UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One )





x
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2004 oro
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from___________ to ___________





Commission File Number: 0-23605








(Exact Name of Registrant as Specified in Its Charter)





Tennessee
62-1721072(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer I.D. Number)








114 West College Street, Murfreesboro, Tennessee
37130(Address of Principal Executive Offices)
(Zip Code)





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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days.





Yesx
Noo


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





Yesx
Noo





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.





Common Stock Issued and Outstanding: 6,778,473 shares as of  May 6, 2004.











CAVALRY BANCORP, INC.





Table of Contents





Part I
Financial Information
PageItem 1.
Financial StatementsConsolidated Balance Sheets at March 31, 2004 (unaudited)
and December 31, 2003
1Consolidated Statements of Income (unaudited) for the Three Months Ended
March 31, 2004 and 2003
2Consolidated Statements of Comprehensive Income (unaudited) for the
Three Months Ended March 31, 2004 and 2003
3Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended March 31, 2004 and 2003
4Notes to Consolidated Financial Statements (unaudited)
5-7Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
7-10Item 3.
Quantitative and Qualitative Disclosures About Market Risk
10-11Item 4.
Controls and Procedures
12Part II
Other Information
13Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
13Item 6.
Exhibits and Reports on Form 8-K
14Signatures

15






























Part I.  Financial Information





ITEM 1.  FINANCIAL STATEMENTS





CAVALRY BANCORP, INC.


CONSOLIDATED BALANCE SHEETS


MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003


(DOLLARS IN THOUSANDS)








March 31,
December 31,Assets

2004
2003(Unaudited)Cash

$
22,039


32,946Interest-bearing deposits with other financial institutions


27,160


37,967Cash and cash equivalents


49,199


70,913Investment securities available-for-sale at fair value (amortized cost: $41,243and $55,136 at March 31, 2004 and December 31, 2003, respectively)


41,370


55,123Loans held for sale, at estimated fair value


1,630


2,648Loans receivable, net of allowances for loan losses of $4,576 at March 31, 2004 and $4,525 at December 31, 2003


378,233


350,412Accrued interest receivable


1,593


1,668Office properties and equipment, net


18,157


18,431Required investments in stock of Federal Home Loan Bank and Federal Reserve Bank, at cost


3,033


2,992Foreclosed assets


7


-Bank owned life insurance


8,367


8,308Goodwill


1,772


1,772Other assets


3,063


2,905Total assets

$
506,424


515,172Liabilities and Shareholders EquityLiabilities:Deposits:Non-interest-bearing

$
67,008


72,443Interest-bearing


373,785


381,814Total deposits


440,793


454,257Advances from Federal Home Loan Bank of Cincinnati


2,876


2,889Accrued expenses and other liabilities


7,174


3,599Total liabilities


450,843


460,745Shareholders equity:Preferred stock, no par valueAuthorized- 250,000 shares; none issued or outstanding at March 31, 2004 and December 31, 2003


-


-Common stock, no par valueAuthorized- 49,750,000 shares; issued and outstanding 6,833,473 and 6,834,873 at March 31, 2004 and December 31, 2003, respectively


10,438


10,175Retained earnings


47,260


46,633Unallocated ESOP shares


(2,195
)

(2,373
)Accumulated other comprehensive income (loss), net of tax


78


(8
)Total shareholders equity


55,581


54,427Total liabilities and shareholders equity

$
506,424


515,172





Note: The balance sheet presented above at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.





See accompanying notes to consolidated financial statements.


1


CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF INCOME


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)





