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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    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 0-27393
 Civitas BankGroup, Inc.
  Tennessee
    
    62-1297760(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 (Address of principal executive offices and Zip Code)
 (Registrants telephone number, including area code)
 
 Title of Each Class
    
    Name of Each Exchangeon which RegisteredCommon Stock, $0.50 par value
    
    Nasdaq Global Market
 
 o þ
 o þ
 þ o
 o
  o þ o
 o þ




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##### 



PAGEPART IITEM 1.
    
    BUSINESS
    
    
    2ITEM 1A.
    
    RISK FACTORS
    
    
    11ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    14ITEM 2.
    
    PROPERTIES
    
    
    14ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    14ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    14PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    15ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    16ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    17ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    37ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    40ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    81ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    81ITEM 9 B.
    
    OTHER INFORMATION
    
    
    81PART IIIITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    82ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    82ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
    
    
    82ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
    
    
    83ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    83ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    83Ex-10.7 Director Compensation SummaryEx-21.1 Subsidiaries of the CompanyEx-23.1 Crowe Chizek ConsentEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 Certification




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1




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PART I
 
 ITEM 1. BUSINESS.
 General.
      History.
  Joint Ventures.
 2




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Market Areas
   County
    
    # of Branches
    
    Amount of Deposits
    
    % of Total Deposits
    
    % of Market ShareWilliamson
    
    
    4
    
    
    $
    363,524
    
    
    
    55.6
    %
    
    
    8.6
    %Sumner
    
    
    4
    
    
    
    141,564
    
    
    
    21.7
    %
    
    
    7.8
    %Davidson
    
    
    1
    
    
    
    57,374
    
    
    
    8.8
    %
    
    
    0.4
    %Smith
    
    
    2
    
    
    
    56,136
    
    
    
    8.6
    %
    
    
    13.2
    %Macon
    
    
    1
    
    
    
    34,781
    
    
    
    5.3
    %
    
    
    9.6
    %
  Competition
  Operational Strategies
 Local Decision Making
 3




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Relationship Banking
 Full Line of Banking Products
 Lending and Deposit Activities
  Construction Loans
 Commercial Real Estate Loans
 4




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Residential Real Estate Loans
 Commercial Business Loans
 Consumer Loans
 Lending Procedures and Loan Approval Process
  5




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Deposit Activities
 Asset/Liability Management
 Investment Activities
  Monetary Policies.
 Supervision and Regulation
  General.
 6




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Branching. de
novo
 Community Reinvestment Act.
 Capital Requirements Generally.
 Risk-Based Capital Requirements.
 7




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
    
    the allowance for possible credit losses in an amount up to 1.25% of risk-weighted assets;
    
    cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus;
    
    hybrid capital instruments defined as instruments with characteristics of both
debt and equity, perpetual debt and mandatory convertible debt securities; and
    
    in an amount up to 50% of Tier 1 capital, eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or more,
including related surplus.
   Leverage Capital Requirements.
  8




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Liability for Bank Subsidiaries.
 Dividend Restrictions.
   Deposit Insurance Assessments.
 9




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Effects of Governmental Policies.
    Available Information
  10




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Employees
  
 ITEM 1A. RISK FACTORS
 Investing in the Companys common stock involves various risks which are particular to the Company,
its industry and its market area. Several risk factors regarding investing in the Companys common
stock are discussed below. This listing should not be considered as all-inclusive. If any of the
following risks were to occur, the Company may not be able to conduct its business as currently
planned and its financial condition or operating results could be negatively impacted. These
matters could cause the trading price of the Companys common stock to decline in future periods.
 The Company may be unable to consummate its proposed merger with Greene County.
  Fluctuations in interest rates could adversely affect the Companys net interest income and impact
funding sources.
    The Company has relatively high amounts of real estate construction and development loans, which
have a greater credit risk than residential mortgage loans or a more diversified loan portfolio.
  11




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Competition with other banking institutions could adversely affect the Companys profitability.
  The amount of common stock owned by the Companys officers and directors may make it more difficult
to obtain shareholder approval of potential takeovers they oppose.
  The Companys key management personnel may leave at any time.
  The Company, as well as its bank subsidiary, operate in a highly regulated environment and are
supervised and examined by various federal and state regulatory agencies who may adversely affect
the Companys ability to conduct business.
  
    
    meeting explicit standards as to capital and financial condition;
    
    limitations on the permissible types, amounts and extensions of credit and investments;
    
    restrictions on permissible non-banking activities; and
    
    restrictions on dividend payments.
   12




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The Company risks losing customers because it competes with often larger, more comprehensive
financial service institutions for customer lending and investment business in the markets it
serves.
  The Company is geographically concentrated in the Nashville, Tennessee MSA, and changes in local
economic conditions impact its profitability.
   The Companys common stock is traded on the Nasdaq Global Market and, as such, has less liquidity
than the average stock quoted on a national securities exchange.
   13




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Holders of the Companys junior subordinated debentures have rights that are senior to those of the
Companys common shareholders.
  
 ITEM 1B. Unresolved Staff Comments
  
 ITEM 2. Properties.
  
 ITEM 3. Legal Proceedings.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders.
  14




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PART II
 
 ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
  CashPrices
    
    dividendsHigh
    
    Low
    
    Close
    
    declared2006:First Quarter
    
    $
    7.65
    
    
    $
    6.90
    
    
    $
    7.35
    
    
    $
    0.00Second Quarter
    
    
    7.75
    
    
    
    6.95
    
    
    
    7.50
    
    
    
    0.02Third Quarter
    
    
    8.00
    
    
    
    7.40
    
    
    
    7.75
    
    
    
    0.02Fourth Quarter
    
    
    8.24
    
    
    
    7.11
    
    
    
    7.94
    
    
    
    0.022005:First Quarter
    
    $
    8.50
    
    
    $
    7.32
    
    
    $
    7.80
    
    
    $
    0.00Second Quarter
    
    
    7.75
    
    
    
    6.50
    
    
    
    7.24
    
    
    
    0.00Third Quarter
    
    
    8.40
    
    
    
    7.05
    
    
    
    8.00
    
    
    
    0.00Fourth Quarter
    
    
    8.15
    
    
    
    7.50
    
    
    
    7.60
    
    
    
    0.00
    15




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ITEM 6. Selected Financial Data
  As of and for years ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share amount)Summary of OperationsInterest income
    
    $
    53,456
    
    
    $
    40,357
    
    
    $
    32,940
    
    
    $
    31,622
    
    
    $
    31,761Interest expense
    
    
    29,309
    
    
    
    19,107
    
    
    
    13,123
    
    
    
    12,162
    
    
    
    13,505Net interest income
    
    
    24,147
    
    
    
    21,250
    
    
    
    19,817
    
    
    
    19,460
    
    
    
    18,256Provision for loan losses
    
    
    2,375
    
    
    
    993
    
    
    
    1,446
    
    
    
    3,083
    
    
    
    4,663Noninterest income
    
    
    10,352
    
    
    
    7,571
    
    
    
    7,793
    
    
    
    6,261
    
    
    
    6,830Noninterest expense
    
    
    21,882
    
    
    
    22,209
    
    
    
    22,917
    
    
    
    20,382
    
    
    
    18,690Income before income taxes
    
    
    10,242
    
    
    
    5,619
    
    
    
    3,247
    
    
    
    2,256
    
    
    
    1,733Income tax expense
    
    
    3,557
    
    
    
    1,715
    
    
    
    941
    
    
    
    823
    
    
    
    596Income from continuing operations
    
    
    6,685
    
    
    
    3,904
    
    
    
    2,306
    
    
    
    1,433
    
    
    
    1,137Basic earnings per share
 continuing operations
    
    
    0.42
    
    
    
    0.24
    
    
    
    0.13
    
    
    
    0.09
    
    
    
    0.08Diluted earnings per share
 continuing operations
    
    
    0.42
    
    
    
    0.24
    
    
    
    0.13
    
    
    
    0.09
    
    
    
    0.08Cash dividends per common share
    
    
    0.06
    
    
    
    0.00
    
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.06Book value per common share
    
    
    3.39
    
    
    
    2.98
    
    
    
    3.28
    
    
    
    3.19
    
    
    
    2.96Selected Period-End BalancesTotal assets of continuing operations
    
    $
    898,166
    
    
    $
    749,516
    
    
    $
    703,678
    
    
    $
    643,543
    
    
    $
    534,183Loans, net of unearned income
    
    
    614,037
    
    
    
    476,421
    
    
    
    430,617
    
    
    
    412,609
    
    
    
    391,934Allowance for loan losses
    
    
    6,298
    
    
    
    4,765
    
    
    
    4,427
    
    
    
    5,688
    
    
    
    5,761Total deposits
    
    
    732,520
    
    
    
    600,766
    
    
    
    566,873
    
    
    
    520,505
    
    
    
    437,607Other borrowings and subordinated debt
    
    
    105,906
    
    
    
    97,452
    
    
    
    90,451
    
    
    
    79,565
    
    
    
    60,688Shareholders equity
    
    
    53,945
    
    
    
    47,225
    
    
    
    57,736
    
    
    
    54,741
    
    
    
    45,473Selected Operating RatiosAnnual % change in loans
    
    
    28.89
    %
    
    
    10.64
    %
    
    
    4.36
    %
    
    
    5.28
    %
    
    
    6.50
    %Annual % change in assets
    
    
    19.83
    %
    
    
    6.51
    %
    
    
    9.34
    %
    
    
    20.47
    %
    
    
    13.64
    %Return on period end assets
    
    
    0.74
    %
    
    
    0.52
    %
    
    
    0.33
    %
    
    
    0.22
    %
    
    
    0.21
    %Return on period end equity
    
    
    12.39
    %
    
    
    8.27
    %
    
    
    3.99
    %
    
    
    2.62
    %
    
    
    2.50
    %
  16




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ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 .
 PERFORMANCE OVERVIEW
 General
  
    
    Income from continuing operations for the year ended December 31, 2006 totaled $6.7
million compared to $3.9 million for the same period for 2005, a 71.8% increase.
    
    Assets increased from $749.5 million at December 31, 2005 to $898.2 million at December
31, 2006, a $148.7 million, or 19.8% increase.
    
    Funds invested in securities increased slightly from the December 31, 2005 balance to $209.9 million.
    
    Loans increased to $614.0 million at December 31, 2006, up 28.9% from $476.4 million at year end 2005.
    
    Nonperforming loans remained level at $1.9 million at December 31, 2006.
    
    Delinquency ratio declined in 2006 from 0.60% to 0.36%.
    
    Deposits totaled $732.5 million, up 21.9% from $600.8 million at year end 2005.
    
    Net interest margin declined to 3.13% from 3.19% in 2005, primarily due to increased cost of funds.
    
    Effective March 31, 2006, the Company completed the sale of its affiliate, The Murray Banc Holding Company.
    
    The Company announced its plan to sell its ownership in Insurors Bank of Tennessee,
which sale was consummated on February 5, 2007.
    
