              
              36
              
              
              83
              
              
              74Other
              
              
              552
              
              
              120
              
              
              1,335
              
              
              261Total
                  interest income
              
              
              8,604
              
              
              6,482
              
              
              23,415
              
              
              18,153Interest
                  expense:Deposits
              
              
              2,463
              
              
              1,367
              
              
              6,386
              
              
              3,880Borrowings
              
              
              24
              
              
              24
              
              
              71
              
              
              73Total
                  interest expense
              
              
              2,487
              
              
              1,391
              
              
              6,457
              
              
              3,953Net
                  interest income
              
              
              6,117
              
              
              5,091
              
              
              16,958
              
              
              14,200Provision
                  for loan losses
              
              
              101
              
              
              176
              
              
              211
              
              
              352Net
                  interest income after provision for loan losses
              
              
              6,016
              
              
              4,915
              
              
              16,747
              
              
              13,848Non-interest
                  income:Servicing
                  income
              
              
              61
              
              
              47
              
              
              165
              
              
              140Gain
                  on sale of loans, net
              
              
              320
              
              
              879
              
              
              984
              
              
              2,281Gain
                  on sale of other assets
              
              
              -
              
              
              -
              
              
              -
              
              
              53Deposit
                  servicing fees and charges
              
              
              1,499
              
              
              1,457
              
              
              4,285
              
              
              3,992Trust
                  service fees
              
              
              258
              
              
              266
              
              
              819
              
              
              832Commissions
                  and other non-banking fees
              
              
              739
              
              
              649
              
              
              2,105
              
              
              1,899Income
                  from bank owned life insurance
              
              
              105
              
              
              72
              
              
              329
              
              
              191Other
                  operating income
              
              
              137
              
              
              149
              
              
              471
              
              
              510Total
                  non-interest income
              
              
              3,119
              
              
              3,519
              
              
              9,158
              
              
              9,898Non-interest
                  expenses:Salaries
                  and employee benefits
              
              
              3,267
              
              
              3,603
              
              
              9,666
              
              
              10,834Occupancy
                  expense
              
              
              322
              
              
              329
              
              
              919
              
              
              984Supplies,
                  communications and other office expenses
              
              
              221
              
              
              223
              
              
              695
              
              
              706Advertising
                  expense
              
              
              70
              
              
              87
              
              
              289
              
              
              404Equipment
                  and service bureau expense
              
              
              930
              
              
              890
              
              
              2,767
              
              
              2,557Professional
                  fees
              
              
              197
              
              
              257
              
              
              531
              
              
              656Other
                  taxes
              
              
              117
              
              
              114
              
              
              357
              
              
              344Loss
                  on sale of investment securities, net
              
              
              -
              
              
              81
              
              
              -
              
              
              3Other
                  operating expense
              
              
              405
              
              
              377
              
              
              1,146
              
              
              1,120Total
                  non-interest expenses
              
              
              5,529
              
              
              5,961
              
              
              16,370
              
              
              17,608Income
                  before income taxes
              
              
              3,606
              
              
              2,473
              
              
              9,535
              
              
              6,138Income
                  tax expense
              
              
              1,461
              
              
              994
              
              
              3,286
              
              
              2,475Net
                  income
              
              $
              2,145
              
              
              1,479
              
              
              6,249
              
              
              3,663Basic
                  earnings per share
              
              $
              0.30
              
              
              0.23
              
              
              0.87
              
              
              0.57Diluted
                  earnings per share
              
              $
              0.29
              
              
              0.22
              
              
              0.85
              
              
              0.55Weighted
                  average shares outstanding - Basic
              
              
              7,217,565
              
              
              6,441,148
              
              
              7,217,565
              
              
              6,463,810Weighted
                  average shares outstanding - Diluted
              
              
              7,328,799
              
              
              6,675,920
              
              
              7,327,831
              
              
              6,700,546
 
 Dividends
        declared: $0.08 per share payable October 14, 2005 for shareholders of record
        date September 30, 2005.
  See
        accompanying notes to consolidated financial statements.
  2
  **CAVALRY
        BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 **THREE
        AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**
 **(DOLLARS
        IN THOUSANDS)**
 **(UNAUDITED)**
 
 Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  income
              
              $
              2,145
              
              
              1,479
              
              
              6,249
              
              
              3,663Other
                  comprehensive income, net of tax:Unrealized
                  gains (losses) on investment securities available-for-sale
              
              
              (274
              )
              
              286
              
              
              (330
              )
              
              (100
              )Reclassification
                  adjustment for losses included in net income
              
              
              -
              
              
              50
              
              
              -
              
              
              2Comprehensive
                  income
              
              $
              1,871
              
              
              1,815
              
              
              5,919
              
              
              3,565
 
 See
        accompanying notes to consolidated financial statements.
  3
  **CAVALRY
        BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **NINE
        MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**
 **(DOLLARS
        IN THOUSANDS)**
 **(UNAUDITED)**
 
 
 2005
              
              2004Operating
                  activities:Net
                  cash provided by operating activities
              
              $
              11,882
              
              
              9,144Investing
                  activities:Increase
                  in loans receivable, net
              
              
              (46,551
              )
              
              (63,770
              )Increase
                  in time deposits with Federal Home Loan Bank
              
              
              (4,000
              )
              
              -Principal
                  payments on investment securities
              
              
              4,283
              
              
              2,406Purchase
                  of investment securities available-for-sale
              
              
              (15,026
              )
              
              (47,746
              )Proceeds
                  from maturities of investment securities
              
              
              9,300
              
              
              14,030Proceeds
                  from sales of investment securities available-for-sale
              
              
              -
              
              
              42,429Purchase
                  of Federal Reserve Stock
              
              
              (104
              )
              
              (35
              )Purchase
                  of office properties and equipment
              
              
              (909
              )
              
              (681
              )Proceeds
                  from sale of foreclosed assets
              
              
              311
              
              
              -Proceeds
                  from sale of assets
              
              
              -
              
              
              30Net
                  cash used in investing activities
              
              
              (52,696
              )
              
              (53,337
              )Financing
                  activities:Net
                  increase in deposits
              
              
              57,521
              
              
              32,089Retirement
                  of common stock
              
              
              -
              
              
              (1,840
              )Proceeds
                  from exercise of stock options
              
              
              -
              
              
              271Dividends
                  paid
              
              
              (12,343
              )
              
              (1,159
              )Net
                  decrease in borrowings
              
              
              (41
              )
              
              (41
              )Net
                  cash provided by financing activities
              
              
              45,137
              
              
              29,320Increase
                  (decrease) in cash and cash equivalents
              
              
              4,323
              
              
              (14,873
              )Cash
                  and cash equivalents, beginning of period
              
              
              63,135
              
              
              70,913Cash
                  and cash equivalents, end of period
              
              $
              67,458
              
              
              56,040**Supplement
                  Disclosures of Cash Flow Information:**Payments
                  during the period for:Interest
              
