x	Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2003 or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from___________ to ___________

(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) 893-1234

Registrant’s telephone number, including area code

Yes x

No o

Yes x

No o

		September 30,			December 31,
Assets		2003			2002
			(Unaudited)
Cash		$	19,714			21,200
Interest-bearing deposits with other financial institutions			20,935			51,962
Cash and cash equivalents			40,649			73,162
Investment securities available-for-sale at fair value (amortized cost: $61,698 and $37,728 at September 30, 2003 and December 31, 2002, respectively)			61,893			37,926
Loans held for sale, at estimated fair value			5,502			17,800
Loans receivable, net of allowances for loan losses of $4,570 at September 30, 2003 and $4,657 at December 31, 2002			331,200			300,524
Accrued interest receivable			1,525			1,577
Office properties and equipment, net			18,763			18,108
Required investments in stock of Federal Home Loan Bank
and Federal Reserve Bank, at cost			2,968			2,874
Foreclosed assets, net			98			203
Bank owned life insurance			8,211			7,921
Goodwill			1,772			1,772
Other assets			3,122			2,498
Total assets		$	475,703			464,365
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing		$	64,402			57,343
Interest-bearing			349,711			350,409
Total deposits			414,113			407,752
Advances from Federal Home Loan Bank of Cincinnati			2,903			2,944
Accrued expenses and other liabilities			5,103			3,923
Total liabilities			422,119			414,619
Shareholders’ equity:
Preferred stock, no par value
Authorized- 250,000 shares; none issued or outstanding at
September 30, 2003 and December 31, 2002			-			-
Common stock, no par value
Authorized- 49,750,000 shares; issued and outstanding
6,820,179 and 6,830,679 at September 30, 2003
and December 31, 2002, respectively			9,850			9,138
Retained earnings			46,161			43,543
Unallocated ESOP Shares			(2,547	)		(3,057	)
Accumulated other comprehensive income, net of tax			120			122
Total shareholders’ equity			53,584			49,746
Total liabilities and shareholders’ equity		$	475,703			464,365

	1

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Interest and dividend income:
Loans		$	5,055			5,224			15,124			15,754
Investment securities			307			340			896			1,286
Other			82			174			309			503
Total interest and dividend income			5,444			5,738			16,329			17,543
Interest expense – deposits			1,303			1,777			4,221			5,473
Interest expense – borrowings			25			12			74			23
Total interest expense			1,328			1,789			4,295			5,496
Net interest income			4,116			3,949			12,034			12,047
Provision for loan losses			-			115			101			278
Net interest income after provision
for loan losses			4,116			3,834			11,933			11,769
Non-interest income:
Servicing income			45			65			176			190
Gain on sale of loans, net			1,687			974			4,711			2,124
Gain on sale of investment securities, net			-			-			11			-
Deposit servicing fees and charges			1,208			971			3,455			2,772
Trust service fees			246			280			740			832
Commissions and other non-banking fees			676			602			1,995			1,694
Other operating income			196			239			579			700
Total non-interest income			4,058			3,131			11,667			8,312
Non-interest expenses:
Salaries and employee benefits			3,962			3,186			11,498			8,995
Occupancy expense			346			333			979			906
Supplies, communications and other
office expenses			286			322			791			844
Federal insurance premiums			15			15			47			48
Advertising expense			107			101			330			364
Equipment and service bureau expense			780			650			2,211			1,980
Other operating expense			563			585			1,645			1,475
Total non-interest expenses			6,059			5,192			17,501			14,612
Income before income taxes			2,115			1,773			6,099			5,469
Income tax expense			835			713			2,373			2,167
Net income		$	1,280			1,060			3,726			3,302
Basic earnings per share		$	0.20			0.17			0.58			0.51
Diluted earnings per share		$	0.19			0.16			0.56			0.50
Weighted average shares outstanding -Basic			6,418,261			6,396,215			6,392,235			6,442,389
Weighted average shares outstanding -Diluted			6,713,772			6,568,172			6,666,276			6,604,630

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Net income		$	1,280			1,060			3,726			3,302
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities
available-for-sale			30			34			5			(37	)
Reclassification adjustment for gains included in net income			-			-			(7	)		-
Comprehensive income		$	1,310			1,094			3,724			3,265