    The Company announced it had purchased a branch location in Murfreesboro with plans to
open a new branch in the second quarter of 2007, pending regulatory approval. The Company
also signed a lease to open a branch in the Cool Springs area of Williamson County.
 CRITICAL ACCOUNTING POLICIES
    17




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Results of Operations Year ended December 31, 2006 Compared to the Year ended December 31, 2005:
 Net Earnings
  Net Interest Income
  Interest Income
  Interest Expense
  18




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Provision for Loan Losses
  Noninterest Income
  Noninterest Expense
  Results of Operations Year ended December 31, 2005 Compared to the Year ended December 31, 2004:
 Net Earnings
  19




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Net Interest Income
  Interest Income
  Interest Expense
  Provision for Loan Losses
  20




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Noninterest Income
  Noninterest Expense
  21




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Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense  dollars in thousands
  December 31, 2006
    
    
    December 31, 2005
    
    
    2006 / 2005 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate1
    
    
    TotalNet loans 2
    
    $
    548,169
    
    
    
    7.76
    %
    
    $
    42.560
    
    
    $
    456,657
    
    
    
    6.78
    %
    
    $
    30,972
    
    
    $
    6,205
    
    
    $
    5,383
    
    
    $
    11,588Securities
    
    
    214,319
    
    
    
    4.88
    %
    
    
    10,454
    
    
    
    200,831
    
    
    
    4.49
    %
    
    
    9,019
    
    
    
    606
    
    
    
    829
    
    
    
    1,435Federal funds sold
    
    
    4,276
    
    
    
    5.05
    %
    
    
    216
    
    
    
    4,635
    
    
    
    2.61
    %
    
    
    121
    
    
    
    (9
    )
    
    
    104
    
    
    
    95Other interest bearing assets
    
    
    4,064
    
    
    
    5.56
    %
    
    
    226
    
    
    
    4,783
    
    
    
    5.12
    %
    
    
    245
    
    
    
    (37
    )
    
    
    18
    
    
    
    (19
    )Total earning assets
    
    
    770,828
    
    
    
    6.93
    %
    
    $
    53,456
    
    
    
    666,906
    
    
    
    6.05
    %
    
    $
    40,357
    
    
    $
    6,765
    
    
    $
    6,334
    
    
    $
    13,099Cash and due from banks
    
    
    20,582
    
    
    
    
    
    
    
    
    
    
    
    24,514Allowance for loan losses
    
    
    (5,437
    )
    
    
    
    
    
    
    
    
    
    
    (4,859
    )Other assets
    
    
    33,820
    
    
    
    
    
    
    
    
    
    
    
    34,589Total assets
    
    $
    819,793
    
    
    
    
    
    
    
    
    
    
    $
    721,150Deposits:NOW
    
    $
    155,063
    
    
    
    3.20
    %
    
    $
    4,967
    
    
    $
    136,034
    
    
    
    2.32
    %
    
    $
    3,154
    
    
    $
    441
    
    
    $
    1,372
    
    
    $
    1,813Money market
    
    
    49,956
    
    
    
    2.91
    %
    
    
    1,455
    
    
    
    57,560
    
    
    
    2.55
    %
    
    
    1,465
    
    
    
    (194
    )
    
    
    184
    
    
    
    (10
    )Savings
    
    
    15,843
    
    
    
    0.54
    %
    
    
    85
    
    
    
    19,591
    
    
    
    0.62
    %
    
    
    122
    
    
    
    (23
    )
    
    
    (14
    )
    
    
    (37
    )Time deposits
    
    
    372,540
    
    
    
    4.53
    %
    
    
    16,881
    
    
    
    290,883
    
    
    
    3.37
    %
    
    
    9,793
    
    
    
    2,752
    
    
    
    4,336
    
    
    
    7,088Total interest-bearing deposits
    
    
    593,402
    
    
    
    3.94
    %
    
    
    23,388
    
    
    
    504,068
    
    
    
    2.88
    %
    
    
    14,534
    
    
    
    2,976
    
    
    
    5,878
    
    
    
    8,854Noninterest-bearing deposits
    
    
    63,009
    
    
    
    
    
    
    
    0
    
    
    
    61,925
    
    
    
    
    
    
    
    0Total deposits
    
    
    656,411
    
    
    
    3.57
    %
    
    
    23,388
    
    
    
    565,993
    
    
    
    2.57
    %
    
    $
    14,534
    
    
    
    2,976
    
    
    
    5,878
    
    
    
    8,854Federal funds purchased and
repurchase agreements
    
    
    63,524
    
    
    
    4.89
    %
    
    
    3,108
    
    
    
    51,565
    
    
    
    3.25
    %
    
    
    1,678
    
    
    
    389
    
    
    
    1,041
    
    
    
    1,430FHLB advances and other
borrowings
    
    
    30,755
    
    
    
    5.16
    %
    
    
    1,586
    
    
    
    40,462
    
    
    
    5.15
    %
    
    
    2,082
    
    
    
    (500
    )
    
    
    4
    
    
    
    (496
    )Subordinated debentures
    
    
    17,000
    
    
    
    7.22
    %
    
    
    1,227
    
    
    
    12,000
    
    
    
    6.78
    %
    
    
    813
    
    
    
    339
    
    
    
    75
    
    
    
    414Total deposits and borrowed
funds
    
    
    767,690
    
    
    
    3.82
    %
    
    
    29,309
    
    
    
    670,020
    
    
    
    2.85
    %
    
    
    19,107
    
    
    
    3,204
    
    
    
    6,998
    
    
    
    10,202Other liabilities
    
    
    5,410
    
    
    
    
    
    
    
    
    
    
    
    3,498Shareholders equity
    
    
    46,693
    
    
    
    
    
    
    
    
    
    
    
    47,632Total liabilities and
shareholders equity
    
    $
    819,793
    
    
    
    
    
    
    
    
    
    
    $
    721,150Net interest income
    
    
    
    
    
    
    
    
    
    $
    24,147
    
    
    
    
    
    
    
    
    
    
    $
    21,250
    
    
    $
    3,561
    
    
    $
    (664
    )
    
    $
    2,897Net interest margin
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    3.19
    %
 
 1
    
    Changes in interest income and expense not due solely to balance or rate changes are
included in the rate category.2
    
    Nonaccrual loans are included in average loan balances and the associated income (recognized
on a cash basis) is included in interest.*
    
    No taxable equivalent adjustments have been made since the effect of tax exempt income is
insignificant. 22




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Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense  dollars in thousands
  December 31, 2005
    
    December 31, 2004
    
    
    2005 / 2004 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate1
    
    
    TotalNet loans2
    
    $
    456,657
    
    
    
    6.78
    %
    
    $
    30,972
    
    
    $
    416,335
    
    
    
    6.00
    %
    
    $
    24,971
    
    
    $
    2,419
    
    
    $
    3,582
    
    
    $
    6,001Securities
    
    
    200,831
    
    
    
    4.49
    %
    
    
    9,019
    
    
    
    179,602
    
    
    
    4.21
    %
    
    
    7,555
    
    
    
    894
    
    
    
    570
    
    
    
    1,464Federal funds sold
    
    
    4,635
    
    
    
    2.61
    %
    
    
    121
    
    
    
    13,215
    
    
    
    1.57
    %
    
    
    207
    
    
    
    (135
    )
    
    
    49
    
    
    
    (86
    )FHLB and FRB stock
    
    
    3,414
    
    
    
    5.10
    %
    
    
    174
    
    
    
    3,291
    
    
    
    4.56
    %
    
    
    150
    
    
    
    6
    
    
    
    18
    
    
    
    24Other interest bearing assets
    
    
    1,369
    
    
    
    5.19
    %
    
    
    71
    
    
    
    2,416
    
    
    
    2.36
    %
    
    
    57
    
    
    
    (25
    )
    
    
    39
    
    
    
    14Total earning assets
    
    
    666,906
    
    
    
    6.05
    %
    
    $
    40,357
    
    
    
    614,859
    
    
    
    5.36
    %
    
    $
    32,940
    
    
    $
    3,159
    
    
    $
    4,258
    
    
    $
    7,417Cash and due from banks
    
    
    24,514
    
    
    
    
    
    
    
    
    
    
    
    17,145Allowance for loan losses
    
    
    (4,859
    )
    
    
    
    
    
    
    
    
    
    
    (5,476
    )Other assets
    
    
    34,589
    
    
    
    
    
    
    
    
    
    
    
    46,565Total assets
    
    $
    721,150
    
    
    
    
    
    
    
    
    
    
    $
    673,093Deposits:NOW
    
    $
    136,034
    
    
    
    2.32
    %
    
    $
    3,154
    
    
    $
    85,440
    
    
    
    1.08
    %
    
    $
    926
    
    
    $
    546
    
    
    $
    1,682
    
    
    $
    2,228Money market
    
    
    57,560
    
    
    
    2.55
    %
    
    
    1,465
    
    
    
    73,706
    
    
    
    1.13
    %
    
    
    836
    
    
    
    (182
    )
    
    
    811
    
    
    
    629Savings
    
    
    19,591
    
    
    
    0.62
    %
    
    
    122
    
    
    
    26,484
    
    
    
    0.97
    %
    
    
    258
    
    
    
    (67
    )
    
    
    (69
    )
    
    
    (136
    )Time deposits
    
    
    290,883
    
    
    
    3.37
    %
    
    
    9,793
    
    
    
    292,845
    
    
    
    2.75
    %
    
    
    8,058
    
    
    
    (54
    )
    
    
    1,789
    
    
    
    1,735Total interest-bearing deposits
    
    
    504,068
    
    
    
    2.88
    %
    
    
    14,534
    
    
    
    478,475
    
    
    
    2.11
    %
    
    
    10,078
    
    
    
    244
    
    
    
    4,212
    
    
    
    4,456Noninterest-bearing deposits
    
    
    61,925
    
    
    
    
    
    
    
    0
    
    
    
    60,143
    
    
    
    
    
    
    
    0Total deposits
    
    
    565,993
    
    
    
    2.57
    %
    
    
    14,534
    
    
    
    538,618
    
    
    
    1.87
    %
    
    
    10,078
    
    
    
    244
    
    
    
    4,212
    
    
    
    4,456Federal funds purchased and
repurchase agreements
    
    
    51,565
    
    
    
    3.25
    %
    
    
    1,678
    
    
    
    21,957
    
    
    
    1.28
    %
    
    
    282
    
    
    
    379
    
    
    
    1,017
    
    
    
    1,396Notes payable
    
    
    4,550
    
    
    
    6.46
    %
    
    
    294
    
    
    
    4,632
    
    
    
    7.41
    %
    
    
    343
    
    
    
    (6
    )
    
    
    (43
    )
    
    
    (49
    )FHLB advances and other
borrowings
    
    
    35,912
    
    
    
    4.98
    %
    
    
    1,788
    
    
    
    36,722
    
    
    
    4.98
    %
    
    
    1,828
    
    
    
    (40
    )
    
    
    0
    
    
    
    (40
    )Subordinated debentures
    
    
    12,000
    
    
    
    6.78
    %
    
    
    813
    
    
    
    12,000
    
    
    
    4.93
    %
    
    
    592
    
    
    
    0
    
    
    
    221
    
    
    
    221Total deposits and borrowed
funds
    
    
    670,020
    
    
    
    2.85
    %
    
    
    19,107
    
    
    
    613,929
    
    
    
    2.14
    %
    
    
    13,123
    
    
    
    576
    
    
    
    5,408
    
    
    
    5,984Other liabilities
    
    
    3,498
    
    
    
    
    
    
    
    
    
    
    
    3,222Shareholders equity
    
    
    47,632
    
    
    
    
    
    
    
    
    
    
    
    55,942Total liabilities and
shareholders equity
    
    $
    721,150
    
    
    
    
    
    
    
    
    
    
    $
    673,093Net interest income
    
    
    
    
    
    
    
    
    
    $
    21,250
    
    
    
    
    
    
    
    
    
    
    $
    19,817
    
    
    $
    2,583
    
    
    $
    (1,150
    )
    
    $
    1,433Net interest margin
    
    
    
    
    
    
    3.19
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %
 
 1
    
    Changes in interest income and expense not due solely to balance or rate changes are included in
the rate category.2
    
    Nonaccrual loans are included in average loan balances and the associated income (recognized on a
cash basis) is included in interest.*
    
    No taxable equivalent adjustments have been made since the effect of tax exempt income is
insignificant. 23




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##### Table of Contents



Investment Portfolio
 General.
   Composition of Investment Portfolio  dollars in thousands
 December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Available for SaleU.S. treasury and government agencies
    
    $
    3,715
    
    
    $
    7,864
    
    
    $
    18,073State and municipals
    
    
    3,317
    
    
    
    3,300
    
    
    
    4,331Mortgage-backed
    
    
    92,066
    
    
    
    77,452
    
    
    
    85,761Other securities
    
    
    0
    
    
    
    1,108
    
    
    
    1,128Total available for sale securities
    
    
    99,098
    
    
    
    89,724
    
    
    
    109,293Held to MaturityU.S. treasury and government agencies
    
    
    1,647
    
    
    
    0
    
    
    
    300State and municipals
    
    
    29,534
    
    
    
    28,669
    
    
    
    26,233Mortgage-backed
    
    
    77,073
    
    
    
    84,522
    
    
    
    66,899Other debt
    
    
    2,504
    
    
    
    2,255
    
    
    
    2,413Total held to maturity securities
    
    
    110,758
    
    
    
    115,446
    
    
    
    95,845Total securities
    
    $
    209,856
    
    
    $
    205,170
    
    
    $
    205,138
 24




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##### Table of Contents



Maturity of Investment Portfolio  dollars in thousands
 AFS
    
    
    HTMAmount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. treasuries and government agenciesUnder 1 year
    
    $
    550
    
    
    
    4.99
    %
    
    $
    0
    
    
    
    1  5 years
    
    
    1,733
    
    
    
    4.36
    %
    
    
    0
    
    
    
    5  10 years
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    Over 10 years
    
    
    1,432
    
    
    
    6.01
    %
    
    
    1,647
    
    
    
    6.39
    %Total U.S. treasuries and government agencies
    
    
    3,715
    
    
    
    5.19
    %
    
    
    1,647
    
    
    
    6.39
    %State and municipalsUnder 1 year
    
    
    0
    
    
    
    
    
    
    
    150
    
    
    
    3.90
    %1  5 years
    
    
    257
    
    
    
    3.20
    %
    
    
    263
    
    
    
    2.97
    %5  10 years
    
    
    1,852
    
    
    
    3.24
    %
    
    
    6,107
    
    
    
