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




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement for its Annual
Meeting of Shareholders to be held on May 20, 2004 are incorporated by
reference into Part III of this Annual Report on Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1. Description of BusinessITEM 2. Description of PropertyITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of ShareholdersPART IIITEM 5. Market for Registrants Common Equity and Related Shareholder MattersITEM 6. Selected Consolidated Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7A. Quantitative and Qualitative Disclosures about Market RiskITEM 8. Financial Statements and Supplementary DataITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureITEM 9A. Controls and ProceduresITEM 10. Directors and Executive Officers of the RegistrantITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and ManagementITEM 13. Certain Relationships and Related TransactionsITEM 14. Principal Accountant Fees and ServicesITEM 15. Exhibits and Reports on Form 8-KEx-21.1 Subsidiaries of the CompanyEx-23.1 Consent of Crowe Chizek and Company LLCEx-23.2 Consent of Heathcott and Mullaly, P.C.EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO    Table of Contents  CROSS REFERENCE INDEX
TO
FORM 10-K PART I PAGEITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    8ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    8ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    8PART IIITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
    
    
    9ITEM 6.
    
    SELECTED CONSOLIDATED FINANCIAL DATA
    
    
    10ITEM 7.
    
    MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
    
    
    27ITEM 8.
    
    FINANCIAL STATEMENTS
    
    
    29ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    62ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    62PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS
    
    
    62ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    63ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND
  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    63ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    63ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    63ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
  REPORTS ON FORM 8-K
    
    
    64




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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 legislature 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. Description of Business General Civitas BankGroup, Inc. is a multi-bank holding company headquartered in
Franklin, Tennessee, with $833.3 million in total assets at December 31, 2003.
We conduct our banking business through five (5) bank subsidiaries in twelve
markets throughout Middle and West Tennessee:  
    
    Cumberland Bank, a Tennessee state chartered bank with nine (9)
offices in Macon, Robertson, Smith, Sumner and Warren Counties,
Tennessee;  
    
    BankTennessee, a Tennessee state chartered bank with five (5) offices
in Shelby and Lauderdale Counties, Tennessee;  
    
    Cumberland Bank South, a Tennessee state chartered bank, with four
(4) offices in Davidson and Williamson Counties, Tennessee; 1




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
    
    Bank of Dyer, a Tennessee state chartered bank with four (4) offices
in Gibson and Madison County, Tennessee; and  
    
    Bank of Mason, a Tennessee state chartered bank with one (1) office
in Tipton County, Tennessee. 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, and brokerage services. We equally serve both
metropolitan and rural areas, targeting local consumers, professionals and
small businesses. Management believes that the markets in which our banks
operate offer an environment for continued growth with respect to our target
market. 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. Competition Our 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 are 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 novostatus, or acquisition could have an 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. Joint Ventures The Company owns a 50% interest in 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
its pro rata
share of operating results of each entity, is included in the consolidated
financial statements. The Murray Banc Holding Company is a single bank holding
company which owns 100% of The Murray Bank. The Murray Bank opened in 1999,
and has approximately $138.2 million in total assets at December 31, 2003.
Insurors Bank opened in November 2000 and has approximately $55.6 million in
assets at December 31, 2003. More information regarding these two entities can
be found in note 6 to the consolidated financial statements. 2




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Monetary Policies The result 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, 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. 3




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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. 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 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 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. 4




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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, 2003, the Companys Tier 1 risk-based Capital and Total
risk-based Capital ratios were 12.27% and 13.53%, respectively. 5




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Capital Commitments. 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
requires 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, 2003. The
Company and its subsidiaries intend to continue to comply with these
agreements, and the Company has requested approval to pay dividends for the
first quarter of 2004 but has not yet received such approval. The Company
believes that the proceeds of its private placement completed in August 2003,
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 2004. 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. Thereafter, the bank may
quarterly, semi-annually, or annually declare a dividend from that account in
an amount judged expedient by the banks board of directors. Before declaring
the 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 if the bank is adequately reserved against deposits
and those reserves will not be impaired by the declaration of the dividend. 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 6




