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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2004 Commission File Number 0-27393 CIVITAS BANKGROUP, INC.  Tennessee
    
    62  1297760(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ                     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 þ                     NO o The aggregate market value of the Registrants voting equity held by non-affiliates of the
registrant on June 30, 2004 was $108,637,470. The market value calculation was determined using
the closing price of $8.71 for the registrants common stock on June 30, 2004, as reported on the
NASDAQ over-the-counter bulletin board. As
of February 28, 2005, 17,593,604 shares of the registrants Common Stock were outstanding.




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement for its Annual Meeting of Shareholders
to be held on May 19, 2005 are incorporated by reference into Part III of this Annual Report on
Form 10-K.




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CROSS REFERENCE INDEX
TO
FORM 10-K  
 PAGEPART IITEM 1.
    
    BUSINESS
    
    
    1ITEM 2.
    
    PROPERTIES
    
    
    11ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    11ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    11PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    12ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    13ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    14ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    32ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    36ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    75ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    75ITEM 9 B.
    
    OTHER INFORMATION
    
    
    76PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    76ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    76ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    76ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    77ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    77ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    77EX-21.1  SUBSIDIARIES OF THE REGISTRANTEX-23.1  CONSENT OF CROWE CHIZEK AND COMPANYEX-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




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Cautionary Statement Concerning
Forward-Looking Information This Annual Report on Form 10-K of Civitas BankGroup, Inc., a Tennessee corporation (the Company)
contains or incorporates by reference certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), which are intended to be
covered by the safe harbors created thereby. Those statements include, but may not be limited
to, the discussions of the Companys expectations concerning its future profitability, operating
performance, growth strategy, and its assumptions regarding other matters. Also, when any of the
words believes, expects, anticipates, intends, estimates, plans, or similar terms or
expressions, are used in this Annual Report on Form 10-K, forward-looking statements are being
made. You should be aware that, while the Company believes the expectations reflected in those
forward-looking statements are reasonable, they are inherently subject to risks and uncertainties
which could cause the Companys future results and shareholder values to differ materially from the
Companys expectations. These factors are disclosed in Managements Discussion and Analysis of
Financial Condition and Results of Operations set forth herein and include, among others, (i)
increased competition with other financial institutions, (ii) lack of sustained growth in the
economy in the Companys market area, (iii) rapid fluctuations in interest rates, (iv) significant
downturns in the businesses of one or more large customers, (v) risks inherent in originating
loans, including prepayment risks, (vi) the fluctuations in collateral values, the rate of loan
charge-offs and the level for the provision for losses on loans, and (vii) changes in the
legislative and regulatory environment. Because of these factors, there can be no assurance that
the forward-looking statements included or incorporated by reference herein will prove to be
accurate. In light of the significant uncertainties inherent in the forward-looking statements
included or incorporated by reference herein, you should not regard the inclusion of such
information as a representation by the Company or any other person that the objectives and plans of
the Company will be achieved. In addition, the Company does not intend to, and is not obligated
to, update these forward-looking statements after the date of this Annual Report on Form 10-K, even
if new information, future events or other circumstances have made them incorrect or misleading as
of any future date. 
 PART I 
 ITEM 1. BUSINESS General.Civitas BankGroup, Inc. is a Tennessee registered bank holding company headquartered in
Franklin, Tennessee with $904.2 million in total assets at
December 31, 2004. At December 31, 2004, (prior to the sale of
our BankTennessee and Bank of Mason subsidiaries described below), we
provided banking
and other financial services through the following three (3) bank subsidiaries in ten (10) markets
throughout Middle and West Tennessee: Total Assets as ofInstitution Name
    
    Principal Markets
    
    December 31, 2004Cumberland Bank
    
    Metropolitan Nashville, Tennessee
    
    $
    686,192BankTennessee
    
    Metropolitan Memphis, Tennessee
    
    
    200,543Bank of Mason
    
    Tipton County, Tennessee
    
    
    7,523
 Our principal operations include traditional banking services incorporating commercial and
residential real estate lending, commercial business lending, consumer lending, construction
lending and other financial services, including depository services. Net interest income is our
principal source of earnings. We serve both metropolitan and rural areas, targeting local
consumers, professionals and small businesses. Our banks are subject to the regulatory authority of the Department of Financial Institutions of
the State of Tennessee, the Federal Reserve Board and the Federal Deposit Insurance Corporation
(the FDIC), which currently insures the depositors of each member bank to a maximum of $100,000
per depositor. For this protection, each bank is subject to a quarterly statutory assessment and
the rules and regulations of the FDIC. On September 1, 2004, two of the Companys banking subsidiaries, Cumberland Bank and Cumberland
Bank South, were merged in an effort to take advantage of the economies of scale while still
maintaining our core community bank philosophies as they both serve the greater metropolitan
Nashville area. At August 31, 2004, total assets were $285.0 million for Cumberland Bank and
$339.0 million for Cumberland Bank South. 1




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In December 2004, through a purchase and assumption transaction, the majority of the assets and
liabilities of Bank of Dyer and its three offices in Gibson County, Tennessee were sold. Bank of
Dyer and Cumberland Bank were merged following consummation of the
transaction. In April 2004, the Company sold the Bank of Dyers
Three-Way branch. These transactions are referred to collectively in
this Form 10-K as the sale of Bank of Dyer. On November 22, 2004 the Company announced that it had entered into an agreement with certain of
its and BankTennessees directors, to sell all of the outstanding stock of
BankTennessee to this group in exchange for 2,000,000 shares of Company common stock owned by
members of the group. The agreement was approved by Civitas directors who are not
members of the purchasing group. In March, we consummated the sale with an effective date of March 1, 2005.
Civitas has agreed to provide data processing, accounting and other transition services to
BankTennessee for a six month period following the effective date. In January 2005 the Company
announced that it had entered into an agreement to sell all of the outstanding stock of the Bank of Mason to Mason Bancorp,
Inc., a newly formed holding company. The transaction is subject to receipt of pending regulatory approval and is
expected to close during the second quarter of 2005. History.Our present company resulted from a merger of equals between the two parent holding
companies of BankTennessee, Cumberland Bank and The Community Bank of Nashville, a bank that later
became known as Cumberland Bank South. The merger occurred in July of 1997. BankTennessee was originally chartered in 1934 as First Federal Savings & Loan Association. First
Federal was converted to a commercial bank at the time of the merger in 1997, and changed its name
to BankTennessee. Cumberland Bank was chartered in 1976 as The Savings & Loan Association of Smith County, Tennessee.
Cumberland Bank was later converted to a state commercial bank. Cumberland Bank South was founded as
First Southern Savings & Loan in 1975. First Southern was acquired by First Federal in 1992. As
noted above, Cumberland Bank and Cumberland Bank South merged in 2004. Joint Ventures.In
addition to its wholly-owned bank subsidiaries, the Company owns a 50% interest in both The Murray Banc Holding Company, LLC in
Murray, Kentucky and Insurors Bank of Tennessee, headquartered in Nashville, Tennessee. Only the
Companys initial investment, adjusted for the pro rata share of operating results of each entity,
is included in the consolidated financial statements. The Companys portion of earnings is
recorded in noninterest income and is also taxed at the Company level. The Murray Banc Holding Company is a joint venture with
BancKentucky, a Kentucky savings and loan holding company. The Murray Banc Holding Company is a
single bank holding company owning 100% of The Murray Bank which opened in 1999. The Murray Banc
Holding Company had $146.4 million in total assets at December 31, 2004 and contributed income of
$492,000 to the Company in 2004. Of the thirteen directors of the
Murray Banc Holding Company, LLC, four (Messrs. Gibson, Porter,
Shepherd and Wilder) are directors of the Company. The Company also owns 50% of
Insurors Bank, which opened in November
2000 and had $65.6 million in assets at December 31, 2004. The remaining ownership interest in
Insurors Bank is owned by InsCorp, a Tennessee corporation owned predominately by Tennessee
insurance agents. Insurors Bank contributed $178,000 of income to the
Company in 2004. Of the thirteen directors of Insurors Bank, four (Messrs. Wallace,
Herrington, Paschal and Mark McDowell, the Companys internal
auditor) are directors or officers of the Company. Market Areas. Prior to the sales of our Bank of Dyer, Bank of Mason and BankTennessee
subsidiaries, we operated principally in ten (10) market areas in Tennessee: Southern Davidson
County, Williamson County, Shelby County, Smith County, Sumner County, Robertson County, Macon
County, Warren County, Tipton County and Lauderdale County. With the sales of Bank of Dyers assets and of the stock of BankTennessee and
the pending sale of the stock of Bank of Mason, the Company intends to focus its efforts on the Nashville
metropolitan market generally, with particular attention on the Williamson and Sumner County
markets. The Nashville metropolitan statistical area consists of Davidson County, Tennessee and
the surrounding thirteen counties and is home to several large employers including HCA Inc.,
Vanderbilt University, Saturn Corporation and Nissan Motor Manufacturing Corporation USA.
Williamson County, Tennessee is one of the fastest growing counties in terms of population in the
State of Tennessee and has the highest per capita income level of any county in Tennessee. The
Company believes that the metropolitan Nashville market offers an environment for strong growth
with respect to the Companys target customers, which include local consumers, professionals and
small businesses. 2




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We serve the metropolitan Nashville market through Cumberland Bank. Our share of the metropolitan
Nashville deposit market at June 30, 2004 was approximately 2% and we were the fourth largest bank headquartered in the metropolitan
Nashville market. Cumberland Bank has four branches located in Williamson County and as of June
30, 2004 Cumberland Bank was the sixth largest bank and largest independent bank in Williamson
County. Cumberland Bank had a less than 1% share of the Davidson County bank deposit market where
it competes with several regional and super-regional banking institutions. The following table shows the
distribution of our deposit base by county as of December 31, 2004 as well as the market
share, based on FDIC data, within each county at June 30, 2004: County
    
    # of Branches
    
    Amount of Deposits
    
    
    % of Total Deposits
    
    % of Market ShareWilliamson
    
    4
    
    $
    262,720
    
    
    35.9%
    
    6.49%Shelby
    
    5
    
    
    144,413
    
    
    19.7%
    
    1.06%Sumner
    
    3
    
    
    127,983
    
    
    17.5%
    
    8.65%Davidson
    
    1
    
    
    57,793
    
    
    7.9%
    
    0.45%Smith
    
    2
    
    
    56,514
    
    
    7.7%
    
    16.4%Warren
    
    1
    
    
    27,806
    
    
    3.8%
    
    5.14%Macon
    
    1
    
    
    23,883
    
    
    3.3%
    
    7.29%Lauderdale
    
    1
    
    
    20,182
    
    
    2.8%
    
    6.19%Tipton
    
    1
    
    
    6,454
    
    
    0.9%
    
    1.78%Robertson
    
    1
    
    
    3,721
    
    
    0.5%
    
    0.70%
 As described above, following the sale of the Bank of Dyer, BankTennessee and Bank of Mason
subsidiaries, we will operate branches primarily in Williamson, Sumner, Smith and Davidson Counties
in Tennessee. Competition. The Companys banks face substantial competition in and out of their immediate market
area in attracting and retaining deposits and lending funds. Competition for deposits and loans is
based on the range and quality of financial services offered, the ability to offer attractive
rates, the availability of convenient office locations, and alternative delivery methods. We
compete not only with banks, but with thrifts, credit unions, and other financial service
providers, such as brokerage and insurance companies, and internet-based financial companies. The
entry of new competitors through expansion, de novo status, or acquisition could have an adverse
effect on our operations in that market. We believe our strategy of relationship banking and local autonomy in the communities we serve
allows flexibility in products offered in response to local needs in a way that can enhance
profitability for our banks, particularly as consolidation of the banking industry occurs and
larger institutions exit markets that are only marginally profitable for them. We believe our
emphasis on community banking, customer service and relationships is the most effective method we
have of competing with these larger regional bank holding companies as well as smaller community
banks. Operational Strategies. We operate according to the following business strategies: Local Decision Making. Foundational to our business strategy is an emphasis on decision
making at the local branch level. Each of our banks has a separate board comprised of local
businesspeople allowing it to be responsive to local community needs and trends. Each branch
manager and individual loan officer is given authority and discretion to price loans and services
and to approve loans in order to respond quickly and efficiently to the needs of each of our banks
customers. As the Company continues its strategy to focus its future growth efforts on the
Nashville metropolitan market area, the Companys local decision
making at the branch level is expected to be strengthened by the narrowing of the Companys
geographic presence and the resulting focus of the Companys senior management, including loan
review personnel, on the Middle Tennessee operations of the remaining
wholly-owned bank subsidiary. Relationship Banking. We focus on serving Tennessee businesses and individuals through a
banking relationship characterized by long-term, multi-service relationships. Drawing upon this
experience and the customer networks of their loan officers and assisted by back office support
services, our banks seek to effectively price and provide related bank services to enhance overall
profitability. Our banks seek to compete with other providers of financial services primarily
through superior relationship management, rather than price competition. 3




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Full Line of Banking Products. We seek to offer the personalized service and local
decision making characteristic of community banks while providing a diversity of financial
services comparable with regional and super-regional financial institutions. We expect to continue
to enhance our product mix through internal development of new products and services designed to
meet the needs of our target customers. Lending and Deposit Activities. Our banks provide a range of retail and commercial banking
services designed to meet the borrowing and depository needs of small and medium size businesses
and consumers in the communities serviced by them. The interest rates charged on loans vary with
the degree of risk, maturity and type of the loan, and are further subject to competitive
pressures, money market rates, availability of funds, and government regulations. Our banks have no
foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve. Substantially all of the loans in our banks loan portfolios have been originated by our banks. Each of our banks
conducts its lending activities pursuant to the loan policies adopted by our board of directors.
These loan policies grant individual loan officers authority to make secured and unsecured loans in specific dollar amounts with those amounts being lower for unsecured loans. Larger
loans must be approved by senior officers or various loan committees. Our banks management
information systems and loan review policies are designed to monitor lending sufficiently to ensure
adherence to our banks loan policies. Commercial Real Estate Loans. Our banks commercial real estate loans include permanent
mortgage loans on commercial and retail properties and development loans. These loans are
originated on both an annual line of credit basis and on a fixed-term basis generally ranging from
one to seven years. In making lending decisions, our banks generally consider, among other things,
the overall quality of the loan, the credit of the borrower, the value of the real estate, the
projected income stream of the property and the reputation and quality of management constructing
or administering the property. No one factor is determinative and such factors may be accorded
different weights in any particular lending decision. As a general rule, our banks also require
that these loans be guaranteed by one or more of the individuals who have a significant equity
investment in the property. Commercial real estate loans generally carry a lower degree of risk
than commercial business loans because they are secured by improved property with a minimal
loan-to-value gap based upon the type of property serving as collateral. Commercial real estate
loans also generally have prime-based interest rates which adjust more rapidly to interest rate
fluctuations and bear higher rates of interest than residential real
estate loans. Accordingly, income from
this type of loan should be more responsive to the changes in the general level of interest rates.
Commercial real estate loans constituted 22.6% of our loan portfolio at December 31, 2004. Residential Real Estate Loans. Residential mortgage products include adjustable rate as
well as conventional, fixed rate loans with terms generally of seven
to fifteen years. Residential mortgage
loans must satisfy underwriting standards that typically require that the homes pledged to secure
the loans must be either owner occupied or investor property which are single family residences,
the value of which has been determined by appraisal, and based on down payments and financial
responsibility of the buyer. Residential real estate loans are generally a lower risk form of
lending than other types of lending, including commercial real estate loans, since they are fully
secured by the underlying property in a housing market that has historically maintained its resale
value. An overall downturn in the housing market in the areas we serve would, however, increase
risk and induce adjustment of our lending standards. We believe that the residential real estate
market in Sumner and Williamson Counties will remain strong as those counties continue to
experience population growth at rates above many of the other
counties within our market area. Our banks are active in
the sale of mortgage loans in the secondary market. These loans are
made in accordance with underwriting standards set by the purchaser
of the loan, including as to loan-to-value ratio, interest rate and
documentation. These loans are generally made under a commitment to
purchase from a loan purchaser. The banks generally collect from the
borrower or purchaser a combination of the origination fee, discount
point and/or service release fee. During 2004, the banks sold
approximately $46.5 million in loans to such purchasers and these sales
accounted for 14.8% of our total
noninterest income in 2004. Residential real estate loans constituted 27.3% of our loan portfolio
at December 31, 2004. Commercial Business Loans. Our banks commercial lending activities generally involve
small to medium size companies located in Smith, Shelby, Davidson, Williamson and Sumner Counties,
Tennessee. With the sale of BankTennessee and the Bank of Mason, these activities will be
concentrated in the markets we serve around Nashville, Tennessee, including, particularly southern
Davidson, Williamson and Sumner Counties. The banks make both secured and unsecured loans for
working capital, equipment purchases and other general purposes, although the majority of
commercial lending is done on a secured basis. Typically, these commercial business loans are for
under $500,000 and are secured by the receivables, inventory, equipment, and/or general corporate
assets of the borrowers, and in some cases, real estate as an
additional source of collateral. These loans are originated on both an annual line of credit basis and on a
fixed-term basis ranging from one to five years. Commercial business loans typically have 4




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prime-based interest rates and carry a higher degree of credit risk than residential mortgage loans
because they are more
likely to be adversely affected by unfavorable economic conditions and our ability to receive
payments based on the collateral securing these loans may be adversely affected by the fact that
the receivables may not be collectible and the inventory may not be saleable. Commercial business
loans constituted 23.9% of our loan portfolio at December 31, 2004. Consumer Loans. Types of consumer loans originated by our banks, other than residential
real estate loans, include personal installment loans (generally secured by motor vehicles and
having fixed interest rates), and personal unsecured lines of credit. Consumer loans offered
typically involve a higher degree of credit risk than residential loans secured by first mortgages,
but also carry higher yields and shorter maturities, typically from
one to five years depending on the nature and condition of the
collateral. Consumer loans often are affected by general
economic conditions, changes in market interest rates and bankruptcy protection of delinquent
debtors. Historically, losses from this type of lending have been higher for us than from other
types of lending. The Company instituted new underwriting software in
late 2004 in an effort to reduce the credit risk of its consumer
loans. Consumer loans constituted 4.2% of our loan portfolio at December 31, 2004. Construction Loans. Our banks originate construction loans for land acquisition,
residential development or income-producing property development. We originate these loans both on
a fixed and variable basis for a term generally of one year. We consider this type of lending to
have higher credit risks than single-family residential lending because the principal is
concentrated in a limited number of loans and borrowers and repayment of these loans is dependent
on the successful operation of the related real estate project and thus may be subject, to a
greater extent, to adverse conditions in the real estate market or the economy, generally. Our
banks risk of loss on a construction loan is dependent largely upon the accuracy of the initial
estimate of the propertys value upon completion of the project and the estimated cost of the
project. If the estimated cost of construction or development proves to be inaccurate, our banks
may be compelled to advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value proves to be inaccurate, our banks may be confronted, at or
prior to the maturity of the loan, with a project value which is insufficient to assure full
repayment. As loan payments become due, the cash flow from the project may not be adequate to
service total debt and we may have to agree with the borrower to modify the terms of the loan. In
addition, by nature these loans are generally less predictable and more difficult to evaluate and
monitor and collateral securing them may be difficult to dispose of. Our banks have sought to
minimize these risks by lending primarily to established companies and generally restricting such
loans to their primary market area. Construction loans constituted 21.2% of our loan portfolio at
December 31, 2004 Deposit Activities. Our banks offer several types of deposit and personal banking programs
designed to attract both short-term and long-term funds from the general public by providing an
assortment of accounts and rates, including the following accounts: commercial and retail demand
deposit accounts; NOW Accounts; IRAs; regular savings accounts; other retail deposit services such
as fixed rate, fixed maturity certificates of deposit, money market
accounts, ATMs, internet banking, cash management, Heritage travel
club and other
personal miscellaneous services such as safe deposit boxes, night depository services, travelers
checks, merchant credit cards, direct deposit of payroll, official bank checks, and
U.S. savings bonds. Our banks deposit accounts are insured by the FDIC up to $100,000.
A majority of the depositors of our banks are from the local market areas surrounding each of their
offices. Lending Procedures and Loan Approval Process. Lending procedures of our banks reflect our
philosophy of granting local control to decision making but retaining general oversight at the
holding company level. Although the overall lending policy of the banks is set by our board of
directors and is subject to the oversight and control of our board of directors and members of our
senior management, we depend, to a great degree, upon the judgment of our loan officers and senior
management at each bank to assess and control lending risks. Individual loan officers have discretionary authority to approve certain loans at each of our banks
without prior approval. Each of our banks utilize a loan committee comprised of officers and
outside bank directors to review loan requests exceeding the discretionary limit of the loan
officer or branch manager, or for which the loan officer or branch manager chooses not to exercise
his or her discretionary authority. Each of the banks also has its own officer loan committee,
reflecting our emphasis on local control and decision making. Loans are reviewed periodically by
both our banks senior lending officers and our independent external auditors. In addition, we have
a senior credit officer who is responsible for asset quality at our banks and who reviews the loan
portfolio for each of our banks and makes decisions with respect to whether or not additional
charges should be made to each banks provision for loan losses. We utilize this process to grade
each of our banks loans and determine the adequacy of our banks loan loss reserve. 5




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Asset/Liability
Management. We have a committee comprised of our senior officers and
directors
charged with managing assets and liabilities. The committees task is to maximize and stabilize
the net interest margin, and to provide reasonable growth of assets, earnings and return on equity
capital while maintaining credit quality, reasonable interest rate risk, adequate capital and
liquidity. To meet these objectives, the committee monitors its banks progress and assists in
directing overall acquisition and allocation of funds. The committee meets monthly to review
liquidity and funds position, and to review the general economic condition and other factors
affecting the availability and use of funds of the banks. The committee reports monthly to our and
the individual banks boards of directors explaining variances between budget and actual results,
providing the likely reasons for any variances and reporting managements course of action in light
of any budget variances. Each of our banks boards of directors reviews the banks asset liability
management policy annually. Investment Activities. Our banks maintain separate investment portfolios consisting primarily of
investment grade securities, including federal agency obligations, corporate bonds and asset-backed
securities. Federal regulations limit the types and quality of instruments in which the banks may
invest. A key objective of each of our banks investment portfolios is to provide a balance with the banks
loans consistent with each banks liability structures, and to assist in management of interest
rate risk. The investment portfolio generally receives more weight than loans in the risk-based
capital formula, and provides the necessary liquidity to meet fluctuations in credit demands and
fluctuations in deposit levels of the local communities served. The portfolios also provide
collateral for pledging against public deposits as well as income for our banks. Monetary Policies. The results of operations of our banks and the Company are affected by credit policies of monetary
authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed
by the Federal Reserve Board include open market operations in U.S. government securities, changes
in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits.
In view of changing conditions in the national economy and in the money markets, as well as the
effects of actions by monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates, deposit levels, loan demand
or the effect of such matters on the business and earnings of the Company. Supervision and Regulation As a bank holding company, Civitas BankGroup is subject to regulation under the Bank Holding
Company Act, and supervision by the Federal Reserve Board. As a publicly traded company, Civitas
is also subject to the various other laws, regulation and supervision by the National Association
of Securities Dealers and Securities and Exchange Commission. Our bank subsidiaries are subject to
state and federal banking laws and regulations which impose specific requirements or restrictions
and provide for general regulatory oversight with respect to virtually all aspects of our banks
operations. These laws and regulations are generally intended to protect depositors, not
shareholders. The following summaries of statutes and regulations affecting banks and bank holding
companies do not purport to be complete. These summaries are qualified in their entirety by
reference to the statutes and regulations described. General.As a bank holding company, we are regulated under the Bank Holding Company Act of 1956,
as amended (the BHCA), and are inspected, examined, and supervised by the Board of Governors of
the Federal Reserve System. Under the BHCA, bank holding companies generally may not acquire the
ownership or control of more than 5% of the voting shares, or substantially all the assets, of any
company, including a bank, without the Federal Reserves prior approval. In addition, bank holding
companies generally may engage, directly or indirectly, only in banking and such other activities
as are determined by the Federal Reserve to be closely related to banking. Under the
Gramm-Leach-Bliley Act of 1999, bank holding companies may elect to become financial holding
companies, which are permitted to engage in activities that are financial in nature or incidental
to a financial activity. We have not elected to become a financial holding company. Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, as
amended, limit borrowings by us and our nonbank subsidiaries from our affiliate banks. These
requirements also limit various other transactions between us and our nonbank subsidiaries, on the
one hand, and our banks, on the other. For example, 6




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Section 23A limits to no
more than 10% of its total capital the aggregate outstanding amount
of any banks loans and other covered transactions with any particular nonbank affiliate, and limits to no more than 20% of its
total capital the aggregate outstanding amount of any banks covered transactions with all of its
nonbank affiliates. Section 23A also generally requires that a banks loans to its nonbank
affiliates be secured, and Section 23B generally requires that a banks transactions with its
nonbank affiliates be on arms length terms. All of our banks are incorporated under the banking laws of the State of Tennessee and, as such,
are governed by the applicable provisions of those laws. Consequently, the Tennessee Department of
Financial Institutions (TDFI) supervises and regularly examines our banks. Our banks deposits
are insured by the FDIC through the Bank Insurance Fund, and therefore are governed by the
provisions of the Federal Deposit Insurance Act. However, most of our banks are members of the
Federal Reserve Bank System. Therefore, our primary federal banking regulator is the Federal
Reserve. The TDFI and the FDIC regulate or monitor virtually all areas of our banks operations. The Murray Bank is a federal savings bank organized under the laws of the United States of America.
The Murray Bank is primarily regulated and examined by the Office of Thrift Supervision. The FDIC
also regulates various operations of The Murray Bank. Branching.Tennessee law imposes limitations on the ability of a state bank to establish branches
in Tennessee. Under current Tennessee law, any Tennessee bank domiciled in Tennessee may establish
branch offices at any location in any county in the state. Furthermore, Tennessee and federal law
permits out-of-state acquisitions by bank holding companies, interstate merging by banks, and de
novobranching of interstate banks, subject to certain conditions. These powers may result in an
increase in the number of competitors in our banks markets. We believe our banks can compete
effectively in their markets despite any impact of these branching powers, but there can be no
assurance that future developments will not affect our banks ability to compete effectively. Community Reinvestment Act.The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, the federal bank
regulatory agencies responsible for evaluating us and our banks evaluate the record of the
depository institutions in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of those institutions.
These factors are also considered in evaluating mergers, acquisitions and applications to open a
branch or facility. The CRA ratings for the Companys BankTennessee, Bank of Mason, and Cumberland
Bank subsidiaries respectively were satisfactory, satisfactory and outstanding as of each banks
most recent evaluations. Capital Requirements Generally.The federal regulatory agencies that evaluate us and our banks use
capital adequacy guidelines in their examination and regulation of banks. If the capital falls
below the minimum levels established by these guidelines, the banks may be denied approval to
acquire or establish additional banks or non-bank businesses, or to open facilities, or the banks
may be regulated by additional regulatory restrictions or actions. Risk-Based Capital Requirements.All of the federal regulatory agencies have adopted risk-based
capital guidelines for banks and bank holding companies. These risk-based capital guidelines are
designed to make regulatory capital requirements more sensitive to differences in risk profile
among banks to account for off-balance sheet exposure and to minimize disincentives for holding
liquid and lower-risk assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The ratios are minimums.
The guidelines require all federally-regulated banks to maintain a minimum risk-based total capital
ratio of 8%, of which at least 4% must be Tier I capital, as described below. A banking organizations qualifying total capital consists of two components: Tier I, or core
capital, and Tier 2, or supplementary capital. Tier I capital is an amount equal to the sum of:
(1) common shareholders equity, including adjustments for any surplus or deficit; (2)
non-cumulative perpetual preferred stock; and (3) the companys minority interests in the equity
accounts of consolidated subsidiaries. With limited exceptions for goodwill arising from certain
supervisory acquisitions, intangible assets generally must be deducted from Tier I capital. Other
intangible assets may be included in an amount up to 25% of Tier I capital, so long as the asset is
capable of being separated and sold apart from the banking organization or the bulk of its assets.
Additionally, the market value of the asset must be established on an annual basis through an
identifiable stream of cash flows, and there must be a high degree of certainty that the asset will 7