    3.71
    %Over 10 years
    
    
    1,208
    
    
    
    3.69
    %
    
    
    23,014
    
    
    
    4.26
    %Total state and municipals
    
    
    3,317
    
    
    
    3.41
    %
    
    
    29,534
    
    
    
    4.22
    %Mortgage-backed
    
    
    92,066
    
    
    
    5.11
    %
    
    
    77,073
    
    
    
    4.99
    %Other securitiesUnder 1 year
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    1  5 years
    
    
    0
    
    
    
    
    
    
    
    1,004
    
    
    
    5.44
    %5  10 years
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    Over 10 years
    
    
    0
    
    
    
    
    
    
    
    1,500
    
    
    
    8.97
    %Total other
    
    
    0
    
    
    
    
    
    
    
    2,504
    
    
    
    7.55
    %Total securities
    
    $
    99,098
    
    
    
    4.38
    %
    
    $
    110,758
    
    
    
    4.92
    %
 25




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##### Table of Contents



LOANS
 General.
 Composition of Loan Portfolio  dollars in thousands
 December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Real Estate
 construction
    
    $
    271,251
    
    
    $
    157,381
    
    
    $
    93,841
    
    
    $
    58,570
    
    
    $
    45,531Real Estate  commercial and other
    
    
    129,422
    
    
    
    115,609
    
    
    
    77,294
    
    
    
    56,683
    
    
    
    51,496Real Estate  residential
    
    
    139,553
    
    
    
    112,281
    
    
    
    107,456
    
    
    
    111,490
    
    
    
    123,359Commercial
    
    
    57,575
    
    
    
    71,929
    
    
    
    128,114
    
    
    
    145,380
    
    
    
    129,355Consumer
    
    
    14,667
    
    
    
    15,938
    
    
    
    21,561
    
    
    
    35,699
    
    
    
    41,454Other
    
    
    2,041
    
    
    
    3,840
    
    
    
    2,880
    
    
    
    5,145
    
    
    
    1,017Total gross loans
    
    
    614,509
    
    
    
    476,978
    
    
    
    431,146
    
    
    
    412,967
    
    
    
    392,212Unearned income and deferred fees
    
    
    (472
    )
    
    
    (557
    )
    
    
    (529
    )
    
    
    (358
    )
    
    
    (296
    )Net loans
    
    $
    614,037
    
    
    $
    476,421
    
    
    $
    430,617
    
    
    $
    412,609
    
    
    $
    391,916
    26




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##### Table of Contents



Maturity of Loan Portfolio  dollars in thousands
 Due in 1
    
    
    Due after 1
    
    
    Due afterType of Loan
    
    Year or Less
    
    
    to 5 Years
    
    
    5 Years
    
    
    TotalReal estate
 construction
    
    $
    250,124
    
    
    $
    16,338
    
    
    $
    4,789
    
    
    $
    271,251Real estate  commercial and other
    
    
    28,972
    
    
    
    87,220
    
    
    
    13,230
    
    
    
    129,422Real estate  residential
    
    
    76,027
    
    
    
    47,010
    
    
    
    16,516
    
    
    
    139,553Commercial
    
    
    30,962
    
    
    
    24,944
    
    
    
    1,669
    
    
    
    57,575Consumer
    
    
    5,123
    
    
    
    9,456
    
    
    
    88
    
    
    
    14,667Other
    
    
    1,632
    
    
    
    409
    
    
    
    0
    
    
    
    2,041Total gross loans
    
    $
    392,840
    
    
    $
    185,377
    
    
    $
    36,292
    
    
    $
    614,509
  Mix of Rate Type  dollars in thousands
 Variable Rate
    
    
    Fixed Rate
    
    
    TotalReal estate
 construction
    
    $
    194,977
    
    
    $
    79,274
    
    
    $
    271,251Real estate  commercial and other
    
    
    21,023
    
    
    
    108,399
    
    
    
    129,422Real estate  residential
    
    
    65,897
    
    
    
    73,656
    
    
    
    139,553Commercial
    
    
    8,578
    
    
    
    48,997
    
    
    
    57,575Consumer
    
    
    213
    
    
    
    14,454
    
    
    
    14,667Other
    
    
    215
    
    
    
    1,826
    
    
    
    2,041Total gross loans
    
    $
    290,903
    
    
    $
    326,606
    
    
    $
    614,509
 Provision and Allowance for Loan Losses.
 27




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##### Table of Contents



Summary of Allowance for Loan Losses  dollars in thousands
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    4,765
    
    
    $
    4,427
    
    
    $
    5,688
    
    
    $
    5,742
    
    
    $
    5,351Decrease due to dispositions
    
    
    0
    
    
    
    49
    
    
    
    0
    
    
    
    0
    
    
    
    04,765
    
    
    
    4,378
    
    
    
    5,688
    
    
    
    5,742
    
    
    
    5,351Loans charged-off:Real estate
 construction
    
    
    0
    
    
    
    39
    
    
    
    199
    
    
    
    354
    
    
    
    560Real estate  commercial and other
    
    
    205
    
    
    
    104
    
    
    
    179
    
    
    
    82
    
    
    
    0Real estate  residential
    
    
    107
    
    
    
    129
    
    
    
    595
    
    
    
    212
    
    
    
    181Commercial
    
    
    881
    
    
    
    313
    
    
    
    1,419
    
    
    
    1,622
    
    
    
    2,139Consumer
    
    
    137
    
    
    
    240
    
    
    
    738
    
    
    
    1,251
    
    
    
    1,528Other
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    11
    
    
    
    134Total charge-offs
    
    $
    1,331
    
    
    $
    825
    
    
    $
    3,130
    
    
    $
    3,532
    
    
    $
    4,542Recoveries:Real estate
 construction
    
    
    0
    
    
    
    22
    
    
    
    28
    
    
    
    35
    
    
    
    36Real estate  commercial and other
    
    
    50
    
    
    
    0
    
    
    
    29
    
    
    
    0
    
    
    
    0Real estate  residential
    
    
    41
    
    
    
    13
    
    
    
    29
    
    
    
    3
    
    
    
    0Commercial
    
    
    307
    
    
    
    82
    
    
    
    94
    
    
    
    187
    
    
    
    88Consumer
    
    
    91
    
    
    
    102
    
    
    
    232
    
    
    
    167
    
    
    
    145Other
    
    
    0
    
    
    
    0
    
    
    
    11
    
    
    
    3
    
    
    
    6Total recoveries
    
    $
    489
    
    
    $
    219
    
    
    $
    423
    
    
    $
    395
    
    
    $
    275Net loans charged-off
    
    
    842
    
    
    
    606
    
    
    
    2,707
    
    
    
    3,137
    
    
    
    4,267Current year provision
    
    
    2,375
    
    
    
    993
    
    
    
    1,446
    
    
    
    3,083
    
    
    
    4,658Balance at end of year
    
    $
    6,298
    
    
    $
    4,765
    
    
    $
    4,427
    
    
    $
    5,688
    
    
    $
    5,742Loans at year end
    
    $
    614,037
    
    
    $
    476,421
    
    
    $
    430,617
    
    
    $
    412,609
    
    
    $
    391,916Ratio of allowance to loans at year end
    
    
    1.03
    %
    
    
    1.00
    %
    
    
    1.03
    %
    
    
    1.38
    %
    
    
    1.47
    %Average loans
    
    $
    548,169
    
    
    $
    456,657
    
    
    $
    416,335
    
    
    $
    412,604
    
    
    $
    384,642Ratio of charge-offs to average loans
    
    
    0.15
    %
    
    
    0.13
    %
    
    
    0.65
    %
    
    
    0.76
    %
    
    
    1.11
    %
 Nonperforming Assets.
 28




---



##### Table of Contents



Summary of Nonperforming Loans  dollars in thousands
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Non-accrual loans
    
    $
    1,946
    
    
    $
    2,273
    
    
    $
    5,377
    
    
    $
    3,532
    
    
    $
    8,172Loans past due 90 days or more
still accruing
    
    
    0
    
    
    
    0
    
    
    
    40
    
    
    
    3
    
    
    
    0Restructured loans
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total nonperforming loans
    
    $
    1,946
    
    
    $
    2,273
    
    
    $
    5,417
    
    
    $
    3,535
    
    
    $
    8,172Foreclosed properties
    
    
    352
    
    
    
    346
    
    
    
    793
    
    
    
    1,284
    
    
    
    2,184Total nonperforming assets
    
    $
    2,298
    
    
    $
    2,619
    
    
    $
    6,210
    
    
    $
    4,819
    
    
    $
    10,356
   Allocation of Allowance for Loan Losses  dollars in thousands
 2006
    
    
    2005
    
    
    2004Real Estate
 construction
    
    $
    1,988
    
    
    $
    1,032
    
    
    $
    330Real Estate  commercial and other
    
    
    1,508
    
    
    
    1,144
    
    
    
    868Real Estate  residential
    
    
    1,057
    
    
    
    539
    
    
    
    1,089Commercial
    
    
    741
    
    
    
    1,292
    
    
    
    1,433Consumer
    
    
    989
    
    
    
    737
    
    
    
    625Other
    
    
    15
    
    
    
    21
    
    
    
    82Total allowance for loan losses
    
    $
    6,298
    
    
    $
    4,765
    
    
    $
    4,427
 29




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##### Table of Contents



Supplemental Loan Information   dollars in thousands
 % of
    
    
    Non-
    
    
    Year-to-dateLoans
    
    
    total
    
    
    accrual
    
    
    net charge-
    
    
    Allocationoutstanding
    
    
    Loans
    
    
    loans
    
    
    offs
    
    
    of allowanceReal Estate
 construction
    
    $
    271,251
    
    
    
    44.1
    %
    
    $
    184
    
    
    $
    0
    
    
    $
    1,988Real Estate  commercial and other
    
    
    129,422
    
    
    
    21.1
    %
    
    
    1,196
    
    
    
    155
    
    
    
    1,508Real Estate  residential
    
    
    139,553
    
    
    
    22.7
    %
    
    
    131
    
    
    
    66
    
    
    
    1,057Commercial
    
    
    57,575
    
    
    
    9.4
    %
    
    
    433
    
    
    
    575
    
    
    
    741Consumer
    
    
    14,667
    
    
    
    2.4
    %
    
    
    2
    
    
    
    46
    
    
    
    989Other
    
    
    2,041
    
    
    
    0.3
    %
    
    
    0
    
    
    
    0
    
    
    
    15Total gross loans
    
    
    614,509
    
    
    
    100
    %
    
    $
    1,946
    
    
    $
    842
    
    
    $
    6,298Deferred fees and costs
    
    
    (472
    )Net loans
    
    $
    614,037
  Summary of Classified Loans  dollars in thousands
 Substandard
    
    $
    7,079Doubtful
    
    
    1,273Loss
    
    
    0Total
    
    $
    8,352
  30




---



##### Table of Contents



DEPOSITS
   Deposit Maturity  dollars in thousands
 Under 3 months
    
    $
    108,8743  12 months
    
    
    122,2921  3 years
    
    
    35,891Over 3 years
    
    
    4,855Total
    
    $
    271,912
  KEY RATIOS
  Performance Indicators
 December 31, 2006
    
    December 31, 2005Return on average assets
    
    
    0.82
    %
    
    
    0.54
    %Return on average equity
    
    
    14.3
    %
    
    
    8.20
    %Cash dividend payout ratio
    
    
    14.2
    %
    
    
    0.00
    %Equity to assets ratio
    
    
    6.01
    %
    
    
    6.30
    %
 INCOME TAXES
  FINANCIAL CONDITION
 Balance Sheet Summary
    31




---



##### Table of Contents



Liquidity and Asset Management
         32




---



##### Table of Contents



Contractual Obligations
  Contractual Obligations  dollars in thousands
 Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1  3 years
    
    
    3  5 years
    
    
    5 yearsLong-Term Debt Obligations
    
    $
    30,500
    
    
    $
    4,000
    
    
    $
    26,500
    
    
    $
    0
    
    
    $
    0Capital Leases
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Leases
    
    
    2,868
    
    
    
    729
    
    
    
    1,144
    
    
    
    264
    
    
    
    731Purchase Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Subordinated Debentures
    
    
    17,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    17,000Total
    
    $
    50,368
    
    
    $
    4,729
    
    
    $
    27,644
    
    
    $
    264
    
    
    $
    17,731
 Off Balance Sheet Arrangements
  33




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##### Table of Contents



Capital Position and Dividends
   34




---



##### Table of Contents



Capital Standards  dollars in thousands
 To be wellRequired
    
    capitalized underminimum for
    
    prompt corrective
    
    
    
    
    
    
    
    
    
    Excess over wellcapital adequacy
    
    action provisions
    
    Actual
    
    capitalizedAmount
    
    Ratios
    
    Amount
    
    Ratios
    
    Amount
    
    Ratios
    
    AmountDecember 31, 2006Tier 1 to average assets  leverageCivitas BankGroup, Inc.
    