              $
              6,260
              
              
              3,919Income
                  taxes
              
              $
              2,622
              
              
              2,195**Supplemental
                  Disclosures of Noncash Investing and Financing
                  Activities**:Increase
                  in deferred tax asset related to unrealized losses on
                  investments
              
              $
              215
              
              
              145Net
                  unrealized losses on investment securities available for
                  sale
              
              $
              (545
              )
              
              (47
              )Foreclosures
                  and in substance foreclosures of loans during the year
              
              $
              414
              
              
              9Dividends
                  declared and payable
              
              $
              577
              
              
              405
 
 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 nine months ended September
        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,
        as amended.
  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 No. 148, “Accounting for
        Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
        No.
        123,” (“SFAS 148”) 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
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004(Dollars
                  in thousands, except per share data)Net
                  income:As
                  reported
              
              $
              2,145
              
              
              1,479
              
              
              6,249
              
              
              3,663Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value methods for all awards granted, net of related tax
                  effects
              
              
              -
              
              
              (110
              )
              
              -
              
              
              (311
              )Pro
                  forma net income
              
              $
              2,145
              
              
              1,369
              
              
              6,249
              
              
              3,352Earnings
                  per share:Basic
                  - as reported
              
              $
              0.30
              
              
              0.23
              
              
              0.87
              
              
              0.57Basic
                  - pro forma
              
              $
              0.30
              
              
              0.21
              
              
              0.87
              
              
              0.52Diluted
                  - as reported
              
              $
              0.29
              
              
              0.22
              
              
              0.85
              
              
              0.55Diluted
                  - pro forma
              
              $
              0.29
              
              
              0.21
              
              
              0.85
              
              
              0.50
   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 nine
        months ended September 30, 2005 and 2004. Diluted common shares arise from
        the
        potentially dilutive effect of the Company’s stock options
        outstanding.
 
 Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Basic
                  EPS:Net
                  income
              
              $
              2,145,000
              
              
              1,479,000
              
              
              6,249,000
              
              
              3,663,000Weighted
                  average common sharesoutstanding
              
              
              7,217,565
              
              
              6,441,148
              
              
              7,217,565
              
              
              6,463,810Earnings
                  per share - basic
              
              $
              0.30
              
              
              0.23
              
              
              0.87
              
              
              0.57Diluted
                  EPS:Net
                  income
              
              $
              2,145,000
              
              
              1,479,000
              
              
              6,249,000
              
              
              3,663,000Weighted
                  average common sharesoutstanding
              
              
              7,217,565
              
              
              6,441,148
              
              
              7,217,565
              
              
              6,463,810Dilutive
                  effect of stock options
              
              
              111,234
              
              
              234,772
              
              
              110,266
              
              
              236,736Weighted
                  average dilutive sharesoutstanding
              
              
              7,328,799
              
              
              6,675,920
              
              
              7,327,831
              
              
              6,700,546Earnings
                  per share - diluted
              
              $
              0.29
              
              
              0.22
              
              
              0.85
              
              
              0.55
 
 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)September
                  30, 2005:Interest
                  revenue
              
              $
              8,591
              
              
              -
              
              
              -
              
              
              13
              
              
              -
              
              
              8,604Other
                  income-external customers
              
              
              1,942
              
              
              -
              
              
              276
              
              
              624
              
              
              (43
              )
              
              2,799Interest
                  expense
              
              
              2,487
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,487Depreciation
                  and amortization
              
              
              408
              
              
              17
              
              
              14
              
              
              6
              
              
              -
              
              
              445Other
                  significant items:Provision
                  for loan losses
              
              
              101
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              101Gain
                  on sales of assets
              
              
              -
              
              
              320
              
              
              -
              
              
              -
              
              
              -
              
              
              320Segment
                  profit
              
              
              3,300
              
              
              85
              
              
              32
              
              
              214
              
              
              (25
              )
              
              3,606Segment
                  assets
              
              
              628,942
              
              
              1,099
              
              
              233
              
              
              3,605
              
              
              (1,873
              )
              
              632,006
 
  Banking
              
              Mortgage
                  Banking
              
              Trust
              
              Insurance
              
              Eliminations
              
              ConsolidatedFor
                  the three months ended
              
              (Dollars
                  in thousands)September
                  30, 2004:Interest
                  revenue
              
              $
              6,482
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,482Other
                  income-external customers
              
              
              1,789
              
              
              47
              
              
              266
              
              
              538
              
              
              -
              
              
              2,640Interest
                  expense
              
              
              1,391
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,391Depreciation
                  and amortization
              
              
              361
              
              
              36
              
              
              17
              
              
              2
              
              
              -
              
              
              416Other
                  significant items:Provision
                  for loan losses
              
              
              176
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              176Gain
                  on sales of assets
              
              
              -
              
              
              879
              
              
              -
              
              
              -
              
              
              -
              
              
              879Segment
                  profit
              
              
              2,344
              
              
              27
              
              
              33
              
              
              86
              
              
              (17
              )
              
              2,473Segment
                  assets
              
              
              547,928
              
              
              2,576
              
              
              324
              
              
              2,991
              
              
              (1,917
              )
              
              551,902
 
  Banking
              
              Mortgage
                  Banking
              
              Trust
              
              Insurance
              
              Eliminations
              
              ConsolidatedFor
                  the nine months ended
              
              (Dollars
                  in thousands)September
                  30, 2005:Interest
                  revenue
              
              $
              23,397
              
              
              -
              
              
              -
              
              
              19
              
              
              (1
              )
              
              23,415Other
                  income-external customers
              
              
              5,685
              
              
              3
              
              
              861
              
              
              1,753
              
              
              (128
              )
              
              8,174Interest
                  expense
              
              
              6,458
              
              
              -
              
              
              -
              
              
              -
              
              
              (1
              )
              
              6,457Depreciation
                  and amortization
              
              
              1,194
              
              
              60
              
              
              41
              
              
              19
              
              
              -
              
              
              1,314Other
                  significant items:Provision
                  for loan losses
              
              
              211
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              211Gain
                  on sales of assets
              
              
              -
              
              
              984
              
              
              -
              
              
              -
              
              
              -
              
              
              984Segment
                  profit
              
              
              8,815
              
              
              170
              
              
              139
              
              
              486
              
              
              (75
              )
              
              9,535Segment
                  assets
              
              
              628,942
              
              
              1,099
              
              
              233
              
              
              3,605
              
              
              (1,873
              )
              
              632,006
 
  Banking
              
              Mortgage
                  Banking
              
              Trust
              
              Insurance
              
              Eliminations
              
              ConsolidatedFor
                  the nine months ended
              
              (Dollars
                  in thousands)September
                  30, 2004:Interest
                  revenue
              
              $
              18,153
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              18,153Other
                  income-external customers
              
              
              5,040
              
              
              140
              
              
              832
              
              
              1,552
              
              
              -
              
              
              7,564Interest
                  expense
              
              
              3,953
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,953Depreciation
                  and amortization
              
              
              1,062
              
              
              123
              
              
              52
              
              
              19
              
              
              -
              
              
              1,256Other
                  significant items:Provision
                  for loan losses
              
              
              352
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              352Gain
                  on sales of assets
              
              
              53
              
              
              2,281
              
              
              -
              
              
              -
              
              
              -
              
              
              2,334Segment
                  profit (loss)
              
              
              5,985
              
              
              (127
              )
              
              147
              
              
              180
              
              
              (47
              )
              
              6,138Segment
                  assets
              
              
              547,928
              
              
              2,576
              
              
              324
              
              
              2,991
              
              
              (1,917
              )
              
              551,902
  7
  5. Definitive
        Merger Agreement with Pinnacle Financial Partners, Inc.
 
