##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  FORM 10-K/A  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2003 Commission File Number 0-27393 CIVITAS BANKGROUP, INC.
(Exact name of registrant as specified in its charter) Tennessee
    
    62  1297760(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4 Corporate Centre
810 Crescent Centre Dr, Ste 320, Franklin, Tennessee
    
     37067(Address of principal executive offices)
    
    (Zip Code)
 (615) 383-6619
(Issuers telephone number) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.50 par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x    NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ___ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES o    NO x The aggregate market value of the Registrants voting equity held by
non-affiliates of the registrant on June 30, 2003 was $60,724,693. The market
value calculation was determined using the closing price of $6.38 for the
registrants common stock on June 30, 2003, as reported on the NASDAQ
over-the-counter bulletin board. As of February 29, 2004, 17,455,496 shares of the registrants Common
Stock were outstanding.




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Explanatory Note On March 30, 2004, Civitas BankGroup, Inc., a Tennessee corporation, (the Company) filed it
Annual Report on Form 10-K for its fiscal year ended December 31, 2003 (the Form 10-K). The
Company hereby amends the Form 10-K in this Amendment No. 1 to Form 10-K to include the audit
report of Crowe Chizek and Company, LLC for the fiscal year ended December 31, 2001, replacing the
audit report of Heathcott & Mullaly, P.C., the Companys independent public accountant for the year
ended December 31, 2001, which firm subsequently was acquired by Crowe, Chizek and Company,
LLP, the predecessor to Crowe Chizek and Company, LLC, on April 1, 2002. The audit report
of Crowe Chizek and Company, LLC included with the Companys financial statements in this Amendment
No. 1 to Form 10-K covers the balance sheets of the Company as of December 31, 2003 and 2002,
and the related statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2003. This Amendment No. 1 to Form 10-K also amends the Form 10-K to delete the consent of Heathcott
and Mullaly, P.C. contained in Exhibit 23.2 of the Form 10-K and reflect such deletion on the list
of exhibits included in Part IV, Item 15 of the Form 10-K. This Amendment No. 1 to Form 10-K also
includes certain certifications of the chief executive officer and chief financial officer of the
Company required by the rules and regulations of the Securities and Exchange Commission. No
other amendments or changes to the Form 10-K are made by this Amendment No. 1 to Form 10-K.




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TABLE OF CONTENTS  PART IIITEM 8. Financial Statements and Supplementary DataPART IVITEM 15. Exhibits and Reports on Form 8-KEX-23.1  CONSENT OF CROWE CHIZEK AND COMPANY LLCEX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEO & CFO    Table of Contents  CROSS REFERENCE INDEX
TO
FORM 10-K/A PAGEPART IIITEM 8.
    
    FINANCIAL STATEMENTS
    
    
    1PART VITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
  REPORTS ON FORM 8-K
    
    
    33




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PART II 
 ITEM 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors
Civitas BankGroup, Inc.
Franklin, Tennessee We have audited the accompanying balance sheets of Civitas BankGroup, Inc. as of December 31, 2003
and 2002, and the related statements of operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Civitas BankGroup, Inc. as of December 31, 2003 and 2002, and
the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting principles. /s/ Crowe Chizek and Company LLC Brentwood, Tennessee
March 5, 2004 1




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CIVITAS BANKGROUP, INC.
Consolidated Balance Sheet
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  2003
    
    2002ASSETS:Cash and due from banks
    
    $
    19,977
    
    
    $
    21,681Federal funds sold
    
    
    15,081
    
    
    
    20,225Total cash and cash equivalents
    
    
    35,058
    
    
    
    41,906Interest-bearing deposits in other financial institutions
    
    
    4,046
    
    
    
    9,466Securities available for sale
    
    
    140,844
    
    
    
    79,051Securities held to maturity (fair value $62,984 and
$11,616)
    
    
    62,527
    
    
    
    11,488Loans
    
    
    550,565
    
    
    
    526,215Allowance for loan losses
    
    
    (8,414
    )
    
    
    (9,062
    )Loans, net
    
    
    542,151
    
    
    
    517,153Premises and equipment, net
    
    
    22,280
    
    
    
    23,366Restricted equity securities
    
    
    5,478
    
    
    
    5,040Other real estate
    
    
    3,793
    
    
    
    6,338Investment in unconsolidated affiliates
    
    
    6,977
    
    
    
    6,163Goodwill
    
    
    1,596
    
    
    
    1,596Accrued interest receivable
    
    
    3,896
    
    
    
    3,922Other assets
    
    
    4,674
    
    
    
    6,389Total assets
    
    $
    833,320
    
    
    $
    711,878LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:DepositsNon-interest bearing
    
    $
    68,032
    
    
    $
    56,639Interest bearing
    
    
    603,604
    
    
    
    536,359Total deposits
    
    
    671,636
    
    
    
    592,998Notes payable
    
    
    4,700
    
    
    
    5,500Federal funds purchased and repurchase agreements
    
    
    33,886
    
    
    
    Advances from Federal Home Loan Bank
    
    
    51,852
    
    
    
    50,852Accrued interest payable
    
    
    2,350
    
    
    
    3,129Other liabilities
    
    
    2,155
    
    
    
    1,926Subordinated debentures
    
    
    12,000
    
    
    
    12,000Total liabilities
    
    
    778,579
    
    
    
    666,405Shareholders equity:Common stock, $0.50 par value; authorized 20,000,000 shares,
shares issued and outstanding 17,135,056 at December 31, 2003
and 15,382,626 at December 31, 2002
    
    
    8,568
    
    
    
    7,691Additional paid-in capital
    
    
    35,930
    
    
    
    27,504Retained earnings
    
    
    9,877
    
    
    
    9,749Accumulated other comprehensive income
    
    
    366
    
    
    
    529Total shareholders equity
    
    
    54,741
    
    
    
    45,473Total liabilities and shareholders equity
    
    $
    833,320
    
    
    $
    711,878
 See accompanying notes to consolidated financial statements. 2




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CIVITAS BANKGROUP, INC.
Consolidated Statements of Income
Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except share and per share amounts)  2003
    
    2002
    
    2001Interest income:Loans, including fees
    
    $
    35,542
    
    
    $
    38,977
    
    
    $
    48,155Securities
    
    
    5,302
    
    
    
    2,877
    
    
    
    1,958Deposits in financial institutions
    
    
    104
    
    
    
    145
    
    
    
    1,152Federal funds sold
    
    
    102
    
    
    
    616
    
    
    
    1,227Federal Home Loan Bank dividends
    
    
    226
    
    
    
    233
    
    
    
    373Total interest income
    
    
    41,276
    
    
    
    42,848
    
    
    
    52,865Interest expense:Deposits
    
    
    12,434
    
    
    
    14,920
    
    
    
    24,630Federal funds purchased and repurchase agreements
    
    
    117
    
    
    
    54
    
    
    
    267Advances
from Federal Home Loan Bank
    
    
    2,516
    
    
    
    2,538
    
    
    
    2,629Subordinated
debentures
    
    
    591
    
    
    
    662
    
    
    
    740Notes payable
    
    
    419
    
    
    
    469
    
    
    
    635Total interest expense
    
    
    16,077
    
    
    
    18,643
    
    
    
    28,901Net interest income
    
    
    25,199
    
    
    
    24,205
    
    
    
    23,964Provision for loan losses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Net interest income after provision for loan losses
    
    
    21,620
    
    
    
    17,405
    
    
    
    17,587Noninterest income:Service charges on deposit accounts
    
    
    3,875
    
    
    
    3,817
    
    
    
    3,551Other service charges, commissions and fees
    
    
    1,793
    
    
    
    2,298
    
    
    
    1,877Mortgage banking activities
    
    
    1,690
    
    
    
    1,645
    
    
    
    1,328Net gain on securities transactions
    
    
    274
    
    
    
    461
    
    
    
    Net gain (loss) on sale of real estate
    
    
    (224
    )
    
    
    190
    
    
    
    10Net gain on sale of SBA loans
    
    
    
    
    
    
    37
    
    
    
    282Total noninterest income
    
    
    7,408
    
    
    
    8,448
    
    
    
    7,048Noninterest expense:Salaries and employee benefits
    
    
    13,967
    
    
    
    12,461
    
    
    
    12,137Occupancy and equipment
    
    
    3,697
    
    
    
    3,374
    
    
    
    3,367Data processing expense
    
    
    1,499
    
    
    
    1,505
    
    
    
    1,606Other real estate expense
    
    
    714
    
    
    
    652
    
    
    
    479Deposit insurance premiums
    
    
    278
    
    
    
    130
    
    
    
    152Other
    
    
    7,177
    
    
    
    6,982
    
    
    
    8,273Total noninterest expenses
    
    
    27,332
    
    
    
    25,104
    
    
    