    $
    35,017
    
    
    
    4.00
    %
    
    $
    43,772
    
    
    
    5.00
    %
    
    $
    72,211
    
    
    
    8.25
    %
    
    $
    28,439Cumberland Bank
    
    
    34,841
    
    
    
    4.00
    %
    
    
    43,551
    
    
    
    5.00
    %
    
    
    64,407
    
    
    
    7.62
    %
    
    
    22,856Tier 1 to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    28,883
    
    
    
    4.00
    %
    
    
    43,324
    
    
    
    6.00
    %
    
    
    72,211
    
    
    
    10.00
    %
    
    
    28,887Cumberland Bank
    
    
    28,745
    
    
    
    4.00
    %
    
    
    43,118
    
    
    
    6.00
    %
    
    
    66,407
    
    
    
    9.24
    %
    
    
    23,289Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    57,766
    
    
    
    8.00
    %
    
    
    72,207
    
    
    
    10.00
    %
    
    
    78,509
    
    
    
    10.87
    %
    
    
    6,302Cumberland Bank
    
    
    57,491
    
    
    
    8.00
    %
    
    
    71,864
    
    
    
    10.00
    %
    
    
    72,705
    
    
    
    10.12
    %
    
    
    841December 31, 2005Tier 1 to average assets  leverageCivitas BankGroup, Inc.
    
    $
    28,813
    
    
    
    4.00
    %
    
    $
    36,016
    
    
    
    5.00
    %
    
    $
    65,913
    
    
    
    9.15
    %
    
    $
    29,897Cumberland Bank
    
    
    28,810
    
    
    
    4.00
    %
    
    
    36,013
    
    
    
    5.00
    %
    
    
    53,709
    
    
    
    7.46
    %
    
    
    17,696Tier 1 to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    23,143
    
    
    
    4.00
    %
    
    
    34,714
    
    
    
    6.00
    %
    
    
    65,913
    
    
    
    11.39
    %
    
    
    31,199Cumberland Bank
    
    
    21,399
    
    
    
    4.00
    %
    
    
    32,098
    
    
    
    6.00
    %
    
    
    53,709
    
    
    
    10.04
    %
    
    
    21,611Total capital to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    49,285
    
    
    
    8.00
    %
    
    
    57,857
    
    
    
    10.00
    %
    
    
    70,678
    
    
    
    12.22
    %
    
    
    12,821Cumberland Bank
    
    
    42,798
    
    
    
    8.00
    %
    
    
    53,497
    
    
    
    10.00
    %
    
    
    58,474
    
    
    
    10.93
    %
    
    
    4,977
 35




---



##### Table of Contents



Adoption of New Accounting Standards
 Share-Based Payment
  Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108),
 Subsequent Events
    36




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  Interest Rate Sensitivity  dollars in thousands
 1-90 Days
    
    
    91-365 Days
    
    
    1 - 5 Years
    
    
    Over 5 Years
    
    
    TotalInterest earning assets:Loans, net
    
    $
    335,436
    
    
    $
    99,520
    
    
    $
    164,740
    
    
    $
    14,341
    
    
    $
    614,037Securities available for sale
    
    
    4,251
    
    
    
    12,362
    
    
    
    46,279
    
    
    
    36,206
    
    
    
    99,098Securities held to maturity
    
    
    2,978
    
    
    
    10,091
    
    
    
    39,987
    
    
    
    57,702
    
    
    
    110,758Federal funds sold and
securities
purchased under
resell agreement
    
    
    17,451
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    17,451Interest-earning deposits
    
    
    772
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    772Total interest earning assets
    
    $
    360,888
    
    
    $
    121,973
    
    
    $
    251,006
    
    
    $
    108,249
    
    
    $
    842,116Interest bearing liabilities:Interest bearing demand deposits
    
    
    244,649
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    244,649Savings deposits
    
    
    16,494
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,494Time deposits
    
    
    140,849
    
    
    
    200,490
    
    
    
    56,981
    
    
    
    1,549
    
    
    
    399,869FHLB borrowings
    
    
    0
    
    
    
    4,000
    
    
    
    26,500
    
    
    
    0
    
    
    
    30,500Federal funds purchased and
repurchase agreements
    
    
    58,406
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    58,406Subordinated debentures
    
    
    17,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    17,000Total interest bearing liabilities
    
    $
    477,398
    
    
    $
    204,490
    
    
    $
    83,481
    
    
    $
    1,549
    
    
    $
    766,918Rate sensitive gap
    
    
    (116,510
    )
    
    
    (82,517
    )
    
    
    167,525
    
    
    
    106,700
    
    
    
    75,198Rate sensitive cumulative gap
    
    $
    (116,510
    )
    
    $
    (199,027
    )
    
    $
    (31,502
    )
    
    $
    75,198Cumulative gap as a percentage
of total earnings assets
    
    
    (13.85
    %)
    
    
    (23.65
    %)
    
    
    (3.76
    %)
    
    
    8.91
    %
   37




---



##### Table of Contents



Market Risk  dollars in thousands
 Down 200
    
    Down 100
    
    Base
    
    Up 100
    
    Up 200Net Interest Income
    
    $
    30,519
    
    
    $
    30,752
    
    
    $
    29,845
    
    
    $
    28,281
    
    
    $
    26,600Change from Base
    
    
    674
    
    
    
    907
    
    
    
    
    
    
    
    (1,564
    )
    
    
    (3,245
    )%  Change from Base
    
    
    2.3
    %
    
    
    3.0
    %
    
    
    
    
    
    
    5.2
    %
    
    
    10.9
    %
 
 38




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Management on the Companys
Internal Control over Financial Reporting
      /s/ Richard Herrington
    
    /s/ Lisa MusgrovePresident and Chief Executive Officer
    
    Chief Financial Officer and Chief Operating Officer
 39




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 40




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONROL OVER FINANCIAL REPORTING
 
        
 41




---



##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 2006
    
    
    2005ASSETS:Cash and due from banks
    
    $
    20,385
    
    
    $
    31,510Federal funds sold and securities purchased under resell agreements
    
    
    17,451
    
    
    
    2,700Cash and cash equivalents
    
    
    37,836
    
    
    
    34,210Interest-bearing deposits in other financial institutions
    
    
    772
    
    
    
    957Securities available for sale
    
    
    99,098
    
    
    
    89,724Securities held to maturity (fair value $109,538 and $113,577)
    
    
    110,758
    
    
    
    115,446Loans held for sale
    
    
    4,246
    
    
    
    3,720Loans
    
    
    614,037
    
    
    
    476,421Allowance for loan losses
    
    
    (6,298
    )
    
    
    (4,765
    )Loans, net
    
    
    607,739
    
    
    
    471,656Premises and equipment, net
    
    
    14,875
    
    
    
    14,025Restricted equity securities
    
    
    3,897
    
    
    
    3,527Foreclosed property
    
    
    352
    
    
    
    346Investment in unconsolidated affiliates
    
    
    3,091
    
    
    
    7,734Accrued interest receivable
    
    
    4,736
    
    
    
    3,567Cash surrender value of life insurance
    
    
    6,252
    
    
    
    0Other assets
    
    
    4,514
    
    
    
    4,604Total assets
    
    $
    898,166
    
    
    $
    749,516LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:DepositsNon-interest bearing
    
    $
    71,508
    
    
    $
    64,195Interest bearing
    
    
    661,012
    
    
    
    536,571Total deposits
    
    
    732,520
    
    
    
    600,766Repurchase agreements
    
    
    58,406
    
    
    
    45,452Advances from Federal Home Loan Bank
    
    
    30,500
    
    
    
    35,000Accrued interest payable
    
    
    3,486
    
    
    
    2,109Subordinated debentures
    
    
    17,000
    
    
    
    17,000Other liabilities
    
    
    2,309
    
    
    
    1,964Total liabilities
    
    
    844,221
    
    
    
    702,291Commitments and contingent liabilities
    
    
    0
    
    
    
    0Shareholders equity:Common stock, $0.50 par value; authorized 40,000,000 shares,
shares issued and outstanding 15,911,750 and 15,835,095
at December 31, 2006 and 2005, respectively
    
    
    7,956
    
    
    
    7,918Additional paid-in capital
    
    
    24,666
    
    
    
    23,866Retained earnings
    
    
    22,390
    
    
    
    16,942Accumulated other comprehensive income (loss)
    
    
    (1,067
    )
    
    
    (1,501
    )Total shareholders equity
    
    
    53,945
    
    
    
    47,225Total liabilities and shareholders equity
    
    $
    898,166
    
    
    $
    749,516
  42




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006, 2005 and 2004
 (dollars in thousands, except share and per share amounts)
 2006
    
    
    2005
    
    
    2004Interest income:Loans, including fees
    
    $
    42,560
    
    
    $
    30,972
    
    
    $
    24,971Securities
    
    
    10,454
    
    
    
    9,019
    
    
    
    7,555Deposits in financial institutions
    
    
    11
    
    
    
    71
    
    
    
    57Federal funds sold
    
    
    216
    
    
    
    121
    
    
    
    207Restricted equity securities
    
    
    215
    
    
    
    174
    
    
    
    150Total interest income
    
    
    53,456
    
    
    
    40,357
    
    
    
    32,940Interest expense:Deposits
    
    
    23,388
    
    
    
    14,534
    
    
    
    10,078Federal funds purchased and repurchase agreements
    
    
    3,108
    
    
    
    1,678
    
    
    
    282Advances from Federal Home Loan Bank
    
    
    1,586
    
    
    
    1,788
    
    
    
    1,828Subordinated debentures
    
    
    1,227
    
    
    
    813
    
    
    
    592Notes payable
    
    
    0
    
    
    
    294
    
    
    
    343Total interest expense
    
    
    29,309
    
    
    
    19,107
    
    
    
    13,123Net interest income
    
    
    24,147
    
    
    
    21,250
    
    
    
    19,817Provision for loan losses
    
    
    2,375
    
    
    
    993
    
    
    
    1,446Net interest income after provision for loan losses
    
    
    21,772
    
    
    
    20,257
    
    
    
    18,371Noninterest income:Service charges on deposit accounts
    
    
    2,773
    
    
    
    2,761
    
    
    
    2,975Other service charges, commissions and fees
    
    
    1,023
    
    
    
    911
    
    
    
    636Mortgage banking activities
    
    
    1,647
    
    
    
    2,086
    
    
    
    929Net gain on securities transactions
    
    
    63
    
    
    
    100
    
    
    
    655Net gain (loss) on sale of foreclosed property
    
    
    4
    
    
    
    (84
    )
    
    
    3Income from unconsolidated affiliates
    
    
    207
    
    
    
    703
    
    
    
    727Gain on sale of assets
    
    
    700
    
    
    
    148
    
    
    
    79Gain on sale of affiliate
    
    
    3,457
    
    
    
    0
    
    
    
    0Other noninterest income
    
    
    478
    
    
    
    946
    
    
    
    1,789Total noninterest income
    
    
    10,352
    
    
    
    7,571
    
    
    
    7,793Noninterest expense:Salaries and employee benefits
    
    
    12,926
    
    
    
    12,501
    
    
    
    12,264Occupancy and equipment
    
    
    3,136
    
    
    
    3,279
    
    
    
    3,182Foreclosed property
    
    
    49
    
    
    
    86
    
    
    
    265Other noninterest expense
    
    
    5,771
    
    
    
    6,343
    
    
    
    7,206Total noninterest expense
    
    
    21,882
    
    
    
    22,209
    
    
    
    22,917Income from continuing operations before income taxes
    
    
    10,242
    
    
    
    5,619
    
    
    
    3,247Income tax expense
    
    
    3,557
    
    
    
    1,715
    
    
    
    941Income from continuing operations
    
    $
    6,685
    
    
    $
    3,904
    
    
    $
    2,306
   43




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006, 2005 and 2004
 (dollars in thousands, except share and per share amounts)
 2006
    
    
    2005
    
    
    2004Income from continuing operations
    
    $
    6,685
    
    
    $
    3,904
    
    
    $
    2,306Discontinued operationsIncome (loss) from operations of discontinued
components, less applicable income taxes (benefits)
of $0, $47, and $(293), respectively
    
    
    0
    
    
    
    82
    
    
    
    (422
    )Gain on sale of discontinued operations
    
    
    0
    
    
    
    3,782
    
    
    
    0Tax provision on sale of discontinued operations
    
    
    0
    
    
    
    418
    
    
    
    0Net Income
    
    $
    6,685
    
    
    $
    7,350
    
    
    $
    1,884Earnings per share, basic,
continuing operations
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.13Earnings per share, diluted,
continuing operations
    