Three Months EndedMarch 31,2004
2003Interest income:Loans

$
5,273


5,024Investment securities:Taxable


341


283Non-taxable


7


-Other


90


126Total interest income


5,711


5,433Interest expense  deposits


1,269


1,519Interest expense  borrowings


24


24Total interest expense


1,293


1,543Net interest income


4,418


3,890Provision for loan losses


101


56Net interest income after provision for loan losses


4,317


3,834Non-interest income:Servicing income


45


71Gain on sale of loans, net


586


1,322Gain on sale of other assets


53


-Gain on sale of investment securities, net


66


11Deposit servicing fees and charges


1,224


1,055Trust service fees


292


246Commissions and other non-banking fees


655


616Other operating income


264


298Total non-interest income


3,185


3,619Non-interest expenses:Salaries and employee benefits


3,573


3,659Occupancy expense


320


315Supplies, communications and other office expenses


219


253Advertising expense


151


101Equipment and service bureau expense


816


695Professional fees


188


106Other taxes


115


97Other operating expense


377


332Total non-interest expenses


5,759


5,558Income before income taxes


1,743


1,895Income tax expense


727


727Net income

$
1,016


1,168Basic earnings per share

$
0.16


0.18Diluted earnings per share

$
0.15


0.18Weighted average shares outstanding -Basic


6,486,988


6,365,767Weighted average shares outstanding -Diluted


6,732,839


6,579,436





Dividends declared $0.06 per share payable April 9, 2004 for shareholders of record date March 31, 2004.





See accompanying notes to consolidated financial statements.


2


CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Months EndedMarch 31,2004


2003Net income

$
1,016


1,168Other comprehensive income, net of tax:Unrealized gains (losses) on investment securities available-for-sale


127


(30
)Reclassification adjustment for gains included in net income


(41
)

(7
)Comprehensive income

$
1,102


1,131





See accompanying notes to consolidated financial statements.


3


CAVALRY BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


THREE MONTHS ENDED MARCH 31, 2004 AND 2003


(DOLLARS IN THOUSANDS)


(UNAUDITED)








2004
2003Operating activities:Net cash provided by operating activities

$
6,358


19,088Investing activities:Increase in loans receivable, net


(28,007
)

(15,604
)Principal payments on investment securities


405


3,473Purchase of investment securities available-for-sale


(26,619
)

(18,880
)Proceeds from maturities of investment securities


10,650


12,550Proceeds from sales of investment securities available-for-sale


29,541


2,511Purchase of Federal Reserve Stock


(18
)

-Purchase of office properties and equipment


(168
)

(965
)Proceeds from sale of assets


32


93Net cash used in investing activities


(14,184
)

(16,822
)Financing activities:Net decrease in deposits


(13,464
)

(10,286
)Retirement of common stock


(22
)

(137
)Dividends paid


(389
)

(298
)Net decrease in borrowings


(13
)

(14
)Net cash used in financing activities


(13,888
)

(10,735
)Decrease in cash and cash equivalents


(21,714
)

(8,469
)Cash and cash equivalents, beginning of period


70,913


73,162Cash and cash equivalents, end of period

$
49,199


64,693Supplement Disclosures of Cash Flow Information:Payments during the period for:Interest

$
1,287


1,544Income taxes

$
-


-Supplemental Disclosures of Noncash Investing and Financing Activities:Increase in deferred tax asset (liability) related to unrealized gains (losses) on investments

$
(54
)

23Net unrealized gains (losses) on investment securities available for sale

$
140


(60
)Dividends declared and payable

$
410


298





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





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





The results of operations for the three months ended March 31, 2004, are not necessarily indicative of the results to be expected for the year ending December 31, 2004. 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, 2003.





2.  Stock Options





The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS 123 requires entities which continue to apply the provisions of APB Opinion No. 25 to provide pro-forma earnings per share disclosure for stock option grants made in 1995 and subsequent years as if the fair value based method defined in SFAS 123 had been applied. SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB No. 123, provides that an entity that has transitioned to the accounting treatment prescribed by SFAS 123 may use the intrinsic value method in lieu of the fair value based method for determining the fair value of stock options at the date of grant. SFAS 148 requires disclosure in addition to SFAS 123 if APB Opinion No. 25 is currently being applied.





The Company applies APB Opinion No. 25 and related interpretations in accounting for the stock option plan. No compensation cost has been recognized for the plan because the stock option price is equal to or greater than the fair value at the grant date. 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 EndedMarch 31,2004
2003(Dollars in thousands, except per share data)Net income:As reported

$
1,016


1,168Deduct: Total stock-based employee compensation expense determined under fair value methods for all awards granted, net of related tax effects


(103
)

(33
)Pro forma net income

$
913


1,135Earnings per share:Basic  as reported

$
0.16


0.18Basic  pro forma

$
0.14


0.18Diluted  as reported

$
0.15


0.18Diluted  pro forma

$
0.14


0.17







5




3.  Earnings Per Share





The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the three months ended March 31, 2004 and 2003. Diluted common shares arise from the potentially dilutive effect of the Companys stock options outstanding.