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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 our banks as
state member banks of the Federal Reserve. Our banks may not declare or pay a
dividend if that dividend would exceed the banks undivided profits, 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 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. 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 $0.00 to $0.43 per $100 of
deposits. 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 7




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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s Internet website is www.civitasbankgroup.com. We make
available on our website our filings with the SEC, including the Companys
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 it electronically files or furnishes 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. Employees Civitas BankGroup and
its subsidiaries had approximately 279 full-time
equivalent employees as of December 31, 2003. 
 ITEM 2. Description of Property Civitas BankGroup, Inc.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 houses our mortgage division. Our Technology Center is a leased
building also located in Cool Springs and is home to our centralized
operational units. Our subsidiary banks operate 23 banking offices, of which
seven are leased and 26 ATMs. 
 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, 2003. 8




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##### Table of Contents



PART II 
 ITEM 5. Market for Registrants Common Equity and Related Shareholder Matters The Companys common stock is currently traded over-the-counter on the OTC
Bulletin Board under the symbol CVBG. Prior to being traded on the OTC Bulletin Board, there was no
established public trading market for our shares. Accordingly, there was no
comprehensive record of trades or the prices of any trades prior to the shares
being listed on the OTC Bulletin Board. The following table reflects stock
prices for our shares to the extent any information is available for trades
prior to the fourth quarter of 2002, the date that the shares were first listed
on the OTC Bulletin Board and for trades after such date as reported on the OTC
Bulletin Board. CashDividendsHigh
    
    Low
    
    Close
    
    Declared2002:First Quarter
    
    $
    3.95
    
    
    $
    3.40
    
    
    $
    3.75
    
    
    $
    0.015Second Quarter
    
    
    4.50
    
    
    
    3.70
    
    
    
    4.13
    
    
    
    0.015Third Quarter
    
    
    4.30
    
    
    
    4.00
    
    
    
    4.14
    
    
    
    0.015Fourth Quarter
    
    
    6.00
    
    
    
    4.07
    
    
    
    5.30
    
    
    
    0.0152003: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
    
    
    
    0.015
 As of February 29, 2004, we had approximately 1,622 record shareholders.
At that date, 17,455,496 shares were outstanding. Cash
dividends totaling $0.06 per share were declared in 2003 and 2002. In the first quarter of
2004, a cash dividend was declared subject to regulatory approval in the amount
of $0.015 per share payable on April 14, 2004 to shareholders of record on
March 1, 2004. At this time we have not received the required regulatory
approval and we can not give any assurance that we will receive the requested
approval. The amount of the 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 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. As a result, we may not be able to declare a
dividend to holders of the shares even if the present dividend policy were to
change. See Supervision and Regulation  Dividend Restrictions and
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity. 9




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##### Table of Contents



ITEM 6. Selected Consolidated 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, 1999, 2000,
2001, 2002 and 2003. 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)2003
    
    2002
    
    2001
    
    2000
    
    1999Summary of OperationsInterest income
    
    $
    41,276
    
    
    $
    42,848
    
    
    $
    52,865
    
    
    $
    51,651
    
    
    $
    39,193Interest expense
    
    
    16,077
    
    
    
    18,643
    
    
    
    28,901
    
    
    
    27,057
    
    
    
    19,127Net interest income
    
    
    25,199
    
    
    
    24,205
    
    
    
    23,964
    
    
    
    24,594
    
    
    
    20,066Provision for loan losses
    
    
    (3,579
    )
    
    
    (6,800
    )
    
    
    (6,377
    )
    
    
    (2,636
    )
    
    
    (1,623
    )Noninterest income
    
    
    7,408
    
    
    
    8,448
    
    
    
    7,048
    
    
    
    5,771
    
    
    
    4,290Noninterest expense
    
    
    (27,332
    )
    
    
    (25,104
    )
    
    
    (24,408
    )
    
    
    (21,132
    )
    
    
    (17,109
    )Income before income taxes
    
    
    1,696
    
    
    
    749
    
    
    
    227
    
    
    
    6,597
    
    
    
    5,624Income tax expense
    
    
    595
    
    
    
    228
    
    
    
    18
    
    
    
    2,436
    
    
    
    2,113Net earnings
    
    
    1,101
    
    
    