    24,408Income before income taxes
    
    
    1,696
    
    
    
    749
    
    
    
    227Income tax expense
    
    
    595
    
    
    
    228
    
    
    
    18Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Net earnings per share  basic
    
    $
    0.07
    
    
    $
    0.04
    
    
    
    0.02Net earnings per share  diluted
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.01
 See accompanying notes to consolidated financial statements. 3




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CIVITAS BANKGROUP, INC.
Consolidated Statements of Changes in Shareholders Equity
Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except share and per share amounts)  Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedOther
    
    TotalPaid-In
    
    Retained
    
    Comprehensive
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    EquityBalance at January 1, 2001
    
    
    6,893,628
    
    
    $
    3,447
    
    
    $
    25,526
    
    
    $
    10,682
    
    
    $
    (179
    )
    
    $
    39,476Purchase and retirement of common stock
    
    
    (47,000
    )
    
    
    (24
    )
    
    
    (259
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )Issuance of common stock in connection with the
acquisition of minority interest of Bank of Mason
    
    
    53,250
    
    
    
    27
    
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    480Two for one stock split
    
    
    6,899,878
    
    
    
    3,450
    
    
    
    (3,450
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    8,480
    
    
    
    4
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    23Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (830
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    209Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $146 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    238Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447Balance at December 31, 2001
    
    
    13,808,236
    
    
    
    6,904
    
    
    
    22,289
    
    
    
    10,061
    
    
    
    59
    
    
    
    39,313Issuance of common stock
    
    
    1,342,710
    
    
    
    671
    
    
    
    4,700
    
    
    
    
    
    
    
    
    
    
    
    5,371Exercise of stock options
    
    
    231,680
    
    
    
    116
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    631Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833
    )
    
    
    
    
    
    
    (833
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    521
    
    
    
    
    
    
    
    521Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $307 in income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    754
    
    
    
    754Less: adjustment for gains included in net income,
net of $177 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284
    )
    
    
    (284
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    991Balance at December 31, 2002
    
    
    15,382,626
    
    
    
    7,691
    
    
    
    27,504
    
    
    
    9,749
    
    
    
    529
    
    
    
    45,473Issuance of common stock
    
    
    1,620,330
    
    
    
    811
    
    
    
    8,132
    
    
    
    
    
    
    
    
    
    
    
    8,943Exercise of stock options
    
    
    132,100
    
    
    
    66
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    360Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (973
    )
    
    
    
    
    
    
    (973
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,101
    
    
    
    
    
    
    
    1,101Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $2 in income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Less: adjustment for gains included in net income,
net of $105 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169
    )
    
    
    (169
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    938Balance at December 31, 2003
    
    
    17,135,056
    
    
    $
    8,568
    
    
    $
    35,930
    
    
    $
    9,877
    
    
    $
    366
    
    
    $
    54,741
 See accompanying notes to consolidated financial statements 4




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CIVITAS BANKGROUP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
 (Dollars in thousands, except share and per share amounts)  2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Adjustments to reconcile net income to net cash from operating activities:Provision for loan losses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Depreciation and amortization
    
    
    1,779
    
    
    
    1,698
    
    
    
    1,876Operations of unconsolidated affiliates
    
    
    (465
    )
    
    
    150
    
    
    
    505Origination of mortgage loans held for sale
    
    
    (79,912
    )
    
    
    (61,824
    )
    
    
    (47,277
    )Proceeds from sale of mortgage loans held for sale
    
    
    79,178
    
    
    
    60,464
    
    
    
    42,396Federal Home Loan Bank stock dividend
    
    
    (226
    )
    
    
    (233
    )
    
    
    (373
    )Net gain on securities transactions
    
    
    (274
    )
    
    
    (461
    )
    
    
    Net gain/loss on sale of other real estate
    
    
    224
    
    
    
    (190
    )
    
    
    (10
    )Net change in:Deferred
income taxes
    
    
    255
    
    
    
    205
    
    
    
    (1,521
    )Accrued interest receivable
    
    
    26
    
    
    
    771
    
    
    
    951Accrued interest payable and other liabilities
    
    
    (550
    )
    
    
    (1,038
    )
    
    
    (716
    )Other, net
    
    
    1,391
    
    
    
    (9,275
    )
    
    
    (102
    )Total adjustments
    
    
    5,005
    
    
    
    (2,933
    )
    
    
    2,106Net cash from operating activities
    
    
    6,106
    
    
    
    (2,412
    )
    
    
    2,315Cash flows from investing activities:Net change in interest-bearing deposits in financial institutions
    
    
    5,420
    
    
    
    (4,903
    )
    
    
    10,425Purchases of securities available for sale
    
    
    (148,961
    )
    
    
    (83,088
    )
    
    
    (38,118
    )Proceeds from maturities, pay downs, and calls of securities
available for sale
    
    
    72,310
    
    
    
    23,918
    
    
    
    11,108Proceeds from sales of securities available for sale
    
    
    15,038
    
    
    
    23,865
    
    
    
    Purchases of securities held to maturity
    
    
    (70,645
    )
    
    
    (7,097
    )
    
    
    (11,632
    )Proceeds from maturities, pay downs, and calls of securities
held to maturity
    
    
    19,394
    
    
    
    8,344
    
    
    
    7,322Net change in loans
    
    
    (34,906
    )
    
    
    (9,431
    )
    
    
    (21,768
    )Investments in unconsolidated affiliates
    
    
    (395
    )
    
    
    (1,118
    )
    
    
    (212
    )Purchases of premises and equipment, net
    
    
    (693
    )
    
    
    (1,193
    )
    
    
    (2,166
    )Proceeds from sale of real estate
    
    
    9,384
    
    
    
    9,710
    
    
    
    3,942Net cash from investing activities
    
    
    (134,054
    )
    
    
    (40,993
    )
    
    
    (41,099
    )Cash flows from financing activities:Net change in deposits
    
    
    78,638
    
    
    
    43,574
    
    
    
    25,282Federal funds purchased
    
    
    1,000
    
    
    
    (1,675
    )
    
    
    (7,900
    )Proceeds from Federal Home Loan Bank advances
    
    
    1,000
    
    
    
    1,300
    
    
    
    24,652Repayments of Federal Home Loan Bank advances
    
    
    
    
    
    
    (1,300
    )
    
    
    (20,011
    )Proceeds from repurchase agreements
    
    
    32,886
    
    
    
    
    
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    Repayments of notes payable
    
    
    (800
    )
    
    
    (2,159
    )
    
    
    (1,090
    )Proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    
    
    
    
    4,000Dividends paid
    
    
    (927
    )
    
    
    (830
    )
    
    
    (795
    )Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (283
    )Proceeds from issuance of common stock
    
    
    9,303
    
    
    
    6,002
    
    
    
    23Net cash from financing activities
    
    
    121,100
    
    
    
    44,912
    
    
    
    23,878Net change in cash and cash equivalents
    
    
    (6,848
    )
    
    
    2
    
    
    
    (14,906
    )Cash and cash equivalents at beginning of year
    
    
    41,906
    
    
    
    40,399
    
    
    
    55,305Cash and cash equivalents at end of year
    
    $
    35,058
    
    
    $
    41,906
    
    
    $
    40,399Supplemental disclosure of cash flow information:Interest paid
    
    $
    16,856
    
    
    $
    19,508
    
    
    $
    29,601Income taxes paid
    
    
    30
    
    
    
    1,253
    
    
    
    1,627Non-Cash Activities:Issuance of common stock  due to acquisitions
    
    
    
    
    
    
    
    
    
    
    480Assets acquired through foreclosure
    
    
    7,063
    
    
    
    9,388
    
    
    
    8,130
 See accompanying notes to consolidated financial statements 5




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Civitas BankGroup, Inc. conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking and financial services industry. The significant
policies are summarized as follows: Basis of Presentation:The accompanying consolidated financial statements
include the accounts of Civitas BankGroup, Inc. (the Company) and its
subsidiaries. Material intercompany accounts and transactions have been
eliminated in consolidation. As further discussed in Note 12, a trust that had
previously been consolidated with the company is now reported separately. Nature of Operations:Substantially all of the assets, liabilities, and
operations presented in the consolidated financial statements are attributable
to the Companys five subsidiary banks: Cumberland Bank, BankTennessee,
Cumberland Bank South, Bank of Dyer, and Bank of Mason (collectively, the
Banks). The Banks provide a variety of banking services to individuals and
businesses through their 23 branches located across ten counties in Middle and
West Tennessee. Their primary deposit products are demand deposits, savings
deposits, and certificates of deposit, and their primary lending products are
commercial business, real estate mortgage, and installment loans. Other
financial services such as credit insurance, investment products, consumer loan
services, and property and casualty insurance are also provided by subsidiaries
or divisions of the Banks. Use of Estimates:The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Disclosures provided and
actual results could differ from those estimates. The allowance for loan
losses and fair value of financial instruments are particularly subject to
change. Cash Flows:Cash and cash equivalents include cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows
are reported for loans, deposit and short-term borrowing transactions. Cash and Due From Banks:Deposits in excess of $100 are not insured by the
Federal Deposit Insurance Corporation. Although the Company has several
deposit accounts with other banks in excess of this limit as of December 31, 2003, credit risk
is considered nominal. Included in cash and due from banks are legal reserve requirements, which must
be maintained on an average basis in the form of cash and balances due from the
Federal Reserve Banks. Cash on hand or on deposit with the Federal
Reserve Bank of $921 was required to meet regulatory reserve and clearing
requirements at year-end 2003. These balances do not earn interest. 6