Three Months Ended
March 31,2004
2003Basic EPS:Net income

$
1,016,000


1,168,000Average common shares outstanding


6,486,988


6,365,767Earnings per share - basic

$
0.16


0.18Diluted EPS:Net income

$
1,016,000


1,168,000Average common shares outstanding


6,486,988


6,365,767Dilutive effect of stock options


245,851


213,669Average dilutive shares outstanding


6,732,839


6,579,436Earnings per share - diluted

$
0.15


0.18





4.  Business Segments





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





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





Segment information is derived from the internal reporting system utilized by management with accounting policies and procedures consistent with those described in Note 1 of the 2003 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
MortgageBanking
Trust
Insurance
Eliminations
ConsolidatedFor the three months endedMarch 31, 2004:Interest revenue

$
5,711


-


-


-


-


5,711Other income-external customers


1,624


45


292


519


-


2,480Interest expense


1,293


-


-


-


-


1,293Depreciation and amortization


360


45


17


10


-


432Other significant items:Provision for loan losses


101


-


-


-


-


101Gain on sales of assets


119


586


-


-


-


705Segment profit (loss)


1,792


(154
)

67


52


(14
)

1,743Segment assets


503,066


1,868


357


3,063


(1,930
)

506,424 
 
 Banking
MortgageBanking
Trust
Insurance
Eliminations
ConsolidatedFor the three months endedMarch 31, 2003:Interest revenue

$
5,433


-


-


-


-


5,433Other income-external customers


1,378


71


246


591


-


2,286Interest expense


1,543


-


-


-


-


1,543Depreciation and amortization


301


90


16


15


-


422Other significant items:Provision for loan losses


56


-


-


-


-


56Gain on sales of assets


11


1,322


-


-


-


1,333Segment profit


1,699


89


25


100


(18
)

1,895Segment assets


453,497


3,542


379


3,078


(2,863
)

457,633


ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations





This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as expects, feels, believes, anticipates, intends, and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause the Company's actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; changes in market conditions in the Companys principal market area; adverse changes in the financial condition of the loan loss reserves; competitive pressures on loan or deposit terms; legislative and regulatory changes; and other factors disclosed periodically in the Company's filings with the Securities and Exchange Commission. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements.





Overview of Operating Results for the Three Months Ended March 31, 2004 and March 31, 2003





Net income decreased from $1.2 million or $0.18 per diluted share for the quarter ended March 31, 2003 to $1.0 million or $0.15 per diluted share for the quarter ended March 31, 2004. The decrease in earnings was a result of decreased gain on sale of loans, an increase in the provision for loan losses and an increase in non-interest expense. These factors were partially offset by increased interest income, an increase in other non-interest income excluding gain on sale of loans, and a decline in interest expense. These items are discussed in further detail below.





7


Critical Accounting Policies





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





Comparison of Financial Condition at March 31, 2004 and December 31, 2003





Total Assets . Total assets decreased 1.71%, from $515.2 million at December 31, 2003 to $506.4 million at March 31, 2004. This overall decrease reflects a $21.7 million or 30.62% decrease in cash and cash equivalents and a $13.8 million or 24.95% decrease in investments available-for-sale. These decreases were primarily driven by an overall $13.5 million decrease in total deposits, which reflects a seasonal decline in public deposits. This decline in deposits resulted in less funds available for liquidity and investment purposes. These decreases were partially offset by a $27.8 million or 7.94 % increase in loans receivable, net.





Deposits . Total deposits decreased $13.5 million or 2.97%, from $454.3 million at December 31, 2003 to $440.8 million at March 31, 2004. Transaction accounts decreased $16.4 million, from $280.5 million at December 31, 2003 to $264.1 million at March 31, 2004. Savings accounts increased $1.2 million, from $21.0 million at December 31, 2003 to $22.2 million at March 31, 2004. Certificates of deposit increased $1.7 million, from $152.8 million at December 31, 2003 to $154.5 million at March 31, 2004. Non-interest bearing deposits decreased $5.4 million or 7.50% and interest bearing deposits decreased $8.0 million or 2.10%. Declines were primarily those of local government deposits, which management believes are temporary. Management expects to continue to actively market deposit relationships at all locations.