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hold this market value notwithstanding the future prospects of the banking organization. Finally,
the banking
organization must demonstrate that a liquid market exists for the asset. Intangible assets in
excess of 25% of Tier I capital generally are deducted from a banking organizations regulatory
capital. At least 50% of the banking organizations total regulatory capital must consist of Tier
I capital. Tier 2 capital is generally considered to be an amount equal to the sum of the following:  
    the allowance for possible credit losses in an amount up to 1.25% of risk-weighted assets;
    cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus;
    hybrid capital instruments defined as instruments with characteristics of both
debt and equity, perpetual debt and mandatory convertible debt securities; and
    in an amount up to 50% of Tier I capital, eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or more,
including related surplus. Investments in unconsolidated banking and finance subsidiaries, investments in securities
subsidiaries and reciprocal holdings of capital instruments must be deducted from capital. The
federal regulatory agencies may require other deductions on a case-by-case basis. Under the risk-weighted capital guidelines, balance sheet assets and certain off-balance sheet
items like standby letters of credit are assigned to one of four risk-weight categories according
to the nature of the asset and its collateral or the identity of any obligor or guarantor. These
four categories are 0%, 20%, 50% or 100%. For example, cash is assigned to the 0% risk category,
while loans secured by one-to-four family residences are assigned to the 50% risk category. The
aggregate amount of assets and off-balance sheet items in each risk category is adjusted by the
risk-weight assigned to that category to determine weighted values, which are added together to
determine the total risk-weighted assets for the banking organization. Accordingly, an asset, like
a commercial loan, which is assigned to a 100% risk category, is included in risk-weighted assets
at its nominal face value, whereas a loan secured by a single-family home mortgage is included at
only 50% of its nominal face value. The application ratios are equal to capital, as determined,
divided by risk-weighted assets, as determined. Leverage Capital Requirements.The federal regulatory agencies have issued a final regulation
requiring certain banking organizations to maintain additional capital of 1% to 2% above a 3%
minimum Tier I leverage capital ratio equal to Tier I capital, less intangible assets, to total
assets. In order for an institution to operate at or near the minimum Tier I leverage capital
ratio of 3%, the banking regulators expect that the institution would have well-diversified risk,
no undue rate risk exposure, excellent asset quality, high liquidity and good earnings. In
general, the bank would have to be considered a strong banking organization, rated in the highest
category under the bank rating system and have no significant plans for expansion. Higher Tier I
leverage capital ratios of up to 5% will generally be required if all of the above characteristics
are not exhibited, or if the institution is undertaking expansion, seeking to engage in new
activities, or otherwise faces unusual or abnormal risks. Institutions not in compliance with these regulations are expected to be operating in compliance
with a capital plan or agreement with that institutions regulator. If they do not do so, they are
deemed to be engaging in an unsafe and unsound practice and may be subject to enforcement action.
Failure to maintain a Tier I leverage capital ratio of at least 2% of assets constitutes an unsafe
and unsound practice and may result in enforcement action against an institution justifying
termination of that institutions FDIC insurance. At December 31, 2004, the Companys Tier 1 risk-based capital, total risk-based capital and
leverage ratios were 12.50%, 13.61%, and 7.61% respectively. Capital Commitments. The Company and its subsidiaries, Cumberland Bank and BankTennessee, 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 8




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shares, or paying dividends
from Cumberland Bank and BankTennessee 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 requires the
Company to maintain a Tier I leverage ratio of at least 7.0% at BankTennessee and Cumberland Bank. The Company and its subsidiaries believe they were in compliance in all material respects with
these agreements at December 31, 2004. As a result of the sale of BankTennessee, the Company is no
longer required to maintain BankTennessees capital at a
required level or to continue to comply with the other terms of the
BankTennessee agreements. The Company and its
subsidiaries intend to continue to comply with the agreement with respect to Cumberland Bank. The
Company believes that earnings from operations and available funds will be sufficient to allow the
Company to meet all these commitments and the requirements for well-capitalized status through the
end of 2005. However, the Companys regulators have considerable discretion in determining whether
to grant required approvals, and no assurance can be given that such approvals will be forthcoming. Liability for Bank Subsidiaries.Under the Federal Reserve policy, we, as a bank holding company,
are expected to act as a source of financial and managerial strength to each of our banks and to
maintain resources adequate to support each of our banks. This support may be required at times
when we may not have the resources to provide it. Any depository institution insured by the FDIC
can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with the default of a commonly-controlled, FDIC-insured depository institution like a
bank subsidiary. Additionally, depository institutions insured by the FDIC may be held liable to
the FDIC for any loss incurred or reasonably expected to be incurred in connection with any
assistance provided by the FDIC to a commonly-controlled, FDIC-insured depository institution in
danger of default. Default is defined generally as the appointment of a conservator or receiver
and in danger of default is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance. All of our banks are
FDIC-insured depository institutions. Also, in the event that such a default occurred with respect
to one of our banks, any capital loans from us to that bank would be subordinate in right of
payment to payment of the banks depositors and other of the banks obligations. Dividend Restrictions.Federal and Tennessee law limits the payment of dividends by banks. Under
Tennessee law, the directors of a state bank, after making proper deduction for all expenditures,
expenses, taxes, losses, bad debts, and any write-offs or other deductions required by the TDFI,
may credit net profits to the banks undivided profits account.
Before declaring a dividend, the board of directors
must deduct any net loss from the undivided profits account and transfer to the banks surplus
account (1) the amount, if any, required to raise the surplus to 50% of the capital stock and (2)
the amount required, if any, but not less than 10% of net profits, to make the paid-in-surplus
account equal the capital stock account. Thereafter, the bank may declare a dividend, provided
that the amount declared in any calendar year can not exceed the net income for that year plus the
retained net income for the preceding two years without the prior approval of the Commissioner of
the TDFI. A state bank, with the approval of the TDFI, may transfer funds from its surplus account to the
undivided profits or retained earnings account or any part of its paid-in-capital account. The
payment of dividends by any bank is dependent upon its earnings and financial condition and also
may be limited by federal and state regulatory agency protections against unsafe or unsound banking
practices. The payment of dividends could, depending upon the financial condition of a bank,
constitute an unsafe or unsound banking practice. When a banks surplus account is less than its
capital stock account, Tennessee law imposes other restrictions on dividends. Finally, the FDIC
prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it
is in default in the payment of any assessments due the FDIC. The Federal Reserve also imposes dividend restrictions on state member banks of the Federal
Reserve similar to those under Tennessee law. Dividends in any calendar year cannot exceed the banks net profits for that year plus
retained net income for the two previous years unless the
bank has received the prior approval of the Board of Governors of the Federal Reserve.
Additionally, our banks may not permit any portion of their permanent capital to be withdrawn
unless the withdrawal has been approved by the Board of Governors of the Federal Reserve.
Permanent capital is defined as the total of a banks perpetual preferred stock and related
surplus, common stock and surplus, and minority interest in consolidated subsidiaries. Finally, if
one of our banks has a capital surplus in excess of that required by law, that excess may be
transferred to the banks undivided profits account and be available for the payment of dividends so 9




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long as (1) the amount came from the earnings of prior periods, excluding earnings transferred
as a result of stock dividends, and (2) the banks board and the Board of Governors of the Federal
Reserve approved the transfer. In addition to these
regulatory and legal restrictions, the Company and certain of its
bank subsidiaries are subject to certain restrictions on their
ability to pay dividends as described in more detail in
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Asset
Management. Deposit Insurance Assessments.The deposits of each of our banks are insured up to regulatory
limits by the FDIC and we are required under the FDICs deposit insurance assessments to maintain
the Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF). The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment system. Each
financial institution is assigned to one of three capital groups; well capitalized, adequately
capitalized or undercapitalized; and further assigned to one of three subgroups within a capital
group. A banks assignment is based on supervisory evaluations by the institutions primary
federal regulator and, if applicable, other information relevant to the institutions financial
condition and the risk posed to the applicable insurance fund. The assessment rate applicable to
our banks in the future will depend in part upon the risk assessment classification assigned to
each bank by the FDIC and in part on the BIF assessment schedule adopted by the FDIC. Institutions
are prohibited from disclosing the risk classification to which they have been assigned. The
Deposit Insurance Funds Act of 1996 provides for assessments to be imposed on insured depository
institutions with respect to deposits insured by the BIF and the SAIF. Currently, the annual
insurance premiums on bank deposits insured by the BIF and SAIF vary between $0.01 to $0.09 per
$100 of deposits. The Companys premium amount per $100 of deposits on a weighed average basis was
$0.03 for 2004. Effects of Governmental Policies.The difference between interest earned by our banks on their
loans and investments and the interest paid by them on their deposits or other borrowings affects
our banks earnings. The yields on their assets and the rates paid on their liabilities are
sensitive to changes in prevailing market rates of interest. Thus, the general economic
conditions, fiscal policies of the federal government, and the policies of regulatory agencies,
particularly the Federal Reserve, which establishes national monetary policy, will influence our
banks earnings and growth. The nature and impact of any future changes in fiscal or monetary
policies cannot be predicted. Commercial banks are affected by the credit policy of various regulatory authorities, including the
Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of
bank credit. Among the instruments of monetary policy used by the Federal Reserve to implement
these objectives are open market operations in U.S. Government securities, changes in reserve
requirements on bank deposits, changes in the discount rate on bank borrowings, and limitations on
interest rates that banks may pay on time and savings deposits. The Federal Reserve uses these
means in varying combinations to influence overall growth of bank loans, investments and deposits,
and also to affect interest rates charged on loans, received on investments or paid for deposits. The monetary and fiscal policies of regulatory authorities, including the Federal Reserve, also
affect the banking industry. Through changes in the reserve requirements against bank deposits,
open market operations in U.S. Government securities and changes in the discount rate on bank
borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending
and investing. No prediction can be made with respect to possible future changes in interest
rates, deposit levels or loan demand or with respect to the impact of these changes on the business
and earnings of our banks. Various federal and state laws, rules and regulations, and amendments to existing laws, rules and
regulations, are enacted that affect banks and bank holding companies. Future legislation and
regulation could significantly change the competitive environment for banks and bank holding
companies. We cannot predict the likelihood or effect of any such legislation or regulation. Available Information The Company maintains an internet website at www.civitasbankgroup.com. We make available on our
website our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably
practicable after we electronically file or furnish such materials to the Securities and Exchange
Commission (the SEC). The information provided on our website is not part of this report, and is
therefore not incorporated by reference herein unless such information is otherwise specifically
referenced elsewhere in this report. 10




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Employees Civitas BankGroup and its subsidiaries had approximately 274 full-time equivalent employees as of
December 31, 2004. Following the sale of Bank of Dyer, Bank of Mason and BankTennessee, the
Company will have approximately 229 full-time equivalent employees. Civitas BankGroup considers
its relations with its employees to be good. 
 ITEM 2. Properties Civitas BankGroups
principal executive offices are located at 4 Corporate Centre, 810 Crescent
Centre Drive, Suite 320, Franklin, Tennessee 37067 in a leased facility. This facility located in
the Cool Springs area of Franklin also houses Cumberland Banks mortgage division. Our Technology Center is a leased
building also located in Cool Springs and is home to our centralized operational units. At
December 31, 2004 our subsidiary banks operated 20 banking offices, of which six were leased and
the remaining 14 were owned. Our banks also own 22 ATMs. Following the sale of BankTennessee, our
subsidiary banks operate 14 banking offices, of which five are leased
and nine are owned, including Bank
of Masons one branch. During 2004, we paid approximately
$605,000 in lease payments for our leased facilities. 
 ITEM 3. Legal Proceedings As of the date hereof, there are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of its properties are subject; nor are there
material proceedings known to the Company or its subsidiaries to be contemplated by any
governmental authority; nor are there material proceedings known to the Company or its
subsidiaries, pending or contemplated, in which any director, officer or affiliate or any principal
security holder of the Company or any of its subsidiaries or any associate of any of the foregoing,
is a party or has an interest adverse to the Company or any of its subsidiaries. 
 ITEM 4. Submission of Matters to a Vote of Shareholders No matters were submitted to a vote of shareholders during the fourth quarter of the Companys
fiscal year ending December 31, 2004. 11




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PART II 
  ITEM 5.
    Market for Registrants Common Equity, Related Shareholder Matters, and Issuer
Purchases of Equity Securities The Companys common stock is currently traded over-the-counter on the OTC Bulletin Board under the
symbol CVBG. The following
table reflects stock prices as reported on the OTC Bulletin Board. Prices
    
    
    CashDividendsHigh
    
    
    Low
    
    
    Close
    
    
    Declared2003:First Quarter
    
    $
    6.50
    
    
    $
    4.90
    
    
    $
    6.25
    
    
    $
    0.015Second Quarter
    
    
    6.50
    
    
    
    6.20
    
    
    
    6.38
    
    
    
    0.015Third Quarter
    
    
    6.30
    
    
    
    5.85
    
    
    
    6.15
    
    
    
    0.015Fourth Quarter
    
    
    6.50
    
    
    
    6.05
    
    
    
    6.45
    
    
    
    0.0152004:First Quarter
    
    $
    7.50
    
    
    $
    6.35
    
    
    $
    7.20
    
    
    $
    0.015Second Quarter
    
    
    8.75
    
    
    
    7.10
    
    
    
    8.75
    
    
    
    0.015Third Quarter
    
    
    9.90
    
    
    
    7.50
    
    
    
    8.75
    
    
    
    0.000Fourth Quarter
    
    
    8.75
    
    
    
    8.01
    
    
    
    8.50
    
    
    
    0.000
 As of February 28, 2005,
we had approximately 1,090 shareholders of record. At that date, 17,593,604
shares were outstanding. The amount of any dividend, while in our sole discretion, depends in part upon the performance of
the Company. Our ability to pay dividends is restricted by federal laws and regulations applicable
to bank holding companies and by Tennessee laws relating to the payment of dividends by Tennessee
corporations. Because substantially all of our operations are conducted through our subsidiaries,
our ability to pay cash dividends also depends on the ability of our banks to pay a dividend to us. The
ability of the banks to pay cash dividends is restricted by applicable regulations of the TDFI, the
Federal Reserve, the OTS and the FDIC and by agreements with and
commitments to the TDFI and the Federal Reserve. See Supervision and
Regulation  Dividend Restrictions and Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Asset
Management. The Company elected to pay stock dividends for the third and fourth quarters 2004. We are paying
stock dividends in lieu of a cash dividends in an effort to conserve capital as we continue our
efforts to grow our business in key markets. The Company did not repurchase any shares of its common stock during the quarter ended December 31,
2004. 12




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ITEM 6.
    Selected Financial Data The table below provides selected consolidated financial data for the Company as of and for each of
the five years ended December 31, 2000, 2001, 2002, 2003 and 2004. You should read the following
selected consolidated financial information in conjunction with our financial statements and the
notes to those statements and Managements Discussion and Analysis of Financial Condition and
Results of Operations located elsewhere in this document. For years ending December 31,
(In thousands, except per share amount) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Summary of OperationsInterest income
    
    $
    42,918
    
    
    $
    41,276
    
    
    $
    42,848
    
    
    $
    52,865
    
    
    $
    51,651Interest expense
    
    
    16,841
    
    
    
    16,077
    
    
    
    18,643
    
    
    
    28,901
    
    
    
    27,057Net interest income
    
    
    26,077
    
    
    
    25,199
    
    
    
    24,205
    
    
    
    23,964
    
    
    
    24,594Provision for loan losses
    
    
    (2,467
    )
    
    
    (3,579
    )
    
    
    (6,800
    )
    
    
    (6,377
    )
    
    
    (2,636
    )Noninterest income
    
    
    7,746
    
    
    
    7,408
    
    
    
    8,448
    
    
    
    7,048
    
    
    
    5,771Noninterest expense
    
    
    (28,824
    )
    
    
    (27,332
    )
    
    
    (25,104
    )
    
    
    (24,408
    )
    
    
    (21,132
    )Income before income taxes
    
    
    2,532
    
    
    
    1,696
    
    
    
    749
    
    
    
    227
    
    
    
    6,597Income tax expense
    
    
    (648
    )
    
    
    (595
    )
    
    
    (228
    )
    
    
    (18
    )
    
    
    (2,436
    )Net earnings
    
    
    1,884
    
    
    
    1,101
    
    
    
    521
    
    
    
    209
    
    
    
    4,161Basic earnings per share
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.30Diluted earnings per share
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.30Cash dividends per common share
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.05Book value per common share
    
    
    3.28
    
    
    
    3.19
    
    
    
    2.96
    
    
    
    2.85
    
    
    
    2.86Selected Period-End BalancesTotal assets
    
    $
    904,221
    
    
    $
    833,320
    
    
    $
    711,878
    
    
    $
    667,511
    
    
    $
    643,457Loans, net of unearned income
    
    
    573,503
    
    
    
    550,565
    
    
    
    526,215
    
    
    
    522,245
    
    
    
    507,217Allowance for loan losses
    
    
    6,446
    
    
    
    8,414
    
    
    
    9,062
    
    
    
    9,023
    
    
    
    6,137Total deposits
    
    
    731,469
    
    
    
    671,636
    
    
    
    592,998
    
    
    
    549,424
    
    
    
    524,142Other borrowings
    
    
    98,493
    
    
    
    90,438
    
    
    
    56,352
    
    
    
    60,186
    
    
    
    64,535Shareholders equity
    
    
    57,736
    
    
    
    54,741
    
    
    
    45,473
    
    
    
    39,313
    
    
    
    39,476Selected Average BalancesTotal assets
    
    
    848,687
    
    
    
    780,066
    
    
    
    690,610
    
    
    
    671,690
    
    
    
    576,622Securities
    
    
    211,416
    
    
    
    154,713
    
    
    
    62,135
    
    
    
    32,344
    
    
    
    23,468Loans, net of unearned income
    
    
    554,835
    
    
    
    548,071
    
    
    
    520,825
    
    
    
    512,918
    
    
    
    476,339Allowance for loan losses
    
    
    7,894
    
    
    
    8,431
    
    
    
    9,078
    
    
    
    7,027
    
    
    
    5,635Total deposits
    
    
    693,391
    
    
    
    645,023
    
    
    
    572,809
    
    
    
    550,569
    
    
    
    485,708Other borrowings
    
    
    82,776
    
    
    
    69,337
    
    
    
    60,090
    
    
    
    63,975
    
    
    
    47,437Shareholders equity
    
    
    55,942
    
    
    
    48,910
    
    
    
    39,967
    
    
    
    40,056
    
    
    
    37,366Selected Operating RatiosAnnual % change in average loans
    
    
    1.23
    %
    
    
    5.23
    %
    
    
    1.54
    %
    
    
    7.68
    %
    
    
    27.12
    %Annual % change in average assets
    
    
    8.80
    %
    
    
    12.95
    %
    
    
    2.82
    %
    
    
    16.49
    %
    
    
    27.18
    %Return on
average equity
    
    
    3.37
    %
    
    
    2.25
    %
    
    
    1.30
    %
    
    
    0.52
    %
    
    
    11.14
    %Return on
average assets
    
    
    0.22
    %
    
    
    0.14
    %
    
    
    0.08
    %
    
    
    0.03
    %
    
    
    0.72
    %
 Per share amounts are adjusted to reflect the effect of stock splits and stock dividends. 13




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ITEM 7.
    Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with our financial statements and the notes
to those statements appearing elsewhere in this document. PERFORMANCE OVERVIEW General. The Company experienced a significant number of changes in 2004 which management believes
will position the Company for improved performance during 2005. First, the Company continued its
focus on identifying problem assets and improving its loan underwriting standards at each of its
banks. Second, the Company initiated its efforts to focus its business operations more completely
on the Nashville metropolitan market with the merger of its Cumberland Bank and Cumberland Bank
South banks, the sale of the majority of the assets of its Bank of Dyer subsidiary, the subsequent
merger of Bank of Dyer with Cumberland Bank and the execution of an agreement to sell its
BankTennessee subsidiary, which transaction closed effective March 1, 2005. Finally, subsequent to December 31, 2004,
the Company entered into an agreement to sell its Bank of Mason subsidiary. Following completion
of the sale of Bank of Mason, the Company will have one wholly-owned bank subsidiary with branches in
Williamson, Sumner, Davidson and Smith Counties in Tennessee, each of which
are attractive markets that management believes
provide significant opportunities for loan and deposit growth. In
addition, at December 31, 2004, BankTennessee and Bank of Mason had
$11.8
million in nonperforming assets, which represented 66.3% of the
Companys total nonperforming assets at that date. With the sale of these subsidiaries,
these nonperforming assets will no longer be included on the Companys balance
sheet. In 2004, the Company also continued its efforts to strengthen its back office and information
technology systems and believes that the simplification of its organizational structure,
the strengthening of its loan review procedures and internal audit
function and improvement of its back office operations will
position the Company to take advantage of the opportunities to grow its business within the
Nashville metropolitan market generally and the Williamson County market specifically. Set forth below are certain significant items that occurred during the year ended December 31,
2004:  
    Net income for the year ended December 31, 2004, totaled $1.9 million compared to $1.1
million for the same period for 2003, a 72.7% increase.
    Assets increased from $833.3 million at December 31, 2003, to $904.2 million at December
31, 2004, a $70.9 million or 8.5% increase.
    Securities increased $38.8 million to $242.1 million at December 31, 2004, up 19.1% over
year-end 2003 as excess funds from deposit growth were invested in
securities.
    Loans increased to $573.5 million, up 4.2% from
$550.6 million at year end 2003 despite the sale of $17.3
million in loans in connection with the sale of Bank of Dyer and
runoff of $26.7 million in loans that do not meet the Companys
risk characteristics.
    Nonperforming assets were $17.8 million at
December 31, 2004, up 10.1% from December 31, 2003.
    Deposits totaled $731.5 million, up 8.9% from $671.6 million at year end 2003.
    Net interest margin declined to 3.30% from 3.48% in 2004 as
the Company redefined its lending strategy and underwriting standards
to reduce credit risks resulting in minimal loan growth for 2004 and
an increase in securities.
    Cumberland Bank opened two branches, one in downtown Franklin, Tennessee and another in
Spring Hill, Tennessee. Both of these branches are located in Williamson County
communities.
    The merger of two of the Companys bank subsidiaries, Cumberland Bank and Cumberland
Bank South, both of which serve the greater Nashville market, closed on September 1, 2004.
    The Company announced that it had entered into an agreement for the sale of its
BankTennessee subsidiary to a group of its and BankTennessees directors in exchange for
the surrender of 2,000,000 shares of Company common stock.
    The Company completed the sale of certain assets of its Bank of Dyer subsidiary in 2004
in exchange for the assumption of certain of Bank of Dyers liabilities by the purchaser.
The Company subsequently merged the Bank of Dyer with Cumberland Bank.
    The Company refinanced $4.6 million of debt, initially reducing the interest rate paid by 200
basis points. 14




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES The accounting principles we follow and our methods of applying these principles conform with
accounting principles generally accepted in the United States and with general practices within the
banking industry. In connection with the application of those principles to the determination of
our allowance for loan losses (ALL), we have made judgments and estimates which have significantly
impacted our financial position and results of operations. Our management assesses the adequacy of the ALL on a regular basis. This assessment includes
procedures to estimate the ALL and test the adequacy and appropriateness of the resulting balance.
The ALL consists of two portions (1) an allocated amount representative of specifically identified
credit exposure and exposures readily predictable by historical or comparative experience, and
(2)an unallocated amount representative of inherent loss which is not readily identifiable. Even
though the ALL is composed of two components, the entire allowance is available to absorb any
credit losses. We establish the allocated amount separately for two different risk groups (1) unique loans
(commercial loans, including those loans considered impaired); and
(2) homogeneous loans (generally
consumer loans). We base the allocation for unique loans primarily on risk rating grades assigned
to each of these loans as a result of our loan management and review processes. Each risk-rating
grade is assigned an estimated loss ratio, which is determined based on the experience of
management, discussions with banking regulators, historical and current economic conditions and our
independent loan review process. We estimate losses on impaired loans based on estimated cash flows
discounted at the loans original effective interest rate or the underlying collateral value. We
also assign estimated loss ratios to our consumer portfolio. However, we base the estimated loss
ratios for these homogenous loans on the category of consumer credit (e.g., automobile, residential
mortgage, home equity) and not on the results of individual loan reviews. The unallocated amount is particularly subjective and does not lend itself to the exact
mathematical calculation. We use the unallocated amount to absorb inherent losses which may exist
as of the balance sheet date for such matters as changes in the local or national economy, the
depth or experience of the lending staff, any concentrations of credit in any particular industry
group, and new banking laws or regulations. After we assess applicable factors, we evaluate the
aggregate unallocated amount based on our managements experience. We then test the resulting ALL balance by comparing the balance in the allowance account to
historical trends and peer information. Our management then evaluates the result of the procedures
performed, including the result of our testing, and concludes on the appropriateness of the balance
of the ALL in its entirety. The loan review and the finance committee of our board of directors
review the assessment prior to the filing of financial information Results of Operations Year
ended December 31, 2004 Compared to the Year ended
December 31, 2003: Net Earnings Net earnings for 2004 totaled $1.9 million compared to $1.1 million in 2003, an increase of 72.7%.
The improvement in earnings performance is a result of a $1.1 million decrease in provision for
loan losses compared to 2003. The net interest margin continued to experience compression during
the year and restricted further improvement in net earnings. Accounting for much of this
compression was a change in the average earning asset mix as securities increased 36.7% while
average net loans grew at a rate of 1.2% as the Company continued to focus on improving asset
quality. Operating expenses increased $1.5 million as
the Company continues to build a solid infrastructure to facilitate
future growth while strengthening operational control through the centralization of backroom
operations. Operating
efficiencies remained flat yet at high levels as noninterest expense related to asset quality
improvement efforts continued to negatively impact earnings. 15