    
    0.42
    
    
    
    0.24
    
    
    
    0.13Earnings/(loss) per share, basic,
discontinued operations
    
    
    0.00
    
    
    
    0.22
    
    
    
    (0.02
    )Earnings/(loss) per share, diluted,
discontinued operations
    
    
    0.00
    
    
    
    0.22
    
    
    
    (0.02
    )Earnings per share, basic
    
    
    0.42
    
    
    
    0.46
    
    
    
    0.11Earnings per share, diluted
    
    
    0.42
    
    
    
    0.46
    
    
    
    0.11
  44




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2006, 2005 and 2004
 (dollars in thousands, except share and per share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2004
    
    
    17,135,056
    
    
    $
    8,568
    
    
    $
    35,930
    
    
    $
    9,877
    
    
    $
    366
    
    
    $
    54,741Exercise of stock options
    
    
    344,050
    
    
    
    172
    
    
    
    872
    
    
    
    0
    
    
    
    0
    
    
    
    1,044Issuance of common stock
    
    
    56,253
    
    
    
    28
    
    
    
    366
    
    
    
    0
    
    
    
    0
    
    
    
    394Cash dividends ($0.03 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (527
    )
    
    
    0
    
    
    
    (527
    )Stock dividends issued
    
    
    43,505
    
    
    
    21
    
    
    
    355
    
    
    
    (376
    )
    
    
    0
    
    
    
    0Tax benefit  stock options
    
    
    0
    
    
    
    0
    
    
    
    668
    
    
    
    0
    
    
    
    0
    
    
    
    668Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,884
    
    
    
    0
    
    
    
    1,884Other comprehensive income (loss):Change in unrealized loss on securities
available for sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (64
    )
    
    
    (64
    )Less: adjustment for realized gain
included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (404
    )
    
    
    (404
    )Total comprehensive income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,416Balance at December 31, 2004
    
    
    17,578,864
    
    
    $
    8,789
    
    
    $
    38,191
    
    
    $
    10,858
    
    
    $
    (102
    )
    
    $
    57,736Exercise of stock options
    
    
    71,859
    
    
    
    36
    
    
    
    339
    
    
    
    0
    
    
    
    0
    
    
    
    375Issuance of common stock
    
    
    67,033
    
    
    
    35
    
    
    
    446
    
    
    
    0
    
    
    
    0
    
    
    
    481Retirement of common stock
    
    
    (2,043,072
    )
    
    
    (1,022
    )
    
    
    (16,278
    )
    
    
    0
    
    
    
    0
    
    
    
    (17,300
    )Stock dividends issued
    
    
    160,411
    
    
    
    80
    
    
    
    1,168
    
    
    
    (1,266
    )
    
    
    0
    
    
    
    (18
    )Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7,350
    
    
    
    0
    
    
    
    7,350Other comprehensive income (loss):Change in unrealized loss on securities
available for sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,337
    )
    
    
    (1,337
    )Less: adjustment for realized gain
included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (62
    )
    
    
    (62
    )Total comprehensive income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5,951Balance at December 31, 2005
    
    
    15,835,095
    
    
    $
    7,918
    
    
    $
    23,866
    
    
    $
    16,942
    
    
    $
    (1,501
    )
    
    $
    47,225Exercise of stock options
    
    
    10,256
    
    
    
    5
    
    
    
    67
    
    
    
    0
    
    
    
    0
    
    
    
    72Issuance of common stock
    
    
    27,227
    
    
    
    14
    
    
    
    162
    
    
    
    0
    
    
    
    0
    
    
    
    176Stock dividends issued
    
    
    39,172
    
    
    
    19
    
    
    
    263
    
    
    
    (282
    )
    
    
    0
    
    
    
    0Cash dividends ($0.06 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (955
    )
    
    
    0
    
    
    
    (955
    )Compensation expense
    
    
    0
    
    
    
    0
    
    
    
    308
    
    
    
    0
    
    
    
    0
    
    
    
    308Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    6,685
    
    
    
    0
    
    
    
    6,685Other comprehensive income:Change in unrealized loss on securities
available for sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    473
    
    
    
    473Less: adjustment for realized gain
included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (39
    )
    
    
    (39
    )Total comprehensive income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7,120Balance at December 31, 2006
    
    
    15,911,750
    
    
    $
    7,956
    
    
    $
    24,666
    
    
    $
    22,390
    
    
    $
    (1,067
    )
    
    $
    53,945
  45




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
 (dollars in thousands, except share and per share amounts)
 2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    6,685
    
    
    $
    7,350
    
    
    $
    1,884Adjustments to reconcile net income to
net cash from operating activities:Provision for loan losses
    
    
    2,375
    
    
    
    993
    
    
    
    1,446Depreciation and amortization
    
    
    1,334
    
    
    
    1,558
    
    
    
    1,378Amortization/accretion of securities, net
    
    
    (50
    )
    
    
    427
    
    
    
    640Operations of unconsolidated affiliates
    
    
    (207
    )
    
    
    (703
    )
    
    
    (727
    )Stock based compensation
    
    
    308
    
    
    
    0
    
    
    
    0Origination of mortgage loans held for sale
    
    
    (85,754
    )
    
    
    (103,289
    )
    
    
    (53,698
    )Proceeds from sale of mortgage loans held for sale
    
    
    86,348
    
    
    
    107,919
    
    
    
    46,901Gain on sale of mortgage loans
    
    
    (1,119
    )
    
    
    (1,390
    )
    
    
    (378
    )Federal Home Loan Bank stock dividend
    
    
    (160
    )
    
    
    (131
    )
    
    
    (69
    )Net (gain) on sale of available for sale securities
    
    
    (63
    )
    
    
    (100
    )
    
    
    (655
    )Net (gain) / loss on sale of other real estate
    
    
    (4
    )
    
    
    84
    
    
    
    (3
    )Gain on sale of assets
    
    
    (700
    )
    
    
    (148
    )
    
    
    (79
    )Gain on sale of discontinued operations
    
    
    0
    
    
    
    (3,364
    )
    
    
    0Gain on sale of affiliate
    
    
    (3,457
    )
    
    
    0
    
    
    
    0Increase in bank owned life insurance
    
    
    (252
    )
    
    
    0
    
    
    
    0Net change in:Deferred income tax benefits
    
    
    (1,278
    )
    
    
    (557
    )
    
    
    (550
    )Accrued interest receivable
    
    
    (1,169
    )
    
    
    (588
    )
    
    
    170Accrued interest payable and other liabilities
    
    
    1,722
    
    
    
    1,283
    
    
    
    (457
    )Other, net
    
    
    1,460
    
    
    
    681
    
    
    
    8,008Total adjustments
    
    
    (666
    )
    
    
    2,675
    
    
    
    1,924Net cash from operating activities
    
    
    6,019
    
    
    
    10,025
    
    
    
    (40
    )Cash flows from investing activities:Net change in interest-bearing deposits in financial
institutions
    
    
    185
    
    
    
    2,738
    
    
    
    (285
    )Purchases of securities available for sale
    
    
    (158,414
    )
    
    
    (47,130
    )
    
    
    (124,335
    )Proceeds from sales of securities available for sale
    
    
    9,214
    
    
    
    16,998
    
    
    
    51,732Proceeds from maturities, pay downs, and calls of
securities available for sale
    
    
    140,150
    
    
    
    47,536
    
    
    
    74,531Purchases of securities held to maturity
    
    
    (9,015
    )
    
    
    (37,148
    )
    
    
    (50,109
    )Proceeds from maturities, pay downs, and calls of
securities held to maturity
    
    
    13,833
    
    
    
    17,462
    
    
    
    12,893Investment in bank owned life insurance
    
    
    (6,000
    )
    
    
    0
    
    
    
    0Proceeds from sale of affiliate
    
    
    8,500
    
    
    
    0
    
    
    
    0Net change in loans
    
    
    (139,026
    )
    
    
    (46,458
    )
    
    
    (17,136
    )Investment in unconsolidated affiliates
    
    
    (193
    )
    
    
    (37
    )
    
    
    264Purchases of premises and equipment, net
    
    
    (1,484
    )
    
    
    (688
    )
    
    
    (615
    )Purchases of restricted equity securities
    
    
    (210
    )
    
    
    0
    
    
    
    0Proceeds from sale of discontinued operations
    
    
    0
    
    
    
    1,350
    
    
    
    0Proceeds from sale of foreclosed property
    
    
    566
    
    
    
    1,060
    
    
    
    2,697Net cash used by investing activities
    
    
    (141,894
    )
    
    
    (44,317
    )
    
    
    (50,363
    )
   46




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
 (dollars in thousands, except share and per share amounts)
 2006
    
    
    2005
    
    
    2004Cash flows from financing activities:Net change in deposits
    
    
    131,754
    
    
    
    33,893
    
    
    
    46,368Repayments of Federal Home Loan Bank advances
    
    
    (4,500
    )
    
    
    (1,000
    )
    
    
    (852
    )Proceeds from repurchase agreements
    
    
    12,954
    
    
    
    7,551
    
    
    
    12,888Repayments of notes payable
    
    
    0
    
    
    
    (4,550
    )
    
    
    (150
    )Proceeds from issuance of subordinated debentures
    
    
    0
    
    
    
    13,000
    
    
    
    0Repayments of subordinated debentures
    
    
    0
    
    
    
    (8,000
    )
    
    
    0Cash dividends paid
    
    
    (955
    )
    
    
    0
    
    
    
    (526
    )Proceeds from issuance of common stock
    
    
    248
    
    
    
    856
    
    
    
    1,438Net cash provided by financing activities
    
    
    139,501
    
    
    
    41,750
    
    
    
    59,166Net change in cash and cash equivalents
    
    
    3,626
    
    
    
    7,458
    
    
    
    8,763Cash and cash equivalents at beginning of year
    
    
    34,210
    
    
    
    26,752
    
    
    
    17,989Cash and cash equivalents at end of year
    
    $
    37,836
    
    
    $
    34,210
    
    
    $
    26,752Supplemental disclosure of cash flow information:Interest paid
    
    $
    27,932
    
    
    $
    18,807
    
    
    $
    16,775Income taxes paid
    
    
    4,071
    
    
    
    830
    
    
    
    30Non-Cash Activities:Transfers from loans to foreclosed property
    
    
    568
    
    
    
    774
    
    
    
    247Stock received from disposal of subsidiary
    
    
    0
    
    
    
    17,300
    
    
    
    0
  47




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of Presentation
 Nature of Operations
 Use of Estimates
 Cash Flows
 Interest-bearing Deposits in Other Financial Institutions
 Securities
 48




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Loans Held for Sale
  Loans
   Allowance for Loan Losses
  49




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Servicing Rights
   Foreclosed Assets
 Premises and Equipment
 Restricted Equity Securities
 50




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Company Owned Life Insurance
 Long-Term Assets
 Loan Commitments and Related Financial Instruments
 Mortgage Banking Derivatives
 Stock Based Compensation Share-Based Payment
  51




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Accounting for Stock-Based
Compensation,
 2005
    
    
    2004Income from continuing operations as reported
    
    $
    3,904
    
    
    $
    2,306Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (903
    )
    
    
    (164
    )Pro forma income from continuing operations
    
    $
    3,001
    
    
    $
    2,142Basic earnings per share from continuing operations
    
    
    0.24
    
    
    
    0.13Pro forma basic earnings per share
    
    
    0.19
    
    
    
    0.12Diluted earnings per share as from continuing operations
    
    
    0.24
    
    
    
    0.13Pro forma diluted earnings per share
    
    
    0.19
    
    
    
    0.12
  Income Taxes
 Fair Value of Financial Instruments
 Earnings Per Common Share
 Comprehensive Income
 Operating Segments
 52




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Adoption of New Accounting Standards
 Share-Based Payment
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements ( ),
 Effect of Newly Issued But Not Yet Effective Accounting Standards
 Accounting
for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140
 53




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Accounting for Servicing of Financial Assets-an
amendment of FASB Statement No. 140 .
 Fair Value Measurements
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109
 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements
 Accounting for
Purchases of Life Insurance  Determining the Amount That Could Be Realized in Accordance with FASB
Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).
 54




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Loss Contingencies
 Dividend Restrictions
 Reclassifications
 NOTE 2  INTEREST BEARING DEPOSITS
  55




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 3  SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2006U.S. treasury and government agencies
    
    $
    3,767
    
    
    $
    0
    
    
    $
    (52
    )
    
    $
    3,715State and municipals
    
    
    3,352
    
    
    
    10
    
    
    
    (45
    )
    
    
    3,317Mortgage-backed
    
    
    93,609
    
    
    
    250
    
    
    
    (1,793
    )
    
    
    92,066Total
    
    $
    100,728
    
    
    $
    260
    
    
    $
    (1,890
    )
    