	3

		2003			2002
Operating activities:
Net cash provided by operating activities		$	19,658			10,864
Investing activities:
Increase in loans receivable, net			(31,849	)		(19,043	)
Principal payments on investment securities			5,572			3,042
Purchase of investment securities
available-for-sale			(76,080	)		(40,889	)
Purchase of Federal Reserve Stock			-			(1,240	)
Proceeds from maturities of investment securities			43,789			34,510
Proceeds from sales of investment securities
Available-for-sale			2,500			-
Purchase of office properties and equipment			(1,984	)		(3,535	)
Proceeds from sale of foreclosed assets			743			340
Cash paid in acquisition of Miller & Loughry			-			(1,944	)
Net cash used in investing activities			(57,309	)		(28,759	)
Financing activities:
Net increase (decrease) in deposits			6,361			(1,051	)
Retirement of common stock			(137	)		(2,423	)
Proceeds from the exercise of stock options			-			12
Dividends paid			(1,045	)		(913	)
Net increase (decrease) in borrowings			(41	)		1,959
Net cash provided by (used in)
financing activities			5,138			(2,416	)
Decrease in cash and cash equivalents			(32,513	)		(20,311	)
Cash and cash equivalents, beginning of period			73,162			69,281
Cash and cash equivalents, end of period		$	40,649			48,970
Supplement Disclosures of Cash
Flow Information:
Payments during the period for:
Interest		$	4,365			5,498
Income taxes		$	2,700			2,200
Supplemental Disclosures of Noncash
Investing and Financing Activities :
Increase in deferred tax asset related
to unrealized loss on investments		$	1			24
Net unrealized losses on investment
securities available for sale		$	(3	)		(61	)
Dividends declared and payable		$	409			317

	4

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Net income:
As reported		$	1,280			1,060			3,726			3,302
Deduct: Total stock-based employee compensation expense determined under fair value methods for all awards granted, net of related tax effects			(32	)		(33	)		(95	)		(99	)
Pro forma net income		$	1,248			1,027			3,631			3,203
Earnings per share:
Basic - as reported		$	0.20			0.17			0.58			0.51
Basic – pro forma		$	0.19			0.16			0.57			0.50
Diluted – as reported		$	0.19			0.16			0.56			0.50
Diluted – pro forma		$	0.19			0.16			0.54			0.49

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Basic EPS:
Net income		$	1,280,000			1,060,000			3,726,000			3,302,000
Average common shares outstanding			6,418,261			6,396,215			6,392,235			6,442,389
Earnings per share - basic		$	0.20			0.17			0.58			0.51
Diluted EPS:
Net income		$	1,280,000			1,060,000			3,726,000			3,302,000
Average common shares outstanding			6,418,261			6,396,215			6,392,235			6,442,389
Dilutive effect of stock options			295,511			171,957			274,041			162,241
Average dilutive shares outstanding			6,713,772			6,568,172			6,666,276			6,604,630
Earnings per share - diluted		$	0.19			0.16			0.56			0.50

	6

For the three months ended			Banking			Mortgage Banking			Trust			Insurance			Eliminations			Consolidated
September 30, 2003:
Interest revenue		$	5,444			-			-			-			-			5,444
Other income-external customers			1,539			45			246			541			-			2,371
Interest expense			1,328			-			-			-			-			1,328
Depreciation and amortization			329			92			16			15			-			452
Other significant items:
Provision for loan losses			-			-			-			-			-			-
Gain on sales of assets			-			1,687			-			-			-			1,687
Segment profit			1,836			264			37			75			(97	)		2,115
Segment assets			469,050			5,733			335			2,855			(2,270	)		475,703

For the three months ended			Banking			Mortgage Banking			Trust			Insurance			Eliminations			Consolidated
September 30, 2002:
Interest revenue		$	5,738			-			-			-			-			5,738
Other income-external customers			1,295			65			280			530			(37	)		2,133
Interest expense			1,789			-			-			-			-			1,789
Depreciation and amortization			330			52			29			16			-			427
Other significant items:
Provision for loan losses			115			-			-			-			-			115
Gain on sales of assets			24			974			-			-			-			998
Segment profit			1,740			-			52			83			(102	)		1,773
Segment assets			427,664			8,408			395			2,454			(2,265	)		436,656