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Securities:Debt securities are classified as held to maturity and carried at
amortized cost when the Company has the positive intent and ability to hold
them to maturity. Debt securities are classified as available for sale when
they might be sold before maturity. Securities available for sale are carried
at fair value, with unrealized holding gains and losses reported in other
comprehensive income. Equity securities with readily determinable fair values
are classified as available for sale. Interest income includes amortization of purchase premium or discount. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary. Loans:Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on
mortgage and commercial loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection.
Consumer loans are typically charged off no later than 180 days pas due. In
all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful. All interest accrued, but not
received, for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. Allowance for Loan Losses:The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. The Company
estimates the allowance balance required using past loan loss experience, the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in managements judgment,
should be charged off. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance for loan loss
reserve. The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as
impaired. The general component covers non-classified loans and is based on historical loss experience adjusted
for current factors. A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loans existing rate or at the fair value of collateral if
repayment is expected solely 7




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) from the collateral. Large groups of smaller balance homogeneous loans, such
as consumer and residential real estate loans, are collectively evaluated for
impairment, and accordingly, they are not separately identified for impairment
disclosures. Mortgage Banking Activities:The Banks originate mortgage loans for sale and
these loans are generally sold at origination. Loans held for sale are carried
at the lower of cost or fair value, on an aggregate basis. Origination fees
are recorded as income when the loans are sold to third party investors. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. Premises and Equipment:Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation has been computed
on straight-line method, based on the estimated useful lives of the respective
asset which range from 3 to 10 years for furniture, fixtures, and equipment and
5 to 40 years for buildings and improvements. Restricted Equity Securities:These amounts are stated at cost, and consist
primarily of Federal Home Loan Bank and Federal Reserve Bank Stock. Foreclosed Assets:Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. Goodwill: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets
and liabilities and identifiable intangible assets. Upon adopting new
accounting guidance in 2002, the Company ceased amortizing goodwill. Goodwill
is assessed at least annually for impairment and any such impairment will be
recognized in the period identified. Long-term Assets:Premises and equipment, goodwill, other intangible assets,
and other long-term assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair value. Loan Commitments and Related Financial Instruments:Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are
recorded when they are funded. Instruments, such as standby letters of credit,
that are considered financial guarantees in accordance with FASB Interpretation
No. 45 are recorded at fair value. 8




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Stock Compensation:Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation. 2003
    
    2002
    
    2001Net income as reported
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (208
    )
    
    
    (130
    )
    
    
    (202
    )Pro forma net income
    
    $
    893
    
    
    $
    391
    
    
    $
    7Basic earnings per share as reported
    
    
    .07
    
    
    
    0.04
    
    
    
    0.02Pro forma basic earnings per share
    
    
    .06
    
    
    
    0.01
    
    
    
    0.00Diluted earnings per share as reported
    
    
    .07
    
    
    
    0.04
    
    
    
    0.01Pro forma diluted earnings per share
    
    
    .05
    
    
    
    0.01
    
    
    
    0.01
 The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.44
    %
    
    
    4.71
    %
    
    
    4.31
    %Expected option life
    
    
    7 yrs.
    
    
    7 yrs.
    
    7 yrs.Expected stock price volatility
    
    
    8.8
    %
    
    
    18
    %
    
    
    18
    %Dividend yield
    
    
    0.93
    %
    
    
    1.50
    %
    
    
    1.46
    %
 Income Taxes:Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized. Fair Value of Financial Instruments:Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates. Earnings Per Common Share:Basic earnings per common share is net income
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. 9




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Comprehensive Income:Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as separate
components of equity. Operating Segments:While the chief decision-makers monitor the revenue
streams of the various products and services, the identifiable segments are not
material and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating segment. Adoption of New Accounting Standards:During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations,FASB Statement 145,
Rescission of FAS Statement 4, 44 and 64, Amendment of FAS Statement 13, and
Technical Corrections,FASB Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities,FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Statement 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation
46, Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Companys operating results or financial
condition. Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
than will have a material effect on the financial statements. Reclassifications:Certain reclassifications have been made to prior year
amounts to conform to the current year presentation. Dividend Restrictions:Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the banks to the Company or
by the Company to shareholders. See Note 14 for more specific disclosure related to
dividend restrictions. NOTE 2  INTEREST BEARING DEPOSITS At December 31, 2003, the Company had demand deposits totaling $2.3 million at
the Federal Home Loan Bank (FHLB). Additionally, the Company held $1.4 million
in certificates of deposit with non-affiliated banks. 10




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 3  SECURITIES The fair value of securities available for sale and the related gross
unrealized gains and losses recognized in accumulated other comprehensive
income were as follows: Gross
    
    GrossFair
    
    Unrealized
    
    UnrealizedValue
    
    Gains
    
    LossesDecember 31, 2003:U.S. Treasury and U.S. government
agencies
    
    $
    10,116
    
    
    $
    5
    
    
    $
    (2
    )Obligations of state and political
subdivisions
    
    
    1,496
    
    
    
    26
    
    
    
    Mortgage-backed
    
    
    127,641
    
    
    
    849
    
    
    
    (329
    )Marketable equity securities
    
    
    1,091
    
    
    
    
    
    
    
    (102
    )Other debt securities
    
    
    500
    
    
    
    
    
    
    
    Total
    
    $
    140,844
    
    
    $
    880
    
    
    $
    (433
    )December 31, 2002:U.S. Treasury and U.S. government
agencies
    
    $
    6,923
    
    
    $
    97
    
    
    $
    Obligations of state and political
subdivisions
    
    
    723
    
    
    
    27
    
    
    
    Mortgage-backed
    
    
    69,524
    
    
    
    562
    
    
    
    (79
    )Marketable equity securities
    
    
    1,108
    
    
    
    
    
    
    
    (85
    )Other debt securities
    
    
    773
    
    
    
    19
    
    
    
    Total
    
    $
    79,051
    
    
    $
    705
    
    
    $
    (164
    )
 The carrying amount, unrecognized gains and losses, and fair value of
securities held to maturity were as follows: Gross
    
    GrossCarrying
    
    Unrecognized
    
    Unrecognized
    
    FairAmount
    
    Gains
    
    Losses
    
    ValueDecember 31, 2003:U.S. Treasury and U.S. government
agencies
    
    $
    1,139
    
    
    $
    9
    
    
    $
    (5
    )
    
    $
    1,143Obligations of state and political
subdivisions
    
    
    17,748
    
    
    
    292
    
    
    
    (284
    )
    
    
    17,756Mortgage-backed
    
    
    40,729
    
    
    
    411
    
    
    
    (25
    )
    
    
    41,115Other debt securities
    
    
    2,911
    
    
    
    59
    
    
    
    
    
    
    
    2,970Total
    
    $
    62,527
    
    
    $
    771
    
    
    $
    (314
    )
    
    $
    62,984
 11




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 3  SECURITIES(Continued) Gross
    
    GrossCarrying
    
    Unrecognized
    
    Unrecognized
    
    FairAmount
    
    Gains
    
    Losses
    
    ValueDecember 31, 2002:U.S. Treasury and U.S. government
agencies
    
    $
    3,398
    
    
    $
    39
    
    
    $
    (18
    )
    
    $
    3,419Obligations of state and political
subdivisions
    
    
    2,823
    
    
    
    77
    
    
    
    
    
    
    
    2,900Mortgage-backed
    
    
    2,651
    
    
    
    38
    
    
    
    (8
    )
    
    
    2,681Other debt securities
    
    
    2,616
    
    
    
    
    
    
    
    
    
    
    
    2,616Total
    
    $
    11,488
    
    
    $
    154
    
    
    $
    (26
    )
    
    $
    11,616
 Sales of available for sale securities were as follows: 2003
    
    2002
    
    2001Proceeds
    
    $
    15,038
    
    
    $
    23,865
    
    
    $
    Gross gains
    
    
    274
    
    
    
    502
    
    
    
    Gross losses
    
    
    
    
    
    
    41
    
    
    
    
 Contractual maturities of securities at year-end 2003 are shown below.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately. Held to maturity
    