Shareholders Equity . Shareholders equity increased $1.2 million, from $54.4 million at December 31, 2003 to $55.6 million at March 31, 2004. This increase was the result of net income of $1.0 million and the allocation of shares under the Bank's Employee Stock Ownership Plan (ESOP) that totaled $463,000. Additionally, there was an $86,000 increase in the valuation allowance for available-for-sale investment securities. These increases were partially offset by dividends of $389,000 and the repurchase of $22,000 of Company common stock.





Non-Performing Assets . Non-performing assets totaled $1.08 million and $859,000 at March 31, 2004 and December 31, 2003, respectively. The allowance for loan losses increased 2.22%, from $4.5 million at December 31, 2003 to $4.6 million at March 31, 2004. Although the non-performing asset balance reflects an increase of $221,000 or 25.73%, non-performing assets have continued to be a very small portion of the Banks portfolio, with the balance equal to 0.28% of total loans and 0.21% of total assets. Therefore, management feels that the increase in the allowance for loan losses is adequate as of March 31, 2004.





Comparison of Operating Results for the Three Months Ended March 31, 2004 and March 31, 2003.





Net Income . Net income was $1.0 million for the three months ended March 31, 2004 compared to $1.2 million for the three months ended March 31, 2003. Diluted earnings per share decreased $0.03, from $0.18 for the three months ended March 31, 2003 to $0.15 for the same period in 2004. Return on average assets decreased from 1.06% for the three months ended March 31, 2003 to 0.81% for the same period in 2004. Return on average equity also decreased, from 9.44% for the three months ended March 31, 2003 to 7.44% for the same period in 2004. These declines are mainly attributable to lower fees collected for mortgage banking, since refinancing slowed considerably during the first three months of 2004 compared to high levels experienced during the period ended March 31, 2003. The Company also had increased costs during 2004 due to a new branch opening during the latter part of the second quarter of 2003. Additionally, the Company experienced an increase in professional fees due to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002. Further reasons for these changes are discussed in more detail in the following sections.





Net Interest Income . When comparing the quarter ended March 31, 2003 to the same period ended March 31, 2004, there was an overall decline in market interest rates which caused both lower yields and lower costs. However, these declines were partially offset by an increase of $54.9 million or 13.85% in interest-earning assets as well as an increase of $59.7 million or 13.34% in interest-bearing liabilities. Net interest income increased 12.82%, from $3.9 million for the three months ended March 31, 2003 to $4.4 million for the same period in 2004. Interest rate spread increased 0.01%, from 3.73% for the three months ended March 31, 2003 to 3.74% for the same period in 2004. Net interest margin decreased 0.04%, from 3.98% for the three months ended March 31, 2003 to 3.94% for the same period in 2004. The ratio of average interest-earning assets to average interest-bearing liabilities increased 1.32%, from 115.89% for the three months ended March 31, 2003 to 117.21% for the same period in 2004.





8




Interest Income . Interest income increased $278,000 or 5.12%, primarily due to an increase of $249,000 or 4.96% in loan interest income. This increase is the result of an increase of $49.2 million or 15.62% in average loans receivable, net. The average yield on these loans decreased, from 6.47% for the three months ended March 31, 2003 to 5.82% for the same period in 2004. Interest income on all other investments, including Federal Home Loan Bank stock, Federal Reserve stock, and interest-bearing deposits with other financial institutions, increased by $29,000 or 7.09%. The average yield for these investments decreased 0.02%, from 2.03% for the three months ended March 31, 2003 to 2.01% for the same period in 2004.





Interest Expense . Total interest expense decreased $250,000 or 16.20%, due to a decrease in interest expense paid on deposits. This decrease is primarily due to a decrease in the average cost of deposits, which declined from 1.82% for the three months ended March 31, 2003 to 1.33% for the same period in 2004. Average deposits increased $43.0 million or 12.67%, from $339.3 million for the three months ended March 31, 2003 to $382.3 million for the same period in 2004. The total cost of funds decreased 0.48%, from 1.83% for the three months ended March 31, 2003 to 1.35% for the same period in 2004.





Provision for Loan Losses . The provision for loan losses is a charge to earnings to bring the total allowance for loan losses to a level management considers adequate to provide for inherent losses in the loan portfolio. Management examines a variety of factors on a monthly basis to determine the estimated charge or credit necessary to bring the allowance to an acceptable level. These factors include the nature of the portfolio, collateral values, credit concentrations, historical loss experience along with delinquency and charge-off trends, and economic conditions. Management also identifies specific impaired loans by incorporating known information about individual loans, including borrowers sensitivity to interest rate movements and other relevant factors.