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##### Table of Contents



Net Interest Income Net interest income
represents the amount of interest earned on earning assets less interest
paid on deposits and other interest bearing liabilities and is our principal source of earnings
representing 77.1% of net revenues. In 2004 our net interest income increased $878,000 or 3.5%, to
$26.1 million. Although net interest income increased, the Companys net interest margin continued
to compress throughout 2004 declining to 3.30% from 3.48% in 2003. Average interest bearing assets
and liabilities increased for the year ended December 31, 2004, increasing net interest income $1.6
million, which was offset by a decline in net yield on these balances reducing net interest income
by $719,000 as compared to 2003. Net interest income is impacted by several factors including
volume, rate, mix, interest rate fluctuations, and asset quality. More detail on changes in
interest income and interest expense due to changes in rates is shown
on page 20. Interest Income Interest income increased $1.6 million or 4.0% in 2004 to $42.9 million. The increase was largely
due to an increase in average earning assets of $66.7 million, primarily in the investment
portfolio. This increase in average balances accounted for a $2.4 million increase in interest
income. However, during 2004, the yield on average earning assets declined to 5.43% from 5.70% in
2003 and the resulting affect was a reduction of interest income of $764,000. The decline in
earning asset yield resulted from a reduction in loan yield and increased balances in securities.
The yield on loans was 6.02% in 2004, compared to 6.48% in 2003, resulting in a $2.6 million
reduction in interest income. Interest income earned as a result of net average loan growth
experienced in 2004 totaled $439,000, reducing the negative impact of lower yields. Loan growth and
profitability continued to be negatively impacted by the runoff of $26.7 million in loans that did
not meet the risk characteristics targeted by management and the sale
of $17.3 million in loans as
part of the Bank of Dyer sale. Both of these loan groups carried higher yields
than that of the average of the balance of the portfolio. Despite this runoff, the Company
experienced net loan growth in 2004. Excess deposit growth not utilized to fund loan growth was
invested in securities, which generally have lower yields than do loans. Average securities
balance increased $56.7 million or 36.7% over 2003. This growth and improved yield during the
second half of 2004 generated a $3.6 million increase in interest income as compared to 2003
securities results. The level of non-performing loans also was a significant drag on interest
income. Interest totaling $435,000 due to loans in a non-accrual status was not realized in 2004.
Average non-accrual loans for 2004 were $13.8 million. Average amount of and average yield earned
on our average earning assets are represented by asset type on the
table on pages 20 through 21. Interest Expense Interest expense increased $764,000 compared to 2003. The average balance of deposits and
interest-bearing liabilities increased $61.8 million, resulting in $809,000 in additional interest
expense. The average rate paid for interest-bearing liabilities declined from 2.21% in 2003 to
2.14% in 2004. This accounted for a $45,000 decrease in interest
expense. Increased costs of
non-maturity deposit products and short-term borrowings reflected increases in short-term interest
rates during the second half of 2004. The Companys time deposit portfolio benefited from the low
interest rate environment throughout most of 2004 as higher cost time deposits matured and renewed
at lower rates. Additionally, management emphasized shorter-term certificate of deposit rates over
longer ones to reduce costs. In December, the Company refinanced $4.6 million in Company debt lowering the
initial interest rate by 200 basis points which the Company believes will benefit interest expense in the
future. The level and costs
of our Federal Home Loan Bank borrowings inhibited further reduction
in costs, as these $51 million in borrowings carry the highest
interest costs of the bank subsidiaries funding sources. Provision for Loan Losses Provision for loan losses is a charge to earnings to maintain an allowance for loan losses
representative of inherent risks and losses in the loan portfolio. The provision for loan losses
totaled $2.5 million for 2004 compared to $3.6 million in 2003, a decrease of $1.1 million or
30.6%. Net loan charge-offs were $4.4 million in 2004 compared to $4.2 million in 2003, an
increase of $200,000. The ratio of the allowance for loan losses as a percentage of total loans was
1.12% at December 31, 2004 as compared to 1.53% at December 31, 2003. The decline in the allowance
for loan losses as a percentage of total loans outstanding at December 31, 2004 compared to
December 31, 2003 reflects loan charge-offs taken against
specific, allocated reserves. Reserves totaling $705,000 were charged
off against those loans sold in connection with the Bank of Dyer
transaction. The decrease in provision expense reflects
managements progress in evaluating and identifying credit risk
in the loan portfolio. 16




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##### Table of Contents



Noninterest Income The components of the Companys noninterest income include service charges on deposit accounts,
other fees and commissions, mortgage banking activities, gain on sale of securities and gain on
sale of assets. Total noninterest income increased 4.6% to $7.7 million in 2004 compared to the
same period in 2003. Noninterest income as a percent of total gross revenue was 15.3% in 2004
compared to 15.2% in 2003. The largest component of the Companys noninterest income is revenue
generated on deposit accounts. Service charges on deposit accounts decreased $479,000 or 12.4% to
$3.4 million during 2004 compared to 2003. This decrease is primarily due to a decrease in the
volume of insufficient check fees charged to customers and a decrease in the number of accounts subject to
service charges. These decreases are a direct result of those
customers associated with the loan runoff described above. Revenue from mortgage banking activities
totaled $1.1 million, a decline of $547,000 or 32.4% during 2004 compared to last year. This
decline is primarily due to a significant slow down in mortgage activity since the high levels of
refinancing during 2003 due to low interest rates. Mortgage banking
revenues include mortgage servicing rights income in the amount of
$481,000 and $189,000 and net gain on the sale of mortgage loans in
the amount of $662,000 and $1.5 million for 2004 and 2003,
respectively. Other service charges, fees and commissions
totaled $854,000 for 2004, a decrease of $126,000 or 12.9%. This decrease is attributable to a
$131,000 decrease in credit insurance products. Profits from the sale of securities increased from
$274,000 to $551,000 for 2004 as compared to last year. Other noninterest income increased
$538,000, which includes $431,000 in fraud recovery. Included in other noninterest income is the net affect of the Bank of Dyer transaction
described above and the simultaneous bulk loan sale. The Company earned a 3.5% deposit premium totaling $910,000
which was offset by the subsequent loss of $930,000 on the loan sale resulting in a net loss of
$20,000. Noninterest Expense Noninterest expense consists primarily of salaries and employee benefits, occupancy expenses,
furniture and equipment expenses, data processing expenses and other operating expenses. Total
noninterest expense increased $1.5 million or 5.5% to $28.8 million during 2004. Salaries and
employee benefits make up the largest category in noninterest operating expenses. These expenses
increased only $337,000 or 2.4% for 2004 despite staffing of the two new Williamson County branch
offices, the development of a large-scale competitive mortgage banking division and continued
infrastructure changes. Expenses relating to foreclosed properties increased $332,000 for 2004 to
$1.0 million as compared to the same period in 2003. The majority of these expenses are associated
with our West Tennessee banking subsidiaries. Deposit insurance premiums increased by $202,000 for
2004 from the same period last year. Other operating expenses
increased $176,000 which includes $431,000 in fraud loss. Savings of
$134,000 resulting from bringing previously outsourced functions
in-house and a reduction in expenses associated with fewer new credit
life insurance policies written at Cumberland Life reduced other
noninterest expense. Audit and accounting expenses increased primarily due
to costs associated with the Sarbanes Oxley internal control assessments. Results of Operations Year ended December 31, 2003 Compared to the Year ended December 31, 2002: Net Earnings Net earnings for 2003 were $1.1 million compared to $521,000 in 2002, an increase of 111.1%. The
improvement in earnings performance is a result of a $3.2 million decrease in provision for loan
losses compared to 2002. Net charge-offs decreased by $2.5 million over this same time period.
Operating expenses increased $2.2 million as the Company continued to build a solid infrastructure
to improve operational efficiency and strengthen operational control through the centralization of
backroom operations and as a result of the hiring of a full-time
president and chief executive officer in December 2002 and other
officers and members of senior management during 2003. Earnings were enhanced $615,000 through leverage strategies facilitated by
the addition of new capital in 2002 and 2003. The Companys results of
operations in 2003 were enhanced by managements decision to invest the
additional external capital raised by the Company in the third quarter of 2003 along with funds
generated through brokered certificates of deposit in investment
securities to immediately impact earnings which allowed management to focus on
improving asset quality without sacrificing earnings. Managements use of these
additional amounts to purchase investment securities (primarily
mortgage backed securities) rather than to fund loan growth was primarily
driven by the desire to enhance current earnings and provide cash flow for future loan growth while
continuing the efforts to improve asset quality. Management used
various financial models to simulate different types of investment
securities and funding sources to choose the investment securities
that the Company should invest in. This analysis was utilized in the
selection of both assets and funding sources to find an appropriate mix. For 2003, this
strategy generated $615,000 in
earnings. Although requiring less operating expenses as compared to
loans, this leverage strategy resulted in a
smaller spread between the yield on the securities purchased and the rate on the brokered
certificates of deposits used to fund the investment, resulting in net interest margin compression.
Interest 17




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##### Table of Contents



income is also reduced as
investments generally carry lower yields than loans. The Company
believes that its net interest margin will recover as the cash flows generated from the investment
portfolio are invested in higher yielding loans and the brokered certificates of deposit utilized
in these transactions, which tend to bear a higher cost over deposits generated in the Companys
market, are repaid upon maturity. Net Interest Income Net interest income is our principal source of earnings. In 2003 our net interest income increased
$994,000 or 4.1%, to $25.2 million. Net interest income increased $3.8 million due to an increase
in average earning assets as compared to 2002 but decreased $2.8 million as a result of changes in
asset yields. Although net interest income increased, the Companys net interest margin continued
to compress throughout 2003 declining to 3.48% from 3.84% in 2002. The favorable effect of lower
rates on deposits and borrowings were countered by lower yields on
earning assets stemming from a change in asset mix and a high level
of nonperforming assets. Net interest
income is impacted by several factors including volume, rate, mix, interest rate fluctuations, and
asset quality. More detail on changes in interest income and interest expense due to changes in
rates is shown on page 21. Interest Income Interest income decreased $1.6 million or 3.7% in 2003 to $41.3 million. The decrease was
primarily attributable to the decline in the yield on average earning assets, which fell to 5.70%
in 2003 from 6.79% in 2002 and reduced interest income by $7.5 million. From the beginning of 2001
to March 2004, the Federal Reserve decreased the federal funds rate by a total of 550 basis points,
with the most recent decrease being 25 basis points in June 2003. In response, our bank
subsidiaries lowered their lending rates. The decline in yield is a result of the effect of these
changes in interest rates and lower reinvestment rates in addition to a higher percentage of
earning assets invested in the securities portfolio. Average earning assets increased $93.7
million in 2003 primarily in the investment securities portfolio from the leverage transactions
and, to a lesser degree, in loans. The positive effect in interest income of $5.9 million related
to the increase in earning assets was not sufficient to offset the decrease due to lower rates. A
lower loan yield was the primary factor driving the decrease in the earning assets yield. The
yield on loans was 6.48% in 2003, compared to 7.48% in 2002, resulting in a $5.4 million reduction
in interest income. Interest income earned as a result of loan growth experienced in 2003 totaled
$2.0 million reducing the negative impact of lower yields to a $3.4 million reduction in loan
interest income. Average amount of and average yield earned on our average earning assets are
represented by asset type on the table on page 21. The level of non-performing loans
also heavily contributed to this decline in interest income. Lost interest totaling $619,000 due
to loans in a non-accrual status was not realized in 2003. Average non-accrual loans for 2003 were
$18.0 million. In addition, accelerated prepayments of our mortgage-backed securities resulted in
an increased amortization of premiums that negatively impacted our
yield on earning assets. Many of the mortgage-backed securities purchased as part of the
January 2003 leverage transaction were purchased with a premium
to be amortized over the life of the security. The yield on
premium mortgage-backed bonds generally decreases during falling
or low interest rate environments as prepayments generally
accelerate causing the premium to be written down against
interest income faster than in increasing or high rate
environments. Bonds are purchased at a premium when they carry a
higher interest rate than current market. The write-down of the
premium reduces interest income in correlation to the principal
payments received thus affecting the securitys yield. During 2003, funding sources from deposits and repurchase
agreements increased $112.5 million or 13.2%. Of this
increase, $57.4 million represents brokered certificates of deposits.
Loans during this same time period increased $24.4 million
or 4.6% while securities increased $112.8 million or
124.6%. A lower level of interest income was generated as a
result of the lower yield causing a decline in the
Companys net interest margin. Interest Expense The reduction in interest income was offset by an even larger decline in interest expense as the
rates paid on our interest-bearing liabilities decreased when repriced. Interest expense decreased
$2.6 million or 13.8% in 2003 compared to 2002. This expense reduction resulted from the repayment
of higher-cost deposits and borrowings, managing our deposit costs and utilizing alternative low
cost funding sources. The average rate paid for interest-bearing liabilities decreased from 2.89%
in 2002 to 2.21% in 2003. This accounted for a $4.7 million decrease in interest expense and was
due primarily to the falling interest rate environment previously discussed. Funding sources
increased an average of $81.5 million during 2003 with a corresponding interest cost of $2.1
million. The majority of this increase was directly related to the
funding sources, primarily brokered certificate of deposits, used to
purchase securities. Provision for Loan Losses The provision for loan losses totaled $3.6 million for 2003 compared to $6.8 million in 2002, a
decrease of $3.2 million or 47.4%. Net loan charge-offs were $4.2 million in 2003 compared to $6.8
million in 2002, a decrease of $2.6 million. A decrease of $8.6 million in non-performing assets
and declining past due ratio, along with the reduction in net charge-offs are the primary reasons
for this decrease. The ratio of net charge-offs to average loans decreased 53 basis points to
0.77% from 1.3% for 2002. A Special Asset Team and Oversight Committee were created to improve the
problem loan management and resolution process. 18




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##### Table of Contents



Noninterest Income Noninterest income decreased $1.0 million, or 12.3%, to $7.4 million in 2003. Service charges on
deposit accounts continue to be our largest source of noninterest income. These are fees received
for services related to our retail and commercial deposit products. These charges increased
$58,000 or 1.5% in 2003 to $3.9 million. This compares to $3.8 million for 2002. Mortgage banking
income totaled $1.7 million, an increase of $45,000 or 2.7% from 2002 levels, as favorable low
mortgage interest rates continued through much of 2003. Mortgage
banking income is comprised of mortgage servicing income of $189,000,
and net gains on sale of mortgage loans totaling $1.5 million. The
Company realized $274,000 in the sale of some of its investment
securities in 2003. This compares to $461,000 in 2002, a decrease of
$187,000. Security
transactions are an integral part of balance sheet and interest rate
risk management activities and are determined by holdings, market
interest rates or funding needs.
Noninterest income represents 15.2% of total revenues as compared to 16.5% in 2002. For 2003, we recorded a loss of $244,000 associated with the
sale of other real estate owned compared to a gain of $190,000
in 2002, resulting in a $414,000 reduction in noninterest
income. The Company also made the decision in the fourth quarter
of 2002 to sell or close its finance, insurance and investment
subsidiaries. These subsidiaries accounted for $281,000 of
nonrecurring noninterest income in 2002. The Company also
recovered $120,000 in insurance proceeds in 2002 associated with
a lawsuit involving the former president of its Bank of Dyer
subsidiary. Noninterest Expense Noninterest expense increased $2.2 million, or 8.9%, to $27.3 million in 2003. Salaries and
employee benefits represent the largest category of noninterest expense and totaled $14.0 million
in 2003, an increase of $1.5 million or 12.1%. This increase was
the result of the Companys hiring of additional personnel
necessary to build the infrastructure needed to create a strong control environment and to attract and retain
qualified personnel. The increase in salaries and employee benefits in 2003 was also
the result of the Companys hiring of a full-time president
and chief executive officer in December 2002 and other officers
and members of senior management during 2003. Management believes this combination of controls and expertise will create a
stronger earnings base for more efficient operations in the future. Other operating expenses
include $714,000 in legal fees and expenses related to other real estate and $1.5 million in data
processing expenses. The current data processing system is under evaluation to identify cost
savings and position the Company for future growth while minimizing increased data processing
costs. Management expects the data processing costs to increase in the
short term as a result of changes to the Companys data
processing and information technology systems. 19




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##### Table of Contents



CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expensedollars in thousands The following table shows the consolidated average monthly balances of each principal category
of assets, liabilities and stockholders equity of the Company, and an analysis of net interest
revenue, and the change in interest income and interest expense segregated into amounts
attributable to changes in volume and changes in rates. 2004
    
    
    2003
    
    
    2004/2003 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate (1)
    
    
    TotalNet loans (2 and 3)
    
    $
    554,835
    
    
    
    6.02
    %
    
    $
    33,390
    
    
    $
    548,071
    
    
    
    6.48
    %
    
    $
    35,542
    
    
    $
    439
    
    
    $
    (2,591
    )
    
    $
    (2,152
    )Securities
    
    
    211,416
    
    
    
    4.23
    %
    
    
    8,951
    
    
    
    154,713
    
    
    
    3.43
    %
    
    
    5,302
    
    
    
    1,943
    
    
    
    1,706
    
    
    
    3,649Federal funds sold
    
    
    16,008
    
    
    
    1.60
    %
    
    
    256
    
    
    
    10,506
    
    
    
    0.97
    %
    
    
    102
    
    
    
    53
    
    
    
    101
    
    
    
    154FHLB and FRB stock
    
    
    5,644
    
    
    
    4.46
    %
    
    
    252
    
    
    
    5,214
    
    
    
    4.33
    %
    
    
    226
    
    
    
    19
    
    
    
    7
    
    
    
    26Interest-bearing deposits in banks
    
    
    3,209
    
    
    
    2.15
    %
    
    
    69
    
    
    
    5,924
    
    
    
    1.76
    %
    
    
    104
    
    
    
    (48
    )
    
    
    13
    
    
    
    (35
    )Total earning assets
    
    
    791,112
    
    
    
    5.43
    %
    
    
    42,918
    
    
    
    724,428
    
    
    
    5.70
    %
    
    $
    41,276
    
    
    $
    2,406
    
    
    $
    (764
    )
    
    $
    1,642Cash and due from banks
    
    
    20,915
    
    
    
    
    
    
    
    
    
    
    
    18,793Allowance for loan losses
    
    
    (7,894
    )
    
    
    
    
    
    
    
    
    
    
    (8,431
    )Other assets
    
    
    44,555
    
    
    
    
    
    
    
    
    
    
    
    45,276Total assets
    
    $
    848,688
    
    
    
    
    
    
    
    
    
    
    $
    780,066Deposits:NOW investments
    
    
    103,856
    
    
    
    0.95
    %
    
    
    982
    
    
    $
    76,286
    
    
    
    0.72
    %
    
    
    549
    
    
    
    198
    
    
    
    235
    
    
    
    433Money market investments
    
    
    102,474
    
    
    
    1.17
    %
    
    
    1,195
    
    
    
    115,167
    
    
    
    1.11
    %
    
    
    1,278
    
    
    
    (142
    )
    
    
    59
    
    
    
    (83
    )Savings
    
    
    30,029
    
    
    
    0.90
    %
    
    
    270
    
    
    
    29,181
    
    
    
    0.97
    %
    
    
    282
    
    
    
    8
    
    
    
    (20
    )
    
    
    (12
    )Time deposits $100,000
and over
    
    
    204,071
    
    
    
    2.73
    %
    
    
    5,561
    
    
    
    172,700
    
    
    
    2.84
    %
    
    
    4,906
    
    
    
    892
    
    
    
    (237
    )
    
    
    655Other time deposits
    
    
    181,837
    
    
    
    2.77
    %
    
    
    5,039
    
    
    
    189,754
    
    
    
    2.86
    %
    
    
    5,419
    
    
    
    (226
    )
    
    
    (154
    )
    
    
    (380
    )Total interest-bearing
deposits
    
    
    622,267
    
    
    
    2.10
    %
    
    
    13,047
    
    
    
    583,088
    
    
    
    2.13
    %
    
    
    12,434
    
    
    
    730
    
    
    
    (117
    )
    
    
    613Non interest-bearing demand deposits
    
    
    71,124
    
    
    
    
    
    
    
    
    
    
    
    61,935Total deposits
    
    
    693,391
    
    
    
    1.88
    %
    
    
    13,047
    
    
    
    645,023
    
    
    
    1.93
    %
    
    
    12,434Fed Funds purchased and
repurchase agreements
    
    
    26,422
    
    
    
    1.26
    %
    
    
    333
    
    
    
    12,223
    
    
    
    0.96
    %
    
    
    117
    
    
    
    136
    
    
    
    80
    
    
    
    216Notes payable
    
    
    4,632
    
    
    
    7.41
    %
    
    
    343
    
    
    
    5,272
    
    
    
    7.95
    %
    
    
    419
    
    
    
    (51
    )
    
    
    (25
    )
    
    
    (76
    )FHLB advances and other borrowings
    
    
    51,722
    
    
    
    4.88
    %
    
    
    2,526
    
    
    
    51,842
    
    
    
    4.85
    %
    
    
    2,516
    
    
    
    (6
    )
    
    
    16
    
    
    
    10Subordinated debentures
    
    
    12,000
    
    
    
    4.93
    %
    
    
    592
    
    
    
    12,000
    
    
    
    4.93
    %
    
    
    591
    
    
    
    0
    
    
    
    1
    
    
    
    1Total deposits and
borrowed funds
    
    
    788,167
    
    
    
    2.14
    %
    
    
    16,841
    
    
    
    726,360
    
    
    
    2.21
    %
    
    
    16,077
    
    
    
    809
    
    
    
    (45
    )
    
    
    764Other liabilities
    
    
    4,579
    
    
    
    
    
    
    
    
    
    
    
    4,796Shareholders equity
    
    
    55,942
    
    
    
    
    
    
    
    
    
    
    
    48,910Total liabilities and
shareholders equity
    
    $
    848,688
    
    
    
    
    
    
    
    
    
    
    $
    780,066Net interest income
    
    
    
    
    
    
    
    
    
    $
    26,077
    
    
    
    
    
    
    
    
    
    
    $
    25,199
    
    
    $
    1,597
    
    
    $
    (719
    )
    
    $
    878Net yield on earning assets
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    
    
    
    
    3.48
    %
   1
    
    Changes in interest income and expense not due solely to balance or rate changes are included in the rate category.2
    
    Interest income includes fees on loans of $1,333 in 2004 and $1,558 in 2003.3
    
    Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.*
    
    No taxable equivalent adjustments have been made since the effect of tax exempt income is
insignificant. 20




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##### Table of Contents



CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expensedollars in thousands The following table shows the consolidated average monthly balances of each principal category
of assets, liabilities and stockholders equity of the Company, and an analysis of net interest
revenue, and the change in interest income and interest expense segregated into amounts
attributable to changes in volume and changes in rates. 2003
    
    
    2002
    
    
    2003/2002 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate (1)
    
    
    TotalNet loans (2 and 3)
    
    $
    548,071
    
    
    
    6.48
    %
    
    $
    35,542
    
    
    $
    520,825
    
    
    
    7.48
    %
    
    $
    38,977
    
    
    
    2,039
    
    
    
    (5,475
    )
    
    
    (3,436
    )Securities
    
    
    154,713
    
    
    
    3.43
    %
    
    
    5,302
    
    
    
    62,135
    
    
    
    4.63
    %
    
    
    2,877
    
    
    
    4,287
    
    
    
    (1,862
    )
    
    
    2,425Federal funds sold
    
    
    10,506
    
    
    
    0.97
    %
    
    
    102
    
    
    
    38,060
    
    
    
    1.62
    %
    
    
    616
    
    
    
    (446
    )
    
    
    (68
    )
    
    
    (514
    )FHLB and FRB stock
    
    
    5,214
    
    
    
    4.33
    %
    
    
    226
    
    
    
    4,871
    
    
    
    4.78
    %
    
    
    233
    
    
    
    16
    
    
    
    (23
    )
    
    
    (7
    )Interest-bearing deposits in banks
    
    
    5,924
    
    
    
    1.76
    %
    
    
    104
    
    
    
    4,860
    
    
    
    2.98
    %
    
    
    145
    
    
    
    32
    
    
    
    (73
    )
    
    
    (41
    )Total earning assets
    
    
    724,428
    
    
    
    5.70
    %
    
    $
    41,276
    
    
    
    630,751
    
    
    
    6.79
    %
    
    $
    42,848
    
    
    $
    5,928
    
    
    $
    (7,501
    )
    
    $
    (1,573
    )Cash and due from banks
    
    
    18,793
    
    
    
    
    
    
    
    
    
    
    
    22,576Allowance for loan losses
    
    
    (8,431
    )
    
    
    
    
    
    
    
    
    
    
    (9,078
    )Other assets
    
    
    45,276
    
    
    
    
    
    
    
    
    
    
    
    46,361Total assets
    
    $
    780,066
    
    
    
    
    
    
    
    
    
    
    $
    690,610Deposits:NOW investments
    
    $
    76,286
    
    
    
    0.72
    %
    
    
    549
    
    
    $
    64,558
    
    
    
    1.20
    %
    
    
    774
    
    
    
    141
    
    
    
    (366
    )
    
    
    (225
    )Money market investments
    
    
    115,167
    
    
    
    1.11
    %
    
    
    1,277
    
    
    
    116,840
    
    
    
    2.30
    %
    
    
    2,692
    
    
    
    (39
    )
    
    
    (1,376
    )
    
    
    (1,415
    )Savings
    
    
    29,181
    
    
    
    0.97
    %
    
    
    282
    
    
    
    23,488
    
    
    
    1.99
    %
    
    
    467
    
    
    
    113
    
    
    
    (298
    )
    
    
    (185
    )Time deposits $100,000
and over
    
    
    172,700
    
    
    
    2.84
    %
    
    
    4,907
    
    
    
    116,945
    
    
    
    3.70
    %
    
    
    4,326
    
    
    
    2,062
    
    
    
    (1,481
    )
    
    
    581Other time deposits
    
    
    189,754
    
    
    
    2.86
    %
    
    
    5,419
    
    
    
    197,873
    
    
    
    3.37
    %
    
    
    6,661
    
    
    
    (273
    )
    
    
    (968
    )
    
    
    (1,241
    )Total interest-bearing
deposits
    
    
    583,088
    
    
    
    2.13
    %
    
    
    12,434
    
    
    
    519,704
    
    
    
    2.87
    %
    
    
    14,920
    
    
    
    2,004
    
    
    
    (4,489
    )
    
    
    (2,485
    )Non interest-bearing demand deposits
    
    
    61,935
    
    
    
    
    
    
    
    
    
    
    
    53,105Total deposits
    
    
    645,023
    
    
    
    1.93
    %
    
    
    12,434
    
    
    
    572,809
    
    
    
    2.60
    %
    
    
    14,920Fed Funds purchased and
repurchase agreements
    
    
    12,223
    
    
    
    0.96
    %
    
    
    117
    
    
    
    2,989
    
    
    
    1.81
    %
    
    
    54
    
    
    
    167
    
    
    
    (104
    )
    
    
    63Notes payable
    
    
    5,272
    
    
    
    7.95
    %
    
    
    419
    
    
    
    6,211
    
    
    
    7.55
    %
    
    
    469
    
    
    
    (71
    )
    
    
    21
    
    
    
    (50
    )FHLB advances and other borrowings
    
    
    51,842
    
    
    
    4.85
    %
    
    
    2,516
    
    
    
    50,890
    
    
    
    4.99
    %
    
    
    2,538
    
    
    
    0
    
    
    
    (22
    )
    
    
    (22
    )Subordinated debentures
    
    
    12,000
    
    
    
    4.93
    %
    
    
    591
    
    
    
    12,000
    
    
    
    5.52
    %
    
    
    662
    
    
    
    0
    
    
    
    (71
    )
    
    
    (71
    )Total deposits and
borrowed funds
    
    
    726,360
    
    
    
    2.21
    %
    
    
    16,077
    
    
    
    644,899
    
    
    
    2.89
    %
    
    
    18,643
    
    
    
    2,100
    
    
    
    (4,665
    )
    
    
    (2,565
    )Other liabilities
    
    
    4,796
    
    
    
    
    
    
    
    
    
    
    
    5,744Shareholders equity
    
    
    48,910
    
    
    
    
    
    
    
    
    
    
    
    39,967Total liabilities and
shareholders equity
    
    $
    780,066
    
    
    
    
    
    
    
    
    