    AvailableCarrying
    
    Fair
    
    for saleAmount
    
    Value
    
    Fair ValueDue in one year or less
    
    $
    
    
    
    $
    
    
    
    $
    4,504Due from one to five years
    
    
    1,500
    
    
    
    1,548
    
    
    
    5,500Due from five to ten years
    
    
    1,939
    
    
    
    1,977
    
    
    
    464Due after ten years
    
    
    15,448
    
    
    
    15,374
    
    
    
    1,144Mortgage-backed
    
    
    40,729
    
    
    
    41,116
    
    
    
    127,641Marketable equity securities
    
    
    
    
    
    
    
    
    
    
    1,091Other debt securities
    
    
    2,911
    
    
    
    2,969
    
    
    
    500Total
    
    $
    62,527
    
    
    $
    62,984
    
    
    $
    140,844
 Securities with carrying amounts of approximately $106,462 at December 31, 2003
and $22,770 at December 31, 2002 were pledged to secure deposits and for other
purposes as required or permitted by law. At December 31, 2003, the Company did not hold securities of any single issuer,
other than obligations of the U. S. Treasury and other U. S. Government
agencies, whose aggregate carrying value exceeded ten percent of shareholders
equity. 12




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 3  SECURITIES(Continued) Securities with unrealized loss at year end 2003 and the length of time they
have been in continuous unrealized loss positions are as follows: Less than 12 Months
    
    12 Months or More
    
    TotalDescription of Securities
    
    Fair Value
    
    Unrealized Loss
    
    Fair Value
    
    Unrealized Loss
    
    Fair Value
    
    Unrealized LossU.S. Treasury and
Government Agencies
    
    $
    1,598
    
    
    $
    (7
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,598
    
    
    $
    (7
    )Obligations of State and
Political
Subdivisions
    
    
    7,437
    
    
    
    (284
    )
    
    
    
    
    
    
    
    
    
    
    7,437
    
    
    
    (284
    )Mortgage Backed
    
    
    57,785
    
    
    
    (343
    )
    
    
    1,062
    
    
    
    (11
    )
    
    
    58,847
    
    
    
    (354
    )Equity Securities
    
    
    
    
    
    
    
    
    
    
    1,091
    
    
    
    (102
    )
    
    
    1,091
    
    
    
    (102
    )Total temporarily
impaired
    
    $
    66,820
    
    
    $
    (634
    )
    
    $
    2,153
    
    
    $
    (113
    )
    
    $
    68,973
    
    
    $
    (747
    )
 Unrealized losses on securities have not been recognized into income because
the securities are of high credit quality, management has the intent and
ability to hold for the foreseeable future, and the decline in fair value is
largely due to increases in market interest rates. The fair value is expected
to recover as the securities approach their maturity date or market
rate change. NOTE 4  LOANS A summary of loans outstanding by category follows: 2003
    
    2002Real estate:Construction and development
    
    $
    83,211
    
    
    $
    71,907One-to-four family residential properties
    
    
    158,116
    
    
    
    169,220Commercial
    
    
    106,483
    
    
    
    93,894Commercial
    
    
    157,470
    
    
    
    145,409Consumer
    
    
    39,258
    
    
    
    44,978Other
    
    
    6,385
    
    
    
    1,103Total loans
    
    
    550,923
    
    
    
    526,511Net unearned income and deferred fees
    
    
    (358
    )
    
    
    (296
    )Subtotal
    
    
    550,565
    
    
    
    526,215Allowance for loan losses
    
    
    (8,414
    )
    
    
    (9,062
    )Loans, net
    
    $
    542,151
    
    
    $
    517,153
 Loans serviced for others, which are not included in net loans, totaled $72,238
and $74,139 at December 31, 2003 and 2002. Loans held for
sale totaled $1,651 and $10,442 at December 31, 2003 and 2002 and are
included in one-to-four family residential properties in the table
above. 13




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 4  LOANS(Continued) Certain parties (principally, directors and officers of the Company or the
Banks, including their affiliates, families, and companies in which they hold
ten percent or more ownership) were customers of, and had loans and other
transactions with the Banks in the ordinary course of business. The
outstanding balances of such loans totaled $5,737 and $3,922 at December 31,
2003 and December 31, 2002. These loan transactions were made on
substantially the same terms as those prevailing at the time for comparable
loans to other persons. They did not involve more than the normal risk of
collectibility or present other unfavorable features. Activity in the allowance for loan losses was as follows: 2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137Allowance for loan losses due to acquisition
    
    
    
    
    
    
    
    
    
    
    Provision charged to operating expenses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Loans charged off
    
    
    (5,143
    )
    
    
    (7,399
    )
    
    
    (3,903
    )Recoveries on previously charged off loans
    
    
    916
    
    
    
    638
    
    
    
    412Balance at end of year
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023
 Impaired loans were as follows: 2003
    
    2002Year-end loans with no allocated allowance for loan losses
    
    $
    422
    
    
    $
    Year-end loans with allocated allowance for loan losses
    
    
    20,189
    
    
    
    18,435Total
    
    $
    20,611
    
    
    $
    18,435Amount of the allowance for loan losses allocated
    
    $
    3,772
    
    
    $
    2,765
 2003
    
    2002
    
    2001Average of impaired loans during the year
    
    $
    17,969
    
    
    $
    15,701
    
    
    $
    10,649
 Cash-basis interest income recognized on impaired loans for 2003, 2002 and 2001
was immaterial. 2003
    
    2002
    
    2001Nonperforming loans were as follows:Loans past due over 90 days still on accrual
    
    $
    3
    
    
    $
    
    
    
    
    1,168Nonaccrual loans
    
    
    12,362
    
    
    
    18,435
    
    
    
    12,625
 Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category. 14




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 5  PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 2003
and 2002. 2003
    
    2002Land
    
    $
    6,027
    
    
    $
    5,666Buildings and improvements
    
    
    15,568
    
    
    
    15,993Leasehold improvements
    
    
    844
    
    
    
    816Furniture, fixtures and equipment
    
    
    9,293
    
    
    
    8,291Automobiles
    
    
    157
    
    
    
    270Construction in process
    
    
    32
    
    
    
    51131,921
    
    
    
    31,547Less: Accumulated depreciation
    
    
    9,641
    
    
    
    8,181Net premises and equipment
    
    $
    22,280
    
    
    $
    23,366
 Depreciation expense related
to premises and equipment amounted to $1,779 in 2003, $1,698 in 2002 and
$1,876 in 2001. The Company has entered into various non-cancelable operating lease
arrangements in connection with its operating locations. Based upon these
agreements at December 31, 2003, future minimum lease commitments before
considering renewal options that generally are present are as follows: 2004
    
    $
    4742005
    
    
    4802006
    
    
    4822007
    
    
    4922008
    
    
    438Thereafter
    
    
    198$
    2,564
 Rent expense relating to these agreements which are included in occupancy
expense amounted to $381 in 2003, $264 in 2002 and $235 in 2001. During 2003, the subsidiaries of the Company leased certain premises from
related parties. The related expense from the leases totaled approximately
$19. 15




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 6  INVESTMENT IN UNCONSOLIDATED AFFILIATES Investments in unconsolidated affiliates consist of the following at December
31, 2003 and 2002: 2003
    
    2002Investment
in The Murray Banc Holding Company (50% ownership)
    
    $
    4,039
    
    
    $
    3,493Investment in Insurors Bank of Tennessee (50% ownership)
    
    
    2,677
    
    
    
    2,332Other investments in other unconsolidated affiliates
    
    
    261
    
    
    
    338$
    6,977
    
    
    $
    6,163
 The Company uses the equity
method of accounting for its investments in unconsolidated affiliates. The initial investment is recorded
at cost and the carrying amount of the investment is increased or decreased by
the Companys proportionate share of earnings or losses. Any dividends received
are recorded as a reduction in the investment. Condensed financial information for The Murray Banc Holding Company (TMB) and
Insurors Bank of Tennessee (IBOT) are as follows as of December 31, 2003 and
2002: CONDENSED BALANCE SHEETS TMB
    
    IBOT2003
    
    2002
    
    2003
    
    2002ASSETS:Cash and due from banks
    
    $
    4,367
    
    
    $
    4,152
    
    
    $
    1,716
    
    
    $
    757Federal funds sold
    
    
    6,991
    
    
    
    8,488
    
    
    
    
    
    
    
    325Securities available for sale
    
    
    21,320
    
    
    
    25,837
    
    
    
    11,170
    
    
    
    6,191Securities held to maturity
    
    
    31,491
    
    
    
    
    
    
    
    
    
    
    
    Loans, net
    
    
    66,028
    
    
    
    54,631
    
    
    
    41,319
    
    
    
    33,120Premises and equipment, net
    
    
    2,806
    
    
    
    2,303
    
    
    