The provision for loan losses totaled $101,000 for the three months ended March 31, 2004 compared to $56,000 for the same period ended March 31, 2003. This 80.36% increase is primarily due to an increase in the loan portfolio. Net charge-offs declined $29,000, from $79,000 for the quarter ended March 31, 2003 to $50,000 for the same period ended March 31, 2004. Management feels that their evaluations and estimations were reasonable for determining the provision and the allowance for loan losses is deemed to be adequate as of March 31, 2004. 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 $434,000 or 11.11%, from $3.6 million for the three months ended March 31, 2003 to $3.2 million for the same period in 2004. This overall decrease is primarily due to a $736,000 or 55.67% decrease in net gain on sale of loans. The decrease in net gain on sale of loans is the result of a decline in loans sold during the three month period ended March 31, 2004, compared to the same period ended March 31, 2003. The decline is partially attributable to the Company retaining more loans in its portfolio during the first three months of 2004. In addition, there was a decrease in the volume of loans closed during the first quarter of 2004 when compared to the first quarter of 2003, primarily due to the large refinancing activity that occurred during the first three months of 2003. The decrease in net gain on sale of loans is offset by an increase of $169,000 or 16.02% in deposit-related service fees and charges. This is due to an increase in the Banks service fee schedule as well as an increase in the number of deposit accounts. Gain on sale of investments also increased by $55,000 or 500.00% due to increased investment activity. In the trust segment, trust service fees increased by $46,000 or 18.70% due to the increase in the overall market economy.





Non-Interest Expense . Non-interest expense increased $201,000 or 3.57%, from $5.6 million for the three months ended March 31, 2003 to $5.8 million for the same period in 2004. This is primarily due to an increase of $121,000 or 17.41% in equipment and service bureau expense, which primarily is a result of increased equipment maintenance expense, equipment rental and lease expense, and computer expense. These increases are partially attributable to the opening of the Banks Sam Ridley branch late in the second quarter of 2003. In addition, professional fees increased $82,000 or 77.36%. This increase is due to an increase in internal audit fees as well as an increase in consulting fees as a result of the implementation of Section 404 of the Sarbanes-Oxley Act of 2002. The Company also experienced an increase in information technology consulting fees and an increase in other consulting fees due to engaging a professional to assist us in designing an incentive program for the Banks new Private Banking division. These increases were partially offset by a decrease of $86,000 or 2.35% in salaries and employee benefits, which was due to decreased commission expense and other retirement expense.





9




Liquidity and Capital Resources





The Companys primary sources of funds are customer deposits, proceeds from loan principal and interest payments, sale of loans, maturing securities and Federal Home Loan Bank (FHLB) of Cincinnati advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are influenced greatly by general interest rates, other economic conditions, and competition. The Company and the Bank generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2004, cash and cash equivalents totaled $49.2 million or 9.71% of total assets, and investment securities availableforsale totaled $41.4 million. At March 31, 2004, the Bank also maintained, but did not draw upon, a line of credit with the FHLB of Cincinnati in the amount of $50.0 million.





As of March 31, 2004, the Company and the Banks regulatory capital ratios were in excess of all applicable regulatory requirements. At March 31, 2004, under the regulations of the Federal Reserve Board, the Banks actual leverage, Tier 1 risk-based, and risked-based capital ratios were 9.23%, 12.17% and 13.39%, respectively,  compared to requirements of 3.0%, 4.0% and 8.0%, respectively.  At March 31, 2004, under the regulations of the Federal Reserve Board, the Companys actual leverage, Tier 1 risk-based, and risked-based capital ratios were  10.61%, 14.16%, and 15.37%, respectively.





At March 31, 2004, the Bank had loan commitments of approximately $49.4 million. In addition, at March 31, 2004, the unused portion of lines of credit extended by the Bank was approximately $8.1 million for consumer loans and $30.7 million for commercial loans. Standby letters of credit and financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2004, the Bank had $9.2 million of letters of credit outstanding.





Impact of Inflation and Changing Prices





The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial condition and operating results in terms of historical dollars without considering the change in relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial. As a result, interest rates have a greater impact on the Companys performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.





