CAVALRY BANCORP INC - 10-Q Quarterly Report

Part I	Financial Information	Page

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003	1

	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2004 and 2003	2

	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2004 and 2003	3

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2004 and 2003	4

	Notes to Consolidated Financial Statements (unaudited)	5-7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7-10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	10-11

Item 4.	Controls and Procedures	12

Part II	Other Information	13

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	13

Item 6.	Exhibits and Reports on Form 8-K	14

Signatures		15

	March 31,			December 31,
Assets	2004			2003

	(Unaudited)
Cash	$	22,039			32,946
Interest-bearing deposits with other financial institutions		27,160			37,967

Cash and cash equivalents		49,199			70,913
Investment securities available-for-sale at fair value (amortized cost: $41,243 and $55,136 at March 31, 2004 and December 31, 2003, respectively)		41,370			55,123
Loans held for sale, at estimated fair value		1,630			2,648
Loans receivable, net of allowances for loan losses of $4,576 at March 31, 2004 and $4,525 at December 31, 2003		378,233			350,412
Accrued interest receivable		1,593			1,668
Office properties and equipment, net		18,157			18,431
Required investments in stock of Federal Home Loan Bank and Federal Reserve Bank, at cost		3,033			2,992
Foreclosed assets		7			-
Bank owned life insurance		8,367			8,308
Goodwill		1,772			1,772
Other assets		3,063			2,905

Total assets	$	506,424			515,172


Liabilities and Shareholders’ Equity

Liabilities:
Deposits:
Non-interest-bearing	$	67,008			72,443
Interest-bearing		373,785			381,814

Total deposits		440,793			454,257
Advances from Federal Home Loan Bank of Cincinnati		2,876			2,889
Accrued expenses and other liabilities		7,174			3,599

Total liabilities		450,843			460,745

Shareholders’ equity:
Preferred stock, no par value
Authorized- 250,000 shares; none issued or outstanding at March 31, 2004 and December 31, 2003		-			-
Common stock, no par value
Authorized- 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			10,175
Retained earnings		47,260			46,633
Unallocated ESOP shares		(2,195	)		(2,373	)
Accumulated other comprehensive income (loss), net of tax		78			(8	)

Total shareholders’ equity		55,581			54,427

Total liabilities and shareholders’ equity	$	506,424			515,172

	Three Months Ended
	March 31,
	2004		2003

Interest income:
Loans	$	5,273		5,024
Investment securities:
Taxable		341		283
Non-taxable		7		-
Other		90		126

Total interest income		5,711		5,433

Interest expense – deposits		1,269		1,519
Interest expense – borrowings		24		24

Total interest expense		1,293		1,543

Net interest income		4,418		3,890
Provision for loan losses		101		56

Net interest income after provision for loan losses		4,317		3,834

Non-interest income:
Servicing income		45		71
Gain on sale of loans, net		586		1,322
Gain on sale of other assets		53		-
Gain on sale of investment securities, net		66		11
Deposit servicing fees and charges		1,224		1,055
Trust service fees		292		246
Commissions and other non-banking fees		655		616
Other operating income		264		298

Total non-interest income		3,185		3,619

Non-interest expenses:
Salaries and employee benefits		3,573		3,659
Occupancy expense		320		315
Supplies, communications and other office expenses		219		253
Advertising expense		151		101
Equipment and service bureau expense		816		695
Professional fees		188		106
Other taxes		115		97
Other operating expense		377		332

Total non-interest expenses		5,759		5,558

Income before income taxes		1,743		1,895
Income tax expense		727		727

Net income	$	1,016		1,168

Basic earnings per share	$	0.16		0.18

Diluted earnings per share	$	0.15		0.18

Weighted average shares outstanding -Basic		6,486,988		6,365,767

Weighted average shares outstanding -Diluted		6,732,839		6,579,436

	Three Months Ended
	March 31,
		2004		2003


Net income	$	1,016		1,168
Other 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

	2004			2003


Operating activities:
Net cash provided by operating activities	$	6,358			19,088

Investing activities:
Increase in loans receivable, net		(28,007	)		(15,604	)
Principal payments on investment securities		405			3,473
Purchase of investment securities available-for-sale		(26,619	)		(18,880	)
Proceeds from maturities of investment securities		10,650			12,550
Proceeds from sales of investment securities available-for-sale		29,541			2,511
Purchase of Federal Reserve Stock		(18	)		-
Purchase of office properties and equipment		(168	)		(965	)
Proceeds from sale of assets		32			93