    364
    
    
    
    515Accrued interest receivable
    
    
    738
    
    
    
    583
    
    
    
    167
    
    
    
    151Restricted equity securities
    
    
    337
    
    
    
    324
    
    
    
    473
    
    
    
    433Other assets
    
    
    4,134
    
    
    
    123
    
    
    
    351
    
    
    
    199Total assets
    
    $
    138,212
    
    
    $
    96,441
    
    
    $
    55,560
    
    
    $
    41,691LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Total deposits
    
    $
    115,532
    
    
    $
    87,541
    
    
    $
    43,319
    
    
    $
    30,971Borrowings
    
    
    9,894
    
    
    
    1,141
    
    
    
    6,731
    
    
    
    5,791Accrued interest payable
    
    
    303
    
    
    
    333
    
    
    
    73
    
    
    
    206Subordinated notes and debentures
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    406
    
    
    
    441
    
    
    
    83
    
    
    
    59Total liabilities
    
    
    130,135
    
    
    
    89,456
    
    
    
    50,206
    
    
    
    37,027Shareholders equity
    
    
    8,077
    
    
    
    6,985
    
    
    
    5,354
    
    
    
    4,664Total liabilities and shareholders equity
    
    $
    138,212
    
    
    $
    96,441
    
    
    $
    55,560
    
    
    $
    41,691
 16




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 6  INVESTMENT IN UNCONSOLIDATED AFFILIATES(continued) CONDENSED INCOME STATEMENT TMB
    
    IBOT2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Net interest income
    
    $
    2,969
    
    
    $
    2,482
    
    
    $
    1,835
    
    
    $
    1,538
    
    
    $
    1,077
    
    
    $
    419Provision for loan losses
    
    
    166
    
    
    
    128
    
    
    
    373
    
    
    
    75
    
    
    
    256
    
    
    
    Noninterest income
    
    
    976
    
    
    
    662
    
    
    
    492
    
    
    
    221
    
    
    
    77
    
    
    
    16Noninterest expense
    
    
    2,893
    
    
    
    2,249
    
    
    
    1,778
    
    
    
    1,649
    
    
    
    1,554
    
    
    
    1,622Income tax expense
    
    
    275
    
    
    
    261
    
    
    
    51
    
    
    
    (130
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    611
    
    
    $
    506
    
    
    $
    125
    
    
    $
    165
    
    
    $
    (656
    )
    
    $
    (1,187
    )
 NOTE 7  GOODWILL Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows: 2003
    
    2002
    
    2001Reported net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Add back: goodwill amortization, net of income tax
    
    
    
    
    
    
    
    
    
    
    70Adjusted net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    279Basic earnings per share:Reported net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.01Adjusted net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.03Diluted earnings per share:Reported net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.01Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.01Adjusted net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02
 17




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 8  DEPOSITS A summary of deposits at December 31, 2003 and 2002 is as follows: 2003
    
    2002Noninterest-bearing demand
    
    $
    68,032
    
    
    $
    56,639Interest-bearing demand
    
    
    189,257
    
    
    
    193,033Savings
    
    
    29,734
    
    
    
    28,562Certificates of deposit of $100 or more
    
    
    203,510
    
    
    
    120,796Other time
    
    
    181,103
    
    
    
    193,968Total deposits
    
    $
    671,636
    
    
    $
    592,998
 Scheduled maturities of time deposits for the next five years were as follows: 2004
    
    $
    241,6752005
    
    
    51,7482006
    
    
    31,9112007
    
    
    34,5012008
    
    
    24,778
 NOTE 9  SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured by securities with a
carry amount of $29,590 at year-end 2003. There were no securities sold under
agreement to repurchase in 2002. Securities sold under agreements to repurchase are financing arrangements that
mature daily. At maturity, the securities underlying the agreements are
returned to the Company. Information concerning securities sold under
agreements to repurchase is summarized as follows: 2003Average daily balance during the year
    
    $
    11,223Average interest rate during the year
    
    
    0.89
    %Maximum month-end balance during the year
    
    $
    25,232Weighted average interest rate at year-end
    
    
    0.80
    %
 18




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 10  ADVANCES FROM FEDERAL HOME LOAN BANK The Federal Home Loan Bank (FHLB) of Cincinnati advances funds to the Company
with the requirement that the advances are secured by qualifying loans,
essentially home mortgages (1-4 family residential). To participate in this
program, the Company is required to be a member of the Federal Home Loan Bank
and own stock in the FHLB. The Company has $4.4 million of such stock at
December 31, 2003 to satisfy this requirement. At December 31, 2003 and
2002, advances from the FHLB totaled $51,852 and
$50,852. The interest rates on these advances ranged from 2.72% to
5.45%. Qualifying loans totaling $121,631 and $94,117 were pledged as security
under a pledge agreement with the FHLB at December 31, 2003 and 2002.
Securities totaling $16,814 and $21,670 were also pledged for these borrowings
at December 31, 2003 and 2002. Maturities of the advances from FHLB at December 31, 2003 are as follows: 2004
    
    $
    8522005
    
    
    1,0002006
    
    
    2,0002007
    
    
    2008
    
    
    10,000Later years
    
    
    38,000$
    51,852
 19




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 11  NOTES PAYABLE Notes payable consist of the
following at year-end: 2003
    
    2002$2,000
credit facility from a lending
institution which bears a variable
rate of interest equal to 90 day LIBOR Rate plus
225 basis points. This note is
currently at its floor rate of 7.50%.
Interest is payable quarterly.
Principal is payable in forty equal
quarterly payments of $50. The note
is secured by all of the outstanding
shares of the capital stock of
Cumberland Bank, BankTennessee,
Cumberland Bank South, The Bank of
Dyer and any shares of capital stock
the Company owns in any other banks.
    
    $
    1,700
    
    
    $
    1,900$6,000 credit from a lending
institution which bears interest at a
rate of 7.50%. Interest is payable
quarterly and principal is payable in
ten annual installments of $600
commencing April 1, 2000. The note is
secured by 100% of the common stock of
Cumberland Bank, BankTennessee, and
Cumberland Bank South.
    
    
    3,000
    
    
    
    3,600$
    4,700
    
    
    $
    5,500
 Minimum annual principal payments for future years are as follows: 2004
    
    $
    8002005
    
    
    8002006
    
    
    8002007
    
    
    8002008
    
    
    800Later years
    
    
    700$
    4,700
 The Company has agreed to certain covenants in connection with the notes
payable. These covenants include, among other
things, minimum financial ratios for the Banks. The Banks were in
compliance with all of the provisions of the loan covenants as of December 31,
2003. 20




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 12  SUBORDINATED DEBENTURES On December 29, 2000, Civitas BankGroup, Inc., through Cumberland Capital Trust
I and with the assistance of its Placement Agent, sold to institutional
investors $8,000,000 of capital securities. Cumberland Capital Trust I, a
business trust, issued $8,000,000 of Floating Rate Capital Securities. Holders
of the Capital Securities are entitled to receive preferential cumulative cash
distributions from the Trust, at a rate per annum reset quarterly equal to the
sum of three month LIBOR plus 350 basis points. The rate was 4.66% at December
31, 2003. Interest is payable quarterly. The Company can defer payment of the cash distributions on the
securities at any time or from time to time for a period not to exceed twenty
consecutive quarters. Civitas BankGroup, Inc. has, through various contractual arrangements, fully
and unconditionally guaranteed all of Cumberland Capital Trust Is obligations
with respect to the capital securities. These Capital Securities qualify as a
Tier I Capital, subject to certain limitations, and are presented in the
consolidated balance sheets as subordinated debentures. The sole asset of
Cumberland Capital Trust I is $8,000,000 of junior subordinated debentures
issued by Civitas BankGroup, Incorporated. These junior subordinated
debentures also carry the same floating rate as the Capital Securities and both
mature on December 25, 2025; however, the maturity of both may be shortened to
a date not earlier than December 25, 2005. On July 31, 2001, Civitas BankGroup, Inc., through Cumberland Capital Trust II
and with the assistance of its Placement Agent, sold to institutional investors
$4,000,000 of capital securities. Cumberland Capital Trust II, a Connecticut
business trust, issued $4,000,000 of Floating Rate Capital Securities. Holders
of the Capital Securities are entitled to receive preferential cumulative cash
distributions from the Trust, at a rate per annum reset quarterly equal to the
sum of three month LIBOR plus 358 basis points. The rate was 5.15% at
December 31, 2003. Interest is payable quarterly. The Company can defer payment on the securities at any time
or from time to time for a period not to exceed twenty consecutive quarters. Civitas BankGroup, Inc. has, through various contractual arrangements, fully
and unconditionally guaranteed all of Cumberland Capital Trust IIs obligations
with respect to the capital securities. These Capital Securities qualify as a
Tier I Capital, subject to certain limitations, and are presented in the
consolidated balance sheets as subordinated debentures. The sole asset of
Cumberland Capital Trust II is $4,000,000 of junior subordinated debentures
issued by Civitas BankGroup, Inc. These junior subordinated debentures also
carry the same floating rate as the Capital Securities and both mature on July
31, 2031; however, the maturity of both may be shortened to a date not earlier
than July 31, 2006. 21