Item 3. Quantitative and Qualitative Disclosures About Market Risk





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





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





10




The following table presents the Company's repricing gap at March 31, 2004. The table indicates that at March 31, 2004 the Company was asset sensitive up to six months and had a positive cumulative gap for up to one year. This would indicate an increase in earnings in a rising rate environment.





Within
Six
Months
Six
Months
to One
Year
After
One to
Three
Years
After
Three
to Five
Years
Over
Ten
Years
Total(in thousands)Interest-earning assets:Loans receivable, net

$
132,895

39,121

58,833

129,819

19,195

379,863FHLB and FRB stock


3,033

-

-

-

-

3,033Investment securities available-for-sale


3,482

291

7,094

29,521

982

41,370Interest-bearing deposits with other financial institutions


27,160

-

-

-

-

27,160Total rate sensitive assets

$
166,570

39,412

65,927

159,340

20,177

451,426Interest-bearing liabilities:Deposits:Savings deposits

$
2,297

2,297

9,186

9,186

-

22,966Demand deposits


36,956

36,956

90,350

32,102

-

196,364Certificates of deposit


62,240

43,431

34,553

14,221

10

154,455Borrowings


27

27

2,109

109

604

2,876Total rate sensitive liabilities

$
101,520

82,711

136,198

55,618

614

376,661Excess (deficiency) of interest sensitive assets over interest sensitive liabilities

$
65,050

(43,299
)
(70,271
)
103,722

19,563

74,765Cumulative excess (deficiency) of interest sensitive assets

$
65,050

21,751

(48,520
)
55,202

74,765

74,765Cumulative ratio of interest-earning assets to interest-bearing liabilities


164.08
%
111.81
%
84.86
%
114.68
%
119.85
%
119.85
%Interest sensitivity gap to total rate sensitive assets


14.41
%
(9.59)
%
(15.57)
%
22.98
%
4.33
%
16.56
%Ratio of interest-earning assets to interest -bearing liabilities


164.08
%
47.65
%
48.41
%
286.49
%
3,286.16
%
119.85
%Ratio of cumulative gap to total rate sensitive assets


14.41
%
4.82
%
(10.75)
%
12.23
%
16.56
%
16.56
%








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 growth conditions would be a decline of 17 basis points. The magnitude of potential gain for a 100 basis point increase under projected growth conditions would be an increase of 11 basis points.





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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.








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Part II. Other Information





Item 1. Legal Proceedings





None.





Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities





(a)  Not applicable.


(b)  Not applicable.


(c)  Not applicable.


(d)  Not applicable.


(e)  The following table provides information about purchases by the Company during the quarter ended March 31, 2004 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
sharespurchased
Average price
paidper share
Total number of shares purchased as part of publiclyannounced plans or programs
Maximum number of shares that may yet be purchasedunder the plans or programsJanuary 1, 2004 through January 31, 2004


-

$
-


-


407,304February 1, 2004 through February 29, 2004


-


-


-


407,304March 1, 2004 through March 31, 2004


1,400


15.75


1,400


405,904Total


1,400


15.75


1,400





On September 26, 2001, the Company announced its plans to implement a program to repurchase 710,480 shares of its common stock outstanding (stock repurchase program). The stock repurchase program does not have an expiration date and unless terminated earlier by resolution of the Companys board of directors, will expire when the Company has repurchased all shares authorized for repurchase thereunder. The Company has no other programs to repurchase common stock at this time.





Item 3. Defaults Upon Senior Securities





Not applicable.





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





None.





Item 5. Other Information





None.





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Item 6. Exhibits and Reports on Form 8-K





(a) Exhibits





31.1  CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)


31.2  CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)


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


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





(b) Reports on Form 8-K





The Company furnished a report on Form 8-K under Item 7, Item 9 and Item 12 dated January 30, 2004, reporting the announcement of the Companys earnings for 2003.





Notwithstanding the foregoing, information furnished under Item 9 and Item 12 of our Current Reports on Form 8-K, including the related Exhibits, shall not be deemed to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934.





14





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











CAVALRY BANCORP, INC.Date: May 6, 2004
byEd C. Loughry, Jr.Chairman of the Board and Chief Executive Officer











Date: May 6, 2004
byHillard C. GardnerSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)





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