    
    $
    690,610Net interest income
    
    
    
    
    
    
    
    
    
    $
    25,199
    
    
    
    
    
    
    
    
    
    
    $
    24,205
    
    
    $
    3,828
    
    
    $
    (2,836
    )
    
    $
    992Net yield on earning assets
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.84
    %
   1
    
    Changes in interest income and expense not due solely to balance or rate changes are included in the rate category.2
    
    Interest income includes fees on loans of $1,558 in 2003 and $2,057 in 2002.3
    
    Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.  *
    
    No taxable equivalent adjustments have been made since the effect of tax exempt income is
insignificant. 21




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##### Table of Contents



Investment Portfolio General.Our securities portfolio consists primarily of mortgage-backed securities, tax-free
municipals, and federal agency bonds and is primarily used as a source of liquidity. Total
securities were $242.1 million at year-end 2004 compared to $203.4 million at December 31, 2003, an
increase of $38.7 million or 19.0% from year-end 2003. The securities portfolio comprised 26.8% of
total assets at year-end 2004 as compared to 24.4% at December 31, 2003. Growth of the investment
securities portfolio in 2005 will depend on our loan and deposit growth, changes in the yield curve
and reinvestment rates. It is currently anticipated that the investment securities portfolio will
remain approximately the same percentage of assets in 2005. Our banks policy guidelines are designed to minimize credit, market and liquidity risk.
Securities must be investment grade or higher to be purchased. At December 31, 2004, the
investment portfolio had a net unrealized gain of $796,000 compared to $904,000 at December 31,
2003. Other than commitments to originate or sell mortgage loans, our banks do not invest in
off-balance sheet or derivative financial instruments. Net gains totaling $664,000 were realized
from the sale of $51.8 million in available for sale securities
during 2004. This was offset by a $113,000 other-than-temporary
impairment write-down of
available-for-sale securities. The Company invests primarily in obligations of the United States, obligations of states, counties,
and municipalities and mortgage-backed securities. The following table presents, for the periods
indicated, the carrying amount of our securities portfolio segregated into available for sale, or
AFS, and held to maturity, or HTM, categories: Composition of Investment Portfoliodollars in thousands December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Available for SaleU.S. government agencies
    
    $
    18,072
    
    
    $
    10,116
    
    
    $
    6,923State and municipal securities
    
    
    4,331
    
    
    
    1,496
    
    
    
    723Mortgage-backed securities
    
    
    111,894
    
    
    
    127,641
    
    
    
    69,524Marketable equity securities
    
    
    1,078
    
    
    
    1,091
    
    
    
    1,108Other debt securities
    
    
    51
    
    
    
    500
    
    
    
    773Total Available for Sale
    
    
    135,426
    
    
    
    140,844
    
    
    
    79,051Held to MaturityU.S. government agencies
    
    
    300
    
    
    
    1,139
    
    
    
    3,398State and municipal securities
    
    
    28,532
    
    
    
    17,748
    
    
    
    2,823Mortgage-backed securities
    
    
    74,430
    
    
    
    40,729
    
    
    
    2,651Other debt securities
    
    
    3,441
    
    
    
    2,911
    
    
    
    2,616Total Held to Maturity
    
    
    106,703
    
    
    
    62,527
    
    
    
    11,488Total Securities
    
    $
    242,129
    
    
    $
    203,371
    
    
    $
    90,539
 22




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##### Table of Contents



The following table indicates the maturities of securities at December 31, 2004 at the
carrying amount and the weighted average yields of such securities: Maturity of Investment Portfoliodollars in thousands AFS
    
    
    HTMAmount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. Treasuries and AgenciesUnder 1 year
    
    $
    11,940
    
    
    
    2.63
    %
    
    $
    0
    
    
    
    0.00
    %1 - 5 years
    
    
    4,584
    
    
    
    2.84
    %
    
    
    200
    
    
    
    4.30
    %5 - 10 years
    
    
    1,441
    
    
    
    4.45
    %
    
    
    100
    
    
    
    4.63
    %Over 10 years
    
    
    107
    
    
    
    5.00
    %
    
    
    0
    
    
    
    0.00
    %Total U.S. Treasuries and Agencies
    
    
    18,073
    
    
    
    2.85
    %
    
    
    300
    
    
    
    4.41
    %State and Political SubdivisionsUnder 1 year
    
    
    0
    
    
    
    0.00
    %
    
    
    100
    
    
    
    3.68
    %1 - 5 years
    
    
    0
    
    
    
    0.00
    %
    
    
    956
    
    
    
    4.02
    %5 - 10 years
    
    
    1,226
    
    
    
    3.01
    %
    
    
    2,276
    
    
    
    3.91
    %Over 10 years
    
    
    3,105
    
    
    
    3.78
    %
    
    
    25,200
    
    
    
    4.22
    %Total State and Political Subdivisions
    
    
    4,331
    
    
    
    3.23
    %
    
    
    28,532
    
    
    
    4.27
    %Mortgage-backed
    
    
    111,894
    
    
    
    4.50
    %
    
    
    74,430
    
    
    
    4.65
    %Other SecuritiesUnder 1 year
    
    
    51
    
    
    
    6.63
    %
    
    
    0
    
    
    
    0.00
    %1 - 5 years
    
    
    0
    
    
    
    0.00
    %
    
    
    1,007
    
    
    
    5.44
    %5 - 10 years
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Over 10 years
    
    
    1,078
    
    
    
    2.09
    %
    
    
    2,434
    
    
    
    9.39
    %Total Other Securities
    
    
    1,129
    
    
    
    2.29
    %
    
    
    3,441
    
    
    
    8.23
    %Total Securities
    
    $
    135,426
    
    
    
    4.24
    %
    
    $
    106,703
    
    
    
    4.68
    %
 23




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##### Table of Contents



LOANS General.Loans are the largest category of earning assets and typically provide higher yields than
the other types of earning assets. Associated with the higher loan yields are the inherent credit
and liquidity risks which management attempts to control and counterbalance. The following table
indicates loans outstanding, as of the dates indicated. The segregation used in compiling the
following information is based on the collateral of the loan rather than the source of loan
payments and is consistent with the method followed for regulatory reporting. Composition of Loan Portfoliodollars in thousands December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Real Estate  residential
    
    $
    156,436
    
    
    $
    158,116
    
    
    $
    169,220
    
    
    $
    181,675

    
    
    $
    181,723Real Estate  construction
    
    
    121,518
    
    
    
    83,211
    
    
    
    71,907
    
    
    
    73,713
    
    
    
    73,706Real Estate  other
    
    
    129,943
    
    
    
    106,483
    
    
    
    93,894
    
    
    
    68,089
    
    
    
    63,450Commercial
    
    
    137,600
    
    
    
    157,470
    
    
    
    145,409
    
    
    
    142,122
    
    
    
    131,548Consumer
    
    
    24,147
    
    
    
    39,258
    
    
    
    44,978
    
    
    
    57,517
    
    
    
    58,156Other
    
    
    4,229
    
    
    
    6,385
    
    
    
    1,103
    
    
    
    1,115
    
    
    
    1,396Total gross loans
    
    
    573,873
    
    
    
    550,923
    
    
    
    526,511
    
    
    
    524,231
    
    
    
    509,979Unearned income and deferred fees
    
    
    (370
    )
    
    
    (358
    )
    
    
    (296
    )
    
    
    (1,986
    )
    
    
    (2,762
    )Net loans
    
    $
    573,503
    
    
    $
    550,565
    
    
    $
    526,215
    
    
    $
    522,245
    
    
    $
    507,217
 Totals loans grew $22.9 million since December 31, 2003 even though the Company experienced runoff
of $26.7 million in loans that do not meet the risk characteristics targeted by management and
$17.3 million in loans sold in connection with the Companys sale of Bank of Dyer. Additionally
the Companys loan volume increase was partially offset by
foreclosed properties of $9.1 million. Managements focus during 2003 and 2004 has been on
building a centralized infrastructure to support future growth,
develop common policies and procedures, and establish controls. Management is placing greater emphasis on short-term real estate lending such as construction,
acquisition and development, and commercial real estate loans. The Company has established
internal targets for real estate secured loans at 75% of total loans, with an emphasis on variable
interest rate loans or loans with maturities under five years if at fixed rates. Currently, 71%
of our loan portfolio is secured by real estate. The change in the composition of the loan portfolio from 2003 reflects managements lending
philosophy and its focus on real property as the primary collateral. The increase in real estate -
construction in 2004 and 2003 over the prior years is predominately single-family homes located in Davidson and Williamson Counties.
These are loans made to local builders who are well known within the community and represent a
60/40 split between speculative and custom homes. Also included in this category are residential
land development and acquisition loans. Real estate  other are largely commercial real estate
loans on local small retail properties located predominately in
Williamson and Davidson Counties,
two of our most vibrant and economically stable markets. The decline in commercial and consumer loans reflect those types of loans that do not meet the risk
characteristics targeted by management. Management prefers to make loans secured by real estate, a
strategy that it believes to be a more conservative lending
approach. During 2003, a seasoned construction lender was added
to an already seasoned lending staff in the Williamson and Davidson
County markets. This lending officer
generated increased real estate construction loans in the
Williamson and Davidson County markets in 2004. In addition, a
special assets team was organized within the Company in 2003 to
manage and work through the Companys problem assets which
were predominately located in West Tennessee. The Companys loan
growth in the Williamson County market was also aided in 2004 by
continued consolidation of financial institutions in this market. Management anticipates that as its asset
quality problems improve and the Company experiences increased
cash flows from its investment securities it will be able to
invest these available funds in higher earning loans in its
Middle Tennessee market areas and improve its net interest
margin and net income. 24




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##### Table of Contents



The following is a presentation of an analysis of maturities of loans as of December 31, 2004: Maturity of Loan
Portfoliodollars in thousands Due in 1 year or
    
    
    Due in 1 to 5
    
    
    Due After 5Type of Loan
    
    less
    
    
    Years
    
    
    Years
    
    
    Total($ in thousands)Real estate  residential
    
    $
    88,566
    
    
    $
    50,175
    
    
    $
    17,695
    
    
    $
    156,436Real estate  construction
    
    
    110,900
    
    
    
    9,396
    
    
    
    1,222
    
    
    
    121,518Real estate  other
    
    
    50,771
    
    
    
    64,051
    
    
    
    15,121
    
    
    
    129,943Commercial
    
    
    96,615
    
    
    
    36,771
    
    
    
    4,214
    
    
    
    137,600Consumer
    
    
    7,890
    
    
    
    16,125
    
    
    
    132
    
    
    
    24,147Other
    
    
    1,868
    
    
    
    2,282
    
    
    
    79
    
    
    
    4,229Total gross loans
    
    $
    356,610
    
    
    $
    178,800
    
    
    $
    38,463
    
    
    $
    573,873
 Provision and Allowance for Loan Losses.The Company has placed a greater emphasis on identifying
at-risk borrowers as our banks have experienced a higher than normal amount of borrower
bankruptcies which account for a large portion of our loan charge-offs. Additionally,
deteriorating economic conditions in some of the markets we serve have resulted in some of our
commercial and consumer borrowers experiencing financial difficulty and in some cases the inability
to pay their obligations to us. The allowance for loan losses is based on past loan experience and
other factors, which in managements judgment deserve current recognition in estimating possible
loan losses. Such factors include past loan loss experience, growth and composition of the loan
portfolio, review of specific problem loans, trends in past due loans, the relationship of the
allowance for loan losses to outstanding loans, and current economic conditions that may affect the
borrowers ability to repay their obligations to the Company. Management has in place a risk rating
system designed for monitoring its loan portfolio in an effort to identify potential problem loans. 25




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##### Table of Contents



The 41 basis point decline in the allowance for loan losses as a percentage of total loans
outstanding since December 31, 2003 reflects loan charge-offs taken against specific allocated
reserves. Reserves totaling $705,000 were charged off against those
loans sold in connection with the sale of the
Bank of Dyer. A five year summary of loan loss experience is
provided below. Summary of Allowance for Loan Lossesdollars in thousands Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of year
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137
    
    
    $
    5,146Increase due to acquisitions
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    588,414
    
    
    
    9,062
    
    
    
    9,023
    
    
    
    6,137
    
    
    
    5,204Loans charged-off:Real estate  construction
    
    
    (199
    )
    
    
    (596
    )
    
    
    (679
    )
    
    
    (258
    )
    
    
    (73
    )Real estate  residential
    
    
    (1,321
    )
    
    
    (498
    )
    
    
    (598
    )
    
    
    (295
    )
    
    
    (414
    )Real estate  other
    
    
    (1,028
    )
    
    
    (491
    )
    
    
    (496
    )
    
    
    (608
    )
    
    
    (62
    )Commercial
    
    
    (1,675
    )
    
    
    (2,083
    )
    
    
    (3,670
    )
    
    
    (1,553
    )
    
    
    (614
    )Consumer
    
    
    (808
    )
    
    
    (1,464
    )
    
    
    (1,806
    )
    
    
    (1,052
    )
    
    
    (704
    )Other
    
    
    (0
    )
    
    
    (11
    )
    
    
    (150
    )
    
    
    (137
    )
    
    
    0Total charge-offs
    
    $
    (5,031
    )
    
    $
    (5,143
    )
    
    $
    (7,399
    )
    
    $
    (3,903
    )
    
    $
    (1,867
    )Recoveries:Real estate  construction
    
    
    28
    
    
    
    37
    
    
    
    137
    
    
    
    19
    
    
    
    0Real estate  residential
    
    
    29
    
    
    
    5
    
    
    
    53
    
    
    
    34
    
    
    
    5Real estate  other
    
    
    68
    
    
    
    162
    
    
    
    47
    
    
    
    29
    
    
    
    32Commercial
    
    
    201
    
    
    
    379
    
    
    
    180
    
    
    
    112
    
    
    
    10Consumer
    
    
    259
    
    
    
    230
    
    
    
    214
    
    
    
    156
    
    
    
    117Other
    
    
    11
    
    
    
    103
    
    
    
    7
    
    
    
    62
    
    
    
    0Total recoveries
    
    $
    596
    
    
    $
    916
    
    
    $
    638
    
    
    $
    412
    
    
    $
    164Net loans charged-off
    
    
    (4,435
    )
    
    
    (4,227
    )
    
    

    (6,761
    )
    
    
    (3,491
    )
    
    
    (1,703
    )Current year provision
    
    
    2,467
    
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377
    
    
    
    2,636Balance at end of year
    
    $
    6,446
    
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137Loans at year end
    
    $
    573,503
    
    
    $
    550,565
    
    
    $
    526,215
    
    
    $
    522,245
    
    
    $
    507,217Ratio of allowance to loans at year end
    
    
    1.12
    %
    
    
    1.53
    %
    
    
    1.72
    %
    
    
    1.73
    %
    
    
    1.21
    %Average loans
    
    $
    554,835
    
    
    $
    548,071
    
    
    $
    520,825
    
    
    $
    512,918
    
    
    $
    476,339Ratio of charge-offs to average loans
    
    
    0.80
    %
    
    
    0.77
    %
    
    
    1.30
    %
    
    
    0.68
    %
    
    
    0.36
    %
 Nonperforming Assets.The level of non-performing loans is an important element in assessing asset
quality and the relevant risk in the credit portfolio. Non-performing loans include non-accrual
loans, restructured loans and loans delinquent 90 days or more. Accrual of interest is
discontinued on a loan when management believes the borrowers financial condition is such that
collection of interest is doubtful. In addition to consideration of these factors, the Company has
a consistent and continuing policy of placing all loans on nonaccrual status if they become 90 days
or more past due. When a loan is placed on nonaccrual status, all
unpaid interest which has accrued on the
loan is reversed and deducted from earnings as a reduction of reported interest. No additional
interest is accrued on the loan balance until collection of both principal and interest becomes
reasonably certain. During the years ending December 31, 2004, 2003 and 2002 26




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##### Table of Contents



approximately
$435,000, $619,000 and $1.2 million, respectively, in additional interest income would have been
recognized in earnings if the Companys loans had been current in accordance with the original
terms. Another element associated with asset quality is foreclosed properties, which is carried as
other real estate owned on the balance sheet. For financial statement purposes, nonaccrual loans
are included in loans outstanding, whereas repossessions and other real estate are included in
other assets. The following is a summary of nonperforming assets: Summary of Nonperforming Loans dollars in
thousands
 Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Non-accrual loans
    
    $
    13,306
    
    
    $
    12,362
    
    
    $
    18,435
    
    
    $
    12,625
    
    
    $
    5,608Loans past due 90 days or more
still accruing
    
    
    40
    
    
    
    3
    
    
    
    0
    
    
    
    1,168
    
    
    
    345Restructured loans
    
    
    0
    
    
    
    0
    
    
    
    223
    
    
    
    252
    
    
    
    0Total nonperforming loans
    
    $
    13,346
    
    
    $
    12,365
    
    
    $
    18,658
    
    
    $
    14,045
    
    
    $
    5,953Foreclosed properties
    
    
    4,446
    
    
    
    3,793
    
    
    
    6,338
    
    
    
    7,330
    
    
    
    3,142Total nonperforming assets
    
    $
    17,792
    
    
    $
    16,158
    
    
    $
    24,996
    
    
    $
    21,375
    
    
    $
    9,095
 Non-performing assets to total loans were 3.1% at December 31, 2004 as compared to 2.9% at December
31, 2003. The increase in nonperforming assets during the year ended December 31, 2004 was due
primarily to managements continued efforts in identifying problem credits and an increase in
bankruptcy filings. It is anticipated that the level of nonperforming loans will gradually improve
as management resolves problem loans. Loan delinquencies, defined
as loans past due more than 30 days, were 3.3% of the total loan portfolio on December 31, 2004, and 3.2% at December
31, 2003. Provision expense equaled $2.5 million and $3.6 million in 2004 and 2003 respectively. Supplemental Loan Information as of December 31, 2004dollars in thousands Other real% of
    
    
    
    
    
    
    estate owned
    
    
    Year-to-Loans
    
    
    Total
    
    
    Nonaccrual
    
    
    and
    
    
    date net
    
    
    Allocation ofoutstanding
    
    
    Loans
    
    
    loans
    
    
    repossessions
    
    
    charge-offs
    
    
    allowanceReal Estate  residential
    
    $
    156,436
    
    
    
    27
    %
    
    $
    3,269
    
    
    $
    3,554
    
    
    $
    171
    
    
    $
    1,890Real Estate  construction
    
    
    121,518
    
    
    
    21
    %
    
    
    156
    
    
    
    103
    
    
    
    1,293
    
    
    
    531Real Estate  other
    
    
    129,943
    
    
    
    23
    %
    
    
    5,830
    
    
    
    809
    
    
    
    960
    
    
    
    1,441Commercial
    
    
    137,600
    
    
    
    24
    %
    
    
    3,609
    
    
    
    0
    
    
    
    1,474
    
    
    
    1,604Consumer
    
    
    24,147
    
    
    
    4
    %
    
    
    442
    
    
    
    55
    
    
    
    548
    
    
    
    843Other
    
    
    4,229
    
    
    
    1
    %
    
    
    0
    
    
    
    0
    
    
    
    (11
    )
    
    
    41Unallocated
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    96Total gross loans
    
    $
    573,873
    
    
    
    100
    %
    
    $
    13,306
    
    
    $
    4,521
    
    
    $
    4,435
    
    
    $
    6,446Deferred fees and costs
    
    
    (370
    )Net loans
    
    $
    573,503
 In addition to the nonaccrual loans, management has internally identified an additional $20.1
million in loans as potential problem credits. These loans are performing loans but are classified
due to payment history, decline in the borrowers financial position or decline in collateral
value. Loans classified as substandard are inadequately protected by the current 27




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##### Table of Contents



sound worth and
paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a
well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans classified
as doubtful have all the weaknesses inherent in one classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable. Loans
classified as loss are considered uncollectible and of such little value that their continuance as
bankable assets is not warranted. The following table shows the amount in each classification. Summary of Performing
Classified Loans
As of December 31, 2004 dollars in
thousands
 Substandard
    
    $
    18,880Doubtful
    
    
    1,176Loss
    
    
    0Total
    
    $
    20,056
 No material portion of these loans represents loans to one borrower or a group of affiliated
borrowers. Management believes the balance of the allowance for loan losses to be adequate as of
December 31, 2004 based on its internal evaluation of the allowance for loan losses and loan
portfolio. Quarterly, the allowance for loan losses is evaluated under the provision of SFAS 114
and 118. Under these guidelines, specific reserves are allocated for loans considered impaired. A
general reserve is also maintained for the Companys homogeneous loans. The level of the allowance
and the amount of the provision involve evaluation of uncertainties and matters of judgment.
Although management believes the allowance for loan losses at December 31, 2004 to be adequate,
further deterioration in problem credits, the results of the loan review process, or the impact of
deteriorating economic conditions on other businesses, could require increases in the provision for
loan losses and could result in future charges to earnings which could have a significant negative
impact on net earnings DEPOSITS Deposits, our primary source of funding asset growth, were $731.5 million at December 31, 2004, and
increase of $59.9 million over the December 31, 2003 balance of $671.6 million. This 8.9% increase
is primarily due to the opening of two branches in Williamson County in 2004. Deposit growth was
greater than loan growth in 2004, resulting in a decrease in loan to deposit ratio from 82.0% at
year end 2003 to 78.4% at year end 2004. The Company will continue to target low-cost deposits to
minimize interest expense and for their potential for providing deposit fee income. The amount of time deposits of $100,000 or
more outstanding at December 31, 2004 by time remaining until maturity is as follows: Deposit Maturitydollars in thousands Under 3 months
    
    $
    21,3484 - 6 months
    
    
    26,8007 - 12 months
    
    
    52,092Over 12 months
    
    
    105,317Total
    
    $
    205,557
 Brokered certificates of deposit totaling $54.2 million are included in the above totals. These
brokered deposits were used to purchase specific securities as part of the Companys leverage
transaction in 2003 and have not been used as a general funding or liquidity source of the Company. 28




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##### Table of Contents



KEY RATIOS Returns on average consolidated assets and average consolidated equity for the periods indicated
are as follows: Performance Indicators December 31, 2004
    
    December 31, 2003Return on Average Assets
    
    0.22%
    
    
    0.14%Return on Average Equity
    
    3.37%
    
    
    2.25%Dividend Payout Ratio
    
    28%
    
    
    88%Average Equity to Average
Assets Ratio
    
    6.59%
    
    
    6.27%
 INCOME TAXES Income tax expense for 2004 totaled $648,000 as compared to $595,000 for 2003. When measured as a
percentage of income before taxes, the Companys effective tax rate was 25.6% in 2004 as compared
to 35.1% in 2003. Effective tax rates are lower than statutory rates due primarily to the interest
from investment in tax exempt municipal bonds. FINANCIAL CONDITION Balance Sheet Summary The Companys total assets increased $70.9 million or 8.5% to $904.2 million at December 31, 2004
from $833.3 million at December 31, 2003. This increase was primarily the result of a $38.8
million increase in the securities portfolio along with a $22.9 million or 4.2% increase in the
loan portfolio. Loan growth for 2004 was impacted by the sale of
$17.3 million in loans in connection with the sale of the Bank of
Dyer. Total liabilities increased $67.9 million or 8.7% to $846.5 million at December 31, 2004 compared
to $778.6 million at December 31, 2003. Deposits, which are the Companys primary source of
funding growth, grew $59.8 million or 8.9% to
$731.5 million. Deposit growth was impacted by the $27.6 million
reduction in deposits in connection with the sale of the Bank of
Dyer. Repurchase agreements increased
$10.1 million or 30.6% since December 31, 2003. Outstanding Federal Home Loan Bank advances
declined by $852,000 in 2004. Shareholders equity increased $3.0 million to $57.7 million at December 31, 2004, up 5.5% from
$54.7 million at year end 2003 largely due to exercise of stock options. See Capital Position
and Dividends for further analysis. Liquidity and Asset Management The Companys management seeks to maximize net interest income by managing the Companys assets and
liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity
is the ability to maintain sufficient cash levels necessary to fund operations, meet the
requirements of depositors and borrowers and fund attractive investment opportunities. Higher
levels of liquidity bear corresponding costs, measured in terms of lower yields on short-term, more
liquid earning assets and higher interest expense involved in extending liability maturities.
Liquid assets including cash, due from banks and federal funds sold totaled $39.8 million at
December 31, 2004. In addition, the Company has $102.1 million in unpledged securities to secure
additional borrowing capacity for liquidity needs. The Companys primary source of liquidity is a stable core deposit base. Payments from the loan and
investment portfolios provide a secondary source. Borrowing lines with correspondent banks, the
Federal Home Loan Bank and the Federal Reserve augment these traditional sources. Repurchase
agreements, brokered certificates of deposit, and public fund deposits are alternative sources of funding to which the
Company has access. As of December 31, 2004, the Company had approximately $25.4 million of
additional borrowing capacity from the Federal Home Loan Bank. 29




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##### Table of Contents



The Companys securities portfolio consists of earning assets that provide liquidity and
interest income. For those securities classified as held-to-maturity the Company has the ability
and intent to hold these securities to maturity. Securities classified as available-for-sale
include securities intended to be used as part of the Companys asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment risk, the need or
desire to increase capital and similar economic factors. Cash flows
totaling approximately $52.6
million are projected to be generated from the securities portfolio within the next twelve months. Also providing monthly cash
flow is the Companys loan portfolio. At December 31, 2004,
projected cash flows of approximately $258.2 million will be
generated from the loan portfolio within
twelve months. Continued emphasis will be placed on amortizing loan
structures. As for liabilities, time deposits greater than $100,000 of approximately $100.2 million will become
due during the next twelve months. Historically, there has been no significant reduction in
immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market
demand accounts, demand deposit and regular savings. Management anticipates that there will be no
significant withdrawals from these transaction accounts in the
future. Management believes that deposit growth in the markets it
serves, particularly Williamson County, will be sufficient to
fund the Companys expected loan growth. The focus of the
branch retail network will be on generating deposit growth and
relationship building. The certificate of deposit base consists
of local in-market deposits at competitive rates and is
considered to be core deposits by management. Excess funds that
are not used to fund loan growth will continue to be invested
either in short-term government agency bonds or amortizing
mortgage-backed securities to provide future cash flow. Management believes that with current liquid assets, present maturities, borrowing sources and the
efforts of management in its asset/liability management program, liquidity will not pose a problem
in the near term future. However, the Companys bank borrowings
and subordinated debentures have
certain interest payment requirements and the Company has certain operating expenses at the holding
company level, which require dividends or management fees from the
Companys bank subsidiaries in order to be funded. The Companys recent asset quality problems
have resulted in regulatory restrictions on its subsidiaries ability to pay dividends or
management fees to the holding company without prior regulatory approval. The Company
anticipates that it will be able to meet required payments on its outstanding debt and subordinated
debentures for the next four quarters through available cash resources.
The Companys regulators have considerable discretion in determining whether to grant required
approvals, and no assurance can be given that such approvals will be
forthcoming. As described below, the Companys BankTennessee
subsidiary and its directors consented to the issuance of an agreed
order with the Commissioner of the Department of Financial
Institutions of the State of Tennessee pursuant to which, among other
things, BankTennessee has agreed not to pay dividends, management
fees, or centralized services fees to the Company without prior
approval of the Commissioner. Following the sale of BankTennessee, the Company will no longer be restricted in the
management and central services fees it can charge its bank
subsidiaries. Contractual Obligations The Company has contractual obligations to make future payments on debt and lease agreements.
Long-term debt, capital leases and junior subordinated debentures are reflected on the consolidated
balance sheet, whereas, operating lease obligations for office space and equipment are not recorded
on the consolidated balance sheet. The Company has no unconditional purchase obligations or other
long-term obligations other than as included in the following table. These types of obligations
are more fully discussed in Notes 6, 11 and 12 of the Consolidated Financial Statements included in
this Annual Report. Total contractual obligations of the Company as of December 31, 2004 are as
follows: Contractual Obligationsdollars in thousands Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    yearsLong-Term Debt Obligations
    
    $
    55,550
    
    
    $
    1,000
    
    
    $
    13,668
    
    
    $
    39,668
    
    
    $
    1,214Capital Leases
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Leases
    
    
    2,625
    
    
    
    594
    
    
    
    1,771
    
    
    
    253
    
    
    
    7Purchase Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-term Liabilities
    
    
    12,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    12,000Total
    
    $
    70,175
    
    
    $
    1,594
    
    
    $
    15,439
    
    
    $
    39,921
    
    
    $
    13,221
 30




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##### Table of Contents



Off Balance Sheet Arrangements At December 31, 2004, the Company had unfunded loan commitments outstanding of $150.2 million and
unfunded lines of credit and letters of credit of $3.7 million. Because these commitments generally
have fixed expiration dates and many will expire without being drawn upon, the total commitment
level does not necessarily represent future cash requirements. If needed to fund these outstanding
commitments, the Companys bank subsidiaries have the ability to liquidate Federal funds sold or
securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from
other financial institutions. Additionally, the Companys bank subsidiaries could sell
participations in these or other loans to correspondent banks. Capital Position and Dividends At December 31, 2004, total shareholders equity was $57.7 million or 6.4% of total assets. The
increase of $3.0 million in shareholders equity for 2004 results from the Companys net income of
$1.9 million, the exercise of stock options totaling $1.0 million and $668,000 in tax benefit
relating to these options, and $394,000 in issuance of common stock through the Companys Employee
Stock Purchase Plan all offset by a $468,000 decrease in accumulated
other comprehensive income. Shareholders equity was
further reduced by the payment of cash dividends of $527,000 during
2004. The Companys principal regulators have established minimum risk-based capital requirements and
leverage capital requirements for the Company and its subsidiary banks. These guidelines classify
capital into two categories of Tier I and total risk-based capital. Total risk-based capital
consists of Tier I (or core) capital (essentially common equity less intangible assets) and Tier II
capital (essentially qualifying long-term debt, of which the Company and subsidiary banks have
none, and a part of the allowance for loan losses). In determining risk-based capital requirements,
assets are assigned risk-weights of 0% to 100%, depending on regulatory assigned levels of credit
risk associated with such assets. The risk-based capital guidelines require the subsidiary banks
and the Company to have a total risk-based capital ratio of 8.0% and a Tier I risk-based capital
ratio of 4.0%. Trust preferred securities are allowed to be counted in Tier I capital, subject to
certain limitations. 31




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##### Table of Contents



The Company and the Banks actual capital amounts and ratios at December 31, 2004 and 2003 are as
follows: Capital Ratiosdollars in thousands To be wellcapitalized under
    
    
    
    
    
    
    
    
    
    
    Excess overRequired
    
    
    prompt corrective
    
    
    
    
    
    
    
    
    
    
    wellMinimum
    
    
    action provisions
    
    
    Actual
    
    
    capitalizedDecember 31, 2004
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    AmountTier I to average assets
leverageCivitas BankGroup, Inc.
    