    521
    
    
    
    209
    
    
    
    4,161
    
    
    
    3,511Basic earnings per share
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.30
    
    
    
    0.28Diluted earnings per share
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.30
    
    
    
    0.27Dividends per common share
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.05
    
    
    
    Book value per common share
    
    
    3.19
    
    
    
    2.96
    
    
    
    2.85
    
    
    
    2.86
    
    
    
    2.57Selected Period-End BalancesTotal assets
    
    $
    833,320
    
    
    $
    711,878
    
    
    $
    667,511
    
    
    $
    643,457
    
    
    $
    525,559Loans net of unearned income
    
    
    550,565
    
    
    
    526,215
    
    
    
    522,245
    
    
    
    507,217
    
    
    
    440,316Allowance for loan losses
    
    
    8,414
    
    
    
    9,062
    
    
    
    9,023
    
    
    
    6,137
    
    
    
    5,146Total deposits
    
    
    671,636
    
    
    
    592,998
    
    
    
    549,424
    
    
    
    524,142
    
    
    
    435,252Other borrowings
    
    
    90,438
    
    
    
    56,352
    
    
    
    60,186
    
    
    
    64,535
    
    
    
    49,284Shareholders equity
    
    
    54,741
    
    
    
    45,473
    
    
    
    39,313
    
    
    
    39,476
    
    
    
    35,275Selected Average BalancesTotal assets
    
    
    780,066
    
    
    
    690,610
    
    
    
    671,690
    
    
    
    576,622
    
    
    
    453,378Securities
    
    
    154,713
    
    
    
    62,135
    
    
    
    32,344
    
    
    
    23,468
    
    
    
    25,886Loans net of unearned income
    
    
    548,071
    
    
    
    520,825
    
    
    
    512,918
    
    
    
    476,339
    
    
    
    374,714Allowance for loan losses
    
    
    8,431
    
    
    
    9,078
    
    
    
    7,027
    
    
    
    5,635
    
    
    
    4,196Total deposits
    
    
    583,088
    
    
    
    572,809
    
    
    
    550,569
    
    
    
    485,708
    
    
    
    387,941Other borrowings
    
    
    69,337
    
    
    
    60,090
    
    
    
    63,975
    
    
    
    47,437
    
    
    
    34,477Shareholders equity
    
    
    48,910
    
    
    
    39,967
    
    
    
    40,056
    
    
    
    37,366
    
    
    
    27,200Selected Operating RatiosAnnual %
change in average loans
    
    
    5.23
    %
    
    
    1.54
    %
    
    
    7.68
    %
    
    
    27.12
    %
    
    
    27.60
    %Annual %
change in average assets
    
    
    12.95
    %
    
    
    2.82
    %
    
    
    16.49
    %
    
    
    27.18
    %
    
    
    21.56
    %Return on average equity
    
    
    2.25
    %
    
    
    1.30
    %
    
    
    0.52
    %
    
    
    11.14
    %
    
    
    12.91
    %Return on average assets
    
    
    0.14
    %
    
    
    0.08
    %
    
    
    0.03
    %
    
    
    0.72
    %
    
    
    0.77
    %
 Per share amounts adjusted to reflect the effect of stock splits and stock
dividends. 10