 Effective
        September 30, 2005, the Company entered into a definitive merger agreement
        with
        Pinnacle Financial Partners, Inc. (“Pinnacle”) pursuant to which the Company
        will merge with and into Pinnacle with Pinnacle as the surviving corporation.
        Pursuant to the definitive merger agreement, Company shareholders will receive
        0.95 shares of Pinnacle common stock for every one share of Company common
        stock
        owned by them at the effective time of the merger. Consummation of this merger
        is subject to the receipt of required regulatory approval as well as the
        approval of both Pinnacle's and the Company's shareholders and the satisfaction
        of other customary closing conditions. Subject to approval, the transaction
        is
        expected to be completed during the first quarter of 2006.
 
 ITEM
        2.
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations
 
 Forward-Looking
        Statements and Risk Factors
 
 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, those detailed
        below as well as 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 may be unable to consummate its proposed merger with Pinnacle Financial
        Partners, Inc.*
 
 The
        Company's proposed merger with Pinnacle described in more detail below is
        anticipated to close in the first quarter of 2006 but must be approved by
        both
        Pinnacle's and the Company's shareholders before it can be finalized.
        Consummation of this merger is also subject to the receipt of required
        regulatory approvals and the satisfaction of other customary closing conditions.
        If the merger is not completed for any reason, the Company's stock price
        may
        decline because certain costs related to the merger, such as legal, accounting
        and a portion of financial advisory fees, must be paid even if the merger
        is not
        completed. In addition, if the merger is not completed, the Company's stock
        price may decline to the extent that the current market price reflects the
        assumption by investors that the merger will be completed.
 
 *The
        Company may make some change of control or other payments to its directors
        or
        executive officers prior to the merger.*
 
 The
        Company has represented to Pinnacle that the payment of any change in control
        or
        severance payments or the payment or acceleration of any benefits under any
        of
        the Company's benefit plans as a result of the merger would not be treated
        as an
“excess parachute payment” under Section 280G of the Internal Revenue Code of
        1986, as amended. The merger agreement between Pinnacle and the Company permits
        the Company to take certain actions so that these payments or the acceleration
        of these benefits would not be treated as “excess parachute payments” under the
        Code, which actions may include the Company's payment of all or a portion
        of
        these amounts prior to both December 31, 2005 and the closing of the merger.
        The
        payment of these amounts in 2005, which will not have an impact on the
        consideration to be received by the Company's shareholders in the merger,
        would
        have a significant negative impact on the Company's results of operations
        and
        financial condition for the year ending December 31, 2005 but would not
        constitute a material adverse effect or a default by the Company under the
        terms
        of the merger agreement. While the Company is hopeful that substantially
        all
        material conditions to the closing of the merger will be satisfied prior
        to its
        making these payments, a delay in the receipt of any required regulatory
        approval or any other delay in the closing of the transaction could require
        that
        the Company make these payments prior to the satisfaction of all required
        closing conditions and at a time when it cannot be certain that the merger
        with
        Pinnacle will close. If these payments are made by the Company, and the merger
        of the Company and Pinnacle is not subsequently consummated, the Company's
        stock
        price will likely decline and the substantial negative impact that these
        payments have on the Company's earnings and financial condition for 2005
        may
        make it more difficult for the Company to find a third party willing to acquire
        the Company at a value comparable to the value being offered in the merger
        with
        Pinnacle.
   8
  *The
        Company could sustain losses if its asset quality declines.*
 
 The
        Company's earnings are significantly affected by its ability to properly
        originate, underwrite and service loans. The Company could sustain losses
        if it
        incorrectly assesses the creditworthiness of its borrowers or fails to detect
        or
        respond to deterioration in asset quality in a timely manner. Problems with
        asset quality could cause the Company's interest income and net interest
        margin
        to decrease and its provisions for loan losses to increase, which could
        adversely affect its results of operations and financial condition.
  *An
        inadequate allowance for loan losses would reduce the Company's earnings.*
 
 The
        risk
        of credit losses on loans varies with, among other things, general economic
        conditions, the type of loan being made, the creditworthiness of the borrower
        over the term of the loan and, in the case of a collateralized loan, the
        value
        and marketability of the collateral for the loan. Management maintains an
        allowance for loan losses based upon, among other things, historical experience,
        requirements of regulatory authorities, an evaluation of economic conditions
        and
        regular reviews of delinquencies and loan portfolio quality. Based upon such
        factors, management makes various assumptions and judgments about the ultimate
        collectibility of the loan portfolio and provides an allowance for loan losses
        based upon a percentage of the outstanding balances and takes a charge against
        earnings with respect to specific loans when their ultimate collectibility
        is
        considered questionable. If management’s assumptions and judgments prove to be
        incorrect and the allowance for loan losses is inadequate to absorb losses,
        or
        if the bank regulatory authorities require the Bank to increase the allowance
        for loan losses as a part of their examination process, the Bank’s earnings and
        capital could be significantly and adversely affected.
 
 *Liquidity
        needs could adversely affect the Company's results of operations and financial
        condition.*
 
 The
        Company relies on dividends from the Bank as its primary source of funds.
        The
        primary source of funds of the Bank are customer deposits and loan repayments.
        While scheduled loan repayments are a relatively stable source of funds,
        they
        are subject to the ability of borrowers to repay the loans. The ability of
        borrowers to repay loans can be adversely affected by a number of factors,
        including changes in economic conditions, adverse trends or events affecting
        business industry groups, reductions in real estate values or markets, business
        closings or lay-offs, inclement weather, natural disasters and international
        instability. Additionally, deposit levels may be affected by a number of
        factors, including rates paid by competitors, general interest rate levels,
        returns available to customers on alternative investments and general economic
        conditions. Accordingly, the Company may be required from time to time to
        rely
        on secondary sources of liquidity to meet withdrawal demands or otherwise
        fund
        operations. Such sources include Federal Home Loan Bank advances and federal
        funds lines of credit from correspondent banks. While the Company believes
        that
        these sources are currently adequate, there can be no assurance they will
        be
        sufficient to meet future liquidity demands.
 