For the nine months ended			Banking			Mortgage Banking			Trust			Insurance			Eliminations			Consolidated
September 30, 2003:
Interest revenue		$	16,329			-			-			-			-			16,329
Other income-external customers			4,360			176			740			1,669			-			6,945
Interest expense			4,295			-			-			-			-			4,295
Depreciation and amortization			942			274			50			45			-			1,311
Other significant items:
Provision for loan losses			101			-			-			-			-			101
Gain on sales of assets			11			4,711			-			-			-			4,722
Segment profit			5,380			713			102			191			(287	)		6,099
Segment assets			469,050			5,733			335			2,855			(2,270	)		475,703

For the nine months ended			Banking			Mortgage Banking			Trust			Insurance			Eliminations			Consolidated
September 30, 2002:
Interest revenue		$	17,543			-			-			-			-			17,543
Other income-external customers			3,802			190			832			1,352			(37	)		6,139
Interest expense			5,496			-			-			-			-			5,496
Depreciation and amortization			845			143			41			34			-			1,063
Other significant items:
Provision for loan losses			278			-			-			-			-			278
Gain on sales of assets			49			2,124			-			-			-			2,173
Segment profit (loss)			5,359			(5	)		168			168			(221	)		5,469
Segment assets			427,664			8,408			395			2,454			(2,265	)		436,656

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

	11

 

The following table presents the Company's repricing gap at September 30, 2003. The table indicates that at September 30, 2003 the Company was asset sensitive up to one year and had a positive cumulative GAP for all time periods. 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		$	113,210			45,462			52,875			108,620			16,535			336,702
FHLB & FRB stock			2,968			-			-			-			-			2,968
Investment securities available-for-sale			41,825			11,144			4,511			4,386			27			61,893
Interest-bearing deposits with other
financial institutions			20,935			-			-			-			-			20,935
Total rate sensitive assets		$	178,938			56,606			57,386			113,006			16,562			422,498
Interest-bearing liabilities:
Deposits:
Savings deposits		$	2,157			2,157			8,628			8,634			-			21,576
Demand deposits			112,286			7,210			28,841			28,841			-			177,178
Certificates of deposit			52,856			46,992			31,499			19,600			10			150,957
Borrowings			27			27			1,109			1,109			631			2,903
Total rate sensitive liabilities		$	167,326			56,386			70,077			58,184			641			352,614
Excess (deficiency) of interest sensitive assets over interest sensitive liabilities		$	11,612			220			(12,691	)		54,822			15,921			69,884
Cumulative excess (deficiency) of
interest sensitive assets		$	11,612			11,832			(859	)		53,963			69,884			69,884
Cumulative ratio of interest-earning assets
to interest-bearing liabilities			106.94	%		105.29	%		99.71	%		115.33	%		119.82	%		119.82	%
Interest sensitivity gap to total rate sensitive assets			2.75	%		0.05	%		(3.00)	%		12.98	%		3.77	%		16.54	%
Ratio of interest-earning assets to
interest -bearing liabilities			106.94	%		100.39	%		81.89	%		194.22	%		2,583.78	%		119.82	%
Ratio of cumulative gap to total rate sensitive assets			2.75	%		2.80	%		(0.20)	%		12.77	%		16.54	%		16.54	%

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 dec line of 13 basis points.

 

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 15 d-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 relatin g 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.

	12

Part II. Other Information

Item 1. Legal Proceedings

None

Item 2. Changes in Securities and use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

None

Item 5. Other Information

None

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

 

                (a) Exhibits

31.1    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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 9 and Item 12 dated July 25, 2003, reporting the announcement of the Company’s earnings for the second quarter of 2003.

Notwithstanding the foregoing, information furnished under Items 9 and 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.

	13

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

		CAVALRY BANCORP, INC.
Date: November 7, 2003	by
		Ed C. Loughry, Jr.
		Chairman of the Board and Chief Executive Officer

Date: November 7, 2003	by
		Hillard C. Gardner
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

	14