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##### Table of Contents



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. Critical Accounting Policies The accounting principles followed by the Corporation and the methods of
applying these principles conform with United States generally accepted
accounting principles and with general practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Critical accounting policies relate to investments, loans, allowance
for loan losses, intangibles, revenues, expenses, stock options and income
taxes. A description of these policies, which significantly affect the
determination of the financial position, results of operations and cash flows,
are summarized in Note 1, Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements and discussed elsewhere in this
section. Overview The
Company completed an equity offering in August 2003 raising
$8.9 million. This brings the new equity capital raised since
December 2002 to $14.3 million. These funds were leveraged
through the investment portfolio providing current earnings and
monthly cash flow to support future loan growth. This strategy
represented the majority of asset growth experienced in 2003. Earnings
for 2003 significantly improved despite the level of problem loans,
further compression of our net interest margin, and cost pressures
from the centralization of backroom operations. Although the Company
managed a 34.7% reduction in nonperforming assets, the level remains
high and negatively impacts earnings performance in many ways. Until
the Company can achieve significant reductions in problem assets,
which are discussed in more detail below, it is likely that loan
charge-offs will continue to be incurred, resulting in additional
provisions for loan losses, which will negatively impact future
earnings. The net interest margin compression was primarily due to
interest rates remaining at historically low levels. The
standardization and centralization of backroom operations increased
expenses in the short-term for the long-term benefit. Management
believes this new infrastructure is the foundation for future growth
and profitability along with a strong credit culture. Assets grew from $711.9 million at December 31, 2002, to $833.3 million at
year-end 2003, a $121.4 million increase or 17.1%. The primary changes in
assets were the $112.8 million increase in securities and modest
loan growth of $25.0 million. We funded these
increases primarily by an increase in deposits of $78.6 million
and a $33.9 million increase in repurchase agreements. Our total
liabilities grew from $666.4 million at December 31, 2002 to $778.6 million at
year end 2003, a $112.2 million increase or 16.8%. The Companys securities portfolio increased 124.75% or $112.9 million to
$203.4 million since year-end 2002. This increase is a result of the $47.1
million leverage transaction that was completed in January 2003 in which $3.8
million in state, county and municipal securities and $36.5 million in
mortgage-backed securities were purchased through the use of funds generated
from $24.0 million in brokered CDs, $6.9 million in time deposits, $1.0 million
in FHLB advances, $3.5 million in capital, $3.4 million in federal funds
purchased, and $1.5 million in demand deposits. In August 2003, a second
leverage transaction was completed in the amount of $49.8 million in which
$44.7 million in mortgage-backed securities and $5.1 million in state, county
and municipal securities were purchased through the use of funds generated from
$41.0 million in brokered CDs, $4.8 million in federal funds purchased, and
$4.0 million in capital. Loans totaled $550.6 million at December 31, 2003, an increase of $24.4
million or 4.63% over year-end 2002 balances. A significant portion of this
loan growth is related to loans made by our Williamson County Tennessee
subsidiary, Cumberland Bank South and are primarily secured by real estate
located in the county. 11




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##### Table of Contents



Shareholders equity increased $9.3 million to $54.7 million at December
31, 2003. This increase was primarily the result
of the private placement offering of $8.9 million in August, 2003. Our
leverage capital ratio was 7.86% at
December 31, 2003 compared to 7.95% at December 31, 2002,
resulting from the significant increase in assets generated from the
leverage transactions. See note 14 to our
consolidated financial statements for more information relating to capital. 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 continues to build a solid
infrastructure to improve operational efficiency and strengthen operational
control through the centralization of backroom operations. Earnings were
enhanced $772,000 through leverage strategies facilitated by the addition of
new capital discussed earlier. 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. 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. Since the beginning of 2001, the Federal
Reserve has 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 pages 21 through 22. 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 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. 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 have
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 12




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##### Table of Contents



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 leverage transactions
described earlier. 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. 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 origination fees,
mortgage servicing income, and net gains on sale of mortgage loans. The
company realized $274,000 in the sale of some of its investment securities in
2003. Security transactions are an integral part of balance sheet and interest
rate risk management activities. Noninterest income represents 15.2% of total
revenues as compared to 16.5% in 2002. This decrease is a result of certain
one-time items recognized in 2002. 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 necessary as the Company continued to build
the infrastructure needed to create a strong control environment and to attract
and retain qualified personnel. 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. Results of Operations Year ended December 31, 2002 Compared to the Year ended
December 31, 2001: Net earnings increased $312,000 or 149.3% to $521,000 in 2002 compared to
$209,000 in 2001. Although total revenues decreased by 14.4%, this decrease
was offset by a decrease in total expenses of 17.9% for 2002 as compared to the
prior year. Provision expense increased 6.6% during that same time period. Net interest income increased $241,000 or 1.0%, to $24.2 million in 2002
from $24.0 million in 2001. In 2002, the Federal Reserve continued to reduce
the Federal Funds rate from 1.75% at the end of 2001 to 1.25% at the end of
2002. This reduction followed the 475 basis point reduction in the Federal
Funds rate in 2001. As we continued to operate in this low rate environment,
increased prepayments on both loans and investment securities adversely
affected net interest income. 13