 *Competition
        from financial institutions and other financial service providers may adversely
        affect the Company's profitability.*
 
 The
        banking business is highly competitive and the Company experiences competition
        in its primary market area from many other financial institutions. The Company
        competes with commercial banks, credit unions, savings and loan associations,
        mortgage banking firms, consumer finance companies, securities brokerage
        firms,
        insurance companies, money market funds, and other mutual funds, as well
        as
        other community banks and super-regional and national financial institutions
        that operate offices in the Company's primary market areas and elsewhere.
        Many
        of the Company's competitors are well-established, larger financial institutions
        that have greater resources and lending limits and a lower cost of funds
        than
        the Company has.
 
 Additionally,
        the Company faces competition from de novo community banks, including those
        with
        senior management who were previously affiliated with other local or regional
        banks or those controlled by investor groups with strong local business and
        community ties. These de novo community banks may offer higher deposit rates
        or
        lower cost loans in an effort to attract the Company's customers and may
        attempt
        to hire the Company's management and employees.
 
 9
  The
        Company competes with these other financial institutions both in attracting
        deposits and in making loans. In addition, the Company has to attract its
        customer base from other existing financial institutions and from new residents.
        This competition has made it more difficult for the Company to make new loans
        and at times has forced the Company to offer higher deposit rates. Price
        competition for loans and deposits might result in the Company earning less
        interest on its loans and paying more interest on its deposits, which reduces
        the Company's net interest income. The Company's profitability depends upon
        its
        continued ability to successfully compete with an array of financial
        institutions in its market areas.
 
 *The
        Company’s business is subject to the success of the local economies where it
        operates.*
 
 The
        Company's success significantly depends upon the growth in population, income
        levels, deposits and housing starts in its primary market areas. If the
        communities in which the Company operates do not grow or if prevailing economic
        conditions locally or nationally are unfavorable, the Company's business
        may not
        succeed. Adverse economic conditions in the Company's primary market areas
        could
        reduce its growth rate, affect the ability of its customers to repay their
        loans
        to the Company and generally affect the Company's financial condition and
        results of operations. Because the Company's primary market areas are limited
        to
        two Middle Tennessee counties, the Company is less able than a larger
        institution to spread the risks of unfavorable local economic conditions
        across
        a large number of diversified economies. Moreover, the Company can not give
        any
        assurance that it will benefit from any market growth or favorable economic
        conditions in its primary market areas if they do occur.
 
 Any
        adverse market or economic conditions in Middle Tennessee may disproportionately
        increase the risk that the Company's borrowers will be unable to timely make
        their loan payments. In addition, the market value of the real estate securing
        loans as collateral could be adversely affected by unfavorable changes in
        market
        and economic conditions. Any sustained period of increased payment
        delinquencies, foreclosures or losses caused by adverse market or economic
        conditions in Middle Tennessee could adversely affect the value of the Company's
        assets, its revenues, results of operations and financial condition.
 
 Further,
        the Company maintains a significant number of construction and acquisition
        and
        development loans. The repayment of these loans is dependent upon the success
        of
        the underlying developments and the continued growth in the housing market
        in
        Rutherford and Bedford Counties, Tennessee.
 
 *Changes
        in interest rates could adversely affect the Company's results of operations
        and
        financial condition.*
 
 Changes
        in interest rates may affect the Company's level of interest income, the
        primary
        component of its gross revenue, as well as the level of its interest expense.
        Interest rates are highly sensitive to many factors that are beyond the
        Company's control, including general economic conditions and the policies
        of
        various governmental and regulatory authorities. In a period of rising interest
        rates, the Company's interest expense could increase in different amounts
        and at
        different rates while the interest that the Company earns on its assets may
        not
        change in the same amounts or at the same rates. Accordingly, increases in
        interest rates could decrease the Company's net interest income. Changes
        in the
        level of interest rates also may negatively affect the Company's ability
        to
        originate real estate loans, the value of its assets and its ability to realize
        gains from the sale of its assets, all of which ultimately affect the Company's
        earnings.
 
 *The
        Company relies heavily on the services of key personnel.*
 
 The
        Company depends substantially on the strategies and management services of
        Ed C.
        Loughry, Jr., Ronald F. Knight and William S. Jones, the Company's Chairman
        of
        the Board and Chief Executive Officer, President and Chief Operating Officer
        and
        Executive Vice President and Chief Administrative Officer, respectively.
        Although the Company has entered into employment agreements with each of
        these
        employees, the loss of the services of any of these employees could have
        a
        material adverse effect on the Company's business, results of operations
        and
        financial condition. The Company is also dependent on certain other key officers
        who have important customer relationships or are instrumental to the Company's
        operations. Changes in key personnel and their responsibilities may be
        disruptive to the Company's business and could have a material adverse effect
        on
        its business, financial condition and results of operations.
 
 10
  *The
        Company is subject to extensive regulation that could limit or restrict its
        activities.*
 
 The
        Company operates in a highly regulated industry and is subject to examination,
        supervision, and comprehensive regulation by various federal and state agencies
        including the Board of Governors of the Federal Reserve, the Federal Deposit
        Insurance Corporation and the Tennessee Department of Financial Institutions.
        The Company's regulatory compliance is costly and restricts certain of its
        activities, including payment of dividends, mergers and acquisitions,
        investments, loans and interest rates charged, interest rates paid on deposits
        and locations of offices. The Company is also subject to capitalization
        guidelines established by its regulators, which require it and the Bank to
        maintain adequate capital to support its and the Bank's growth.
 
 The
        laws
        and regulations applicable to the banking industry could change at any time,
        and
        the Company cannot predict the effects of these changes on its business and
        profitability. Because government regulation greatly affects the business
        and
        financial results of all commercial banks and bank holding companies, the
        Company's cost of compliance could adversely affect its ability to operate
        profitably.
 
 The
        Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated
        by
        the Securities and Exchange Commission and Nasdaq National Market that are
        now
        applicable to the Company, have increased the scope, complexity and cost
        of
        corporate governance, reporting and disclosure practices. As a result, the
        Company has experienced, and may continue to experience, greater compliance
        costs.
 
 *Even
        though the Company's common stock is currently traded on The Nasdaq National
        Market, the trading volume in its common stock has been low and the sale
        of
        substantial amounts of its common stock in the public market could depress
        the
        price of the Company's common stock.*
 
 The
        trading volume in the Company's common stock on The Nasdaq National Market
        has
        been relatively low when compared with larger companies listed on The Nasdaq
        National Market or the stock exchanges. Thinly traded stocks such as the
        Company's can be more volatile than stocks trading in an active public market.
        Because of this, the Company's shareholders may not be able to sell their
        shares
        at the volumes, prices, or times that they desire.
 