    $
    99,098December 31, 2005U.S. treasury and government agencies
    
    $
    7,935
    
    
    $
    0
    
    
    $
    (71
    )
    
    $
    7,864State and municipals
    
    
    3,375
    
    
    
    1
    
    
    
    (76
    )
    
    
    3,300Mortgage-backed
    
    
    79,276
    
    
    
    52
    
    
    
    (1,876
    )
    
    
    77,452Marketable equity
    
    
    1,058
    
    
    
    0
    
    
    
    0
    
    
    
    1,058Other debt
    
    
    50
    
    
    
    0
    
    
    
    0
    
    
    
    50Total
    
    $
    91,694
    
    
    $
    53
    
    
    $
    (2,023
    )
    
    $
    89,724
 56




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 3  SECURITIES
  Gross
    
    
    GrossCarrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairAmount
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2006U.S. treasury and government agencies
    
    $
    1,647
    
    
    $
    0
    
    
    $
    (19
    )
    
    $
    1,628State and municipals
    
    
    29,534
    
    
    
    632
    
    
    
    (187
    )
    
    
    29,979Mortgage-backed
    
    
    77,073
    
    
    
    4
    
    
    
    (1,664
    )
    
    
    75,413Other debt
    
    
    2,504
    
    
    
    27
    
    
    
    (13
    )
    
    
    2,518Total
    
    $
    110,758
    
    
    $
    663
    
    
    $
    (1,883
    )
    
    $
    109,538December 31, 2005U.S. treasury and government agencies
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0State and municipals
    
    
    28,669
    
    
    
    337
    
    
    
    (393
    )
    
    
    28,613Mortgage-backed
    
    
    84,522
    
    
    
    2
    
    
    
    (1,697
    )
    
    
    82,827Other debt
    
    
    2,255
    
    
    
    0
    
    
    
    (118
    )
    
    
    2,137Total
    
    $
    115,446
    
    
    $
    339
    
    
    $
    (2,208
    )
    
    $
    113,577
  2006
    
    2005
    
    2004Proceeds
    
    $
    9,214
    
    
    $
    16,998
    
    
    $
    51,732Gross gains
    
    
    72
    
    
    
    112
    
    
    
    655Gross losses
    
    
    9
    
    
    
    12
    
    
    
    0
  57




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 3  SECURITIES
  Held to maturity
    
    
    AvailableCarrying
    
    
    Fair
    
    
    for saleAmount
    
    
    Value
    
    
    Fair ValueDue in one year or less
    
    $
    150
    
    
    $
    151
    
    
    $
    550Due from one to five years
    
    
    1,267
    
    
    
    1,252
    
    
    
    1,990Due from five to ten years
    
    
    6,107
    
    
    
    6,107
    
    
    
    1,852Due after ten years
    
    
    26,161
    
    
    
    26,615
    
    
    
    2,640Mortgage-backed
    
    
    77,073
    
    
    
    75,413
    
    
    
    92,066Total
    
    $
    110,758
    
    
    $
    109,538
    
    
    $
    99,098
   58




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 3  SECURITIES
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossDecember 31, 2006U.S. Treasury and government
agencies
    
    $
    3,559
    
    
    $
    (24
    )
    
    $
    1,423
    
    
    $
    (47
    )
    
    $
    4,982
    
    
    $
    (71
    )State and municipal securities
    
    
    2,717
    
    
    
    (7
    )
    
    
    8,440
    
    
    
    (225
    )
    
    
    11,157
    
    
    
    (232
    )Mortgage-backed securities
    
    
    16,726
    
    
    
    (57
    )
    
    
    122,973
    
    
    
    (3,400
    )
    
    
    139,699
    
    
    
    (3,457
    )Other debt securities
    
    
    0
    
    
    
    0
    
    
    
    991
    
    
    
    (13
    )
    
    
    991
    
    
    
    (13
    )Total temporarily
impaired
    
    $
    23,002
    
    
    $
    (88
    )
    
    $
    133,827
    
    
    $
    (3,685
    )
    
    $
    156,829
    
    
    $
    (3,773
    )December 31, 2005U.S. Treasury and government
agencies
    
    $
    1,968
    
    
    $
    (1
    )
    
    $
    4,396
    
    
    $
    (70
    )
    
    $
    6,364
    
    
    $
    (71
    )State and municipal securities
    
    
    11,027
    
    
    
    (279
    )
    
    
    4,270
    
    
    
    (190
    )
    
    
    15,297
    
    
    
    (469
    )Mortgage-backed securities
    
    
    100,418
    
    
    
    (1,928
    )
    
    
    49,028
    
    
    
    (1,645
    )
    
    
    149,446
    
    
    
    (3,573
    )Other debt securities
    
    
    0
    
    
    
    0
    
    
    
    887
    
    
    
    (118
    )
    
    
    887
    
    
    
    (118
    )Total temporarily
impaired
    
    $
    113,413
    
    
    $
    (2,208
    )
    
    $
    58,581
    
    
    $
    (2,023
    )
    
    $
    171,994
    
    
    $
    (4,231
    )
  59




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 4  LOANS
  2006
    
    
    2005Real estate:Construction and land development
    
    $
    271,251
    
    
    $
    157,381Residential properties
    
    
    139,553
    
    
    
    112,281Commercial real estate
    
    
    129,422
    
    
    
    115,609Commercial
    
    
    57,575
    
    
    
    71,929Consumer
    
    
    14,667
    
    
    
    15,938Other
    
    
    2,041
    
    
    
    3,840Total loans
    
    
    614,509
    
    
    
    476,978Net unearned income and deferred fees
    
    
    (472
    )
    
    
    (557
    )Subtotal
    
    
    614,037
    
    
    
    476,421Allowance for loan losses
    
    
    (6,298
    )
    
    
    (4,765
    )Loans, net
    
    $
    607,739
    
    
    $
    471,656
  60




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 4  LOANS
  2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    4,765
    
    
    $
    4,427
    
    
    $
    5,688Allowance of disposed bank
    
    
    0
    
    
    
    (49
    )
    
    
    0Provision charged to operating expenses
    
    
    2,375
    
    
    
    993
    
    
    
    1,446Loans charged off
    
    
    (1,331
    )
    
    
    (825
    )
    
    
    (3,130
    )Recoveries on previously charged off loans
    
    
    489
    
    
    
    219
    
    
    
    423Balance at end of year
    
    $
    6,298
    
    
    $
    4,765
    
    
    $
    4,427
  2006
    
    
    2005Year-end loans with no allocated allowance
for loan losses
    
    $
    115
    
    
    $
    983Year-end loans with allocated allowance
for loan losses
    
    
    8,352
    
    
    
    7,114Total
    
    $
    8,467
    
    
    $
    8,097Amount of the allowance for loan losses allocated
    
    $
    1,006
    
    
    $
    2,328
 2006
    
    2005
    
    2004Average of impaired loans during the year
    
    $
    6,910
    
    
    $
    12,258
    
    
    $
    22,292
  2006
    
    2005
    
    2004Loans past due over 90 days still on accrual
    
    $
    0
    
    
    $
    0
    
    
    $
    40Nonaccrual loans
    
    
    1,946
    
    
    
    2,273
    
    
    
    5,377
   61




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 5  LOAN SERVICING
  2006
    
    2005
    
    2004Activity during the year:Loans originated for resale, net of principal pay downs
    
    $
    85,754
    
    
    $
    103,289
    
    
    $
    53,698Loans transferred to held to maturity
    
    
    0
    
    
    
    0
    
    
    
    0Proceeds from sales of loans held for sale
    
    
    86,348
    
    
    
    107,919
    
    
    
    46,901Net gains on sales of loans held for sale
    
    
    1,119
    
    
    
    1,390
    
    
    
    378Loan servicing fees, net
    
    
    241
    
    
    
    248
    
    
    
    474
 2006
    
    
    2005Balance at year end:Loans held for sale
    
    $
    4,264
    
    
    $
    3,784Less: Allowance to adjust to lower of cost or market
    
    
    18
    
    
    
    64Loans held for sale, net
    
    $
    4,246
    
    
    $
    3,720
  2006
    
    2005Mortgage loan portfolios serviced for:FHLMC
    
    $
    73,444
    
    
    $
    87,291
    2006
    
    
    2005
    
    
    2004Servicing rights:Beginning of year
    
    $
    631
    
    
    $
    276
    
    
    $
    82Additions
    
    
    22
    
    
    
    481
    
    
    
    291Amortized to expense
    
    
    (145
    )
    
    
    (126
    )
    
    
    (97
    )Provision for loss in fair value
    
    
    0
    
    
    
    0
    
    
    
    0End of year
    
    $
    508
    
    
    $
    631
    
    
    $
    276
  62




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 5  LOAN SERVICING
  2007
    
    $
    1482008
    
    
    1432009
    
    
    962010
    
    
    752011
    
    
    30
 NOTE 6  PREMISES AND EQUIPMENT
  2006
    
    
    2005Land
    
    $
    3,481
    
    
    $
    3,250Buildings and improvements
    
    
    9,396
    
    
    
    8,075Leasehold improvements
    
    
    824
    
    
    
    848Furniture, fixtures and equipment
    
    
    7,482
    
    
    
    6,987Automobiles
    
    
    29
    
    
    
    29Construction in process
    
    
    1,060
    
    
    
    1,11422,272
    
    
    
    20,303Less: Accumulated depreciation
    
    
    7,397
    
    
    
    6,278Net premises and equipment
    
    $
    14,875
    
    
    $
    14,025
   2007
    
    $
    7292008
    
    
    7572009
    
    
    3872010
    
    
    1322011
    
    
    132Thereafter
    
    
    731$
    2,868
  63




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 7  INVESTMENT IN UNCONSOLIDATED AFFILIATES
  2006
    
    
    2005The Murray Banc Holding Company (50% ownership)
    
    $
    0
    
    
    $
    4,765Insurors Bank of Tennessee (50% ownership)
    
    
    3,090
    
    
    
    2,945Other non-consolidated affiliates
    
    
    1
    
    
    
    24$
    3,091
    
    
    $
    7,734
     64




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 7  INVESTMENT IN UNCONSOLIDATED AFFILIATES
   TMBHC
    
    
    IBOT2006
    
    
    2005
    
    
    2006
    
    
    2005ASSETS:Cash and due from banks
    
    $
    0
    
    
    $
    7,876
    
    
    $
    2,289
    
    
    $
    1,139Federal funds sold
    
    
    0
    
    
    
    143
    
    
    
    400
    
    
    
    230Securities available for sale
    
    
    0
    
    
    
    29,736
    
    
    
    13,853
    
    
    
    16,877Securities held to maturity
    
    
    0
    
    
    
    24,031
    
    
    
    0
    
    
    
    0Loans, net
    
    
    0
    
    
    
    90,520
    
    
    
    64,738
    
    
    
    53,830Premises and equipment, net
    
    
    0
    
    
    
    2,883
    
    
    
    459
    
    
    
    521Accrued interest receivable
    
    
    0
    
    
    
    1,035
    
    
    
    370
    
    
    
    276Restricted equity securities
    
    
    0
    
    
    
    439
    
    
    
    696
    
    
    
    577Other assets
    
    
    0
    
    
    
    1,707
    
    
    
    532
    
    
    
    496Total assets
    
    $
    0
    
    
    $
    158,370
    
    
    $
    83,337
    
    
    $
    73,946LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Total deposits
    
    $
    0
    
    
    $
    135,938
    
    
    $
    55,715
    
    
    $
    50,408Borrowings
    
    
    0
    
    
    
    7,954
    
    
    
    21,143
    
    
    
    17,395Accrued interest payable
    
    
    0
    
    
    
    561
    
    
    
    235
    
    
    
    157Subordinated notes and debentures
    
    
    0
    
    
    
    4,124
    
    
    
    0
    
    
    
    0Other liabilities
    
    
    0
    
    
    
    262
    
    
    
    63
    
    
    
    97Total liabilities
    
    
    0
    
    
    
    148,839
    
    
    
    77,156
    
    
    
    68,057Shareholders equity
    
    
    0
    
    
    
    9,531
    
    
    
    6,181
    
    
    
    5,889Total liabilities and shareholders equity
    
    $
    0
    
    
    $
    158,370
    
    
    $
    83,337
    
    
    $
    73,946
  TMBHC
    
    
    IBOT2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Net interest income
    
    $
    1,021
    
    
    $
    3,884
    
    
    $
    3,920
    
    
    $
    2,404
    
    
    $
    2,240
    
    
    $
    1,842Provision for loan losses
    
    
    15
    
    
    
    175
    
    
    
    176
    
    
    
    60
    
    
    
    15
    
    
    
    53Noninterest income
    
    
    253
    
    
    
    1,158
    
    
    
    972
    
    
    