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##### Table of Contents



Interest income decreased 18.9% in 2002 to $42.8 million. The decrease
was primarily attributable to the decline in the yield on average earning
assets, which fell to 6.79% in 2002 from 8.61% in 2001 and reduced interest
income $11.7 million. The decline in yield is a result of the decline in
market interest rates. A lower yield on loans was the primary factor driving
the decrease in the earning assets yield. The yield on loans was 7.48% in
2002, compared to 9.39% in 2001. The increased level of non-performing loans
also heavily contributed to this decline in interest income as lost interest
totaling $1.2 million due to loans in a non-accrual status was not realized, an
increase of $297,000 over the 2001 total of approximately $855,000.
Non-accrual loans increased $5.8 million over the prior year. The reduction in interest income due to declining market interest rates
was offset by the decline in interest expense. This expense reduction resulted
from the repayment of higher-cost deposits and borrowings. Interest expense
decreased $10.3 million or 35.5% in 2002 compared to 2001. The average rate
paid for interest-bearing liabilities decreased from 4.63% in 2001 to 2.89% in
2002. This accounted for a $9.8 million decrease in interest expense and was
due primarily to the falling interest rate environment previously discussed. The Companys net interest spread and net yield on earning assets were
3.90% and 3.84% respectively, in 2002 as compared to 3.98% and 3.90% in 2001.
Net interest spread represents the difference in the yield on earning assets
and the rate paid on interest bearing liabilities. Net yield on earning assets
is net interest income divided by average earning assets. Margin contraction
resulted from the asset sensitive bias of the balance sheet given the
significant reduction in market interest rates coupled with asset quality
deterioration. More detail on changes in interest income and interest expense
due to changes in rates is shown on page 21. The provision for loan losses was $6.8 million for 2002 compared to $6.4
million in 2001, a 6.3% increase. The increase in the provision was
attributable to the increase in classified loans and net charge-offs. Net loan
charge-offs were $6.8 million in 2002 compared to $3.5 million in 2001.
Charge-offs increased due to increased losses in commercial, real estate and
consumer loans. Loan classifications increased due to the economic downturn
and managements aggressive identification actions on loans to borrowers which
otherwise are able to make principal and interest payments, but, upon review,
appear to have financial weaknesses. Loans The following table presents various categories of loans contained in our
banks loan portfolios for the periods indicated and the total amount of all
loans for such period: December 31,Type of Loan
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999($ in thousands)Real
estate  construction and
development
    
    $
    83,211
    
    
    $
    71,907
    
    
    $
    73,713
    
    
    $
    73,706
    
    
    $
    80,789Real
estate  1 to 4 family residential
    
    
    158,116
    
    
    
    169,220
    
    
    
    181,675
    
    
    
    181,723
    
    
    
    157,820Real estate other
    
    
    106,483
    
    
    
    93,894
    
    
    
    68,089
    
    
    
    63,450
    
    
    
    49,708Commercial, financial and
agricultural
    
    
    157,470
    
    
    
    145,409
    
    
    
    142,122
    
    
    
    131,548
    
    
    
    102,385Consumer
    
    
    39,258
    
    
    
    44,978
    
    
    
    57,517
    
    
    
    58,156
    
    
    
    50,643Other
    
    
    6,385
    
    
    
    1,103
    
    
    
    1,115
    
    
    
    1,396
    
    
    
    1,744Total loans
    
    
    550,923
    
    
    
    526,511
    
    
    
    524,231
    
    
    
    509,979
    
    
    
    443,089Unearned income and deferred fees
    
    
    (358
    )
    
    
    (296
    )
    
    
    (1,986
    )
    
    
    (2,762
    )
    