 The
        Company cannot predict the effect, if any, that future sales of its common
        stock
        in the market, or availability of shares of its common stock for sale in
        the
        market, will have on the market price of the Company's common stock. The
        Company, therefore, can give no assurance that sales of substantial amounts
        of
        its common stock in the market, or the potential for large amounts of sales
        in
        the market, would not cause the price of its common stock to decline or impair
        the Company's ability to raise capital through sales of its common stock.
 
 The
        market price of the Company's common stock may fluctuate in the future, and
        these fluctuations may be unrelated to its performance. General market price
        declines or overall market volatility in the future could adversely affect
        the
        price of the Company's common stock, and the current market price may not
        be
        indicative of future market prices. Additionally, as the merger agreement
        with
        Pinnacle provides that Company shareholders will receive 0.95 shares of Pinnacle
        common stock for each share of Company stock owned by such shareholders,
        a
        decline in Pinnacle’s stock price could result in a similar decline in the
        market price for Company stock.
 
 Overview
        of Operating Results for the Three Months Ended September 30, 2005 and September
        30, 2004
 
 Net
        income increased from $1.5 million or $0.22 per diluted share for the quarter
        ended September 30, 2004 to $2.1 million or $0.29 per diluted share for the
        quarter ended September 30, 2005. The increase in earnings was a result of
        increased 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 Nine Months Ended September 30, 2005 and September
        30, 2004
 
 Net
        income increased from $3.7 million or $0.55 per diluted share for the nine
        months ended September 30, 2004 to $6.2 million or $0.85 per diluted share
        for
        the same period ended September 30, 2005. As in the third quarter, the increase
        in earnings for the nine month period was a result of increased 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.
 
 11
  Proposed
        Merger with Pinnacle Financial Partners, Inc.
 
 Effective
        September 30, 2005, the Company entered into a definitive merger agreement
        with
        Pinnacle pursuant to which the Company will merge with and into Pinnacle
        with
        Pinnacle as the surviving corporation. Pursuant to the definitive merger
        agreement, Company shareholders will receive 0.95 shares of Pinnacle common
        stock for every one share of Company common stock owned by them at the effective
        time of the merger. Consummation of this merger is subject to the receipt
        of
        required regulatory approval as well as the approval of both Pinnacle's and
        the
        Company's shareholders and the satisfaction of other customary closing
        conditions. Subject to approval, the transaction is expected to be completed
        during the first quarter of 2006.
 
 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 its borrowers’ sensitivity to
        interest rate movements and other relevant factors. Qualitative factors include
        the general economic environment in the Company’s markets, including economic
        conditions throughout the Southeast and the state of industries predominant
        in
        the Middle Tennessee area.
  Management
        also considers its policy on non-accrual loans to be a critical accounting
        policy. Loans are classified as non-accrual loans when principal or interest
        is
        delinquent for 90 days or more. Once a loan is categorized as non-accrual,
        all
        previously recorded earned income is reversed and income is no longer accrued
        on
        an on-going basis. When the deficiency is cured, the loan is taken out of
        non-accrual status, the related income is recorded on the books, and interest
        income will start accruing again as usual.
  The
        final
        critical accounting policy identified by management relates to the sale of
        loans. The Bank sells mortgage loans for cash proceeds equal to the principal
        amount of the loans sold but with yield rates which reflect the current market
        rate. Gain or loss is recorded at the time of sale in an amount reflecting
        the
        difference between the contractual interest rates of the loans sold and the
        current market rate. The gain or loss on sales includes any fees received
        for
        release of servicing.
 
 Comparison
        of Financial Condition at September 30, 2005 and December 31, 2004
 
 *Total
        Assets* .
        Total
        assets increased 9.21%, from $578.7 million at December 31, 2004 to $632.0
        million at September 30, 2005. Changes in total assets include a $45.8 million,
        or 10.64%, increase in net loans receivable and a $12.0 million, or 30.90%,
        increase in interest-bearing deposits with other financial institutions
        (“IBDs”). IBDs include overnight funds as well as short-term deposits with other
        financial institutions. Offsets to these increases include a decrease of
        $7.7
        million, or 31.54%, in cash and a decrease of $1.4 million, or 57.34%, in
        loans
        held for sale. The decrease in cash is primarily due to dividend payments
        totaling $12.3 million including the special dividend declared in the fourth
        quarter of 2004 that was paid in 2005. The decrease in loans available for
        sale
        is primarily due to the timing of loan funding. The increase in IBDs is
        primarily due to the Bank experiencing significant growth in deposits during
        the
        first three quarters of 2005. This growth led to excess funds that were invested
        in short-term deposits with the Federal
        Home Loan Bank (“FHLB”)
        of Cincinnati to lock in higher short-term interest rates and to maintain
        adequate liquidity to fund loans.
 
 12
  *Deposits* .
        Total
        deposits increased $57.6 million, or 11.37%, from $506.5 million at December
        31,
        2004 to $564.1 million at September 30, 2005. Transaction accounts increased
        $19.4 million, from $313.8 million at December 31, 2004 to $333.2 million
        at
        September 30, 2005. Savings accounts increased $2.5 million, from $23.1 million
        at December 31, 2004 to $25.6 million at September 30, 2005. Certificates
        of
        deposit (“CDs”) increased $35.7 million, from $169.6 million at December 31,
        2004 to $205.3 million at September 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 $4.4 million, from $53.8 million at December 31,
        2004 to $58.2 million at September 30, 2005. This increase was the result
        of net
        income of $6.2 million, which was partially offset by dividends of $1.6 million
        and a $330,000 increase in unrealized losses on available-for-sale investment
        securities. Management does not believe any individual unrealized loss as
        of
        September 30, 2005 represents an other-than-temporary impairment. These
        unrealized losses are primarily attributable to changes in interest rates
        and
        individually were 5% or less of their respective amortized cost basis. The
        Company has both the intent and ability to hold its securities for a time
        necessary to recover the amortized cost.
 
 *Non-Performing
        Assets* .
        Non-performing assets totaled $1.2 million and $764,000 at September 30,
        2005
        and December 31, 2004, respectively. The allowance for loan losses increased
        slightly, from $4.9 million at December 31, 2004 to $5.0 million at September
        30, 2005. Non-performing assets have continued to be a very small portion
        of the
        Bank’s portfolio, with the balance equal to 0.25% of total loans and 0.19% of
        total assets at September 30, 2005. Management feels that the allowance for
        loan
        losses is adequate as of September 30, 2005.
 