    $
    36,029
    
    
    
    4.00
    %
    
    $
    45,036
    
    
    
    5.00
    %
    
    $
    68,562
    
    
    
    7.61
    %
    
    $
    23,526Cumberland Bank
    
    
    26,462
    
    
    
    4.00
    %
    
    
    33,078
    
    
    
    5.00
    %
    
    
    46,672
    
    
    
    7.05
    %
    
    
    13,594BankTennessee
    
    
    7,902
    
    
    
    4.00
    %
    
    
    9,878
    
    
    
    5.00
    %
    
    
    14,147
    
    
    
    7.16
    %
    
    
    4,269Bank of Mason
    
    
    297
    
    
    
    4.00
    %
    
    
    372
    
    
    
    5.00
    %
    
    
    996
    
    
    
    13.40
    %
    
    
    624Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    21,931
    
    
    
    4.00
    %
    
    
    32,897
    
    
    
    6.00
    %
    
    
    68,562
    
    
    
    12.50
    %
    
    
    35,665Cumberland Bank
    
    
    16,316
    
    
    
    4.00
    %
    
    
    24,473
    
    
    
    6.00
    %
    
    
    46,672
    
    
    
    11.44
    %
    
    
    22,199BankTennessee
    
    
    5,138
    
    
    
    4.00
    %
    
    
    7,707
    
    
    
    6.00
    %
    
    
    14,147
    
    
    
    11.01
    %
    
    
    6,440Bank of Mason
    
    
    143
    
    
    
    4.00
    %
    
    
    215
    
    
    
    6.00
    %
    
    
    996
    
    
    
    27.83
    %
    
    
    781Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    43,862
    
    
    
    8.00
    %
    
    
    54,828
    
    
    
    10.00
    %
    
    
    74,594
    
    
    
    13.61
    %
    
    
    19,766Cumberland Bank
    
    
    32,631
    
    
    
    8.00
    %
    
    
    40,789
    
    
    
    10.00
    %
    
    
    51,051
    
    
    
    12.52
    %
    
    
    10,262BankTennessee
    
    
    10,276
    
    
    
    8.00
    %
    
    
    12,845
    
    
    
    10.00
    %
    
    
    15,756
    
    
    
    12.27
    %
    
    
    2,911Bank of Mason
    
    
    286
    
    
    
    8.00
    %
    
    
    358
    
    
    
    10.00
    %
    
    
    1,041
    
    
    
    29.09
    %
    
    
    683
 In 2004, BankTennessee and its directors consented to the issuance of an agreed order by
the Commissioner of the Tennessee Department of Financial Institutions (the
Commissioner). In the order, BankTennessee and its directors agreed not to engage in
certain practices, including, but not limited to, failing to fully comply with an earlier
agreement with the Commissioner, engaging in lending practices that resulted in a large
volume of low quality assets, having an inadequate allowance for loan losses, low net
operating earnings, inadequate liquidity and capital for its risk profile, failing to
operate with effective management and oversight of management, and failing to comply with
legal lending limit and other regulatory requirements. BankTennessee agreed to take certain
actions, including but not limited to assessing its management quality, notifying the
Commissioner of additions or subtractions from its senior executive officers and directors,
maintaining Tier One leverage capital ratio of at least seven percent (7%), taking actions
to reduce the level of classified assets, correct loan documentation exceptions, and reduce
credit concentrations, maintain adequate allowance for loan losses and loan grading system,
improve earnings level consistently with an earning improvement plan, assure adequate
internal audits and reduce the banks reliance on volatile funding sources.
BankTennessee also agreed not to pay any dividends, management fees or centralized services
fees to the Company without prior approval of the Commissioner. In 2004, BankTennessee did
not pay any dividends to the Company but did pay approximately $238,000 in management fees
and $1.2 million in centralized services fees to the Company. Centralized service fees were
paid for services including accounting and financial reporting, information 32




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technology,
loan and deposit operations, human resources, investment management, special asset
management, marketing and public relations, credit administration and risk management.
Under Tennessee banking law, the Commissioner can enforce an agreed order such as this by
injunction or by civil money penalties of up to $500 per day per violation, and in the case
of violations by directors, by removal from office. Quarterly Financial
Information Set forth below is certain
quarterly financial information: Selected Quarterly Financial Datadollars in thousands except per share data 2004 Quarters
    
    
    
    
    
    
    
    
    
    
    2003 QuartersFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthSummary of OperationsInterest income
    
    $
    10,601
    
    
    $
    9,984
    
    
    $
    10,860
    
    
    $
    11,473
    
    
    $
    10,314
    
    
    $
    10,326
    
    
    $
    9,942
    
    
    $
    10,694Interest expense
    
    
    3,871
    
    
    
    3,794
    
    
    
    4,340
    
    
    
    4,836
    
    
    
    4,128
    
    
    
    3,953
    
    
    
    3,969
    
    
    
    4,027Net interest income
    
    
    6,730
    
    
    
    6,190
    
    
    
    6,520
    
    
    
    6,637
    
    
    
    6,186
    
    
    
    6,373
    
    
    
    5,973
    
    
    
    6,667Provision for loan losses
    
    
    561
    
    
    
    508
    
    
    
    577
    
    
    
    821
    
    
    
    424
    
    
    
    2,058
    
    
    
    583
    
    
    
    514Noninterest income
    
    
    1,777
    
    
    
    2,416
    
    
    
    1,821
    
    
    
    1,732
    
    
    
    1,646
    
    
    
    1,976
    
    
    
    2,160
    
    
    
    1,626Noninterest expense
    
    
    6,829
    
    
    
    7,206
    
    
    
    7,495
    
    
    
    7,294
    
    
    
    6,768
    
    
    
    6,834
    
    
    

    7,098
    
    
    
    6,632Net income
    
    
    754
    
    
    
    613
    
    
    
    253
    
    
    
    264
    
    
    
    402
    
    
    
    (345
    )
    
    
    308
    
    
    
    733Earnings per share
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.03
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.04Balance Sheet HighlightsTotal Assets
    
    $
    824,842
    
    
    $
    839,209
    
    
    $
    884,756
    
    
    $
    904,221
    
    
    $
    766,932
    
    
    $
    773,946
    
    
    $
    832,319
    
    
    $
    833,320Securities
    
    
    194,284
    
    
    
    226,646
    
    
    
    236,264
    
    
    
    242,129
    
    
    
    135,171
    
    
    
    145,545
    
    
    
    182,464
    
    
    
    203,371Loans, net of deferred fees
    
    
    551,750
    
    
    
    532,039
    
    
    
    567,601
    
    
    
    573,503
    
    
    
    546,736
    
    
    
    549,064
    
    
    
    551,727
    
    
    
    550,565Allowance for loan losses
    
    
    (8,463
    )
    
    
    (7,794
    )
    
    
    (7,779
    )
    
    
    (6,446
    )
    
    
    (8,505
    )
    
    
    (8,623
    )
    
    
    (8,402
    )
    
    
    (8,414
    )Deposits
    
    
    672,629
    
    
    
    688,902
    
    
    
    734,272
    
    
    
    731,469
    
    
    
    640,692
    
    
    
    638,150
    
    
    
    685,642
    
    
    
    671,636Borrowings
    
    
    78,590
    
    
    
    79,463
    
    
    
    76,663
    
    
    
    98,493
    
    
    
    62,385
    
    
    
    73,288
    
    
    
    76,432
    
    
    
    90,438Shareholders equity
    
    
    56,501
    
    
    
    54,534
    
    
    
    56,773
    
    
    
    57,736
    
    
    
    45,203
    
    
    
    45,044
    
    
    
    53,735
    
    
    
    54,741
 RISK FACTORS Investing in the Companys common stock involves various
risks which are particular to the Company, its industry and its
market area. Several risk factors regarding investing in the
Companys common stock are discussed below. This listing
should not be considered as all-inclusive. If any of the
following risks were to occur, the Company may not be able to
conduct its business as currently planned and its financial
condition or operating results could be negatively impacted.
These matters could cause the trading price of the
Companys common stock to decline in future periods. The amount of the Companys non-performing loans, net
charge-offs and provision for loan losses for the fiscal years
ended 2004, 2003 and 2002 have had the effect of reducing the
Companys net income and return on assets. If further
deterioration in the Companys asset portfolio occurs, the
Company could likely incur additional loan charge-offs and
increased provisions for loan losses which would
negatively impact future earnings. While the Companys amount of non-performing assets
(non-performing loans and foreclosed properties) declined from
approximately $25.0 million at December 31, 2002 to
approximately $16.2 million at December 31, 2003, it
increased to approximately $17.8 million at
December 31, 2004. Total non-performing loans were
$13.3 million at December 31, 2004, as compared to
$12.4 million at December 31, 2003 and
$18.7 million at December 31, 2002. As a percentage of
total loans, non-performing loans
were 2.3%, 2.3%
and 3.6%, at December 31, 2004,
2003 and 2002, respectively. As a result of these asset quality
problems, the Company has experienced increased provisions for
loan losses which continue to negatively impact net income. For
the fiscal year ended December 31, 2004, the Companys
provision for loan losses totaled $2.5 million, compared to
$3.6 million for the year ended December 31, 2003 and
$6.8 million for the year ended December 31, 2002.
Although the provision for loan losses has declined in each of
the last two fiscal years, it remains at levels higher than
historical averages for the Company and higher than banks of
similar size serving similar markets. This increased level of
provision for loan losses continues to negatively impact the
Companys net income and continued deterioration of
economic conditions and further identification of borrowers
experiencing financial weaknesses could cause additional
charge-offs and provision for loan losses and increases in
non-performing assets further negatively impacting net income. The level of the Companys allowance for loan losses and
the amount of the provision involve evaluation of uncertainties
and matters of judgment. Further deterioration in problem
credits, the results of ongoing internal evaluations and reviews
of the loan portfolio, or the impact of deteriorating economic
conditions on other businesses, could require increases in the
provision for loan losses and could result in future charges to
earnings which could have a significant negative impact on net
earnings. Furthermore, the Company believes that continued
deterioration in the economy in both its primary market areas
and nationally could have a significant impact on loans not
currently identified as problems as well as those that are
identified. 33




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The Company experienced a declining net interest margin in
2003 and 2004.

The Companys net interest margin declined from 3.48% for
the year ended December 31, 2003 to 3.30% for the year
ended December 31, 2004 primarily as a result of declining
interest rates, the Companys continued asset quality
problems, the Companys increased focus on originating secured
real estate loans, and the related reduction in yield resulting from
this strategy and the Companys investment of excess deposit
growth in investment securities.
While the Company believes that its net interest margin will
improve in 2005 over 2004 as interest rates increase and it
continues to invest in higher earning assets, future compression
of its net interest margin could negatively impact the
Companys net income, its earnings per share and its
ability to fund its operations.

The Company and its bank subsidiary, Cumberland Bank, have
executed written agreements and agreed orders with bank regulators that
impose certain obligations on the Company, including obligations
with respect to the maintenance of minimum capital levels and
prohibit the Company from paying dividends to its shareholders
without prior regulatory approval.

The Company and its subsidiary, Cumberland Bank, have committed
to bank regulatory officials to take various actions, including
to reduce the level of criticized or non-performing loans, to
improve loan underwriting and loan review, 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 Cumberland Bank 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 Cumberland Bank. The Company
believes it and its subsidiaries were in compliance in all
material respects with these agreements at December 31,
2004. The Company and its subsidiaries intend to continue to
comply with these agreements. The Company believes that the
earnings from operations and available funds will be sufficient
to allow the Company to meet all these commitments and the
requirements for well-capitalized status through 2005. However,
the Companys regulators have considerable discretion in
determining whether to grant required approvals, and no
assurance can be given that such approvals will be forthcoming.

If the Companys bank subsidiaries were unable to pay
dividends to the Company as a result of a regulatory
agencys refusal to grant necessary approval, or for any
other reason the Company would be limited to parent company fees
to fund its operating expenses and would need to obtain
alternative financing sources, such as proceeds of an offering
of its equity securities or the borrowing of additional amounts
in order to meet its debt servicing obligations, including its
senior bank debt and its subordinated debt obligation on the
trust preferred securities issued by Cumberland Capital
Trust I and Cumberland Capital Trust II. The
Companys bank borrowings and trust preferred securities
have certain payment requirements totaling approximately
$1.0 million for
2005. The Company also has certain operating expenses at the
holding company level which it expects to be approximately
$7.0 million in
2005. The Company requires dividends or management or central
services fees from its bank subsidiaries in order for it to be
able to make these required payments. As described above, the
Company and certain of its subsidiaries have agreed to certain
regulatory restrictions on the subsidiaries ability to pay
dividends to the Company without prior
regulatory approval. In connection with the sale of
BankTennessee, the Company agreed to continue to provide certain
services pursuant to a centralized services agreement for a
six-month period, but does not currently anticipate providing
such services for a longer period.

If these required regulatory approvals are not received, and the
Companys bank subsidiaries are unable to pay dividends to the
Company in amounts sufficient to fund
these costs, the Company could be required to raise additional
capital in order to make these payments. If it is necessary for
the Company to raise this additional capital through an offering
of its equity securities, its existing shareholders would have
their ownership interest in the Company diluted.

Fluctuations in interest
rates could adversely affect the
Companys net interest income and impact funding
sources.

The results of operations of banking institutions generally, and
of the Companys bank subsidiaries specifically, are
materially affected by general economic conditions, the monetary
and fiscal policies of the federal government and the regulatory
policies of governmental authorities as well as other factors
that affect market rates of interest. The Companys
profitability is significantly dependent on net interest
income, which is the difference between interest

34



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income on interest-earning assets, like loans and investments,
and interest expense on interest-bearing liabilities, like
deposits and borrowings. Thus, any change in general market
interest rates, whether as a result of changes in monetary
policies of the Federal Reserve or otherwise, could have a
significant effect on the Companys funding costs, net interest
margin and net
interest income and, consequently, the Companys earnings
per share. Although the Companys bank subsidiaries
actively manage their exposure to interest rate changes, these
changes are beyond their control and the bank subsidiaries
cannot fully insulate themselves from the effect of rate changes.


As interest rates change, the Company expects that it will
periodically experience gaps in the interest rate
sensitivities of its assets and liabilities, meaning that either
its interest-bearing liabilities will be more sensitive to
changes in market interest rates than its interest-earning
assets, or vice versa. In either event, if market interest rates
should move contrary to the Companys position, this
gap may work against the Company, and its earnings
may be negatively affected.

Changes in the level of interest rates also may negatively
affect the Companys ability to originate real estate
loans, the value of its assets and its ability to realize gains
from the sale of its assets, all of which ultimately affect the
Companys earnings. A decline in the market value of the
Companys assets may limit its ability to borrow additional
funds or result in its lenders requiring additional collateral
from it under its loan agreements. As a result, the Company
could be required to sell some of its loans and investments
under adverse market conditions, upon terms that are not
favorable to it, in order to maintain its liquidity. If those
sales are made at prices lower than the amortized costs of the
investments, the Company will incur losses.

The Company has relatively high amounts of construction and
development loans, which have a greater credit risk than
residential mortgage loans or a more diversified loan
portfolio.

Construction and development lending is a significant
portion of the Companys loan portfolio. It carries a high
dollar percentage of construction and development loans in its
portfolio, i.e., approximately 21.2%
of its total loans as of December 31, 2004. This type of
lending is generally considered to have higher credit risks than
traditional single-family residential lending because the
principal is concentrated in a limited number of loans with
repayment dependent on the successful operation of the related
real estate project. Consequently, these loans are more
sensitive to adverse conditions in the real estate market or the
general economy. These loans are generally less predictable and
more difficult to evaluate and monitor, and collateral may be
difficult to dispose of in a market decline. As part of its
underwriting practices, the Company performs interest rate shock
analysis on its borrowers of construction and development loans in an
attempt to mitigate potential credit risk. If the
Companys bank subsidiaries experience significant
construction loan loss because they inaccurately estimated the
cost and value of construction loan projects or because of a
general economic downturn, the Company could experience earnings
loss which would reduce its net tangible book value.

The Companys outstanding senior bank debt contains
certain financial and operational covenants. In the event that
the Company is not able to comply with, or obtain waivers of
breaches of, these covenants it would be in default under the
terms of its senior debt.

On December 13, 2004, the Company entered into a Loan
Agreement with First Tennessee Bank, National Association under
which the Company borrowed $5 million and established a
line of credit for an additional $250,000. The Company used the
proceeds of this loan to repay its existing outstanding senior
debt. This new loan is secured by all of the capital stock of
the Companys Cumberland Bank bank subsidiary held by the
Company. The Company has agreed to certain financial and
operational covenants under the terms of its senior debt,
including the maintenance of certain capital levels and levels
of its allowance for loan losses, the ratio of its non
performing loans to total loans, and limiting its ability to
incur additional indebtedness and to pay dividends. The failure
by the Company to comply with these covenants or to obtain
waivers from First Tennessee of any breaches of these covenants
would result in the Company being in default under the terms of
its senior debt. In the event that the Company was not
successful in obtaining a waiver of any future breach of any
covenant or other event of default under its senior debt, it
would be required to repay all amounts then outstanding under
the terms of its senior debt, which payment obligation could
have a material adverse effect on its results of operations and
financial condition. On March 15, 2005, First Tennessee
granted the Company a waiver of its failure to comply with the
financial

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The amount of common stock owned by the Companys
officers and directors may make it more difficult to obtain
shareholder approval of potential takeovers that they oppose.

As of December 31, 2004, directors and executive officers
beneficially owned approximately 28.6%
of the Companys common stock. The common stock and option ownership of
the Companys board and management, could make it difficult
or expensive to obtain majority support for shareholder
proposals or potential acquisition proposals of the Company that
its directors and officers oppose.

The Companys internal control over financial reporting
may have weaknesses or inadequacies that may be material.

Section 404 of the Sarbanes-Oxley Act of 2002 requires the
Company to perform an evaluation of its internal control over
financial reporting and the Companys auditor to attest to such evaluation
on an annual basis. For the fiscal year ended December 31,
2004, management has not yet prepared its report on the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004 nor has the
Companys registered public accounting firm prepared its
attestation. In reliance on an exemptive order of the
Securities and Exchange Commission, the Company anticipates that
managements report on internal control over financial
reporting and the related report of the Companys
registered public accounting firm will be included in an
amendment to this Form 10-K filed with the SEC within
45 days following March 16, 2005. While management
currently believes that the Companys internal control over
financial reporting was effective at December 31, 2004 and
that there were no material weaknesses with respect to the
internal control over financial reporting as of such date, the
Company can give no assurance that it will not discover any
material weaknesses prior to filing its amendment to the
Form 10-K or that its internal control over financial
reporting was effective as of December 31, 2004.

Ongoing compliance with these requirements is expected to be
expensive and time-consuming and may negatively impact the
Companys results of operations. The Company can not make any assurances
that it will not discover material weaknesses in its internal
control over financial reporting in the future. If it discovers
any material weaknesses in the future, it may be required to
make material changes to its internal control over financial
reporting which could negatively impact its results of
operations. In addition, if the Company discovers such material
weaknesses, its management may not be able to conclude that the
Companys internal control over financial reporting is
effective or the Companys registered public accounting
firm may not be able to attest that the Companys internal
control over financial reporting was effective. If the Company
cannot conclude that its internal control over financial
reporting is effective or if its registered public accounting firm is
not able to timely attest to such evaluation, the Company may be
subject to regulatory scrutiny, and a loss of public confidence
in its internal control over financial reporting which may cause
the value of the Companys common stock to decrease.

The Companys key management personnel may leave at any
time.

The Companys future success depends to a significant
extent on the continued service of its key management personnel,
especially Richard Herrington, its president and chief executive
officer, and its bank subsidiaries presidents. The Company
does not have employment agreements with any of its personnel,
however, members of senior management, including Richard Herrington,
are awarded equity incentives which would be forfeited, to the extent
not vested, upon termination.
The Company can provide no assurance that it will be able to
retain any of its key officers and employees or attract and
retain qualified personnel in the future.

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The Company, as well as its bank subsidiaries, operate in a
highly regulated environment and are supervised and examined by
various federal and state regulatory agencies who may adversely
affect the Companys ability to conduct business.

The Tennessee Department of Financial Institutions and the Board
of Governors of the Federal Reserve System supervise and examine
the Companys bank subsidiaries. Because the bank
subsidiaries deposits are federally insured up to
$100,000, the Federal Deposit Insurance Corporation also
regulates the bank subsidiaries. The Federal Reserve also
regulates the Company, as a bank holding company. In addition,
the Office of Thrift Supervision supervises and regulates The
Murray Bank, which is a federal savings bank. These and other
regulatory agencies impose certain regulations and restrictions
on the bank subsidiaries, including:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | meeting explicit standards as to capital and financial condition;                          
|
| |  | limitations on the permissible types, amounts and extensions of
    credit and investments;
|
| |  | restrictions on permissible non-banking activities; and                                    
|
| |  | restrictions on dividend payments.                                                         

Federal and State regulatory agencies have extensive discretion
and power to prevent or remedy unsafe or unsound practices or
violations of law by banks and bank holding companies. As a
result, the Company must expend significant time and expense to
assure that it is in compliance with regulatory requirements and
agency practices.

The Company, as well as its bank subsidiaries, also undergoes
periodic examinations by one or more regulatory agencies.
Following such examinations, the Company may be required, among
other things, to make additional provisions to its allowance for
loan loss or to restrict its operations. These actions would
result from the regulators judgments based on information
available to them at the time of their examination. The bank
subsidiaries operations are also governed by a wide
variety of state and federal consumer protection laws and
regulations. These federal and state regulatory restrictions
limit the manner in which the Company, and the bank
subsidiaries, may conduct business and obtain financing. These
laws and regulations can and do change significantly from time
to time, and any such change could adversely affect the
Companys results of operations.

The Company risks losing customers because it competes with
often larger, more comprehensive financial service institutions
for customer lending and investment business in the markets it
serves.

The banking and financial services business is highly
competitive, especially in Williamson County, Tennessee
generally, and in the market areas of Cumberland Bank
specifically. At June 30, 2004, Cumberland Bank had 6.49%
of the total bank deposits in Williamson County, its primary market. The
Companys bank subsidiaries compete for loans, deposits and
customers and the delivery of other financial services with
other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds,
credit unions, and other non-bank financial service providers.
Many of these competitors have much greater total assets and
capitalization than does the Company. These larger institutions
have higher lending limits, have greater access to capital
markets and offer a broader array of financial services, such as
trust services and international banking services, than the
Companys bank subsidiaries.

The Company is geographically concentrated in the Nashville,
Tennessee MSA, and changes in local economic conditions impact
its profitability.

Following the sale of the Companys BankTennessee and Bank
of Dyer subsidiaries, the Company operates primarily in the
Nashville, Tennessee MSA, and substantially all of its loan
customers and most of its deposit and other customers live or
have operations in the Nashville MSA. Accordingly, the
Companys success significantly depends upon the growth in
population, income levels, deposits and housing starts in the
Nashville MSA, along with the continued attraction of business
ventures to the area. The Companys profitability is
impacted by the changes in general economic conditions in this
market. Additionally, unfavorable local or national economic
conditions could

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The Company is less able than a larger institution to spread the
risks of unfavorable local economic conditions across a large
number of diversified economies. Moreover, the Company cannot
give any assurance that it will benefit from any market growth
or favorable economic conditions in its primary market areas if
they do occur.

The Companys common stock is traded on the
over-the-counter bulletin board and, as such, has less liquidity
than the average stock quoted on a national securities
exchange.

The trading volume in the Companys common stock on the
over-the-counter bulletin board has been relatively low when
compared with larger companies listed on national stock
exchanges or other markets. The Company cannot say with any
certainty that a more active and liquid trading market for its
common stock will develop. Because of this, it may be more
difficult for shareholders to sell a substantial number of
shares for the same price at which shareholders could sell a
smaller number of shares.

The Company cannot predict the effect, if any, that future sales
of its common stock in the market, or the availability of shares
of common stock for sale in the market, will have on the market
price of its common stock. The Company, therefore, can give no
assurance that sales of substantial amounts of common stock in
the market, or the potential for large amounts of sales in the
market, would not cause the price of its common stock to decline
or impair the Companys future ability to raise capital
through sales of its common stock.