    
    (2,773
    )Total loans, net of unearned
income and deferred fees
    
    $
    550,565
    
    
    $
    526,215
    
    
    $
    522,245
    
    
    $
    507,217
    
    
    $
    440,316
 14




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##### Table of Contents



Total loans at December 31, 2003 were $550.6 million, compared to $526.2
at year-end 2002 and represented 76.0% of average earning assets in 2003 and
83.4% in 2002. Loan growth was $24.4 million, or 4.6%, during 2003, and $4.0
million, or 0.8%, during 2002. This growth was concentrated in our Williamson
County market. Managements continued focus on improving asset quality
detracted from business development efforts in other markets we
serve. At December 31, 2003, 1-4 family residential real estate loans constituted
28.7% of total loans and construction and development loans constituted 15.1%
of total loans. It is our philosophy to pursue real estate lending as our core
type of lending relationship. Of our combined loan portfolio, 63.2% is secured
by residential and other real estate The following is a presentation of an analysis of maturities of loans as
of December 31, 2003: Due in 1 year
    
    Due in 1 to 5
    
    Due After 5Type of Loan
    
    or less
    
    Years
    
    Years
    
    Total($ in thousands)Real
estate  construction &
development
    
    $
    66,152
    
    
    $
    16,854
    
    
    $
    205
    
    
    $
    83,211Real
estate  1-4 family residential
    
    
    34,800
    
    
    
    65,118
    
    
    
    58,198
    
    
    
    158,116Real
estate  other
    
    
    15,575
    
    
    
    62,074
    
    
    
    28,834
    
    
    
    106,483Commercial, financial and
agricultural
    
    
    64,900
    
    
    
    70,650
    
    
    
    21,920
    
    
    
    157,470Consumer
    
    
    15,471
    
    
    
    23,395
    
    
    
    392
    
    
    
    39,258Other
    
    
    2,041
    
    
    
    1,208
    
    
    
    3,136
    
    
    
    6,385Total gross loans
    
    $
    198,939
    
    
    $
    239,299
    
    
    $
    112,685
    
    
    $
    550,923
 At December 31, 2003, $233.1 million in loans due after one year had
predetermined interest rates and $118.9 million in loans due after one year had
floating interest rates. Allowance for Loan Losses and Asset Quality The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed by management to be sufficient to absorb inherent losses in
the loan portfolio. Factors considered in establishing an appropriate
allowance include an assessment of the financial condition of the borrower, a
determination of the value and adequacy of underlying collateral, the condition
of the local economy and the condition of the specific industry of the
borrower, an analysis of the levels and trends of loan categories, and a review
of delinquent and classified loans. We apply a systematic process for
determining the adequacy of the allowance for loan losses, including an
internal loan review function and a quarterly analysis of the adequacy of the
allowance. Our quarterly analysis includes determination of specific potential
loss factors on individual classified loans, historical potential loss factors
derived from actual net charge-off experience and trends in nonperforming
loans, and potential loss factors for other loan portfolio risks such as loan
concentrations, local economy, and the nature and volume of loans. 15




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##### Table of Contents



An analysis of our loss experience is furnished in the following table for the
periods indicated: Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Balance at beginning of year
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137
    
    
    $
    5,146
    
    
    $
    4,012Increase due to acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    1529,062
    
    
    
    9,023
    
    
    
    6,137
    
    
    
    5,204
    
    
    
    4,164Loans charged-off:Real estate-construction & development
    
    
    (596
    )
    
    
    (679
    )
    
    
    (258
    )
    
    
    (73
    )
    
    
    Real estate-1 to 4 family
    
    
    (498
    )
    
    
    (598
    )
    
    
    (295
    )
    
    
    (414
    )
    
    
    (117
    )Real estate-other
    
    
    (491
    )
    
    
    (496
    )
    
    
    (608
    )
    
    
    (62
    )
    
    
    Commercial, financial & agricultural
    
    
    (2,083
    )
    
    
    (3,670
    )
    
    
    (1,553
    )
    
    
    (614
    )
    
    
    (123
    )Consumer
    
    
    (1,464
    )
    
    
    (1,806
    )
    
    
    (1,052
    )
    
    
    (704
    )
    
    
    (518
    )Other
    
    
    (11
    )
    
    
    (150
    )
    
    
    (137
    )
    
    
    
    
    
    
    Total charge-offs
    
    $
    (5,143
    )
    
    $
    (7,399
    )
    
    $
    (3,903
    )
    
    $
    (1,867
    )
    