 Comparison
        of Operating Results for the Three Months Ended September 30, 2005 and September
        30, 2004
 
 *Net
        Income* .
        Net
        income was $2.1 million for the three months ended September 30, 2005 compared
        to $1.5 million for the three months ended September 30, 2004. Diluted earnings
        per share increased $0.07, from $0.22 for the three months ended September
        30,
        2004 to $0.29 for the same period in 2005. Annualized return on average assets
        increased from 1.10% for the three months ended September 30, 2004 to 1.39%
        for
        the same period in 2005. Annualized return on average equity also increased,
        from 10.51% for the three months ended September 30, 2004 to 14.65% for the
        same
        period in 2005. These increases are mainly attributable to an almost 20%
        increase in net interest income. Additionally, third quarter non-interest
        expense decreased $432,000 from the prior year period, primarily due to a
        decrease in ESOP expense.
 
 *Net
        Interest Income* .
        When
        comparing the quarter ended September 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 $76.9 million, or 15.83%, and average interest-bearing
        liabilities increased $58.8 million, or 15.17%. These increases led to a
        19.61%
        increase in net interest income, which increased from $5.1 million for the
        three
        months ended September 30, 2004 to $6.1 million for the same period in 2005.
        Interest rate spread declined from 3.89% for the three months ended September
        30, 2004 to 3.87% for the same period in 2005. Net interest margin increased
        from 4.18% for the three months ended September 30, 2004 to 4.32% 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 125.35% for the three months
        ended
        September 30, 2004 to 126.07% for the same period in 2005.
 
 *Interest
        Income* .
        Interest income increased $2.1 million, or 32.74%, for the three months ended
        September 30, 2005 as compared to the same period in 2004, primarily due
        to an
        increase of $1.7 million or 28.65% in loan interest income. This increase
        is the
        result of an increase of $51.7 million or 12.65% in average loans receivable,
        net, which is partially attributable to a healthy lending environment in
        our
        growing middle Tennessee market area. The average yield on loans increased
        as
        well, from 5.84% for the three months ended September 30, 2004 to 6.65% 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
        $405,000, or 82.99%. The average tax equivalent yield for these investments
        increased from 2.60% for the three months ended September 30, 2004 to 3.51%
        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 FHLB.
   13
  *Interest
        Expense* .
        Total
        interest expense increased $1.1 million, or 78.79%, 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 1.41% for the three months ended
        September 30, 2004 to 2.20% for the same period in 2005. Average
        interest-bearing deposits increased $58.8 million, or 15.28%, from $384.9
        million for the three months ended September 30, 2004 to $443.7 million for
        the
        same period in 2005. The total cost of funds increased from 1.43% for the
        three
        months ended September 30, 2004 to 2.21% 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 $101,000 for the three months ended September
        30, 2005 compared to $176,000 for the same period in 2004. Net charge-offs
        remained constant at $48,000 for the quarters ended September 30, 2004 and
        2005,
        approximately 0.01% of average outstanding loans in each period. Management
        feels that their evaluations and estimations were reasonable for determining
        the
        provision and that the allowance for loan losses is adequate as of September
        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. The following table provides asset quality information
        at September 30, 2005 compared to September 30, 2004:
 
 September
                  30,2005
              
              2004Nonaccrual
                  and 90 days or more past due loans as a percent of total loans,
                  net
              
              
              0.22
              %
              
              0.29
              %Nonperforming
                  assets as a percent of total assets
              
              
              0.19
              %
              
              0.22
              %Allowance
                  for loan losses as a percent of total loans receivable
              
              
              1.04
              %
              
              1.14
              %
 
 
 *Non-Interest
        Income* .
        Non-interest income decreased $400,000, or 11.43%, from $3.5 million for
        the
        three months ended September 30, 2004 to $3.1 million for the same period
        in
        2005. This overall decrease is primarily due to a $559,000 or 63.59% 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 September
        30, 2005, compared to the same period ended September 30, 2004. The decline
        is
        primarily attributable to a decrease in the volume of mortgage loans closed
        during the third quarter of 2005 when compared to the third quarter of 2004,
        as
        a result of a reduction in demand for mortgage loans. This decrease was
        partially offset by an increase of $90,000, or 13.87%, in commissions and
        other
        non-banking fees, primarily due to an increase in premium volume at our
        insurance agency, Miller & Loughry.
 
 *Non-Interest
        Expense* .
        Non-interest expense decreased $432,000, or 8.33%, from $6.0 million for
        the
        three months ended September 30, 2004 to $5.5 million for the same period
        in
        2005. This is primarily due to a $336,000 or 9.33% decrease in salaries and
        employee benefit expense. This decrease is mainly attributable to a $469,000
        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.
        Additionally, commission expense has declined during 2005 due to lower volumes
        of mortgage originations.
 
 Comparison
        of Operating Results for the Nine Months Ended September 30, 2005 and September
        30, 2004
 
 *Net
        Income* .
        Net
        income was $6.2 million for the nine months ended September 30, 2005 compared
        to
        $3.7 million for the nine months ended September 30, 2004. Diluted earnings
        per
        share increased $0.30, from $0.55 for the nine months ended September 30,
        2004
        to $0.85 for the same period in 2005. Annualized return on average assets
        increased from 0.95% for the nine months ended September 30, 2004 to 1.42%
        for
        the same period in 2005. Annualized return on average equity also increased,
        from 8.82% for the nine months ended September 30, 2004 to 14.77% 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 nine 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 $1.2 million or 7.03%, 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 nine months ended September 30, 2005, net income
        would have been $5.8 million, diluted earnings per share would have been
        $0.79,
        and for the nine months ended September 30, 2005, annualized return on average
        assets would have been 1.32% and annualized return on average equity would
        have
        been 13.76%.
 
 14
  The
        Company believes it is appropriate to provide investors with information
        regarding its results of operations and certain performance ratios for the
        first
        nine 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 nine 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 nine months ended September 30, 2004 to the same period ended
        September 30, 2005, there was an overall increase in market interest rates
        which
        caused both higher yields and higher costs. In addition, for the nine months
        ended September 30, 2005, average interest-earning assets increased $73.2
        million, or 15.71%, and average interest-bearing liabilities increased $50.8
        million, or 13.25%, when compared to the same period in 2004. These increases
        led to a 19.72% increase in net interest income, which increased from $14.2
        million for the nine months ended September 30, 2004 to $17.0 million for
        the
        same period in 2005. Interest rate spread decreased from 3.84% for the nine
        months ended September 30, 2004 to 3.83% for the same period in 2005. Net
        interest margin increased from 4.09% for the nine months ended September
        30,
        2004 to 4.22% 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
        121.43% for the nine months ended September 30, 2004 to 124.07% for the same
        period in 2005.
 
 *Interest
        Income* .
        Interest income increased $5.3 million, or 28.99%, primarily due to an increase
        of $4.2 million or 25.19% in loan interest income. This increase is the result
        of an increase of $52.7 million, or 13.55%, 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
        5.79%
        for the nine months ended September 30, 2004 to 6.39% 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 $1.0 million, or 77.63%. The average
        tax equivalent yield for these investments increased from 2.34% for the nine
        months ended September 30, 2004 to 3.26% 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
        FHLB.
 