The market price of the Companys common stock may fluctuate in the future, and
these fluctuations may be unrelated to the Companys
performance. General market price declines or overall market
volatility in the future could adversely affect the price of the
Companys common stock, and the current market price may
not be indicative of future market prices.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity A key element in the financial performance of financial institutions is the level and type of
interest rate risk assumed. Responsibility for managing interest rate, market, and liquidity
risk rests with our corporate Asset/Liability management Committee (ALCO). A significant
measure of interest rate risk is the relationship of the repricing periods of earning assets and
interest-bearing liabilities. The more closely the repricing periods are correlated, the less
interest rate risk we assume. In general, community bank customer preferences tend to push the
average repricing period for costing liabilities to a shorter time frame than the average
repricing period of earning assets, resulting in a net liability sensitive position in time
frames less than one year. A summary of the repricing schedule of our interest earning assets
and interest-bearing liabilities (Gap) at year-end 2004 follows: Interest Rate Sensitivitydollars in thousands 1-90 Days
    
    
    91-365 Days
    
    
    1 - 5 Years
    
    
    Over 5 Years
    
    
    TotalInterest earning assets:Loans, net
    
    $
    295,861
    
    
    $
    84,443
    
    
    $
    160,759
    
    
    $
    32,440
    
    
    $
    573,503Securities available for sale
    
    
    11,298
    
    
    
    27,281
    
    
    
    61,659
    
    
    
    35,188
    
    
    
    135,426Securities held to maturity
    
    
    3,419
    
    
    
    10,621
    
    
    
    41,958
    
    
    
    50,705
    
    
    
    106,703Federal funds sold
    
    
    12,166
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    12,166Interest-earning deposits
    
    
    4,198
    
    
    
    793
    
    
    
    99
    
    
    
    0
    
    
    
    5,090Total interest earning assets
    
    $
    326,942
    
    
    $
    123,138
    
    
    $
    264,475
    
    
    $
    118,333
    
    
    $

    832,888Interest bearing liabilities:Interest bearing demand deposits
    
    $
    238,958
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    238,958Savings deposits
    
    
    28,742
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    28,742Time deposits
    
    
    51,967
    
    
    
    156,356
    
    
    
    172,373
    
    
    
    2,136
    
    
    
    382,832FHLB borrowings
    
    
    0
    
    
    
    1,000
    
    
    
    12,000
    
    
    
    38,000
    
    
    
    51,000Notes payable
    
    
    0
    
    
    
    0
    
    
    
    2,224
    
    
    
    2,326
    
    
    
    4,550Federal funds purchased and repurchase agreements
    
    
    42,943
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    42,943Subordinated debentures
    
    
    12,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    12,000Total interest bearing liabilities
    
    $
    374,610
    
    
    $
    157,356
    
    
    $
    186,597
    
    
    $
    42,462
    
    
    $
    761,025Rate sensitive gap
    
    
    (47,668
    )
    
    
    (34,218
    )
    
    
    77,878
    
    
    
    75,871
    
    
    
    71,863Rate sensitive cumulative gap
    
    
    (47,668
    )
    
    
    (81,886
    )
    
    
    (4,008
    )
    
    
    71,863Cumulative gap as a percentage
of earnings assets
    
    
    (5.72
    %)
    
    
    (9.83
    %)
    
    
    (0.48
    %)
    
    
    8.63
    %
 Civitas BankGroups primary business is banking and the resulting earnings, primarily net
interest income, are susceptible to changes in market interest rates. Net interest income
represented 84.7% of net revenues (net interest income and noninterest income) for 2004. Likewise,
it is managements goal to maximize net interest income within acceptable levels of interest rate
and liquidity risks. Repricing gap (the difference between assets and liabilities that reprice
within a specific time period) and simulation modeling (projecting net interest income under
various interest rate scenarios and balance sheet assumptions) are the primary methods the bank
uses in analyzing and managing interest rate risk. Gap analysis attempts to capture the amounts and timing of balances exposed to changes in
interest rates at a given point in time. It does not consider that changes in interest rates do not
affect all categories of assets and liabilities equally or simultaneously. For instance, the
change in rate our deposit base realizes in relation to the total change in 39




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##### Table of Contents



market interest rates
is significantly less than that of our asset base. When this is taken into account, repricing
liabilities are substantially shorter in the three and six month time horizons with a more evenly
matched one year gap. Simulation modeling projects net interest income under various interest rate scenarios based on the
optionality inherent in the balance sheet. The following table depicts projected net income at
December 31, 2005, with rates unchanged and if rates immediately rise or fall 100 or 200 basis
points. Market Riskdollars in thousands Down
    
    
    Down200
    
    
    100
    
    
    Base
    
    
    Up 100
    
    
    Up 200Net Interest Income
    
    $
    22,983
    
    
    $
    25,191
    
    
    $
    27,331
    
    
    $
    28,559
    
    
    $
    29,450Change from Base
    
    
    (4,349
    )
    
    
    (2,140
    )
    
    
    
    
    
    
    1,228
    
    
    
    2,118% Change from Base
    
    
    -15.9
    %
    
    
    -7.8
    %
    
    
    
    
    
    
    4.5
    %
    
    
    7.8
    %
 Both methods are inherently uncertain and cannot precisely estimate net interest income nor predict
the impact of changes in market interest rates on net interest income. As such, investors are
cautioned not to place undue reliance on such estimates and models. Expected Maturity Datedollars in thousands Year Ending December 31,2006 to
    
    
    2008 to
    
    
    2010
    
    
    
    
    
    
    FAIR2005
    
    
    2007
    
    
    2009
    
    
    Thereafter
    
    
    TOTAL
    
    
    VALUEINTEREST-EARNING ASSETS:Loans, net of unearned interest: (1)Variable rate
    
    
    285,590
    
    
    
    5,539
    
    
    
    532
    
    
    
    0
    
    
    
    291,661
    
    
    
    289,819Average interest rate
    
    
    5.56
    %
    
    
    5.39
    %
    
    
    5.66
    %
    
    
    0.00
    %
    
    
    5.56
    %Fixed rate
    
    
    80,938
    
    
    
    77,014
    
    
    
    95,600
    
    
    
    28,290
    
    
    
    281,842
    
    
    
    247,924Average interest rate
    
    
    6.02
    %
    
    
    6.58
    %
    
    
    6.32
    %
    

    
    5.53
    %
    
    
    6.22
    %Securities (2)
    
    
    52,918
    
    
    
    63,832
    
    
    
    39,785
    
    
    
    85,894
    
    
    
    242,129
    
    
    
    242,948Average interest rate
    
    
    3.91
    %
    
    
    4.33
    %
    
    
    4.52
    %
    
    
    4.64
    %
    
    
    4.38
    %Federal funds sold
    
    
    12,166
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    12,166
    
    
    
    12,166Average interest rate
    
    
    2.50
    %
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2.50
    %Interest-earning deposits
in financial institutions
    
    
    4,991
    
    
    
    99
    
    
    
    0
    
    
    
    0
    
    
    
    5,090
    
    
    
    5,090Average interest rate
    
    
    2.11
    %
    
    
    3.40
    %
    
    
    0
    
    
    
    0
    
    
    
    2.13
    %INTEREST-BEARING LIABILITIES:Interest-bearing deposits
    
    
    476,024
    
    
    
    113,129
    
    
    
    59,244
    
    
    
    2,135
    
    
    
    650,532
    
    
    
    693,398Average interest rate
    
    
    1.59
    %
    
    
    3.26
    %
    
    
    3.96
    %
    
    
    4.49
    %
    
    
    2.10
    %Federal funds purchased
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Average interest rate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other borrowings
    
    
    13,000
    
    
    
    3,112
    
    
    
    11,112
    
    
    
    40,326
    
    
    
    67,550
    
    
    
    70,128Average interest rate
    
    
    5.52
    %
    
    
    4.38
    %
    
    
    5.43
    %
    
    
    4.74
    %
    
    
    4.99
    %
   (1)
    
    Loan amounts and weighted average interest rates for loans net out any undisbursed loan
proceeds, make no assumptions about loan prepayments, and do not include the allowance for
loan losses. (2)
    
    Securities include our investment in obligations of certain political subdivisions within
the State of Tennessee. Average interest rates have not been adjusted for any federal,
state, or municipal tax liability that we may incur. 40




---



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 consolidated balance sheets of Civitas BankGroup, Inc. as of December 31, 2004
and 2003, and the related consolidated statements of income, comprehensive income, changes in
shareholders equity, and cash flows for each of the three years in the period ended December 31,
2004. 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, 2004 and 2003, and
the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ Crowe Chizek and Company LLC Brentwood, Tennessee
March 16, 2005   41




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 2004
    
    
    2003ASSETS:Cash and due from banks
    
    $
    27,640
    
    
    $
    19,977Federal funds sold
    
    
    12,166
    
    
    
    15,081Total cash and cash equivalents
    
    
    39,806
    
    
    
    35,058Interest-bearing deposits in other financial institutions
    
    
    5,090
    
    
    
    4,046Securities available for sale
    
    
    135,426
    
    
    
    140,844Securities held to maturity (fair value $107,522 and $62,984)
    
    
    106,703
    
    
    
    62,527Loans
    
    
    573,503
    
    
    
    550,565Allowance for loan losses
    
    
    (6,446
    )
    
    
    (8,414
    )Loans, net
    
    
    567,057
    
    
    
    542,151Premises and equipment, net
    
    
    21,794
    
    
    
    22,280Restricted equity securities
    
    
    5,748
    
    
    
    5,478Other real estate
    
    
    4,446
    
    
    
    3,793Investment in unconsolidated affiliates
    
    
    7,263
    
    
    
    6,977Goodwill
    
    
    1,526
    
    
    
    1,596Accrued interest receivable
    
    
    3,793
    
    
    
    3,896Other assets
    
    
    5,569
    
    
    
    4,674Total assets
    
    $
    904,221
    
    
    $
    833,320LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:DepositsNon-interest bearing
    
    $
    80,937
    
    
    $
    68,032Interest bearing
    
    
    650,532
    
    
    
    603,604Total deposits
    
    
    731,469
    
    
    
    671,636Notes payable
    
    
    4,550
    
    
    
    4,700Federal funds purchased and repurchase agreements
    
    
    42,943
    
    
    
    33,886Advances from Federal Home Loan Bank
    
    
    51,000
    
    
    
    51,852Accrued interest payable
    
    
    2,491
    
    
    
    2,350Subordinated debentures
    
    
    12,000
    
    
    
    12,000Other liabilities
    
    
    2,032
    
    
    
    2,155Total liabilities
    
    
    846,485
    
    
    
    778,579Shareholders equity:Common stock
    
    
    8,789
    
    
    
    8,568Additional paid-in capital
    
    
    38,191
    
    
    
    35,930Retained earnings
    
    
    10,858
    
    
    
    9,877Accumulated other comprehensive income (loss)
    
    
    (102
    )
    
    
    366Total shareholders equity
    
    
    57,736
    
    
    
    54,741Total liabilities and shareholders equity
    
    $
    904,221
    
    
    $
    833,320
   See accompanying notes to consolidated financial statements. 42




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except share and per share amounts) 
 2004
    
    
    2003
    
    
    2002Interest income:Loans, including fees
    
    $
    33,390
    
    
    $
    35,542
    
    
    $
    38,977Securities
    
    
    8,951
    
    
    
    5,302
    
    
    
    2,877Deposits in financial institutions
    
    
    69
    
    
    
    104
    
    
    
    145Federal funds sold
    
    
    256
    
    
    
    102
    
    
    
    616Restricted equity securities
    
    
    252
    
    
    
    226
    
    
    
    233Total interest income
    
    
    42,918
    
    
    
    41,276
    
    
    
    42,848Interest expense:Deposits
    
    
    13,047
    
    
    
    12,434
    
    
    
    14,920Federal funds purchased and repurchase agreements
    
    
    333
    
    
    
    117
    
    
    
    54Advances from Federal Home Loan Bank
    
    
    2,526
    
    
    
    2,516
    
    
    
    2,538Subordinated debentures
    
    
    592
    
    
    
    591
    
    
    
    662Notes payable
    
    
    343
    
    
    
    419
    
    
    
    469Total interest expense
    
    
    16,841
    
    
    
    16,077
    
    
    
    18,643Net interest income
    
    
    26,077
    
    
    
    25,199
    
    
    
    24,205Provision for loan losses
    
    
    2,467
    
    
    
    3,579
    
    
    
    6,800Net interest income after provision for loan losses
    
    
    23,610
    
    
    
    21,620
    
    
    
    17,405Noninterest income:Service charges on deposit accounts
    
    
    3,396
    
    
    
    3,875
    
    
    
    3,817Other service charges, commissions and fees
    
    
    854
    
    
    
    980
    
    
    
    1,490Mortgage banking activities
    
    
    1,143
    
    
    
    1,690
    
    
    
    1,645Net gain on securities transactions
    
    
    551
    
    
    
    274
    
    
    
    461Net gain (loss) on sale of real estate
    
    
    60
    
    
    
    (224
    )
    
    
    190Income from unconsolidated subsidiaries
    
    
    729
    
    
    
    338
    
    
    
    19Other noninterest income
    
    
    1,013
    
    
    
    475
    
    
    
    826Total noninterest income
    
    
    7,746
    
    
    
    7,408
    
    
    
    8,448Noninterest expense:Salaries and employee benefits
    
    
    14,304
    
    
    
    13,967
    
    
    
    12,461Occupancy and equipment
    
    
    4,058
    
    
    
    3,697
    
    
    
    3,374Data processing
    
    
    1,604
    
    
    
    1,499
    
    
    
    1,505Other real estate
    
    
    1,046
    
    
    
    714
    
    
    
    652Communication
    
    
    561
    
    
    
    582
    
    
    
    518Deposit insurance premiums
    
    
    480
    
    
    
    278
    
    
    
    130Other noninterest expense
    
    
    6,771
    
    
    
    6,595
    
    
    
    6,464Total noninterest expense
    
    
    28,824
    
    
    
    27,332
    
    
    
    25,104Income before income taxes
    
    
    2,532
    
    
    
    1,696
    
    
    
    749Income tax expense
    
    
    648
    
    
    
    595
    
    
    
    228Net income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Net earnings per share  basic
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.04Net earnings per share  diluted
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04
   See accompanying notes to consolidated financial statements. 43




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except share and per share amounts) 
 2004
    
    
    2003
    
    
    2002Net income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Other comprehensive income (loss):Unrealized gains/(losses) on securities, net
    
    
    (468
    )
    
    
    (163
    )
    
    
    470Comprehensive income
    
    $
    1,416
    
    
    $
    938
    
    
    $
    991
   See accompanying notes to consolidated financial statements. 44




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except share and per share amounts) 
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2002
    
    
    13,808,236
    
    
    $
    6,904
    
    
    $
    22,289
    
    
    $
    10,061
    
    
    $
    59
    
    
    $
    39     ,    313Issuance of common stock
    
    
    1,342,710
    
    
    
    671
    
    
    
    4,700
    
    
    
    0
    
    
    
    0
    
    
    
    5,371Exercise of stock options
    
    
    231,680
    
    
    
    116
    
    
    
    515
    
    
    
    0
    
    
    
    0
    
    
    
    631Cash dividends
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (833
    )
    
    
    0
    
    
    
    (833
    )Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    521
    
    
    
    0
    
    
    
    521Other comprehensive income:Change in unrealized loss on securities available
for sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    754
    
    
    
    754Less: adjustment for gains included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (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
    
    
    
    0
    
    
    
    0
    
    
    
    8,943Exercise of stock options
    
    
    132,100
    
    
    
    66
    
    
    
    294
    
    
    
    0
    
    
    
    0
    
    
    
    360Cash dividends
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (973
    )
    
    
    0
    
    
    
    (973
    )Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,101
    
    
    
    0
    
    
    
    1,101Other comprehensive income:Change in unrealized loss on securities
available for sale
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    6
    
    
    
    6Less: adjustment for gains included in net income,
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (169
    )
    
    
    (169
    )Total comprehensive income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    938Balance at December 31, 2003
    
    
    17,135,056
    
    
    
    8,568
    
    
    
    35,930
    
    
    
    9,877
    
    
    
    366
    
    
    
    54,741Exercise of stock options
    
    
    344,050
    
    
    
    172
    
    
    
    872
    
    
    
    0
    
    
    
    0
    
    
    
    1,044Issuance of common stock
    
    
    56,253
    
    
    
    28
    
    
    
    366
    
    
    
    0
    
    
    
    0
    
    
    
    394Cash dividends
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (527
    )
    
    
    0
    
    
    
    (527
    )Stock dividends issued
    
    
    43,505
    
    
    
    21
    
    
    
    355
    
    
    
    (376
    )
    
    
    0
    
    
    
    0Tax benefit  stock options
    
    
    0
    
    
    
    0
    
    
    
    668
    
    
    
    0
    
    
    
    0
    
    
    
    668Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,884
    
    
    
    0
    
    
    
    1,884Other comprehensive income (loss):Change in unrealized loss on securities
available for sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (808
    )
    
    
    (808
    )Less: adjustment for realized gain
included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    340
    
    
    
    340Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,416Balance at December 31, 2004
    
    
    17,578,864
    
    
    $
    8,789
    
    
    $
    38,191
    
    
    $
    10,858
    
    
    $
    (102
    )
    
    $
    57,736
   See accompanying notes to consolidated financial statements. 45




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##### Table of Contents



CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except share and per share amounts) 
 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Adjustments to reconcile net income to net cash from operating activities:Provision for loan losses
    
    
    2,467
    
    
    
    3,579
    
    
    
    6,800Depreciation and amortization
    
    
    2,490
    
    
    
    1,779
    
    
    
    1,698Operations of unconsolidated affiliates
    
    
    (729
    )
    
    
    (338
    )
    
    
    (19
    )Origination of mortgage loans held for sale
    
    
    (52,975
    )
    
    
    (79,912
    )
    
    
    (61,824
    )Proceeds from sale of mortgage loans held for sale
    
    
    47,666
    
    
    
    79,178
    
    
    
    60,464Federal Home Loan Bank stock dividend
    
    
    (156
    )
    
    
    (226
    )
    
    
    (233
    )Net (gain) on securities transactions
    
    
    (551
    )
    
    
    (274
    )
    
    
    (461
    )Net (gain) / loss on sale of other real estate
    
    
    (60
    )
    
    
    224
    
    
    
    (190
    )Net change in:Deferred income tax benefits
    
    
    687
    
    
    
    255
    
    
    
    205Accrued interest receivable
    
    
    103
    
    
    
    26
    
    
    
    771Accrued interest payable and other liabilities
    
    
    18
    
    
    
    (550
    )
    
    
    (1,038
    )Other, net
    
    
    (224
    )
    
    
    1,264
    
    
    
    (9,106
    )Total adjustments
    
    
    (1,264
    )
    
    
    5,005
    
    
    
    (2,933
    )Net cash from operating activities
    
    
    620
    
    
    
    6,106
    
    
    
    (2,412
    )Cash flows from investing activities:Net change in interest-bearing deposits in financial institutions
    
    
    (1,044
    )
    
    
    5,420
    
    
    
    (4,903
    )Purchases of securities available for sale
    
    
    (146,700
    )
    
    
    (148,961
    )
    
    
    (83,088
    )Proceeds from maturities, pay downs, and calls of securities
available for sale
    
    
    98,788
    
    
    
    72,310
    
    
    
    23,918Proceeds from sales of securities available for sale
    
    
    52,465
    
    
    
    15,038
    
    
    
    23,865Purchases of securities held to maturity
    
    
    (57,909
    )
    
    
    (70,645
    )
    
    
    (7,097
    )Proceeds from maturities, pay downs, and calls of securities
held to maturity
    
    
    14,055
    
    
    
    19,394
    
    
    
    8,344Net change in loans
    
    
    (15,805
    )
    
    
    (34,906
    )
    
    
    (9,431
    )Investments in unconsolidated affiliates
    
    
    263
    
    
    
    (395
    )
    
    
    (1,118
    )Purchases of premises and equipment, net
    
    
    (550
    )
    
    
    (693
    )
    
    
    (1,193
    )Proceeds from sale of real estate
    
    
    7,205
    
    
    
    9,384
    
    
    
    9,710Net cash from investing activities
    
    
    (49,232
    )
    
    
    (134,054
    )
    
    
    (40,993
    )Cash flows from financing activities:Sale of branches
    
    
    10,524
    
    
    
    0
    
    
    
    0Net change in deposits
    
    
    33,870
    
    
    
    78,638
    
    
    
    43,574Net change
in Federal funds purchased
    
    
    (1,000
    )
    
    
    1,000
    
    
    
    (1,675
    )Proceeds from Federal Home Loan Bank advances
    
    
    0
    
    
    
    1,000
    
    
    
    1,300Repayments of Federal Home Loan Bank advances
    
    
    (852
    )
    
    
    0
    
    
    
    (1,300
    )Proceeds from repurchase agreements
    
    
    10,057
    
    
    
    32,886
    
    
    
    0Proceeds from notes payable
    
    
    4,550
    
    
    
    0
    
    
    
    0Repayments of notes payable
    
    
    (4,700
    )
    
    
    (800
    )
    
    
    (2,159
    )Proceeds from issuance of subordinated debentures
    
    
    0
    
    
    
    0
    
    
    
    0Dividends paid
    
    
    (527
    )
    
    
    (927
    )
    
    
    (830
    )Repurchase and retirement of common stock
    
    
    0
    
    
    
    0
    
    
    
    0Proceeds from issuance of common stock
    
    
    1,438
    
    
    
    9,303
    
    
    
    6,002Net cash from financing activities
    
    
    53,360
    
    
    
    121,100
    
    
    
    44,912Net change in cash and cash equivalents
    
    
    4,748
    
    
    
    (6,848
    )
    
    
    1,507Cash and cash equivalents at beginning of year
    
    
    35,058
    
    
    
    41,906
    
    
    
    40,399Cash and cash equivalents at end of year
    
    $
    39,806
    
    
    $
    35,058
    
    
    $
    41,906Supplemental disclosure of cash flow information:Interest paid
    
    $
    16,700
    
    
    $
    16,856
    
    
    $
    19,508Income taxes paid
    
    
    67
    
    
    
    30
    
    
    
    1,253Non-Cash Activities:Assets acquired through foreclosure
    
    
    9,090
    
    
    
    7,063
    
    
    
    9,388
   See accompanying notes to consolidated financial statements. 46




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (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 13,
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 three
subsidiary banks: Cumberland Bank, BankTennessee, and Bank of Mason (collectively, the Banks).
The Banks provide a variety of banking services to individuals and
businesses through their 20
branches located across 10 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 residential and commercial real estate mortgages, and commercial and installment
loans. 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, loan servicing rights, 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 customer loans
and deposit transactions, interest-bearing deposits in other
financial institutions, repurchase agreements and federal funds
purchased transactions. Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in
other financial institutions are carried at cost. Although the
deposits in excess of $100 are not FDIC insured, the credit risk is
nominal. 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, 2004, credit risk is considered nominal. Restrictions on Cash: 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 Bank. Cash on hand or on deposit with the Federal Reserve Bank of $5,633 and $921 was
required to meet regulatory reserve and clearing requirements at year-end 2004 and 2003. These
balances do not earn interest.   (Continued) 47




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Securities: Debt securities are classified based on managements intention on the date of
purchase. Debt securities which management has the positive intent and ability to hold to maturity
are classified as held to maturity and carried at amortized cost. 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. Premiums and discounts on
securities are amortized on the level-yield method without anticipating prepayments. Gains and
losses on sales are recorded on the trade date and determined using the specific identification
method. Securities are written down to fair value when a decline in fair value is not temporary. Declines in the fair value of securities below their cost that are other than temporary are
reflected as realized losses. In estimating other-than-temporary losses, management considers: (1)
the length of time and extent that fair value has been less than cost, (2) the financial condition
and near term prospects of the issuer, and (3) the Companys ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair value. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value
of mortgage loans sold is reduced by the cost allocated to the servicing right. Gains and losses
on sales of mortgage loans are based on the difference between the selling price and the carrying
value of the related loan sold. 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 accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using the level-yield method
without anticipating prepayments. 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 past 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.   (Continued) 48




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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. The allowance is
maintained at a level that management believes to be adequate to absorb risk inherent in the loan
portfolio. 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 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. Servicing Rights: Servicing rights represent the allocated value of retained servicing
rights on loans sold and the cost of purchased rights. Servicing assets are expensed in proportion
to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the
fair value of the assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to loan type and investor. Fair value is determined using prices for similar
assets with similar characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a valuation allowance, to
the extent that fair value is less than the capitalized amount for a grouping. 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. 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.   (Continued) 49




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Equity Securities: These amounts are stated at cost, and consist primarily of
Federal Home Loan Bank and Federal Reserve Bank Stock. 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. 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. 2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (164
    )
    
    
    (208
    )
    
    
    (130
    )Pro forma net income
    
    $
    1,720
    
    
    $
    893
    
    
    $
    391Basic earnings per share as reported
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04Pro forma basic earnings per share
    
    
    0.10
    
    
    
    0.06
    
    
    
    0.01Diluted earnings per share as reported
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04Pro forma diluted earnings per share
    
    
    0.10
    
    
    
    0.05
    
    
    
    0.01
 The pro forma effects are computed using option pricing models, using the following
weighted-average assumptions as of grant date. 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    3.64
    %
    
    
    3.44
    %
    
    
    4.71
    %Expected option life
    
    
    4 yrs.
    
    
    7 yrs.
    