    $
    (758
    )Charge-offs recovered:Real estate  construction & development
    
    
    37
    
    
    
    137
    
    
    
    19
    
    
    
    
    
    
    
    Real estate - 1-4 family
    
    
    5
    
    
    
    53
    
    
    
    34
    
    
    
    5
    
    
    
    9Real estate  other
    
    
    162
    
    
    
    47
    
    
    
    29
    
    
    
    32
    
    
    
    Commercial
    
    
    379
    
    
    
    180
    
    
    
    112
    
    
    
    10
    
    
    
    19Consumer
    
    
    230
    
    
    
    214
    
    
    
    156
    
    
    
    117
    
    
    
    89Other
    
    
    103
    
    
    
    7
    
    
    
    62
    
    
    
    
    
    
    
    Total recoveries
    
    $
    916
    
    
    $
    638
    
    
    
    412
    
    
    
    164
    
    
    
    117Net loans charged-off
    
    
    (4,227
    )
    
    
    (6,761
    )
    
    
    (3,491
    )
    
    
    (1,703
    )
    
    
    (641
    )Current year provision
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377
    
    
    
    2,636
    
    
    
    1,623Balance at end of year
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137
    
    
    $
    5,146Loans at year end
    
    $
    550,565
    
    
    $
    526,215
    
    
    $
    522,245
    
    
    $
    507,217
    
    
    $
    440,316Ratio of allowance to loans at year end
    
    
    1.53
    %
    
    
    1.72
    %
    
    
    1.73
    %
    
    
    1.21
    %
    
    
    1.17
    %Average loans
    
    $
    548,071
    
    
    $
    520,825
    
    
    $
    512,918
    
    
    $
    476,339
    
    
    $
    374,716Ratio of net loans charged off to average loans
    
    
    0.77
    %
    
    
    1.30
    %
    
    
    0.68
    %
    
    
    0.36
    %
    
    
    0.17
    %
 The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out recoveries
on previously charged-off assets, become net charge-offs. Our policy is to
charge off loans, when, in managements opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery. Net
charge-offs decreased $2.6 million in 2003 to $4.2 million, which compares to
$6.8 million in 2002. Our level of net charge-offs to average loans was 0.77%
in 2003 and 1.30% in 2002. Economic conditions, on a local and a national
level, have adversely affected borrowers, particularly those that were
marginally capitalized. During 2003, the provision for loan losses of $3.6
million was $3.2 million less than the preceding year. Factors
which caused the decreased provision in 2003 were reduced levels of
net charge-offs, reduced level of non-performing assets and a
reduction in past due balances. 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. Loans are classified as non-accrual when management believes
that collection of interest is doubtful. When loans are placed on nonaccrual
status, all unpaid accrued interest is reversed. Another element associated
with asset quality is foreclosed properties, (carried as other real estate on
the balance sheet), which represent real estate or personal property acquired
through loan defaults by customers. 16




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##### Table of Contents



The following table presents information regarding nonaccrual, past due
and restructured loans, and foreclosed properties at the dates indicated: December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Loans accounted for on a
non-accrual basis
    
    $
    12,362
    
    
    $
    18,435
    
    
    $
    12,625
    
    
    $
    5,608
    
    
    $
    2,446Accruing loans which are
contractually past due 90 days
or more as to principal and
interest payments
    
    
    3
    
    
    
    
    
    
    
    1,168
    
    
    
    345
    
    
    
    241Restructured loans
    
    $
    
    
    
    $
    223
    
    
    $
    252
    
    
    $
    
    
    
    $
    693Total nonperforming loans
    
    
    12,365
    
    
    
    18,658
    
    
    
    14,045
    
    
    
    5,953
    
    
    
    3,380Foreclosed properties
    
    
    3,793
    
    
    
    6,338
    
    
    
    7,330
    
    
    
    3,142
    
    
    