    138
    
    
    
    157
    
    
    
    229Noninterest expense
    
    
    922
    
    
    
    3,540
    
    
    
    3,255
    
    
    
    2,289
    
    
    
    1,955
    
    
    
    1,735Income tax expense
    
    
    117
    
    
    
    400
    
    
    
    477
    
    
    
    13
    
    
    
    (59
    )
    
    
    (72
    )Net income
    
    $
    220
    
    
    $
    927
    
    
    $
    984
    
    
    $
    180
    
    
    $
    486
    
    
    $
    355
 65




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 8  DEPOSITS
  2006
    
    
    2005Noninterest-bearing demand
    
    $
    71,508
    
    
    $
    64,195Interest-bearing demand
    
    
    244,649
    
    
    
    211,985Savings
    
    
    16,494
    
    
    
    15,836Time deposits of $100 or more
    
    
    271,912
    
    
    
    193,699Other time
    
    
    127,957
    
    
    
    115,051Total deposits
    
    $
    732,520
    
    
    $
    600,766
  2007
    
    $
    342,3122008
    
    
    32,2482009
    
    
    18,8402010
    
    
    1,7792011
    
    
    3,044Thereafter
    
    
    1,646Total
    
    $
    399,869
 66




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 9  SECURITIES SOLD UNDER AGEEMENTS TO REPURCHASE
   2006
    
    
    2005Average daily balance during the year
    
    $
    46,949
    
    
    $
    41,315Average interest rate during the year
    
    
    4.73
    %
    
    
    3.05
    %Maximum month-end balance during the year
    
    $
    58,406
    
    
    $
    54,796Weighted average interest rate at year-end
    
    
    5.01
    %
    
    
    3.97
    %
 NOTE 10  ADVANCES FROM FEDERAL HOME LOAN BANK
    2007
    
    $
    4,0002008
    
    
    10,0002009
    
    
    02010
    
    
    16,500$
    30,500
 NOTE 11  NOTES PAYABLE
  67




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 12  SUBORDINATED DEBENTURES
       68




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 13  INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current
    
    $
    4,835
    
    
    $
    1,158
    
    
    $
    391Deferred
    
    
    (1,278
    )
    
    
    557
    
    
    
    550Total income tax expense
    
    $
    3,557
    
    
    $
    1,715
    
    
    $
    941
  2006
    
    
    2005Allowance for loan losses
    
    $
    2,411
    
    
    $
    1,825Deferred loan fees
    
    
    181
    
    
    
    213Earnings of unconsolidated subsidiaries
    
    
    218
    
    
    
    0Premises and equipment
    
    
    38
    
    
    
    0Unrealized loss on securities
    
    
    624
    
    
    
    754Accrued Bonus
    
    
    171
    
    
    
    27Other
    
    
    67
    
    
    
    42Total deferred tax assets
    
    
    3,710
    
    
    
    2,861FHLB stock dividends
    
    $
    (400
    )
    
    $
    (338
    )Earnings of unconsolidated subsidiaries
    
    
    0
    
    
    
    (301
    )Premises and equipment
    
    
    0
    
    
    
    (50
    )Loan servicing rights
    
    
    (195
    )
    
    
    (241
    )Other
    
    
    (130
    )
    
    
    (94
    )Total deferred tax liabilities
    
    
    (725
    )
    
    
    (1,024
    )Net deferred tax asset
    
    $
    2,985
    
    
    $
    1,837
  2006
    
    
    2005
    
    
    2004Computed expected provision for income taxes
    
    $
    3,482
    
    
    $
    1,910
    
    
    $
    1,104Increase (decrease) in taxes resulting fromState income taxes, net of federal tax benefit
    
    
    441
    
    
    
    270
    
    
    
    138Tax exempt interest
    
    
    (381
    )
    
    
    (389
    )
    
    
    (308
    )Bank owned life insurance
    
    
    (86
    )
    
    
    0
    
    
    
    0Compensation expense
    
    
    75
    
    
    
    0
    
    
    
    0Other, net
    
    
    26
    
    
    
    (76
    )
    
    
    7Income tax expense
    
    $
    3,557
    
    
    $
    1,715
    
    
    $
    941
 69




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 14  RELATED PARTY TRANSACTIONS
  2006
    
    
    2005Beginning balance
    
    
    
    
    
    $
    2,754
    
    
    $
    1,229New loans
    
    
    
    
    
    
    240
    
    
    
    2,149Repayments
    
    
    
    
    
    
    2,482
    
    
    
    624Ending balance
    
    
    
    
    
    $
    512
    
    
    $
    2,754
  NOTE 15  CAPITAL REQUIREMENTS
     70




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 15  CAPITAL REQUIREMENTS
  To be wellRequired
    
    
    capitalized under
    
    
    
    
    
    
    
    
    
    
    Excessminimum for
    
    
    prompt corrective
    
    
    
    
    
    
    
    
    
    
    over wellcapital adequacy
    
    
    action provisions
    
    
    Actual
    
    
    capitalizedAmount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    AmountDecember 31, 2006Tier 1 to average assets   leverageCivitas BankGroup, Inc.
    
    $
    35,017
    
    
    
    4.00
    %
    
    $
    43,772
    
    
    
    5.00
    %
    
    $
    72,211
    
    
    
    8.25
    %
    
    $
    28,439Cumberland Bank
    
    
    34,841
    
    
    
    4.00
    %
    
    
    43,551
    
    
    
    5.00
    %
    
    
    64,407
    
    
    
    7.62
    %
    
    
    22,856Tier 1 to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    28,883
    
    
    
    4.00
    %
    
    
    43,324
    
    
    
    6.00
    %
    
    
    72,211
    
    
    
    10.00
    %
    
    
    28,887Cumberland Bank
    
    
    28,745
    
    
    
    4.00
    %
    
    
    43,118
    
    
    
    6.00
    %
    
    
    66,407
    
    
    
    9.24
    %
    
    
    23,289Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    57,766
    
    
    
    8.00
    %
    
    
    72,207
    
    
    
    10.00
    %
    
    
    78,509
    
    
    
    10.87
    %
    
    
    6,302Cumberland Bank
    
    
    57,491
    
    
    
    8.00
    %
    
    
    71,864
    
    
    
    10.00
    %
    
    
    72,705
    
    
    
    10.12
    %
    
    
    841
 Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    AmountDecember 31, 2005Tier 1 to average assets  leverageCivitas BankGroup, Inc.
    
    $
    28,813
    
    
    
    4.00
    %
    
    $
    36,016
    
    
    
    5.00
    %
    
    $
    65,913
    
    
    
    9.15
    %
    
    $
    29,897Cumberland Bank
    
    
    28,810
    
    
    
    4.00
    %
    
    
    36,013
    
    
    
    5.00
    %
    
    
    53,709
    
    
    
    7.46
    %
    
    
    17,696Tier 1 to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    23,143
    
    
    
    4.00
    %
    
    
    34,714
    
    
    
    6.00
    %
    
    
    65,913
    
    
    
    11.39
    %
    
    
    31,199Cumberland Bank
    
    
    21,399
    
    
    
    4.00
    %
    
    
    32,098
    
    
    
    6.00
    %
    
    
    53,709
    
    
    
    10.04
    %
    
    
    21,611Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    49,285
    
    
    
    8.00
    %
    
    
    57,857
    
    
    
    10.00
    %
    
    
    70,678
    
    
    
    12.22
    %
    
    
    12,821Cumberland Bank
    
    
    42,798
    
    
    
    8.00
    %
    
    
    53,497
    
    
    
    10.00
    %
    
    
    58,474
    
    
    
    10.93
    %
    
    
    4,977
 71




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 16  EMPLOYEE BENEFITS
  NOTE 17  LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
   2006
    
    2005Commitments to make loan and lines of credit
    
    $
    167,069
    
    
    $
    138,663Fixed
    
    
    23,390
    
    
    
    19,413Variable
    
    
    143,679
    
    
    
    119,250Letters of credit
    
    
    11,261
    
    
    
    8,163
 72




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 18  FAIR VALUES OF FINANCIAL INSTRUMENTS
  2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    37,836
    
    
    $
    37,836
    
    
    $
    34,210
    
    
    $
    34,210Securities available for sale
    
    
    99,098
    
    
    
    99,098
    
    
    
    89,724
    
    
    
    89,724Securities held to maturity
    
    
    110,758
    
    
    
    109,538
    
    
    
    115,446
    
    
    
    113,577Loans, net of allowance
    
    
    607,739
    
    
    
    606,719
    
    
    
    471,656
    
    
    
    472,999Financial liabilities:Deposits
    
    $
    732,520
    
    
    $
    735,250
    
    
    $
    600,766
    
    
    $
    598,480Repurchase Agreements
    
    
    58,406
    
    
    
    58,406
    
    
    
    45,452
    
    
    
    45,452Subordinated debentures
    
    
    17,000
    
    
    
    17,312
    
    
    
    17,000
    
    
    
    17,045Advances from FHLB
    
    
    30,500
    
    
    
    30,575
    
    
    
    35,000
    
    
    
    35,471
   73




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 19  STOCK BASED COMPENSATION
    2006
    
    2005
    
    2004Risk-free interest rate
    
    
    5.10
    %
    
    
    4.27
    %
    
    
    3.64
    %Expected option life
    
    5 yrs.
    
    4 yrs.
    
    4 yrs.Expected stock price volatility
    
    
    4.77
    %
    
    
    24.4
    %
    
    
    23.3
    %
  WeightedAverage
    
    
    AggregateWeighted average
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    exercise price
    
    
    Term
    
    
    ValueOutstanding at beginning of year
    
    
    1,442,175
    
    
    $
    7.51Granted
    
    
    244,309
    
    
    
    7.27Exercised
    
    
    10,256
    
    
    
    7.07Forfeited or expired
    
    
    52,552
    
    
    
    7.49Outstanding at end of year
    
    
    1,623,676
    
    
    $
    7.21
    
    
    
    3.57
    
    
    $
    1,249Exercisable at end of year
    
    
    1,168,256
    
    
    $
    7.27
    
    
    
    1.65
    
    
    $
    954
 74




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 19  STOCK BASED COMPENSATION
  2006
    
    2005
    
    2004Intrinsic value of options exercised
    
    $
    81
    
    
    $
    510
    
    
    $
    2,328Cash received from options exercises
    
    
    72
    
    
    
    375
    
    
    
    1,044Tax benefit realized from options exercises
    
    
    0
    
    
    
    42
    
    
    
    492Weighted average fair value of options granted
    
    
    1.64
    
    
    
    1.42
    
    
    
    1.45
  NOTE 20  DISCONTINUED OPERATIONS
   2005
    
    2004Interest income
    
    $
    1,687
    
    
    $
    9,986Interest expense
    
    
    722
    
    
    
    3,727Net interest income
    
    
    965
    
    
    
    6,259Pretax income (loss)
    
    
    129
    
    
    
    (715
    )Taxes
    
    
    47
    
    
    
    (293
    )Net income (loss)
    
    
    82
    
    
    
    (422
    )
   BankTennessee
    
    $
    2,693Bank of Mason
    
    
    1,089
  BankTennessee
    
    $
    0Bank of Mason
    
    
    418
 75




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 21  EARNINGS PER SHARE
  2006
    
    
    2005
    
    
    2004BasicIncome from continuing operations
    
    $
    6,685
    
    
    $
    3,904
    
    
    $
    2,306Weighted average common shares
outstanding
    
    
    15,888,219
    
    
    
    16,041,868
    
    
    
    17,457,487Basic earnings per common share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.13DilutedIncome from continuing operations
    
    $
    6,685
    
    
    $
    3,904
    
    
    $
    2,306Weighted average common shares
outstanding for basic earnings per
common share
    
    
    15,888,219
    
    
    
    16,041,868
    
    
    
    17,457,487Add: Dilutive effects of assumed
exercise of stock options
    
    
    70,792
    
    
    
    79,021
    
    
    
    119,769Average shares and dilutive potential
common shares
    
    
    15,959,011
    
    
    
    16,120,889
    
    
    
    17,577,256Diluted earnings per common share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.13
 NOTE 22  OTHER COMPREHENSIVE INCOME (LOSS)
  2006
    
    
    2005
    
    
    2004Unrealized holding gains (losses) on
available for sale securities
    
    $
    766
    
    
    $
    (2,167
    )
    
    $
    (103
    )Reclassification adjustment for losses (gains)
realized in income
    
    
    (63
    )
    
    
    (100
    )
    
    
    (655
    )Net unrealized gains (losses)
    
    
    703
    
    
    
    (2,267
    )
    
    
    (758
    )Tax effect
    
    
    269
    
    
    
    (868
    )
    
    
    (290
    )Unrealized gains (losses) net of tax
    
    $
    434
    
    
    $
    (1,399
    )
    