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 12  SUBORDINATED DEBENTURES (continued) Prior to 2003, the trusts were consolidated in the Companys financial
statements, with the trust preferred securities issued by the trust reported in
liabilities as guaranteed preferred beneficial interests and the subordinated
debentures eliminated in consolidation. Under new accounting guidance, FASB
Interpretation No. 46, as revised in December 2003, the trusts are no longer
consolidated with the Company. Accordingly, the Company does not report the
securities issued by the trust as liabilities, and instead reports as
liabilities the subordinated debentures issued by the Company and held by the
trust, as these are no longer eliminated in consolidation. Amounts previously
reported as guaranteed preferred beneficial interests in liabilities have
been recaptioned subordinated debentures and continue to be presented in
liabilities on the balance sheet. The effect of no longer consolidating the
trust does not significantly change the amounts reported as the Companys
assets, liabilities, equity, or interest expense. NOTE 13  INCOME TAXES Income tax expense (benefit) consists of the following: 2003
    
    2002
    
    2001Current federal
    
    $
    124
    
    
    $
    14
    
    
    $
    1,279Current state
    
    
    40
    
    
    
    9
    
    
    
    255Total current
    
    
    164
    
    
    
    23
    
    
    
    1,534Deferred federal
    
    
    210
    
    
    
    166
    
    
    
    (1,283
    )Deferred state
    
    
    45
    
    
    
    39
    
    
    
    (238
    )Total deferred
    
    
    255
    
    
    
    205
    
    
    
    (1,521
    )Tax benefits
credited to shareholders equity
related to exercise of stock options
    
    
    176
    
    
    
    
    
    
    
    5Total income tax expense
    
    $
    595
    
    
    $
    228
    
    
    $
    18
 Temporary differences between tax and financial reporting that
result in deferred tax assets (liabilities) included in other assets on the
consolidated balance sheet are as follows at December 31, 2003 and 2002: 2003
    
    2002Allowance for loan losses
    
    $
    3,378
    
    
    $
    3,535Deferred loan fees
    
    
    138
    
    
    
    89Other
    
    
    224
    
    
    
    370Total deferred tax assets
    
    
    3,740
    
    
    
    3,994FHLB stock dividends
    
    $
    (844
    )
    
    $
    (734
    )Premises and equipment
    
    
    (492
    )
    
    
    (495
    )Unrealized gain on securities
    
    
    (171
    )
    
    
    (205
    )Loan servicing rights
    
    
    (33
    )
    
    
    (84
    )Other
    
    
    (189
    )
    
    
    (244
    )Total deferred tax liabilities
    
    
    (1,729
    )
    
    
    (1,762
    )Net deferred tax asset
    
    $
    2,011
    
    
    $
    2,232
 22




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 13  INCOME TAXES(continued) A reconciliation of income
tax expense with the amount of income
taxes computed by applying the federal statutory rate (34%) to earnings before
income taxes follows: 2003
    
    2002
    
    2001Computed expected provision for income taxes
    
    $
    577
    
    
    $
    256
    
    
    $
    77Increase (decrease) in taxes resulting from:State income taxes, net of federal tax benefit
    
    
    56
    
    
    
    32
    
    
    
    11Tax exempt interest
    
    
    (150
    )
    
    
    (77
    )
    
    
    (75
    )Other, net
    
    
    112
    
    
    
    17
    
    
    
    5Income tax expense
    
    $
    595
    
    
    $
    228
    
    
    $
    18
 During 1996, the subsidiary Banks began computing their tax bad debt reserves
under the rules which apply to commercial banks. In years prior to 1996, the
Banks obtained tax bad debt deductions of approximately $1.8 million in excess
of their financial statement allowance for loan losses for which no provision
for federal income tax was made. These amounts are subject to federal income
tax in future years if used for purposes other than to absorb bad debt losses.
This excess reserve is subject to recapture only if a bank ceases to qualify
as a bank as defined in the Internal Revenue Code. NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS The Company and its subsidiaries, Cumberland Bank, BankTennessee and Bank of
Dyer, have agreed with or committed to bank regulatory officials to
take various actions, including to reduce the level of criticized or
non-performing loans, to improve loan underwriting, problem loan resolution and
collection, and strategic and capital planning, to obtain prior regulatory
approval before incurring additional holding company indebtedness, repurchasing
shares, or paying dividends from certain subsidiary banks to the holding
company or from the holding company to shareholders, and to maintain certain
capital levels at subsidiary banks in excess of those required for well
capitalized status. The most restrictive of these provisions would require the
Company to maintain a Tier I leverage ratio of at least 7.0% at BankTennessee,
Bank of Dyer and Cumberland Bank at December 31, 2003. The Company and its
subsidiaries believe they were in compliance in all material respects with
these agreements at December 31, 2003. Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. As of December 31, 2003, the most recent notification from the Federal Reserve
Bank categorized the Company and all Bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Company and the Banks must maintain total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institutions category. 23




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS (Continued) The Company and the Banks actual capital amounts and ratios at December 31,
2003 and 2002 are as follows: To be wellcapitalized underprompt correctiveRequired Minimum
    
    action provisions
    
    ActualDecember 31, 2003
    
    Amount
    
    Ratios
    
    Amount
    
    Ratios
    
    Amount
    
    RatiosTier I to
average assets  leverageCivitas BankGroup, Inc.
    
    
    33,047
    
    
    
    4.00
    %
    
    
    41,308
    
    
    
    5.00
    %
    
    
    64,965
    
    
    
    7.86
    %Cumberland Bank
    
    
    11,978
    
    
    
    4.00
    %
    
    
    14,973
    
    
    
    5.00
    %
    
    
    21,591
    
    
    
    7.21
    %Cumberland Bank South
    
    
    11,254
    
    
    
    4.00
    %
    
    
    14,067
    
    
    
    5.00
    %
    
    
    19,636
    
    
    
    6.98
    %BankTennessee
    
    
    7,423
    
    
    
    4.00
    %
    
    
    9,278
    
    
    
    5.00
    %
    
    
    14,569
    
    
    
    7.85
    %Bank of Dyer
    
    
    1,969
    
    
    
    4.00
    %
    
    
    2,461
    
    
    
    5.00
    %
    
    
    3,527
    
    
    
    7.16
    %Bank of Mason
    
    
    363
    
    
    
    4.00
    %
    
    
    454
    
    
    
    5.00
    %
    
    
    964
    
    
    
    10.61
    %Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    21,173
    
    
    
    4.00
    %
    
    
    31,759
    
    
    
    6.00
    %
    
    
    64,965
    
    
    
    12.27
    %Cumberland Bank
    
    
    8,576
    
    
    
    4.00
    %
    
    
    12,863
    
    
    
    6.00
    %
    
    
    21,591
    
    
    
    10.07
    %Cumberland Bank South
    
    
    6,052
    
    
    
    4.00
    %
    
    
    9,078
    
    
    
    6.00
    %
    
    
    19,636
    
    
    
    12.98
    %BankTennessee
    
    
    5,069
    
    
    
    4.00
    %
    
    
    7,604
    
    
    
    6.00
    %
    
    
    14,569
    
    
    
    11.50
    %Bank of Dyer
    
    
    1,092
    
    
    
    4.00
    %
    
    
    1,638
    
    
    
    6.00
    %
    
    
    3,527
    
    
    
    12.92
    %Bank of Mason
    
    
    171
    
    
    
    4.00
    %
    
    
    256
    
    
    
    6.00
    %
    
    
    964
    
    
    
    22.60
    %Total capital to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    42,346
    
    
    
    8.00
    %
    
    
    52,932
    
    
    
    10.00
    %
    
    
    71,604
    
    
    
    13.53
    %Cumberland Bank
    
    
    17,151
    
    
    
    8.00
    %
    
    
    21,439
    
    
    
    10.00
    %
    
    
    24,189
    
    
    
    11.28
    %Cumberland Bank South
    
    
    12,105
    
    
    
    8.00
    %
    
    
    15,131
    
    
    
    10.00
    %
    
    
    21,534
    
    
    
    14.23
    %BankTennessee
    
    
    10,139
    
    
    
    8.00
    %
    
    
    12,673
    
    
    
    10.00
    %
    
    
    16,167
    
    
    
    12.76
    %Bank of Dyer
    
    
    2,184
    
    
    
    8.00
    %
    
    
    2,730
    
    
    
    10.00
    %
    
    
    3,872
    
    
    