Net 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			73,162

Cash and cash equivalents, end of period	$	49,199			64,693

Supplement Disclosures of Cash Flow Information:
Payments during the period for:
Interest	$	1,287			1,544

Income taxes	$	-			-

Supplemental Disclosures of Noncash Investing and Financing Activities:

Increase in deferred tax asset (liability) related to unrealized gains (losses) on investments	$	(54	)		23

Net unrealized gains (losses) on investment securities available for sale	$	140			(60	)

Dividends declared and payable	$	410			298

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 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,” pro vides 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 Ended
	March 31,
	2004			2003

	(Dollars in thousands, except per share data)
Net income:
As reported	$	1,016			1,168
Deduct: 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			1,135

Earnings per share:
Basic – as reported	$	0.16			0.18

Basic – pro forma	$	0.14			0.18

Diluted – as reported	$	0.15			0.18

Diluted – pro forma	$	0.14			0.17

	Three Months Ended March 31,
	2004		2003

Basic EPS:
Net income	$	1,016,000		1,168,000
Average common shares outstanding		6,486,988		6,365,767

Earnings per share - basic	$	0.16		0.18

Diluted EPS:
Net income	$	1,016,000		1,168,000

Average common shares outstanding		6,486,988		6,365,767
Dilutive effect of stock options		245,851		213,669

Average dilutive shares outstanding		6,732,839		6,579,436

Earnings per share - diluted	$	0.15		0.18

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.

	Banking		Mortgage Banking			Trust		Insurance		Eliminations			Consolidated
For the three months ended
March 31, 2004:
Interest revenue	$	5,711		-			-		-		-			5,711
Other income-external customers		1,624		45			292		519		-			2,480
Interest expense		1,293		-			-		-		-			1,293
Depreciation and amortization		360		45			17		10		-			432
Other significant items:
Provision for loan losses		101		-			-		-		-			101
Gain on sales of assets		119		586			-		-		-			705
Segment profit (loss)		1,792		(154	)		67		52		(14	)		1,743
Segment assets		503,066		1,868			357		3,063		(1,930	)		506,424

	Banking		Mortgage Banking		Trust		Insurance		Eliminations			Consolidated
For the three months ended
March 31, 2003:
Interest revenue	$	5,433		-		-		-		-			5,433
Other income-external customers		1,378		71		246		591		-			2,286
Interest expense		1,543		-		-		-		-			1,543
Depreciation and amortization		301		90		16		15		-			422
Other significant items:
Provision for loan losses		56		-		-		-		-			56
Gain on sales of assets		11		1,322		-		-		-			1,333
Segment profit		1,699		89		25		100		(18	)		1,895
Segment assets		453,497		3,542		379		3,078		(2,863	)		457,633

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 ch anges 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.

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.

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.

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 la tter 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 inte rest-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.

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.

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.

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.

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.

	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		379,863
FHLB and FRB stock		3,033		-		-		-		-		3,033
Investment securities available-for-sale		3,482		291		7,094		29,521		982		41,370
Interest-bearing deposits with other financial institutions		27,160		-		-		-		-		27,160

Total rate sensitive assets	$	166,570		39,412		65,927		159,340		20,177		451,426


Interest-bearing liabilities:
Deposits:
Savings deposits	$	2,297		2,297		9,186		9,186		-		22,966
Demand deposits		36,956		36,956		90,350		32,102		-		196,364
Certificates of deposit		62,240		43,431		34,553		14,221		10		154,455
Borrowings		27		27		2,109		109		604		2,876

Total rate sensitive liabilities	$	101,520		82,711		136,198		55,618		614		376,661

Excess (deficiency) of interest sensitive assets over interest sensitive liabilities	$	65,050		(43,299	)	(70,271	)	103,722		19,563		74,765
Cumulative excess (deficiency) of interest sensitive assets	$	65,050		21,751		(48,520	)	55,202		74,765		74,765
Cumulative 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.

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 t hose entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

ISSUER PURCHASES OF EQUITY SECURITIES
Period	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 programs

January 1, 2004 through January 31, 2004		-	$	-		-		407,304
February 1, 2004 through February 29, 2004		-		-		-		407,304
March 1, 2004 through March 31, 2004		1,400		15.75		1,400		405,904

Total		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.

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)

		CAVALRY BANCORP, INC.

Date: May 6, 2004	by

		Ed C. Loughry, Jr.
		Chairman of the Board and Chief Executive Officer

Date: May 6, 2004	by

		Hillard C. Gardner
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

x	Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2004 or

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from___________ to ___________