    
    7 yrs.Expected stock price volatility
    
    
    23.3
    %
    
    
    8.8
    %
    
    
    18
    %Dividend yield
    
    
    1.29
    %
    
    
    0.93
    %
    
    
    1.50
    %
 Expected stock price volatility is calculated using the month ending stock price throughout the
year. During 2004, the stock price ranged from $6.35 to $9.90. By contrast, the 2003 stock price
remained relatively stable, ranging from $4.90 to $6.50.   (Continued) 50




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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. Civitas
BankGroup and its subsidiaries file a consolidated income tax return. Each entity provides for
income taxes based on its contribution to income or loss of the consolidated entity. 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. 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: FASB Statement No. 123 Accounting for Stock Based
Compensation, Revised, requires all public companies to record compensation cost for stock options
provided to employees in return for employee service. The cost is measured at the fair value of
the options when granted, and this cost is expensed over the employee service period, which is
normally the vesting period of the options. This will apply to awards granted or modified after
the first quarter or year beginning after June 15, 2005. Compensation cost will also be recorded
for prior option grants that vest after the date of adoption. The effect on results of operations
will depend on the level of future option grants and the calculation of the fair value of the
options granted at such future date, as well as the vesting periods provided, and so cannot
currently be predicted. Existing options that will vest after adoption date are expected to result
in additional compensation expense of approximately $190 during the balance of 2005, $273 in 2006,
$244 in 2007, $203 in 2008 and $34 in 2009. There will be no significant effect on financial
position as total equity will not change. SOP 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer,requires that a
valuation allowance for loans acquired in a transfer, including in a business combination, reflect
only losses incurred after acquisition and should not be recorded at acquisition. It applies to
any loan acquired in a transfer that showed evidence of credit quality deterioration since it was
made. These changes will be adopted in 2005.   (Continued) 51




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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. Equity: The common stock has a $0.50 par value and 40,000,000 shares are authorized. At
December 31, 2004 17,578,864 common shares were outstanding. Transfers from retained earnings are
made for stock dividends using the fair value of shares issued. 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 16 for more specific disclosure related to dividend restrictions. NOTE 2  INTEREST BEARING DEPOSITS At December 31, 2004, the Company had demand deposits totaling $2.9 million at the Federal Home
Loan Bank (FHLB). Additionally, the Company held $892,000 in certificates of deposit with
non-affiliated banks. 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 (loss) were as follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and government agencies
    
    $
    18,121
    
    
    $
    2
    
    
    $
    (51
    )
    
    $
    18,072State and municipal securities
    
    
    4,333
    
    
    
    31
    
    
    
    (33
    )
    
    
    4,331Mortgage-backed securities
    
    
    111,866
    
    
    
    648
    
    
    
    (620
    )
    
    
    111,894Marketable equity securities
    
    
    1,078
    
    
    
    0
    
    
    
    0
    
    
    
    1,078Other debt securities
    
    
    51
    
    
    
    0
    
    
    
    0
    
    
    
    51Total
    
    $
    135,449
    
    
    $
    681
    
    
    $
    (704
    )
    
    $
    135,426
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2003
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and government agencies
    
    $
    10,113
    
    
    $
    5
    
    
    $
    (2
    )
    
    $
    10,116State and municipal securities
    
    
    1,470
    
    
    
    26
    
    
    
    0
    
    
    
    1,496Mortgage-backed securities
    
    
    127,121
    
    
    
    849
    
    
    
    (329
    )
    
    
    127,641Marketable equity securities
    
    
    1,193
    
    
    
    0
    
    
    
    (102
    )
    
    
    1,091Other debt securities
    
    
    500
    
    
    
    0
    
    
    
    0
    
    
    
    500Total
    
    $
    140,397
    
    
    $
    880
    
    
    $
    (433
    )
    
    $
    140,844
   (Continued) 52




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 3 SECURITIES(Continued) The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity
were as follows: Gross
    
    
    GrossCarrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2004
    
    Amount
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and government agencies
    
    $
    300
    
    
    $
    0
    
    
    $
    0
    
    
    $
    300State and municipal securities
    
    
    28,532
    
    
    
    622
    
    
    
    (112
    )
    
    
    29,042Mortgage-backed securities
    
    
    74,430
    
    
    
    478
    
    
    
    (147
    )
    
    
    74,761Other debt securities
    
    
    3,441
    
    
    
    0
    
    
    
    (22
    )
    
    
    3,419Total
    
    $
    106,703
    
    
    $
    1,100
    
    
    $
    (281
    )
    
    $
    107,522
 Gross
    
    
    GrossCarrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2003
    
    Amount
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and government agencies
    
    $
    1,139
    
    
    $
    9
    
    
    $
    (5
    )
    
    $
    1,143State and municipal securities
    
    
    17,748
    
    
    
    292
    
    
    
    (284
    )
    
    
    17,756Mortgage-backed securities
    
    
    40,729
    
    
    
    411
    
    
    
    (25
    )
    
    
    41,115Other debt securities
    
    
    2,911
    
    
    
    59
    
    
    
    0
    
    
    
    2,970Total
    
    $
    62,527
    
    
    $
    771
    
    
    $
    (314
    )
    
    $
    62,984
 Sales of available for sale securities were as follows: 2004
    
    
    2003
    
    
    2002Proceeds
    
    $
    52,465
    
    
    $
    15,038
    
    
    $
    23,865Gross gains
    
    
    664
    
    
    
    274
    
    
    
    502Gross losses
    
    
    113
    
    
    
    0
    
    
    
    41
 The tax benefit related to these net realized gains and losses was $211, $105 and $177
respectively.   (Continued) 53




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 3 SECURITIES(Continued) Contractual maturities of securities at year-end 2004 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
    
    $
    100
    
    
    $
    100
    
    
    $
    11,991Due from one to five years
    
    
    1,156
    
    
    
    1,186
    
    
    
    4,584Due from five to ten years
    
    
    2,376
    
    
    
    2,415
    
    
    
    2,667Due after ten years
    
    
    25,200
    
    
    
    25,641
    
    
    
    3,212Mortgage-backed
    
    
    74,430
    
    
    
    74,761
    
    
    
    111,894Marketable equity securities
    
    
    0
    
    
    
    0
    
    
    
    1,078Other debt securities
    
    
    3,441
    
    
    
    3,419
    
    
    
    0Total
    
    $
    106,703
    
    
    $
    107,522
    
    
    $
    135,426
 Securities with carrying amounts of approximately $140,011 at December 31, 2004 and $106,462 at
December 31, 2003 were pledged to secure public deposits, repurchase agreements and for other
purposes as required or permitted by law. At December 31, 2004, the Company did not hold securities of any single issuer, other than
obligations of other U. S. Government agencies, whose aggregate carrying value exceeded ten percent
of shareholders equity.   (Continued) 54




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 3 SECURITIES(Continued) The following table presents the current fair value and the associated unrealized losses only on
investments in securities with unrealized losses at December 31, 2004 and 2003. The table also
discloses whether these securities have had unrealized losses for less than 12 months or for 12
months or longer. December 31, 2004
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Treasury and government
agencies
    
    $
    17,365
    
    
    $
    (51
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    17,365
    
    
    $
    (51
    )State and municipal securities
    
    
    6,677
    
    
    
    (65
    )
    
    
    2,622
    
    
    
    (80
    )
    
    
    9,299
    
    
    
    (145
    )Mortgage-backed securities
    
    
    80,540
    
    
    
    (587
    )
    
    
    12,045
    
    
    
    (180
    )
    
    
    92,585
    
    
    
    (767
    )Other debt securities
    
    
    1,313
    
    
    
    (22
    )
    
    
    0
    
    
    
    0
    
    
    
    1,313
    
    
    
    (22
    )Total temporarily
impaired
    
    $
    105,895
    
    
    $
    (725
    )
    
    $
    14,667
    
    
    $
    (260
    )
    
    $
    120,562
    
    
    $
    (985
    )
 December 31, 2004
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Treasury and government
agencies
    
    $
    1,598
    
    
    $
    (7
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    1,598
    
    
    $
    (7
    )State and municipal securities
    
    
    7,437
    
    
    
    (284
    )
    
    
    0
    
    
    
    0
    
    
    
    7,437
    
    
    
    (284
    )Mortgage-backed securities
    
    
    57,785
    
    
    
    (343
    )
    
    
    1,062
    
    
    
    (11
    )
    
    
    58,847
    
    
    
    (354
    )Equity securities
    
    
    0
    
    
    
    0
    
    
    
    1,091
    
    
    
    (102
    )
    
    
    1,091
    
    
    
    (102
    )Total temporarily
impaired
    
    $
    66,820
    
    
    $
    (634
    )
    
    $
    2,153
    
    
    $
    (113
    )
    
    $
    68,973
    
    
    $
    (747
    )
 As of December 31, 2004, the Company had twenty issuances (thirteen mortgage-backed securities and
seven municipal securities) that had been in an unrealized loss position for more than twelve
months. The unrealized losses associated with these securities are not considered to be
other-than-temporarily impaired because their unrealized losses are related to changes in interest
rates and do not effect the expected cash flows of the issuer or underlying collateral.
Unrealized losses on securities have not been recognized into income because the securities are of
high credit quality and management has the intent and ability to hold them for the foreseeable
future. The fair value is expected to recover as the securities approach their maturity date or
market rates change. In
2004, the Company recognized $113,000 in write-downs in equity
securities where management determined the unrealized loss was
other-than-temporary. At December 31, 2004, these equity securities
are carried at fair value.   (Continued) 55




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 4  LOANS A summary of loans outstanding by category follows: 2004
    
    
    2003Real estate:Construction and land development
    
    $
    121,518
    
    
    $
    83,211Residential properties
    
    
    156,436
    
    
    
    158,116Commercial real estate
    
    
    129,943
    
    
    
    106,483Commercial
    
    
    137,600
    
    
    
    157,470Consumer
    
    
    24,147
    
    
    
    39,258Other
    
    
    4,229
    
    
    
    6,385Total loans
    
    
    573,873
    
    
    
    550,923Net unearned income and deferred fees
    
    
    (370
    )
    
    
    (358
    )Subtotal
    
    
    573,503
    
    
    
    550,565Allowance for loan losses
    
    
    (6,446
    )
    
    
    (8,414
    )Loans, net
    
    $
    567,057
    
    
    $
    542,151
 Loans serviced for others, which are not included in net loans, totaled $62,765 and $72,238 at
December 31, 2004 and 2003. Loans held for sale totaled $6,960 and $1,651 at December 31, 2004 and
2003 and are included in one-to-four family residential properties in the table above.   (Continued) 56




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 4  LOANS(Continued) Activity in the allowance for loan losses was as follows: 2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023Provision charged to operating expenses
    
    
    2,467
    
    
    
    3,579
    
    
    
    6,800Loans charged off
    
    
    (5,031
    )
    
    
    (5,143
    )
    
    
    (7,399
    )Recoveries on previously charged off loans
    
    
    596
    
    
    
    916
    
    
    
    638Balance at end of year
    
    $
    6,446
    
    
    $
    8,414
    
    
    $
    9,062
 Impaired loans were as follows: 2004
    
    
    2003Year-end loans with no allocated allowance for loan losses
    
    $
    1,092
    
    
    $
    422Year-end loans with allocated allowance for loan losses
    
    
    21,282
    
    
    
    20,189Total
    
    $
    22,374
    
    
    $
    20,611Amount of the allowance for loan losses allocated
    
    $
    3,404
    
    
    $
    3,772
 2004
    
    
    2003
    
    
    2002Average of impaired loans during the year
    
    $
    24,855
    
    
    $
    17,969
    
    
    $
    15,701
 Nonperforming loans were as follows: 2004
    
    
    2003
    
    
    2002Loans past due over 90 days still on accrual
    
    $
    40
    
    
    $
    3
    
    
    $
    0Nonaccrual loans
    
    
    13,306
    
    
    
    12,362
    
    
    
    18,435
 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.   (Continued) 57




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 5  SECONDARY MORTGAGE MARKET ACTIVITIES The following summarizes secondary mortgage market activities for each year: 2004
    
    
    2003
    
    
    2002Activity during the year:Loans originated for resale, net of
principal paydowns
    
    $
    52,975
    
    
    $
    79,912
    
    
    $
    61,824Proceeds from sales of loans held
for sale
    
    
    47,666
    
    
    
    79,178
    
    
    
    60,464Net gains on sales of loans held
for sale
    
    
    1,143
    

    
    
    1,690
    
    
    
    1,645Loan servicing fees, net
    
    
    474
    
    
    
    181
    
    
    
    232
 2004
    
    
    2003Balance at year end:Loans held for sale
    
    $
    6,960
    
    
    $
    1,651Less: Allowance to adjust to lower of cost or market
    
    
    0
    
    
    
    0Loans held for sale, net
    
    $
    6,960
    
    
    $
    1,651
 Mortgage loans serviced for others are not reported as assets. The principal balances of these
loans at year end are as follows: 2004
    
    
    2003Mortgage loan portfolios serviced for:FHLMC
    
    $
    62,249
    
    
    $
    72,238
 Custodial escrow balances maintained in connection with serviced loans were $187 and $115 at
year-end 2004 and 2003. Activity for capitalized mortgage servicing rights and the related valuation allowance follows: 2004
    
    
    2003
    
    
    2002Servicing rights:Beginning of year
    
    $
    82
    
    
    $
    213
    
    
    $
    327Additions
    
    
    291
    
    
    
    0
    
    
    
    0Amortized to expense
    
    
    (97
    )
    
    
    (131
    )
    
    
    (114
    )Provision for loss in fair value
    
    
    0
    
    
    
    0
    
    
    
    0End of year
    
    $
    276
    
    
    $
    82
    
    
    $
    213
 2004
    
    
    2003
    
    
    2002Valuation allowance:Beginning of year
    
    $
    0
    
    
    $
    0
    
    
    $
    0Additions expensed
    
    
    0
    
    
    
    0
    
    
    
    0Reductions credited to expense
    
    
    0
    
    
    
    0
    
    
    
    0Direct write-downs
    
    
    0
    
    
    
    0
    
    
    
    0End of year
    
    $
    0
    
    
    $
    0
    
    
    $
    0
   (Continued) 58




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES(Continued) The following presents the estimated amortization expense for each of the next five years: 2005
    
    $
    32,2692006
    
    
    32,2692007
    
    
    32,2692008
    
    
    29,1552009
    
    
    4,674
 NOTE 6 - PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 2004 and 2003: 2004
    
    
    2003Land
    
    $
    5,926
    
    
    $
    6,027Buildings and improvements
    
    
    13,654
    
    
    
    15,568Leasehold improvements
    
    
    1,189
    
    
    
    844Furniture, fixtures and equipment
    
    
    7,159
    
    
    
    9,293Automobiles
    
    
    125
    
    
    
    157Construction in process
    
    
    1,369
    
    
    
    3229,422
    
    
    
    31,921Less: Accumulated depreciation
    
    
    7,628
    
    
    
    9,641Net premises and equipment
    
    $
    21,794
    
    
    $
    22,280
 Depreciation expense related to premises and equipment amounted to $1,768 in 2004, $1,680 in 2003
and $1,698 in 2002.   (Continued) 59




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 6  PREMISES AND EQUIPMENT(Continued) The Company has entered into various non-cancelable operating lease arrangements in connection with
its operating locations. Based upon these agreements at December 31, 2004, future minimum lease
commitments before considering renewal options that generally are present are as follows: 2005
    
    
    5942006
    
    
    5982007
    
    
    6122008
    
    
    561Thereafter
    
    
    260$
    2,625
 Rent expense relating to
these agreements which are included in occupancy expense amounted to
$605
in 2004, $381 in 2003 and $264 in 2002. NOTE 7  INVESTMENT IN UNCONSOLIDATED AFFILIATES Investments in unconsolidated affiliates consist of the following at December 31, 2004 and 2003: 2004
    
    
    2003The Murray Banc Holding Company (50% ownership)
    
    $
    4,402
    
    
    $
    4,039Insurors Bank of Tennessee (50% ownership)
    
    
    2,804
    
    
    
    2,677Other unconsolidated affiliates
    
    
    57
    
    
    
    261$
    7,263
    
    
    $
    6,977
 The Company owns a 50% interest in both The Murray Banc Holding Company, LLC in Murray, Kentucky
and Insurors Bank of Tennessee, headquartered in Nashville,
Tennessee. Outside of three common directors with each unconsolidated
affiliate, no other transactions exist. Only the Companys initial
investment, adjusted for the pro rata share of operating results of each entity, is included in the
consolidated financial statements. The Companys portion of
earnings is recorded in noninterest income and is also taxed at the
Company level.   (Continued) 60




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 7   INVESTMENT IN UNCONSOLIDATED AFFILIATES(Continued) Condensed financial information for The Murray Banc Holding Company (TMBHC) and Insurors Bank of
Tennessee (IBOT) are as follows as of December 31, 2004 and 2003: CONDENSED BALANCE SHEETS TMBHC
    
    
    IBOT2004
    
    
    2003
    
    
    2004
    
    
    2003ASSETS:Cash and due from banks
    
    $
    4,235
    
    
    $
    4,367
    
    
    $
    1,182
    
    
    $
    1,716Federal funds sold
    
    
    1,366
    
    
    
    6,991
    
    
    
    175
    
    
    
    0Securities available for sale
    
    
    30,456
    
    
    
    21,320
    
    
    

    15,621
    
    
    
    11,170Securities held to maturity
    
    
    28,694
    
    
    
    31,491
    
    
    
    0
    
    
    
    0Loans, net
    
    
    76,085
    
    
    
    66,028
    
    
    
    46,983
    
    
    
    41,319Premises and equipment, net
    
    
    2,756
    
    
    
    2,806
    
    
    
    449
    
    
    
    364Accrued interest receivable
    
    
    823
    
    
    
    738
    
    
    
    206
    
    
    
    167Restricted equity securities
    
    
    412
    
    
    
    337
    
    
    
    520
    
    
    
    473Other assets
    
    
    1,584
    
    
    
    4,134
    
    
    
    459
    
    
    
    351Total assets
    
    $
    146,411
    
    
    $
    138,212
    
    
    $
    65,595
    
    
    $
    55,560LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Total deposits
    
    $
    123,823
    
    
    $
    115,532
    
    
    $
    49,578
    
    
    $
    43,319Borrowings
    
    
    8,965
    
    
    
    9,894
    
    
    
    10,201
    
    
    
    6,731Accrued interest payable
    
    
    308
    
    
    
    303
    
    
    
    88
    
    
    
    73Subordinated notes and debentures
    
    
    4,000
    
    
    
    4,000
    
    
    
    0
    
    
    
    0Other liabilities
    
    
    511
    
    
    
    406
    
    
    
    119
    
    
    
    83Total liabilities
    
    
    137,607
    
    
    
    130,135
    
    
    
    59,986
    
    
    
    50,206Shareholders equity
    
    
    8,804
    
    
    
    8,077
    
    
    
    5,609
    
    
    
    5,354Total liabilities and shareholders equity
    
    $
    146,411
    
    
    $
    138,212
    
    
    $
    65,595
    
    
    $
    55,560
 CONDENSED INCOME STATEMENT TMBHC
    
    
    IBOT2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Net interest income
    
    $
    3,920
    
    
    $
    2,969
    
    
    $
    2,482
    
    
    $
    1,842
    
    
    $
    1,538
    
    
    $
    1,077Provision for loan losses
    
    
    176
    
    
    
    166
    
    
    
    128
    
    
    
    53
    
    
    
    75
    
    
    
    256Noninterest income
    
    
    972
    
    
    
    976
    
    
    
    662
    
    
    
    229
    
    
    
    221
    
    
    
    77Noninterest expense
    
    
    3,255
    
    
    
    2,893
    
    
    
    2,249
    
    
    
    1,735
    
    
    
    1,649
    
    
    
    1,554Income tax expense
    
    
    477
    
    
    
    275
    
    
    
    261
    
    
    
    (72
    )
    
    
    (130
    )
    
    
    0Net income (loss)
    
    $
    984
    
    
    $
    611
    
    
    $
    506
    
    
    $
    355
    
    
    $
    165
    
    
    $
    (656
    )
   (Continued) 61




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 8  GOODWILL The change in balance for goodwill during the year is as follows: 2004
    
    
    2003Beginning of year
    
    $
    1,596
    
    
    $
    1,596Acquired (disposed) goodwill
    
    
    (70
    )
    
    
    0Impairment
    
    
    0
    
    
    
    0End of year
    
    $
    1,526
    
    
    $
    1,596
 In December 2004, the Company sold the majority of the assets of its Bank of Dyer subsidiary
through a purchase and assumption transaction. The remaining assets were simultaneously merged
into the Companys Cumberland Bank subsidiary. All remaining goodwill associated with the Bank of
Dyer was expensed at the date of sale. NOTE 9  DEPOSITS A summary of deposits at December 31, 2004 and 2003 is as follows: 2004
    
    
    2003Noninterest-bearing demand
    
    $
    80,937
    
    
    $
    68,032Interest-bearing demand
    
    
    238,958
    
    
    
    189,257Savings
    
    
    28,742
    
    
    
    29,734Time deposits of $100 or more
    
    
    205,557
    
    
    
    203,510Other time
    
    
    177,275
    
    
    
    181,103Total deposits
    
    $
    731,469
    
    
    $
    671,636
 Scheduled maturities of time deposits for the next five years are as follows: 2005
    
    $
    208,3222006
    
    
    74,9112007
    
    
    38,2192008
    
    
    28,4892009
    
    
    30,755
   (Continued) 62




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 10  SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured by securities with a carrying amount of
$48,909 at year-end 2004 and $29,590 in at year-end 2003. 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: 2004
    
    
    2003Average daily balance during the year
    
    $
    26,158
    
    
    $
    11,223Average interest rate during the year
    
    
    1.24
    %
    
    
    0.89
    %Maximum month-end balance during the year
    
    $
    44,537
    
    
    $
    25,232Weighted average interest rate at year-end
    
    
    2.02
    %
    
    
    0.80
    %
 NOTE 11  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) and securities. 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 had $4.7 million of
such stock at December 31, 2004 to satisfy this requirement. At December 31, 2004 and 2003, advances from the FHLB totaled $51,000 and $51,852. The interest
rates on these advances are fixed and range from 2.72% to 5.45%. Each advance is payable at its
maturity date, or earlier with a prepayment penalty. The Company has 22 advances of which 5 are fixed-rate interest only advances with principal due at
maturity. The remaining 17 are convertible fixed-rate advances which the FHLB can convert to a
variable rate equal to 3 month LIBOR. Should the FHLB exercise their option to convert the
advance, the Company has the ability to prepay the advance without
penalty. Qualifying loans totaling $135,242 and
$121,631 were pledged as security under a pledge agreement with the FHLB at December 31, 2004 and
2003. Securities totaling $13,791 and $16,814 were also pledged for these borrowings at December
31, 2004 and 2003. Based on this collateral and the Companys holdings of FHLB stock, the company
was eligible to borrow an additional $25,391 at year-end 2004. Maturities of the advances from FHLB at December 31, 2004 are as follows: 2005
    
    $
    1,0002006
    
    
    2,0002007
    
    
    02008
    
    
    10,0002009
    
    
    0Later years
    
    
    38,000$
    51,000
   (Continued) 63




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 12  NOTES PAYABLE On December 13, 2004, the Company entered into a loan agreement with First Tennessee Bank in the
amount of $5,000 to refinance its existing senior debt. Notes payable consist of the following at year-end: 2004
    
    
    2003$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.
    
    $
    0
    
    
    $
    1,700$6,000 credit facility 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.
    
    
    0
    
    
    
    3,000$5,000 non-revolving line of credit which
bears a variable rate of interest equal to the
Lenders base commercial rate which was 5.25%
at December 31, 2004. Interest is payable
quarterly. Principal is payable in
thirty-five equal quarterly payments of $139
beginning March 30, 2006 and one final payment
of $135 December 30, 2014. The note is
secured by all the outstanding shares of the
capital stock of Cumberland Bank.
    
    $
    4,550
    
    
    $
    0$
    4,550
    
    
    $
    4,700
   (Continued) 64




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 12  NOTES PAYABLE (Continued) The company secured an additional $250 line of credit which bears a variable rate of interest equal
to the lenders base commercial rate. Interest is payable quarterly and principal is payable at
maturity on September 30, 2005. The note is secured by all the outstanding shares of the capital
stock of Cumberland Bank. Minimum annual principal payments for future years are as follows: 2005
    
    $
    02006
    
    
    5562007
    
    
    5562008
    
    
    5562009
    
    
    556Later years
    
    
    2,326$
    4,550
 The Company has agreed to certain covenants in connection with the notes payable. These covenants
include, among other things, minimum financial ratios. The Company
failed to achieve the required level of return on assets for the year
ended December 31, 2004 and was, as a result, in default under
the terms of its loan agreement. The Company obtained a waiver of
this event of default on March 15, 2005. NOTE 13  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 5.51% at December 31, 2004. 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 5.74% at December 31,
2004. 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.   (Continued) 65




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 13  SUBORDINATED DEBENTURES (Continued) 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. 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. The trust preferred securities qualify as Tier 1 Capital under current regulatory definitions.   (Continued) 66




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 14  INCOME TAXES Income tax expense (benefit) consists of the following: 2004
    
    
    2003
    
    
    2002Current federal
    
    $
    (86
    )
    
    $
    270
    
    
    $
    14Current state
    
    
    47
    
    
    
    70
    
    
    
    9Total current
    
    
    (39
    )
    
    
    340
    
    
    
    23Deferred federal
    
    
    570
    
    
    
    210
    
    
    
    166Deferred state
    
    
    117
    
    
    
    45
    
    
    
    39Total deferred
    
    
    687
    
    
    
    255
    
    
    
    205Total income tax expense
    
    $
    648
    
    
    $
    595
    
    
    $
    228
 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, 2004 and 2003: 2004
    
    
    2003Allowance for loan losses
    
    $
    2,867
    
    
    $
    3,378Deferred loan fees
    
    
    157
    
    
    
    138Other
    
    
    281
    
    
    
    224Total deferred tax assets
    
    
    4,305
    
    
    
    3,740FHLB stock dividends
    
    $
    (908
    )
    
    $
    (844
    )Premises and equipment
    
    
    (491
    )
    
    
    (492
    )Unrealized gain on securities
    
    
    (9
    )
    
    
    (171
    )Loan servicing rights
    
    
    (40
    )
    
    
    (33
    )Other
    
    
    (370
    )
    
    
    (189
    )Total deferred tax liabilities
    
    
    (1,818
    )
    
    
    (1,729
    )Net deferred tax asset
    
    $
    1,495
    
    
    $
    2,011
 A reconciliation of the for income tax expense with the amount of income taxes computed by applying
the federal statutory rate (34%) to earnings before income taxes follows: 2004
    
    
    2003
    
    
    2002Computed expected provision for income taxes
    
    $
    861
    
    
    $
    577
    
    
    $
    256Increase (decrease) in taxes resulting from:State income taxes, net of federal tax benefit
    
    
    107
    
    
    
    56
    
    
    
    32Tax exempt interest
    
    
    (357
    )
    
    
    (150
    )
    
    
    (77
    )Other, net
    
    
    37
    
    
    
    112
    
    
    
    17Income tax expense
    
    $
    648
    
    
    $
    595
    
    
    $
    228
 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. Income taxes would be approximately $689.
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.   (Continued) 67




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts) 
 NOTE 15  RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates in 2004 were as follows. Beginning balance
    
    $
    738New loans
    
    
    749Repayments
    
    
    258Ending balance
    
    $
    1,229
 Deposits from principal officers, directors, and their affiliates at year-end 2004 were $2,796 and
represent 0.4% of total deposits. NOTE 16  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. The
Company and its subsidiaries believe they were in compliance in all material respects with these
agreements at December 31, 2004. The Company and its subsidiaries intend to continue to comply with
these agreements, and the Company received approval to pay dividends for the first and second
quarters of 2004. The Company believes that the earnings from operations and available funds will
be sufficient to allow the Company to meet all these commitments and the requirements for
well-capitalized status through the end of 2005. However, the Companys regulators have
considerable discretion in determining whether to grant required approvals, and no assurance can be
given that such approvals will be forthcoming. 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, 2004, 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 following table.
There are no conditions or events since that notification that management believes have changed
the institutions category.   (Continued) 68




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 16- REGULATORY AGREEMENTS AND CAPITAL REQUIREMENTS(Continued) The Company and the Banks actual capital amounts and ratios at December 31, 2004 and 2003 are as
follows: To be wellcapitalized underRequired
    
    
    prompt corrective
    
    
    
    
    
    
    
    
    
    
    Excess over wellMinimum
    
    
    action provisions
    
    
    Actual
    
    
    capitalizedDecember 31, 2004Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    AmountTier I to average assets
leverageCivitas BankGroup, Inc.
    