    14.18
    %Bank of Mason
    
    
    341
    
    
    
    8.00
    %
    
    
    427
    
    
    
    10.00
    %
    
    
    1,013
    
    
    
    23.75
    %
 24




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS (Continued) To be wellcapitalized underprompt correctiveRequired Minimum
    
    action provisions
    
    ActualDecember 31, 2002
    
    Amount
    
    Ratios
    
    Amount
    
    Ratios
    
    Amount
    
    RatiosTier I to average assets leverageCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    4.00
    %
    
    
    34,933
    
    
    
    5.00
    %
    
    
    55,544
    
    
    
    7.95
    %Cumberland Bank
    
    
    11,024
    
    
    
    4.00
    %
    
    
    13,780
    
    
    
    5.00
    %
    
    
    20,255
    
    
    
    7.35
    %BankTennessee
    
    
    7,439
    
    
    
    4.00
    %
    
    
    9,299
    
    
    
    5.00
    %
    
    
    13,901
    
    
    
    7.47
    %Cumberland Bank South
    
    
    6,691
    
    
    
    4.00
    %
    
    
    8,363
    
    
    
    5.00
    %
    
    
    14,417
    
    
    
    8.62
    %Bank of Dyer
    
    
    2,024
    
    
    
    4.00
    %
    
    
    2,530
    
    
    
    5.00
    %
    
    
    3,777
    
    
    
    7.46
    %Bank of Mason
    
    
    426
    
    
    
    4.00
    %
    
    
    532
    
    
    
    5.00
    %
    
    
    1,088
    
    
    
    10.22
    %Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    4.00
    %
    
    
    34,933
    
    
    
    6.00
    %
    
    
    55,544
    
    
    
    10.92
    %Cumberland Bank
    
    
    11,024
    
    
    
    4.00
    %
    
    
    13,780
    
    
    
    6.00
    %
    
    
    20,255
    
    
    
    9.57
    %BankTennessee
    
    
    7,439
    
    
    
    4.00
    %
    
    
    9,299
    
    
    
    6.00
    %
    
    
    13,901
    
    
    
    10.49
    %Cumberland Bank South
    
    
    6,691
    
    
    
    4.00
    %
    
    
    8,363
    
    
    
    6.00
    %
    
    
    14,417
    
    
    
    11.91
    %Bank of Dyer
    
    
    2,024
    
    
    
    4.00
    %
    
    
    2,530
    
    
    
    6.00
    %
    
    
    3,777
    
    
    
    11.40
    %Bank of Mason
    
    
    426
    
    
    
    4.00
    %
    
    
    532
    
    
    
    6.00
    %
    
    
    1,088
    
    
    
    20.60
    %Total capital to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    8.00
    %
    
    
    34,933
    
    
    
    10.00
    %
    
    
    61,935
    
    
    
    12.18
    %Cumberland Bank
    
    
    11,024
    
    
    
    8.00
    %
    
    
    13,780
    
    
    
    10.00
    %
    
    
    22,911
    
    
    
    10.82
    %BankTennessee
    
    
    7,439
    
    
    
    8.00
    %
    
    
    9,299
    
    
    
    10.00
    %
    
    
    15,578
    
    
    
    11.76
    %Cumberland Bank South
    
    
    6,691
    
    
    
    8.00
    %
    
    
    8,363
    
    
    
    10.00
    %
    
    
    15,930
    
    
    
    13.16
    %Bank of Dyer
    
    
    2,024
    
    
    
    8.00
    %
    
    
    2,530
    
    
    
    10.00
    %
    
    
    4,198
    
    
    
    12.67
    %Bank of Mason
    
    
    426
    
    
    
    8.00
    %
    
    
    532
    
    
    
    10.00
    %
    
    
    1,154
    
    
    
    21.85
    %
 25




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 15  EMPLOYEE BENEFITS The Company maintains a 401(k) savings plan for all employees who have
completed six months of service and are 21 1/2 or more years of age. Employer
contributions to the plan are determined annually by the board of directors.
The Companys expenses related to the plan were $267 in 2003, $233 in 2002 and
$398 in 2001. NOTE 16  OFF-BALANCE-SHEET ACTIVITIES Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year end: 2003
    
    2002Commitments to make loans
    
    $
    72,769
    
    
    $
    58,789Unused lines of credit and letters of credit
    
    
    26,918
    
    
    
    26,156
 Commitments to make loans are generally made for periods of 60 days or less. 26




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##### Table of Contents





CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

(Dollars in thousands, except share and per share amounts)

---

NOTE 17  FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated carrying amounts and fair values of the Companys financial
instruments are as follows at December 31, 2003 and 2002:

2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and due from banks
    
    $
    19,977
    
    
    $
    19,977
    
    
    $
    21,681
    
    
    $
    21,681Federal funds sold
    
    
    15,081
    
    
    
    15,081
    
    
    
    20,225
    
    
    
    20,225Interest-bearing deposits in
financial institutions
    
    
    4,046
    
    
    
    4,046
    
    
    
    9,466
    
    
    
    9,466Securities available for sale
    
    
    140,844
    
    
    
    140,844
    
    
    
    79,051
    
    
    
    79,051Securities held to maturity
    
    
    62,527
    
    
    
    62,984
    
    
    
    11,488
    
    
    
    11,616Loans, net of allowance
    
    
    542,151
    
    
    
    543,954
    
    
    
    517,153
    
    
    
    522,382Accrued interest receivable
    
    
    3,896
    
    
    
    3,896
    
    
    
    3,922
    
    
    
    3,922Restricted equity securities
    
    
    5,478
    
    
    
    5,478
    
    
    
    5,040
    
    
    
    5,040Investment in unconsolidated
affiliates
    
    
    6,977
    
    
    
    6,977
    
    
    
    6,163
    
    
    
    6,163Financial liabilities:Deposits
    
    $
    671,636
    
    
    $
    673,147
    
    
    $
    592,998
    
    
    $
    597,690Notes payable
    
    
    4,700
    
    
    
    4,830
    
    
    
    5,500
    
    
    
    5,766Federal
funds purchased and repurchase agreements
    
    
    33,886
    
    
    
    33,886
    
    
    
    
    
    
    
    Advances from FHLB
    
    
    51,852
    
    
    
    55,939
    
    
    
    50,852
    
    
    
    55,642Accrued interest payable
    
    
    2,350
    
    
    
    2,350
    
    
    
    3,129
    
    
    
    3,129Subordinated
debentures
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000 The methods and assumptions used to estimate fair value are described as
follows: Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. Fair value of debt is
based on current rates for similar financing. The fair value of
off-balance-sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements. 27




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 18  STOCK OPTIONS Options to buy stock are granted to directors, officers and employees under the
Employee Stock Option Plan, which provides for issue of up to 2,000,000
options. Exercise price is the market price at date of grant, so there is no
compensation expense recognized in the income statement. The maximum option
term is ten years, and options typically vest over five years. A summary of the activity in the plan is as follows. 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at
beginning
of year
    
    
    768,890
    
    
    $
    3.49
    
    
    
    911,740
    
    
    $
    3.22
    
    
    
    925,020
    
    
    $
    3.39Granted
    
    
    30,000
    
    
    
    5.63
    
    
    
    121,000
    
    
    
    4.12
    
    
    
    39,100
    
    
    
    4.12Exercised
    
    
    (132,100
    )
    
    
    2.76
    
    
    
    (231,680
    )
    
    
    2.73
    
    
    
    (8,480
    )
    
    
    2.73Forfeited or expired
    
    
    (20,900
    )
    
    
    4.29
    
    
    
    (32,170
    )
    
    
    2.97
    
    
    
    (43,900
    )
    
    
    2.73Outstanding at
end of year
    
    
    645,890
    
    
    
    3.94
    
    
    
    768,890
    
    
    $
    3.49
    
    
    
    911,740
    
    
    $
    3.22Options exercisable
at year-end
    
    
    488,330
    
    
    
    
    
    
    
    615,980
    
    
    
    
    
    
    
    655,296Weighted-average
fair value of
options granted
during year
    
    
    
    
    
    $
    1.67
    
    
    
    
    
    
    $
    1.04
    
    
    
    
    
    
    $
    1.03
 Options outstanding at year-end 2003 were as follows: Outstanding

    ExercisableWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageRemaining
    
    
    
    
    
    RemainingExercise
    
    
    
    
    
    Contractual
    
    
    
    
    
    ContractualPrice
    
    Number
    
    Life in Years
    
    Number
    
    Life in Years$2.73
    
    
    328,290
    
    
    0.16
    
    
    328,290
    
    
    
    0.164.00
    
    
    106,000
    
    
    9.05
    
    
    26,500
    
    
    
    9.054.12
    
    
    39,100
    
    
    7.76
    
    
    18,640
    
    
    