 *Interest
        Expense* .
        Total
        interest expense increased $2.5 million, or 63.34%, 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 1.36% for the nine months ended
        September 30, 2004 to 1.98% for the same period in 2005. Average
        interest-bearing deposits increased $50.9 million, or 13.38%, from $380.5
        million for the nine months ended September 30, 2004 to $431.4 million for
        the
        same period in 2005. The total cost of funds increased from 1.38% for the
        nine
        months ended September 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.
 
 15
  The
        provision for loan losses totaled $211,000 for the nine months ended September
        30, 2005 compared to $352,000 for the same period ended September 30, 2004.
        This
        40.06% decrease is primarily due to lower net charge-offs during the first
        nine
        months of 2005 when compared to the same period in 2004. Net charge-offs
        decreased, from $149,000 for the nine months ended September 30, 2004 to
        $119,000 for the same period ended September 30, 2005. Net charge-offs as
        a
        percentage of average outstanding loans totaled 0.03% for the nine months
        ended
        September 30, 2005 compared to 0.04% for the same period in 2004. Management
        feels that their evaluations and estimations were reasonable for determining
        the
        provision and that the allowance for loan losses is adequate as of September
        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 $700,000, or 7.07%, from $9.9 million for the
        nine
        months ended September 30, 2004 to $9.2 million for the same period in 2005.
        This overall decrease is primarily due to a $1.3 million or 56.86% 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 nine months ended September
        30,
        2005, compared to the same period ended September 30, 2004. The decline is
        primarily attributable to a decrease in the volume of mortgage loans closed
        during the first nine months 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 $293,000, or 7.34%, 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 $206,000, or 10.85%, primarily due to
        an
        increase in premium volume at Miller & Loughry.
 
 *Non-Interest
        Expense* .
        Non-interest expense decreased $1.2 million or 6.82%, from $17.6 million
        for the
        nine months ended September 30, 2004 to $16.4 million for the same period
        in
        2005. This is primarily due to a $1.2 million, or 10.78%, decrease in salaries
        and employee benefit expense. This decrease is attributable to a $1.4 million
        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.
        Additionally, commission expense has declined during 2005 due to lower volumes
        of mortgage originations. Advertising expense decreased $115,000, or 28.47%,
        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 $210,000,
        or 8.21%, 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, for the nine months ended September 30, 2005, net
        income would have been $5.8 million, diluted earnings per share would have
        been
        $0.79, and the effective tax rate would have been 38.9%.  Including
        the tax
        benefit, the effective tax rate for the period ending September 30, 2005
        was
        34.5%, compared with 40.3% for the period ending September 30,
        2004.
 
 The
        Company believes it is appropriate to provide investors with information
        regarding its results of operations and certain performance ratios for the
        first
        nine 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 nine 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 September 30, 2005, cash and cash equivalents totaled $67.5 million
        or
        10.67% of total assets, and investment securities available-for-sale totaled
        $42.9 million. At September 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.
 
 16
  As
        of
        September 30, 2005, the Company and the Bank’s regulatory capital ratios were in
        excess of all applicable regulatory requirements. At September 30, 2005,
        under
        the regulations of the Federal Reserve Board, the Bank’s actual leverage, Tier 1
        risk-based, and total risked-based capital ratios were 8.41%, 10.00% and
        10.97%,
        respectively,  compared
        to requirements of 4.0%, 4.0% and 8.0%, respectively.  At
        September 30, 2005, under the regulations of the Federal Reserve Board, the
        Company’s actual leverage, Tier 1 risk-based, and total risked-based capital
        ratios were 9.29%, 11.11%, and 12.08%, 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
        September 30, 2005, the Bank had loan commitments of approximately $73.3
        million. In addition, at September 30, 2005, the unused portion of lines
        of
        credit extended by the Bank was approximately $24.1 million for consumer
        loans
        and $40.4 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 September 30, 2005, the Bank had $10.1 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.
 
 Recent
        Accounting Pronouncements
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
        123 *,
        Accounting for Stock-Based Compensation* (“SFAS
        123R”). SFAS 123R establishes accounting requirements for share-based
        compensation to employees and carries forward prior guidance on accounting
        for
        awards to non-employees. The provisions of this statement are effective (as
        amended by the Securities and Exchange Commission (“SEC”)) for annual fiscal
        reporting periods beginning after June 15, 2005. SFAS 123R requires an entity
        to
        recognize compensation expense based on an estimate of the number of awards
        expected to actually vest, exclusive of awards expected to be forfeited.
        The
        adoption of SFAS 123R is not expected to have a material impact on the Company’s
        financial position, results of operations or cash flows.
 
 In
        March
        2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), *Share-Based
        Payment* ,
        providing guidance on option valuation methods, the accounting for income
        tax
        effects of share-based payment arrangements upon adoption of SFAS 123R, and
        the
        disclosures in MD&A subsequent to the adoption. The Company will provide SAB
        107 required disclosures upon adoption of SFAS 123R on January 1,
        2006.
 
 In
        May
        2005, the FASB issued Statement No. 154 (“SFAS 154”),“ *Accounting
        Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
        Statement No. 3.* ”
        The new
        standard changes the requirements for the accounting for and reporting of
        a
        change in accounting principle. Among other changes, SFAS 154 requires that
        a
        voluntary change in accounting principle be applied retrospectively with
        all
        prior period financial statements presented on the new accounting principle,
        unless it is impracticable to do so. SFAS 154 also provides that (1) a change
        in
        method of depreciating or amortizing a long-lived non-financial asset be
        accounted for as a change in estimate (prospectively) that was effected by
        a
        change in accounting principle, and (2) correction of errors in previously
        issued financial statements should be termed a “restatement.” The new standard
        is effective for accounting changes and corrections of errors made in fiscal
        years beginning after December 15, 2005. The adoption of SFAS 154 is not
        expected to have a material impact on the Company’s financial position, results
        of operations or cash flows.
 
  17
  Impact
        of
        Inflation and Changing Prices
 
 The
        consolidated financial statements of the Company and notes thereto, presented
        elsewhere herein, have been prepared in accordance with accounting principles
        generally accepted in the United States of America, which require the
        measurement of financial condition and operating results in terms of historical
        dollars without considering the change in relative purchasing power of money
        over time due to inflation. The impact of inflation is reflected in the
        increased cost of the Company’s operations. Unlike most industrial companies,
        nearly all the assets and liabilities of the Company are financial. As a
        result,
        interest rates have a greater impact on the Company’s performance than do the
        effects of general levels of inflation. Interest rates do not necessarily
        move
        in the same direction or to the same extent as the prices of goods and
        services.
 