    $
    36,029
    
    
    
    4.00
    %
    
    $
    45,036
    
    
    
    5.00
    %
    
    $
    68,562
    
    
    
    7.61
    %
    
    $
    23,526Cumberland Bank
    
    
    26,462
    
    
    
    4.00
    %
    
    
    33,078
    
    
    
    5.00
    %
    
    
    46,672
    
    
    
    7.05
    %
    
    
    13,594BankTennessee
    
    
    7,902
    
    
    
    4.00
    %
    
    
    9,878
    
    
    
    5.00
    %
    
    
    14,147
    
    
    
    7.16
    %
    
    
    4,269Bank of Mason
    
    
    297
    
    
    
    4.00
    %
    
    
    372
    
    
    
    5.00
    %
    
    
    996
    
    
    
    13.40
    %
    
    
    624Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    21,931
    
    
    
    4.00
    %
    
    
    32,897
    
    
    
    6.00
    %
    
    
    68,562
    
    
    
    12.50
    %
    
    
    35,665Cumberland Bank
    
    
    16,316
    
    
    
    4.00
    %
    
    
    24,473
    
    
    
    6.00
    %
    
    
    46,672
    
    
    
    11.44
    %
    
    
    22,199BankTennessee
    
    
    5,138
    
    
    
    4.00
    %
    
    
    7,707
    
    
    
    6.00
    %
    
    
    14,147
    
    
    
    11.01
    %
    
    
    6,440Bank of Mason
    
    
    143
    
    
    
    4.00
    %
    
    
    215
    
    
    
    6.00
    %
    
    
    996
    
    
    
    27.83
    %
    
    
    781Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    43,862
    
    
    
    8.00
    %
    
    
    54,828
    
    
    
    10.00
    %
    
    
    74,594
    
    
    
    13.61
    %
    
    
    19,766Cumberland Bank
    
    
    32,631
    
    
    
    8.00
    %
    
    
    40,789
    
    
    
    10.00
    %
    
    
    51,051
    
    
    
    12.52
    %
    
    
    10,262BankTennessee
    
    
    10,276
    
    
    
    8.00
    %
    
    
    12,845
    
    
    
    10.00
    %
    
    
    15,756
    
    
    
    12.27
    %
    
    
    2,911Bank of Mason
    
    
    286
    
    
    
    8.00
    %
    
    
    358
    
    
    
    10.00
    %
    
    
    1,041
    
    
    
    29.09
    %
    
    
    683
   (Continued) 69




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 16  REGULATORY AGREEMENTS AND CAPITAL REQUIREMENTS(Continued) To be wellcapitalized underRequired
    
    
    prompt corrective
    
    
    
    
    
    
    
    
    
    
    Excess over wellMinimum
    
    
    action provisions
    
    
    Actual
    
    
    capitalizedDecember 31, 2003Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    Amount
    
    
    Ratios
    
    
    AmountTier I to average assets leverageCivitas BankGroup, Inc.
    
    $
    33,047
    
    
    
    4.00
    %
    
    $
    41,308
    
    
    
    5.00
    %
    
    $
    64,965
    
    
    
    7.86
    %
    
    $
    23,657Cumberland Bank
    
    
    11,978
    
    
    
    4.00
    %
    
    
    14,973
    
    
    
    5.00
    %
    
    
    21,591
    
    
    
    7.21
    %
    
    
    6,618BankTennessee
    
    
    11,254
    
    
    
    4.00
    %
    
    
    14,067
    
    
    
    5.00
    %
    
    
    19,636
    
    
    
    6.98
    %
    
    
    5,569Cumberland Bank South
    
    
    7,423
    
    
    
    4.00
    %
    
    
    9,278
    
    
    
    5.00
    %
    
    
    14,569
    
    
    
    7.85
    %
    
    
    5,291Bank of Dyer
    
    
    1,969
    
    
    
    4.00
    %
    
    
    2,461
    
    
    
    5.00
    %
    
    
    3,527
    
    
    
    7.16
    %
    
    
    1,066Bank of Mason
    
    
    363
    
    
    
    4.00
    %
    
    
    454
    
    
    
    5.00
    %
    
    
    964
    
    
    
    10.61
    %
    
    
    510Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    21,173
    
    
    
    4.00
    %
    
    
    31,759
    
    
    
    6.00
    %
    
    
    64,965
    
    
    
    12.27
    %
    
    
    33,206Cumberland Bank
    
    
    8,576
    
    
    
    4.00
    %
    
    
    12,863
    
    
    
    6.00
    %
    
    
    21,591
    
    
    
    10.07
    %
    
    
    8,728BankTennessee
    
    
    6,052
    
    
    
    4.00
    %
    
    
    9,078
    
    
    
    6.00
    %
    
    
    19,636
    
    
    
    12.98
    %
    
    
    10,558Cumberland Bank South
    
    
    5,069
    
    
    
    4.00
    %
    
    
    7,604
    
    
    
    6.00
    %
    
    
    14,569
    
    
    
    11.50
    %
    
    
    6,965Bank of Dyer
    
    
    1,092
    
    
    
    4.00
    %
    
    
    1,638
    
    
    
    6.00
    %
    
    
    3,527
    
    
    
    12.92
    %
    
    
    1,889Bank of Mason
    
    
    171
    
    
    
    4.00
    %
    
    
    256
    
    
    
    6.00
    %
    
    
    964
    
    
    
    22.60
    %
    
    
    708Total capital to risk-weighted
assetsCivitas BankGroup, Inc.
    
    
    42,346
    
    
    
    8.00
    %
    
    
    52,932
    
    
    
    10.00
    %
    
    
    71,604
    
    
    
    13.53
    %
    
    
    18,672Cumberland Bank
    
    
    17,151
    
    
    
    8.00
    %
    
    
    21,439
    
    
    
    10.00
    %
    
    
    24,189
    
    
    
    11.28
    %
    
    
    2,750BankTennessee
    
    
    12,105
    
    
    
    8.00
    %
    
    
    15,131
    
    
    
    10.00
    %
    
    
    21,534
    
    
    
    14.23
    %
    
    
    6,403Cumberland Bank South
    
    
    10,139
    
    
    
    8.00
    %
    
    
    12,673
    
    
    
    10.00
    %
    
    
    16,167
    
    
    
    12.76
    %
    
    
    3,494Bank of Dyer
    
    
    2,184
    
    
    
    8.00
    %
    
    
    2,730
    
    
    
    10.00
    %
    
    
    3,872
    
    
    
    14.18
    %
    
    
    1,142Bank of Mason
    
    
    341
    
    
    
    8.00
    %
    
    
    427
    
    
    
    10.00
    %
    
    
    1,013
    
    
    
    23.75
    %
    
    
    586
   (Continued) 70




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 17  EMPLOYEE BENEFITS The Company maintains a 401(k) savings plan for all employees who have completed six months of
service and are 20 1/2 or more years of age. The plan allows employee contributions up to 15% of their
compensation, which are matched in the Company stock equal to 100% of the first 3% of the
compensation contributed. The Companys expenses related to the plan were $267 in 2004, $267 in
2003 and $233 in 2002. Through the Companys Employee Stock
Purchase Plan, employees, subject to certain annual limitations on
amount, can purchase up to 1,750 shares of Company common stock
during a quarter at a purchase price equal to the lesser of 85% of
the closing market price on the first or last day of the quarter. NOTE 18  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: 2004
    
    
    2003Commitments to make loans
    
    $
    150,207
    
    
    $
    72,769Unused lines of credit and letters of credit
    
    
    3,661
    
    
    
    26,918
 Commitments to make loans are generally made for periods of 60 days or less.   (Continued) 71




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 19 FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated carrying amounts and fair values of the Companys financial instruments are as
follows at December 31, 2004 and 2003: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    27,640
    
    
    $
    27,640
    
    
    $
    19,977
    
    
    $
    19,977Federal funds sold
    
    
    12,166
    
    
    
    12,166
    
    
    
    15,081
    
    
    
    15,081Interest-bearing deposits in
financial institutions
    
    
    5,090
    
    
    
    5,090
    
    
    
    4,046
    
    
    
    4,046Securities available for sale
    
    
    135,426
    
    
    
    135,426
    
    
    
    140,844
    
    
    
    140,844Securities held to maturity
    
    
    106,703
    
    
    
    107,522
    
    
    
    62,527
    
    
    
    62,984Loans, net of allowance
    
    
    567,057
    
    
    
    561,743
    
    
    
    542,151
    
    
    
    543,954Accrued interest receivable
    
    
    3,793
    
    
    
    3,793
    
    
    
    3,896
    
    
    
    3,896Restricted equity securities
    
    
    5,748
    
    
    
    5,748
    
    
    
    5,478
    
    
    
    5,478Investment in unconsolidated
affiliates
    
    
    7,263
    
    
    
    7,263
    
    
    
    6,977
    
    
    
    6,977Financial liabilities:Deposits
    
    $
    731,469
    
    
    $
    693,368
    
    
    $
    671,636
    
    
    $
    673,147Notes payable
    
    
    4,550
    
    
    
    4,550
    
    
    
    4,700
    
    
    
    4,830Federal funds purchased
and repurchase agreements
    
    
    42,943
    
    
    
    42,943
    
    
    
    33,886
    
    
    
    33,886Advances from FHLB
    
    
    51,000
    
    
    
    53,578
    
    
    
    51,852
    
    
    
    55,939Accrued interest payable
    
    
    2,491
    
    
    
    2,491
    
    
    
    2,350
    
    
    
    2,350Subordinated 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,
restricted equity securities, investment in unconsolidated
subsidiaries, accrued interest receivable and payable, demand deposits, 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.   (Continued) 72




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 20  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: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding atbeginning of year
    
    
    645,890
    
    
    $
    3.94
    
    
    
    768,890
    
    
    $
    3.49
    
    
    
    911,740
    
    
    $
    3.22Granted
    
    
    676,768
    
    
    
    6.80
    
    
    
    30,000
    
    
    
    5.63
    
    
    
    121,000
    
    
    
    4.12Exercised
    
    
    (344,050
    )
    
    
    3.03
    
    
    
    (132,100
    )
    
    
    2.76
    
    
    
    (231,680
    )
    
    
    2.73Forfeited or expired
    
    
    (82,464
    )
    
    
    5.17
    
    
    
    (20,900
    )
    
    
    4.29
    
    
    
    (32,170
    )
    
    
    2.97Outstanding at end
of year
    
    
    896,144
    
    
    $
    6.70
    
    
    
    645,890
    
    
    $
    3.94
    
    
    
    768,890
    
    
    $
    3.49Options exercisable at year-end212,400
    
    
    
    
    
    
    
    488,330
    
    
    
    
    
    
    
    615,980Weighted-average fair value of options granted during year$
    1.45
    
    
    
    
    
    
    $
    1.67
    
    
    
    
    
    
    $
    1.04
 Options outstanding at year-end 2004 were as follows: Weighted AverageRemainingContractual Life inExercise Price
    
    Outstanding Number
    
    
    Exercisable Number
    
    
    Years$   4.00
    
    
    97,000
    
    
    
    48,500
    
    
    
    4.004.12
    
    
    36,500
    
    
    
    23,900
    
    
    
    1.915.63
    
    
    30,000
    
    
    
    30,000
    
    
    
    4.755.95
    
    
    218,794
    
    
    
    0
    
    
    
    4.005.95
    
    
    18,500
    
    
    
    0
    
    
    
    5.006.25
    
    
    94,000
    
    
    
    90,000
    
    
    
    4.257.10
    
    
    93,600
    
    
    
    0
    
    
    
    4.257.25
    
    
    259,100
    
    
    
    20,000
    
    
    
    5.588.65
    
    
    48,650
    
    
    
    0
    
    
    
    2.75896,144
    
    
    
    212,400
   (Continued) 73




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 21  EARNINGS PER SHARE The factors used in the earnings per share computation follow. 2004
    
    
    2003
    
    
    2002BasicNet income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Weighted average common sharesoutstanding
    
    
    17,457,487
    
    
    
    16,097,403
    
    
    
    14,018,715Basic earnings per common share
    
    $
    0.11
    
    
    $
    .07
    
    
    $
    0.04DilutedNet income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Weighted average common shares
outstanding for basic earnings per
common share
    
    
    17,457,487
    
    
    
    16,097,403
    
    
    
    14,018,715Add: Dilutive effects of assumed
exercise of stock options
    
    
    119,769
    
    
    
    167,945
    
    
    
    124,281Average shares and dilutive potential
common shares
    
    
    17,577,256
    
    
    
    16,265,348
    
    
    
    14,142,996Diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.04
 NOTE 22  OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related tax effects were as follows: 2004
    
    
    2003
    
    
    2002Unrealized holding gains on
available-for-sale securities
    
    $
    1,309
    
    
    $
    538
    
    
    $
    (300
    )Reclassification adjustment for losses (gains)
realized in income
    
    
    (551
    )
    
    
    (274
    )
    
    
    (461
    )Net unrealized gains
    
    
    758
    
    
    
    264
    
    
    
    (761
    )Tax effect
    
    
    290
    
    
    
    101
    
    
    
    (291
    )Net-of-tax amount
    
    
    468
    
    
    
    163
    
    
    
    (470
    )
   (Continued) 74




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 23  QUARTERLY FINANCIAL DATA (UNAUDITED) 2004First
    
    
    Second
    
    
    Third
    
    
    Fourthquarter
    
    
    quarter
    
    
    quarter
    
    
    quarter
    
    
    TotalInterest Income
    
    $
    10,601
    
    
    $
    9,984
    
    
    $
    10,860
    
    
    $
    11,473
    
    
    $
    42,918Net Interest Income
    
    
    6,730
    
    
    
    6,190
    
    
    
    6,520
    
    
    
    6,637
    
    
    
    26,077Provision for Loan Losses
    
    
    561
    
    
    
    508
    
    
    
    577
    
    
    
    821
    
    
    
    2,467Net Income
    
    
    754
    
    
    
    613
    
    
    
    253
    
    
    
    264
    
    
    
    1,884Earnings per Share  Basic
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.11Earnings per Share  Diluted
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.11
 2003First
    
    
    Second
    
    
    Third
    
    
    Fourthquarter
    
    
    quarter
    
    
    quarter
    
    
    quarter
    
    
    TotalInterest Income
    
    $
    10,314
    
    
    $
    10,326
    
    
    $
    9,942
    
    
    $
    10,694
    
    
    $
    41,276Net Interest Income
    
    
    6,186
    
    
    
    6,373
    
    
    
    5,973
    
    
    
    6,667
    
    
    
    25,199Provision for Loan Losses
    
    
    424
    
    
    
    2,058
    
    
    
    583
    
    
    
    514
    
    
    
    3,579Net Income
    
    
    402
    
    
    
    (345
    )
    
    
    308
    
    
    
    736
    
    
    
    1,101Earnings per Share  Basic
    
    
    0.03
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.07Earnings per Share  Diluted
    
    
    0.03
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.07
   (Continued) 75




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 24  PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31,2004
    
    
    2003ASSETS:Cash
    
    $
    1,513
    
    
    $
    1,896Investment in subsidiaries
    
    
    63,456
    
    
    
    61,630Investment in unconsolidated affiliates
    
    
    7,206
    
    
    
    6,716Premises and equipment
    
    
    1,130
    
    
    
    977Other assets
    
    
    2,580
    
    
    
    1,678$
    75,885
    
    
    $
    72,897LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Notes payable
    
    $
    4,550
    
    
    $
    4,700Accrued interest
    
    
    166
    
    
    
    198Other liabilities
    
    
    1,433
    
    
    
    1,258Subordinated debentures
    
    
    12,000
    
    
    
    12,000Total liabilities
    
    
    18,149
    
    
    
    18,156Total shareholders equity
    
    
    57,736
    
    
    
    54,741$
    75,885
    
    
    $
    72,897
   (Continued) 76




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 24  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF INCOME Years Ended December 31,2004
    
    
    2003
    
    
    2002Income:Dividends from subsidiaries
    
    $
    0
    
    
    $
    0
    
    
    $
    2,200Interest income
    
    
    0
    
    
    
    0
    
    
    
    0Other income
    
    
    7,976
    
    
    
    4,601
    
    
    
    7687,976
    
    
    
    4,601
    
    
    
    2,968Expenses:Interest expense
    
    
    953
    
    
    
    1,010
    
    
    
    1,132Other operating expenses
    
    
    7,387
    
    
    
    4,734
    
    
    
    2,0338,340
    
    
    
    5,744
    
    
    
    3,165Loss before income taxes and equity in
undistributed earnings of subsidiaries
    
    
    (364
    )
    
    
    (1,143
    )
    
    
    (197
    )Income tax benefit
    
    
    134
    
    
    
    434
    
    
    
    902Income (loss) before equity in undistributed
earnings of subsidiaries
    
    
    (230
    )
    
    
    (709
    )
    
    
    705Equity in undistributed earnings of subsidiaries
    
    
    2,114
    
    
    
    1,810
    
    
    
    (184
    )Net income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521
   (Continued) 77




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 (Dollars in thousands, except share and per share amounts)  NOTE 24  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31,
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    1,884
    
    
    $
    1,101
    
    
    $
    521Adjustments to reconcile net income to net
cash from operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (2,115
    )
    
    
    (1,810
    )
    
    
    184Income from investments in unconsolidated affiliates
    
    
    (670
    )
    
    
    (388
    )
    
    
    98Depreciation and amortization
    
    
    332
    
    
    
    159
    
    
    
    47Net change in accrued interest payable
    
    
    32
    
    
    
    (704
    )
    
    
    98Other, net
    
    
    1,243
    
    
    
    (123
    )
    
    
    1,353Net cash from operating activities
    
    
    706
    
    
    
    (1,765
    )
    
    
    2,301Cash flows from investing activities:Investment in commercial bank subsidiaries
    
    
    (1,826
    )
    
    
    (5,050
    )
    
    
    (4,952
    )Investment in unconsolidated affiliates
    
    
    (491
    )
    
    
    (300
    )
    
    
    (995
    )Purchase of premises and equipment, net
    
    
    (581
    )
    
    
    (209
    )
    
    
    (416
    )Net cash from investing activities
    
    
    (2,898
    )
    
    
    (5,559
    )
    
    
    (6,363
    )Cash flows from financing activities:Proceeds
from notes payable
    
    $
    4,550
    
    
    $
    0
    
    
    $
    0Repayment of notes payable
    
    
    (4,700
    )
    
    
    (800
    )
    
    
    (2,159
    )Proceeds from issuance of common stock
    
    
    2,483
    
    
    
    9,303
    
    
    
    6,002Dividends paid on common stock
    
    
    (524
    )
    
    
    (927
    )
    
    
    (830
    )Net cash from financing activities
    
    
    1,809
    
    
    
    7,576
    
    
    
    3,013Net change in cash and cash equivalents
    
    
    (383
    )
    
    
    252
    
    
    
    (1,049
    )Cash and cash equivalents at beginning of year
    
    
    1,896
    
    
    
    1,644
    
    
    
    2,693Cash and cash equivalents at end of year
    
    $
    1,513
    

    
    $
    1,896
    
    
    $
    1,644
 NOTE 25  SUBSEQUENT EVENTS Effective March 1, 2005, the Company completed the sale of all of the common stock of
BankTennessee, to a group of investors made up of certain directors of the Company and BankTennessee. In
exchange for all of the outstanding common stock of BankTennessee the Company received 2,000,000
shares of Company common stock. In January, 2005 the Company
announced that it had entered into an agreement to sell all of the
outstanding stock of the Bank of Mason to Mason Bancorp,
Inc., a newly formed holding company.
The transaction is subject to receipt of pending regulatory approval and is expected to close
during the second quarter of 2005.   78




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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated
under the Securities and Exchange Act of 1934 (the Exchange Act), that are designed to ensure
that information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commissions rules and forms and that such information is
accumulated and communicated to its management, including its principal executive officer and its
principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company carried out an evaluation, under the supervision and with the
participation of its management, including it principal executive officer and its principal
financial officer, of the effectiveness of the design and operation of its disclosure controls and
procedures as of the end of the period covered by this report. Based on the evaluation of these
disclosure controls and procedures, the principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures were effective. Management Report on Internal Control Over Financial Reporting As of the date of filing this Form 10-K, the Company, and its registered public accounting firm,
have not finalized the report of management, and the related attestation of the registered public
accounting firm, regarding the effectiveness of the Companys internal control over financial
reporting. In reliance on the Securities and Exchange Commissions 45-day extension for issuers of
a certain size set out in SEC Exemptive Order 50754 dated November
30, 2004, the required management report and related registered public accounting firm
attestation are not included with this Form 10-K, but, rather, will be included in an amendment to
this Form 10-K to be filed by the Company prior to the expiration of the 45-day extension. At this
time management of the Company is not aware of the existence of any material weaknesses in the
Companys internal control over financial reporting at December 31, 2004, however, the Company
continues to evaluate and test its internal control over financial reporting and can give no
assurances that a material weakness will not be discovered between the date of this Form 10-K and
the date of the filing of the amendment to this Form 10-K described above. Changes in Internal Control Over Financial Reporting In connection with managements evaluation of the effectiveness of the Companys internal control
over financial reporting and the related documentation and testing of the Companys internal
controls, the Company has made several changes that materially affected or are reasonably likely to
materially affect its internal control over financial reporting, including the following:  
    implementing written policies and procedures for the preparation of the Companys
financial statements;
    implementing senior management level review of outstanding loan documentation
exceptions;
    modifying loan participation procedures to improve recognition of delinquencies;
    establishing dual control over incentive pay and initiating monthly reconciliation of payroll;
    strengthening and tightening controls, access and
authorizations in the wire transfer, general ledger and cashier check
areas;
    establishing dollar thresholds for investment securities
transactions; and
    improving deposit account documentation procedures including
the monitoring of employee, officer and director accounts; 79




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ITEM 9B. Other Information None. 
 PART III 
 ITEM 10. Directors and Executive Officers of the Registrant The information required by this item with respect to the directors and executive officers,
including the named executive officers, is incorporated herein by reference to the section entitled
Election of Directors in the Companys definitive proxy materials relating to the Annual Meeting
of Shareholders to be held May 19, 2005. The information required by this section with respect to compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to the section entitled Compliance with Section
16(a) of the Exchange Act in the Companys definitive proxy materials relating to the Annual
Meeting of Shareholders to be held May 19, 2005. The Company has adopted a code of conduct for its senior executive and financial officers (the
Code of Conduct), a copy of which is available on the Investor Relations section of the
Companys website. The Company will make any legally required disclosures regarding amendments to,
or waivers of, provisions of its Code of Conduct at on the Investor Relations section of its
website. The information required by this item with respect to the Companys audit committee and any audit
committee financial expert is incorporated herein by reference to the section entitled Meetings
and Committees of the Board of Directors in the Companys definitive proxy materials relating to
the Annual Meeting of Shareholders to be held May 19, 2005. 
 ITEM 11. Executive Compensation The information required by this item with respect to executive compensation is incorporated herein
by reference to the section entitled Executive Compensation in the Companys definitive proxy
materials relating to the Annual Meeting of Shareholders to be held May 19, 2005 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to the security ownership of certain beneficial owners and management is
incorporated herein by reference to the section titled Stock Ownership in the Companys
definitive proxy materials relating to the Annual Meeting of Shareholders to be held May 19, 2005 80




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The following table summarizes information concerning the Companys equity compensation plans at
December 31, 2004: Number of SharesRemaining Availablefor future IssuanceNumber of Shares to
    
    
    
    
    
    
    Under Equitybe Issued upon
    
    
    Weighted Average
    
    
    Compensation PlansExercise of
    
    
    Exercise price of
    
    
    (Excluding sharesOutstanding Options
    
    
    Outstanding Options
    
    
    Reflected in FirstPlan Category
    
    and Warrants
    
    
    and Warrants
    
    
    ColumnEquity
compensation plans
approved by
shareholders
    
    
    896,144
    
    
    $
    7.27
    
    
    
    1,103,856Equity compensation
plans not
approved by
shareholders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    896,144
    
    
    $
    7.27
    
    
    
    1,103,856
 
 ITEM 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is incorporated herein
by reference to the section titled Certain Relationships and Related Transactions in the
Companys definitive proxy materials relating to the Annual Meeting of Shareholders to be held May
19, 2005. 
 ITEM 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to the section titled
Registered Public Accounting Firm Information in the Companys definitive proxy materials
relating to the Annual Meeting of Shareholders to be held May 19, 2005. 
 ITEM 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements. See Item 8. (a)(2) Financial Statements Schedules. Inapplicable. (a)(3) Exhibits. See Index to Exhibits. Registrant is 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. 81




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. CIVITAS BANKGROUP, INC.By:
    
    /s/ Richard HerringtonRichard Herrington
PresidentDate: March 31, 2005
 In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Richard Herrington
Richard Herrington
    
    President (Principal Executive
Officer) and Director
    
    March 31, 2005/s/ Andy LoCascio
Andy LoCascio
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    March 31, 2005/s/ John Wilder
John Wilder
    
    Chairman
    
    March 31, 2005/s/ Danny Herron
Danny Herron
    
    Director
    
    March 31, 2005/s/ Tom E. Paschal
Tom E. Paschal
    
    Director
    
    March 31, 2005/s/ Tom Price
Tom Price
    
    Director
    
    March 31, 2005/s/ Ronald Gibson
Ronald Gibson
    
    Director
    
    March 31, 2005
 82




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Frank Inman, Jr.
Frank Inman, Jr.
    
    Director
    
    March 31, 2005/s/ Alex Richmond
Alex Richmond
    
    Director
    
    March 31, 2005/s/ John S. Shepherd
John S. Shepherd
    
    Director
    
    March 31, 2005/s/ James Rout
James Rout
    
    Director
    
    March 31, 2005/s/ Joel Porter
Joel Porter
    
    Director
    
    March 31, 2005/s/ Paul Pratt, Sr.
Paul Pratt, Sr.
    
    Director
    
    March 31, 2005/s/ R. Todd Vanderpool
R. Todd Vanderpool
    
    Director
    
    March 31, 2005/s/ William Wallace
William Wallace
    
    Director
    
    March 31, 2005
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##### Table of Contents



INDEX TO EXHIBITS 2.1
    
    Plan of Tax-Free Reorganization under Section 355 of the Internal Revenue Code and Agreement by
and between the Company and the Acquirors identified therein dated November 24, 2004 (incorporated
herein by reference to the Companys Current Report on Form 8-K filed with the SEC on December 1,
2004). (pursuant to Item 601(b) (2) of Regulation S-K, the schedules of this agreement are
omitted, but will be provided supplementary to the SEC upon request).3.1
    
    Restated Charter of the Company (Restated for SEC electronic filing purpose only and
incorporated herein by reference to the Companys registration statement on Form S-3 (Registration
No. 333-117041) filed with the SEC on June 30, 2004.3.2
    
    Amended and Restated Bylaws of the Company (Restated for SEC electronic filing purposes
only). (Restated for SEC electronic filing purpose only and incorporated herein by reference
to the Companys registration statement on Form S-3 (Registration No. 333-117041) filed with
the SEC on June 30, 2004.10.1
    
    Civitas BankGroup, Incorporated 1998 Stock Option Plan (incorporated herein by reference to
the Companys 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).10.3
    
    Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to the
Companys Quarterly Report on Form 10-Q filed with the SEC on November 15, 2004).10.4
    
    Form of Incentive Stock Option Agreement (incorporated herein by reference to the Companys
Quarterly Report on Form 10-Q filed with the SEC on November 15, 2004).10.5
    
    Loan Agreement dated December 13, 2004 by and between the Company and First Tennessee Bank,
National Association (incorporated herein by reference to the Companys Current Report on Form
8-K filed with the SEC on December 17, 2004).10.6
    
    Loan Agreement dated December 13, 2004 by and between the Company and First Tennessee Bank,
National Association (incorporated herein by reference to the Companys Current Report on Form
8-K filed with the SEC on December 17, 2004).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.
 84