    7.765.63
    
    
    30,000
    
    
    9.67
    
    
    15,000
    
    
    
    9.686.25
    
    
    142,500
    
    
    5.61
    
    
    99,900
    
    
    
    5.61Outstanding at year end
    
    
    645,890
    
    
    
    
    
    
    
    488,330
 28




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 19  EARNINGS PER SHARE The factors used in the earnings per share computation follow. 2003
    
    2002
    
    2001BasicNet income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Weighted average common shares
outstanding
    
    
    16,097,403
    
    
    
    14,018,715
    
    
    
    13,813,774Basic earnings per common share
    
    $
    .07
    
    
    $
    0.04
    
    
    $
    0.02DilutedNet income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Weighted average common shares
outstanding for basic earnings per
common share
    
    
    16,097,403
    
    
    
    14,018,715
    
    
    
    13,813,774Add: Dilutive effects of assumed
exercise of stock options
    
    
    167,945
    
    
    
    124,281
    
    
    
    206,020Average shares and dilutive potential
common shares
    
    
    16,265,348
    
    
    
    14,142,996
    
    
    
    14,019,794Diluted earnings per common share
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.01
 NOTE 20  QUARTERLY FINANCIAL DATA (UNAUDITED) Net
    
    Provision
    
    Net
    
    Earnings (Loss) per shareInterest
    
    Interest
    
    For Loan
    
    IncomeIncome
    
    Income
    
    Losses
    
    (Loss)
    
    Basic
    
    Diluted2003First quarter
    
    $
    10,314
    
    
    $
    6,186
    
    
    $
    424
    
    
    $
    402
    
    
    $
    0.03
    
    
    $
    0.03Second quarter
    
    
    10,326
    
    
    
    6,373
    
    
    
    2,058
    
    
    
    (345
    )
    
    
    (0.02
    )
    
    
    (0.02
    )Third quarter
    
    
    9,942
    
    
    
    5,973
    
    
    
    583
    
    
    
    308
    
    
    
    0.02
    
    
    
    0.02Fourth quarter
    
    
    10,694
    
    
    
    6,667
    
    
    
    514
    
    
    
    736
    
    
    
    0.04
    
    
    
    0.042002First quarter
    
    $
    11,156
    
    
    $
    6,168
    
    
    $
    892
    
    
    $
    507
    
    
    $
    0.04
    
    
    $
    0.04Second quarter
    
    
    10,810
    
    
    
    6,114
    
    
    
    3,727
    
    
    
    (1,338
    )
    
    
    (0.10
    )
    
    
    (0.10
    )Third quarter
    
    
    10,573
    
    
    
    5,918
    
    
    
    494
    
    
    
    1,033
    
    
    
    0.07
    
    
    
    0.07Fourth quarter
    
    
    10,309
    
    
    
    6,005
    
    
    
    1,687
    
    
    
    319
    
    
    
    0.02
    
    
    
    0.02
 29




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31,2003
    
    2002ASSETS:Cash
    
    $
    1,896
    
    
    $
    1,644Investment in subsidiaries
    
    
    61,630
    
    
    
    55,173Investment in unconsolidated affiliates
    
    
    6,716
    
    
    
    5,825Premises and equipment
    
    
    977
    
    
    
    608Other assets
    
    
    1,678
    
    
    
    3,913$
    72,897
    
    
    $
    67,163LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Notes payable
    
    $
    4,700
    
    
    $
    5,500Accrued interest
    
    
    198
    
    
    
    902Other liabilities
    
    
    1,258
    
    
    
    3,288Subordinated
debentures
    
    
    12,000
    
    
    
    12,000Total liabilities
    
    
    18,156
    
    
    
    21,690Total shareholders equity
    
    
    54,741
    
    
    
    45,473$
    72,897
    
    
    $
    67,163
 30




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF INCOME Years Ended December 31,2003
    
    2002
    
    2001Income:Dividends from subsidiaries
    
    $
    
    
    
    $
    2,200
    
    
    $
    Other dividends
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    4,601
    
    
    
    768
    
    
    
    334,601
    
    
    
    2,968
    
    
    
    33Expenses:Interest
    
    
    1,010
    
    
    
    1,132
    
    
    
    1,375Other
    
    
    4,734
    
    
    
    2,033
    
    
    
    1,1225,744
    
    
    
    3,165
    
    
    
    2,497Loss before income taxes and equity in
undistributed earnings of subsidiaries
    
    
    (1,143
    )
    
    
    (197
    )
    
    
    (2,464
    )Income tax benefit
    
    
    434
    
    
    
    902
    
    
    
    1,112Income (loss) before equity in undistributed
earnings of subsidiaries
    
    
    (709
    )
    
    
    705
    
    
    
    (1,352
    )Equity in undistributed earnings of subsidiaries
    
    
    1,810
    
    
    
    (184
    )
    
    
    1,561Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209
 31




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Adjustments to reconcile net income to net
cash from operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (1,810
    )
    
    
    184
    
    
    
    (1,561
    )Income from investments in unconsolidated affiliates
    
    
    (388
    )
    
    
    98
    
    
    
    505Depreciation and amortization
    
    
    159
    
    
    
    47
    
    
    
    34Net change in accrued interest payable
    
    
    (704
    )
    
    
    98
    
    
    
    91Other, net
    
    
    (124
    )
    
    
    1,353
    
    
    
    (671
    )Net cash from operating activities
    
    
    (1,765
    )
    
    
    2,301
    
    
    
    (1,393
    )Cash flows from investing activities:Investment in commercial bank subsidiaries
    
    
    (5,050
    )
    
    
    (4,952
    )
    
    
    (3,749
    )Investment in unconsolidated affiliates
    
    
    (300
    )
    
    
    (995
    )
    
    
    (212
    )Purchase of premises and equipment, net
    
    
    (209
    )
    
    
    (416
    )
    
    
    (219
    )Net cash from investing activities
    
    
    (5,559
    )
    
    
    (6,363
    )
    
    
    (4,180
    )Cash flows from financing activities:Repayment of notes payable
    
    
    (800
    )
    
    
    (2,159
    )
    
    
    (1,090
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    
    
    
    
    4,000Proceeds from issuance of common stock
    
    
    9,303
    
    
    
    6,002
    
    
    
    23Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (283
    )Dividends paid on common stock
    
    
    (927
    )
    
    
    (830
    )
    
    
    (795
    )Net cash from financing activities
    
    
    7,576
    
    
    
    3,013
    
    
    
    1,855Net change in cash and cash equivalents
    
    
    252
    
    
    
    (1,049
    )
    
    
    (3,718
    )Cash and cash equivalents at beginning of year
    
    
    1,644
    
    
    
    2,693
    
    
    
    6,411Cash and cash equivalents at end of year
    
    $
    1,896
    
    
    $
    1,644
    
    
    $
    2,693
 32




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##### Table of Contents



PART IV 
 ITEM 15. Exhibits and Reports on Form 8-K (a)(1) Financial Statements. See Item 8.   Registrant is a party to certain notes which are more fully described in
the notes to Registrants financial statements pursuant to which Registrant has
borrowed money from other financial institutions in principal amounts which
combined do not exceed ten percent (10%) of Registrants total consolidated
assets. Copies of these notes will be filed with the Commission upon request.
Registrant is also a party to certain agreements entered into in connection
with the Companys offering of $12,000,000 in subordinated debentures in
connection with the offering of Subordinated Debentures to institutional
investors by Cumberland Capital Trust I and Cumberland Capital Trust II.
Copies of the various transaction documents associated with the trust preferred
offerings will be filed with the Commission upon request. Reports on Form 8-K On October 23, 2003, the Company furnished a Current Report on Form 8-K
pursuant to Item 9 and Item 12 announcing the Companys results of operations
for the quarter ended September 30, 2003. Notwithstanding the foregoing,
information furnished under Item 9 or Item 12 of Form 8-K, including the
related exhibits, shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934. 33




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Amendment No. 1 to Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized on this 17th day of December, 2004. CIVITAS BANKGROUP, INC.By:
    /s/ Richard HerringtonRichard HerringtonPresident 34




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INDEX TO EXHIBITS 3.1
    
    Restated Charter of the Company (Restated for SEC electronic filing
purposes only).*3.2
    
    Amended and Restated Bylaws of the Company (Restated for SEC electronic
filing purposes only).*10.1
    
    Civitas BankGroup, Incorporated 1998 Stock Option Plan (incorporated
herein by reference to the Companys Registration Statements on Form S-8
(Registration No 333-105425) filed with the SEC on May 20, 2003.)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.)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.
  * Incorporated by reference
to the Companys Form 10-K for the year ended December 31, 2002,
as filed with the SEC on March 31, 2003. ** Previously filed with
the Companys Form 10-K for the year ended December 31, 2003, as
filed with the SEC on March 30, 2004. 35