 Item
        3.
        Quantitative and Qualitative Disclosures About Market Risk
 
 As
        a
        financial institution, the Company’s primary component of market risk is
        interest rate risk. Ultimately, fluctuations in interest rates will impact
        liquidity, the level of income and expense recorded on most of the Company’s
        assets and liabilities, and the market value of interest-earning assets and
        interest-bearing liabilities. The Company is not subject to foreign exchange
        or
        commodity price risk. The Company does not own any trading assets.
 
 Interest
        rate risk is managed in accordance with policies approved by the Bank’s Board of
        Directors. Management formulates strategies based on appropriate levels of
        interest rate risk. In determining the appropriate level of interest rate
        risk,
        management considers the impact on earnings and capital of the current outlook
        on interest rates, potential changes in interest rates, regional economy,
        liquidity, business strategies and other factors. Management meets regularly
        to
        review, among other things, the sensitivity of assets and liabilities to
        interest rate changes, the book and market value of assets and liabilities,
        unrealized gains and losses, purchase and sales activities, commitments to
        originate loans and the maturities of investments. Management uses an analysis
        of relationships between interest-earning assets and interest-bearing
        liabilities to manage interest rate risk.
 
 The
        following table presents the Company's repricing gap at September 30, 2005.
        The
        table indicates that at September 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.
  18
  
 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
              
              $
              185,458
              
              
              47,867
              
              
              91,379
              
              
              136,463
              
              
              16,254
              
              
              477,421FHLB
                  and FRB stock
              
              
              3,317
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,317Investment
                  securities available-for-sale
              
              
              7,915
              
              
              2,767
              
              
              8,336
              
              
              4,948
              
              
              18,968
              
              
              42,934Interest-bearing
                  deposits with other financial institutions
              
              
              54,810
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              54,810Total
                  rate sensitive assets
              
              $
              251,500
              
              
              50,634
              
              
              99,715
              
              
              141,411
              
              
              35,222
              
              
              578,482Interest-bearing
                  liabilities:Deposits:Savings
                  deposits
              
              $
              2,543
              
              
              2,543
              
              
              10,240
              
              
              10,240
              
              
              -
              
              
              25,566Demand
                  deposits
              
              
              71,079
              
              
              71,079
              
              
              39,361
              
              
              39,361
              
              
              -
              
              
              220,880Certificates
                  of deposit
              
              
              54,208
              
              
              47,970
              
              
              83,495
              
              
              19,289
              
              
              287
              
              
              205,249Borrowings
              
              
              27
              
              
              1,027
              
              
              1,109
              
              
              109
              
              
              522
              
              
              2,794Total
                  rate sensitive liabilities
              
              $
              127,857
              
              
              122,619
              
              
              134,205
              
              
              68,999
              
              
              809
              
              
              454,489Excess
                  (deficiency) of interest sensitive assets over interest sensitive
                  liabilities
              
              $
              123,643
              
              
              (71,985
              )
              
              (34,490
              )
              
              72,412
              
              
              34,413
              
              
              123,993Cumulative
                  excess of interest sensitive assets
              
              $
              123,643
              
              
              51,658
              
              
              17,168
              
              
              89,580
              
              
              123,993
              
              
              123,993Cumulative
                  ratio of interest-earning assets to interest-bearing
                  liabilities
              
              
              196.70
              %
              
              120.62
              %
              
              104.46
              %
              
              119.75
              %
              
              127.28
              %
              
              127.28
              %Interest
                  sensitivity gap to total rate sensitive assets
              
              
              21.37
              %
              
              (12.44
              )%
              
              (5.96
              )%
              
              12.52
              %
              
              5.95
              %
              
              21.43
              %Ratio
                  of interest-earning assets to interest-bearing liabilities
              
              
              196.70
              %
              
              41.29
              %
              
              74.30
              %
              
              204.95
              %
              
              4,353.77
              %
              
              127.28
              %Ratio
                  of cumulative gap to total rate sensitive assets
              
              
              21.37
              %
              
              8.93
              %
              
              2.97
              %
              
              15.49
              %
              
              21.43
              %
              
              21.43
              %
 
 The
        gap
        analysis provides the basis for more detailed analysis in a simulation model.
        Also gap results are popular rate risk indicators. However, to truly evaluate
        the impact of rate change on income, simulation is the best technique because
        variables are changed for various rate conditions. Each category’s interest
        change is calculated as rates ramp up and down. In addition, the prepayment
        speeds and repricing speeds are changed.
 
 “Rate
        shock” is a method for stress testing the net interest margin (NIM) over the
        next four quarters under several rate change levels. These levels span four
        100
        basis point increments up and down, as applicable, from the current interest
        rates. In order to simulate activity, maturing balances are replaced with
        new
        balances at the new rate level and repricing balances are adjusted to the
        new
        rate shock level. The interest is recalculated for each level along with
        the new
        average yield. NIM is then calculated and a margin risk profile is developed.
        This simulation reveals that the Bank will experience a loss in net interest
        income if rates decline in the next year. The magnitude and severity of
        potential loss for a 100 basis point decline in rates under projected asset
        growth conditions would be a decline of 21 basis points in net interest
        margin.
 
  19
  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 September 30, 2005 that have
        materially affected, or are reasonably likely to materially affect, the
        Company’s internal control over financial reporting.
 
 
  20
  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 September 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
                  programsJuly
                  1, 2005 throughJuly
                  31, 2005
              -
              $             
                  -
              -
              275,261August
                  1, 2005 through August 31, 2005
              -
              -
              -
              275,261September
                  1, 2005 through September 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.
 
  21
  Item
        4.
        Submission of Matters to a Vote of Security Holders
 
 None.
 
 Item
        5.
        Other Information
 
 None.
 
 Item
        6.
        Exhibits
 
 (a)  Exhibits
 2.1
                Agreement
                    and Plan of Merger dated September 30, 2005 by and between Pinnacle
                    Financial Partners, Inc. and Cavalry Bancorp, Inc. (incorporated
                    herein by
                    reference to Cavalry Bancorp’s Current Report on Form 8-K filed with the
                    SEC on October 3, 2005). (Pursuant to Item 601(b)(ii) of Regulation
                    S-K
                    the schedules to this agreement have been omitted but will be
                    furnished to
                    the SEC upon request.)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 200232.2
                CFO
                    Certification Pursuant 18 U.S.C. Section 1350, Sarbanes - Oxley
                    Act 2002
  22
  
 SIGNATURES
 
 Pursuant
        to the requirements of the Securities Exchange 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:
                  November 7, 2005
              by:
              Loughry SignatureEd
                  C. Loughry, Jr.Chairman
                  of the Board and Chief Executive
                  Officer
 
 
 
 Date:
                  November 7, 2005
              by:
              Gardner SignatureHillard
                  C. GardnerSenior
                  Vice President and Chief Financial
                  Officer
  
 23