    $
    (468
    )
 76




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 23  QUARTERLY FINANCIAL DATA (UNAUDITED)
  2006First
    
    Second
    
    Third
    
    Fourthquarter
    
    quarter
    
    quarter
    
    quarter
    
    TotalInterest income
    
    $
    11,664
    
    
    $
    12,646
    
    
    $
    14,154
    
    
    $
    14,992
    
    
    $
    53,456Net interest income
    
    
    5,649
    
    
    
    5,807
    
    
    
    6,191
    
    
    
    6,500
    
    
    
    24,147Provision for loan losses
    
    
    328
    
    
    
    490
    
    
    
    1,250
    
    
    
    307
    
    
    
    2,375Income from continuing operations *
    
    
    3,201
    
    
    
    1,111
    
    
    
    1,167
    
    
    
    1,206
    
    
    
    6,685Earnings per share  basic
    
    
    0.20
    
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.42Earnings per share  diluted
    
    
    0.20
    
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.42
 2005First
    
    Second
    
    Third
    
    Fourthquarter
    
    quarter
    
    quarter
    
    quarter
    
    TotalInterest income
    
    $
    9,253
    
    
    $
    10,043
    
    
    $
    10,146
    
    
    $
    10,915
    
    
    $
    40,357Net interest income
    
    
    5,103
    
    
    
    5,523
    
    
    
    5,207
    
    
    
    5,417
    
    
    
    21,250Provision for loan losses
    
    
    333
    
    
    
    205
    
    
    
    325
    
    
    
    130
    
    
    
    993Income from continuing operations
    
    
    780
    
    
    
    1,283
    
    
    
    821
    
    
    
    1,020
    
    
    
    3,904Earnings per share  basic
    
    
    0.06
    
    
    
    0.07
    
    
    
    0.05
    
    
    
    0.06
    
    
    
    0.24Earnings per share  diluted
    
    
    0.06
    
    
    
    0.07
    
    
    
    0.05
    
    
    
    0.06
    
    
    
    0.24
 
 *
    
    First quarter 2006 income includes $2,132 after-tax gain on sale of affiliate, The Murray Banc
Holding Company. See Note 7. 77




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 24  PARENT COMPANY ONLY FINANCIAL INFORMATION
  December 31,2006
    
    
    2005ASSETS:Cash
    
    $
    2,564
    
    
    $
    3,002Investment in subsidiaries
    
    
    65,936
    
    
    
    53,036Investment in unconsolidated affiliates
    
    
    3,091
    
    
    
    7,710Premises and equipment
    
    
    243
    
    
    
    756Other assets
    
    
    977
    
    
    
    1,232Total assets
    
    $
    72,811
    
    
    $
    65,736LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Accrued interest
    
    $
    107
    
    
    $
    62Other liabilities
    
    
    1,760
    
    
    
    1,449Subordinated debentures
    
    
    17,000
    
    
    
    17,000Total liabilities
    
    
    18,867
    
    
    
    18,511Total shareholders equity
    
    
    53,944
    
    
    
    47,225Total liabilities and shareholders equity
    
    $
    72,811
    
    
    $
    65,736
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Income:Income from unconsolidated subsidiaries
    
    $
    200
    
    
    $
    707
    
    
    $
    670Gain on sale of subsidiaries, net of taxes
    
    
    0
    
    
    
    3,364
    
    
    
    0Gain on sale of unconsolidated subsidiary
    
    
    3,457
    
    
    
    0
    
    
    
    0Central services and management fees
    
    
    3,182
    
    
    
    5,846
    
    
    
    6,889Other income
    
    
    825
    
    
    
    146
    
    
    
    4177,664
    
    
    
    10,348
    
    
    
    7,976Expenses:Interest expense
    
    
    1,264
    
    
    
    1,136
    
    
    
    953Other operating expenses
    
    
    3,415
    
    
    
    6,241
    
    
    
    7,3874,679
    
    
    
    7,377
    
    
    
    8,340Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries
    
    
    2,985
    
    
    
    2,971
    
    
    
    (364
    )Income tax expense (benefit)
    
    
    1,240
    
    
    
    25
    
    
    
    (134
    )Income (loss) before equity in undistributed
earnings of subsidiaries
    
    
    1,745
    
    
    
    2,946
    
    
    
    (230
    )Equity in undistributed earnings of subsidiaries
    
    
    4,940
    
    
    
    4,404
    
    
    
    2,114Net income
    
    $
    6,685
    
    
    $
    7,350
    
    
    $
    1,884
 78




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 24  PARENT COMPANY ONLY FINANCIAL INFORMATION
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    6,685
    
    
    $
    7,350
    
    
    $
    1,884Adjustments to reconcile net income to net
cash from operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (4,940
    )
    
    
    (4,404
    )
    
    
    (2,114
    )Compensation expense
    
    
    308
    
    
    
    0
    
    
    
    0Income from investments in unconsolidated affiliates
    
    
    (200
    )
    
    
    (707
    )
    
    
    (670
    )Gain on sale of unconsolidated affiliate
    
    
    (3,457
    )
    
    
    0
    
    
    
    0Gain on sale of subsidiary
    
    
    0
    
    
    
    (3,364
    )
    
    
    0Depreciation and amortization
    
    
    101
    
    
    
    471
    
    
    
    332Net change in accrued interest payable
    
    
    45
    
    
    
    104
    
    
    
    32Other, net
    
    
    565
    
    
    
    1,080
    
    
    
    (1,474
    )Net cash from operating activities
    
    
    (893
    )
    
    
    530
    
    
    
    (2,010
    )Cash flows from investing activities:Investment in commercial bank subsidiaries
    
    
    (7,750
    )
    
    
    (1,600
    )
    
    
    0Proceeds from sale of discontinued operations
    
    
    0
    
    
    
    1,350
    
    
    
    0Proceeds from sale of unconsolidated affiliate
    
    
    8,500
    
    
    
    0
    
    
    
    0Purchase of premises and equipment, net
    
    
    412
    
    
    
    (97
    )
    
    
    (179
    )Net cash from investing activities
    
    
    1,162
    
    
    
    (347
    )
    
    
    (179
    )Cash flows from financing activities:Proceeds from subordinated debentures
    
    
    0
    
    
    
    13,000
    
    
    
    0Repayment of subordinated debentures
    
    
    0
    
    
    
    (8,000
    )
    
    
    0Repayment of notes payable
    
    
    0
    
    
    
    (4,550
    )
    
    
    (150
    )Proceeds from issuance of common stock
    
    
    248
    
    
    
    856
    
    
    
    2,483Cash dividends paid on common stock
    
    
    (955
    )
    
    
    0
    
    
    
    (527
    )Net cash from financing activities
    
    
    (707
    )
    
    
    1,306
    
    
    
    1,806Net change in cash and cash equivalents
    
    
    (438
    )
    
    
    1,489
    
    
    
    (383
    )Cash and cash equivalents at beginning of year
    
    
    3,002
    
    
    
    1,513
    
    
    
    1,896Cash and cash equivalents at end of year
    
    $
    2,564
    
    
    $
    3,002
    
    
    $
    1,513
 NOTE 25  SUBSEQUENT EVENTS
   79




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
 (dollars in thousands, except share and per share amounts)
 NOTE 25  SUBSEQUENT EVENTS
   80




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##### Table of Contents



ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 ITEM 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Management Report on Internal Control Over Financial Reporting.
  Changes in Internal Control over Financial Reporting
  
 ITEM 9B. Other Information.
  81




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##### Table of Contents



PART III
 
 ITEM 10. Directors, Executive Officers and Corporate Governance.
     
 ITEM 11. Executive Compensation.
   
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
   Number of shares
    
    
    Weighted
    
    
    Number of sharesto be issued upon
    
    
    average exercise
    
    
    remaining available forexercise of
    
    
    price of
    
    
    future issuance underoutstanding
    
    
    outstanding
    
    
    equity compensationoptions and
    
    
    options and

    
    
    plans (excluding sharesPlan Category
    
    warrants
    
    
    warrants
    
    
    reflected in first columnEquity compensation
plans
approved by
shareholders
    
    
    1,623,676
    
    
    $
    7.21
    
    
    
    1,134,350Equity compensation
plans not
approved by
shareholders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    1,623,676
    
    
    $
    7.21
    
    
    
    1,134,350
 82




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##### Table of Contents



ITEM 13. Certain Relationships and Related Transactions and Director Independence.
   
 ITEM 14. Principal Accountant Fees and Services.
  
 ITEM 15. Exhibits, Financial Statement Schedules.
     83




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##### Table of Contents



SIGNATURES
  CIVITAS BANKGROUP, INC.By:
    /s/ Richard HerringtonRichard HerringtonPresident


Date: March 9, 2007  Signature
    
    Title
    
    Date/s/Richard Herrington
    
    President (Principal Executive Officer)
and Director
    
    March 9, 2007Richard Herrington/s/ Lisa Musgrove
    
    Chief Financial Officer, Chief
Operating Officer and
    
    March 9, 2007Lisa Musgrove
    
    Executive Vice President (Principal Financial
and Accounting Officer)/s/ John Wilder
    
    Chairman
    
    March 9, 2007John Wilder/s/ Danny Herron
    
    Director
    
    March 9, 2007Danny Herron/s/ Tom Paschal
    
    Director
    
    March 9, 2007Tom Paschal/s/ Tom Price
    
    Director
    
    March 9, 2007Tom Price/s/ William Wallace
    
    Director
    
    March 9, 2007William Wallace
 84




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Frank Inman, Jr.
    
    Director
    
    March 9, 2007Frank Inman, Jr./s/ Alex Richmond
    
    Director
    
    March 9, 2007Alex Richmond/s/ John Shepherd
    
    Director
    
    March 9, 2007John S. Shepherd/s/ Joel Porter
    
    Director
    
    March 9, 2007Joel Porter/s/ Paul Pratt, Sr.
    
    Director
    
    March 9, 2007Paul Pratt, Sr./s/ John Stein
    
    Director
    
    March 9, 2007John Stein
 85




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##### Table of Contents



2.1
    
    Plan of Tax-Free Reorganization under Section 355 of the Internal Revenue Code Agreement by
and between the Company and the Acquirers identified therein dated November 24, 2004
(incorporated herein by reference to the Companys Current Report on form 8-K filed with the
SEC on December 1, 2004). (Pursuant to Item 601(b) (2) of Regulation S-K, the schedules of
this agreement are omitted, but will be provided supplementary to the SEC upon request).2.2
    
    Agreement and Plan of Merger, dated January 25, 2007, by and between Greene County
Bancshares, Inc. and Civitas BankGroup, Inc. (incorporated herein by reference to the
Companys Current Report on Form 8-K filed with the SEC on January 26, 2007).3.1
    
    Restated Charter of the Company (Restated for SEC electronic filing purpose only and
incorporated herein by reference to the Companys registration statement on Form S-3
Registration No. 333-117041) filed with the SEC on June 30, 2004.3.2
    
    Amended and Restated Bylaws of the Company (Restated for SEC electronic filing purposes
only). (Restated for SEC electronic filing purpose only and incorporated herein by reference
to the Companys registration statement on Form S-3 (Registration No. 333-117041) filed with
the SEC on June 30, 2004.10.1
    
    Civitas BankGroup Incorporated 1998 Stock Option Plan (incorporated herein by reference to
the Companys Current Report on Form 8-K filed with the SEC on April 28, 2006). *10.2
    
    Civitas BankGroup, Inc. Employee Stock Purchase Plan (incorporated herein by reference to the
Companys Registration Statement on Form S-8 (Registration No. 333-105424 filed with the SEC
on May 20, 2003). *10.3
    
    Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to the
Companys Quarterly Report on Form 10-Q filed with the SEC on November 15, 2004). *10.4
    
    Form of Incentive Stock Option Agreement (incorporated herein by reference to the Companys
Quarterly Report on Form 10-Q filed with the SEC on November 15, 2004). *10.5
    
    Loan Agreement dated December 13, 2004 by and between the Company and First Tennessee Bank,
National Association (incorporated herein by reference to the Companys Current Report on Form
8-K filed with the SEC on December 17, 2004).10.6
    
    Purchase Agreement dated as of February 5, 2007 by and among Civitas BankGroup, Inc.,
InsCorp, and Insurors Bank of Tennessee (incorporated by reference to the Company, Current
Report on Form 8-K filed with the SEC on August 28, 2006.)10.7
    
    Director and named executive officer compensation summary. *10.8
    
    Form of Endorsement Split Dollar Agreement (incorporated by reference to the Companys
Current Report on Form 8-K filed with the SEC on January 31, 2007). *21.1
    
    Subsidiaries of the Company.23.1
    
    Consent of Crowe Chizek and Company LLC.31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management compensatory plan or arrangement 86