    2,400
 Total non-performing loans were $12.4 million at December 31, 2003, a
decrease of 33.7% from the $18.7 million at December 31, 2002. Non-performing
loans were 2.2% and 3.5% of loans at December 31, 2003 and 2002, respectively.
To total assets, non-performing loans were 1.5% and 2.6% for the same time
periods. The ratio of allowance to non-performing loans at December 31, 2003
and December 31, 2002 was 68% and 49%, respectively. The dollar decrease in
non-performing loans during 2003 is due to managements
concerted efforts to improve credit quality. Additional interest income of
approximately $619,000 in 2003, $1.2 million in 2002, and $855,000 in 2001
would have been recorded if all loans accounted for on a non-accrual basis had
been current in accordance with their original terms. Management has internally classified an additional $21.2 million in loans
as substandard based upon other possible credit problems. These loans are not
included in the above amounts. These loans are performing loans but are
classified as substandard due to payment history, decline in the borrowers
financial position or decline in collateral value. Loans classified as
substandard are inadequately protected by the current 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 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. Doubtful
loans totaled $1.5 million at December 31, 2003. Loans classified as loss are
considered uncollectible and of such little value that their continuance as
bankable assets is not warranted. There were no loans classified as loss as of
December 31, 2003. As of December 31, 2003, there are no loans classified by our regulators
or management as loss, doubtful or substandard that have not been disclosed
above or which represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Non-performing loans, net charge-offs and foreclosed properties
decreased during 2003 and as of December 31, 2003, management believes the allowance for loan losses and the
carrying value of foreclosed properties is properly stated at December 31,
2003. Substantial resources have been devoted to identifying, grading and
valuing problem assets during the past two years. Although it is likely that
the Company will continue to have asset quality problems in 2004, management
believes that identifiable problem assets have been appropriately provided for
in the accompanying financial statements. 17




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##### Table of Contents



The allocation of the allowance for loan losses by loan category at
December 31, for the years indicated is presented below: As of December 31,2003
    
    2002
    
    2001Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofloans in
    
    
    
    
    
    loans in
    
    
    
    
    
    loans incategory to
    
    
    
    
    
    category to
    
    
    
    
    
    category toAmount
    
    total loans
    
    Amount
    
    total loans
    
    Amount
    
    total loansReal estate
 construction & development
    
    $
    826
    
    
    
    15
    %
    
    $
    1,541
    
    
    
    14
    %
    
    $
    1,444
    
    
    
    14
    %Real estate
 1-4 single family
    
    
    1,752
    
    
    
    29
    %
    
    
    725
    
    
    
    32
    %
    
    
    541
    
    
    
    35
    %Real estate
 other
    
    
    1,013
    
    
    
    19
    %
    
    
    634
    
    
    
    18
    %
    
    
    722
    
    
    
    13
    %Commercial, financial and agricultural
    
    
    3,601
    
    
    
    29
    %
    
    
    3,262
    
    
    
    28
    %
    
    
    3,519
    
    
    
    27
    %Consumer
    
    
    1,075
    
    
    
    7
    %
    
    
    2,628
    
    
    
    8
    %
    
    
    2,166
    
    
    
    11
    %Other
    
    
    109
    
    
    
    1
    %
    
    
    181
    
    
    
    0
    %
    
    
    180
    
    
    
    0
    %Unallocated
    
    
    38
    
    
    NA
    
    
    91
    
    
    NA
    
    
    451
    
    
    NATotal
    
    $
    8,414
    
    
    
    100
    %
    
    $
    9,062
    
    
    
    100
    %
    
    $
    9,023
    
    
    
    100
    %
 As of December 31, 2003, real estate mortgage loans constituted 63% of
outstanding loans. Approximately $143.5 million, or 90.8%, of this category
represents first mortgage residential real estate mortgages where the amount of
the original loan generally does not exceed 80% of the appraised value of the
collateral. We have $83.2 million in construction and development loans, which
are primarily related to the home building industry in Shelby, Williamson,
Davidson and Sumner Counties, Tennessee. The remaining portion of this
category consists primarily of commercial real estate loans. Approximately 29%
of the loan portfolio is in the category of commercial, financial and
agricultural. Risk of loss for these loans is generally higher than
residential loans. Therefore, management has allocated a significant portion of
the allowance for loan losses to this category. The ratio of the allowance for
loan losses to total loans was 1.53% at the end of 2003 compared to 1.72% at
December 31, 2002. Securities Our banks securities portfolios are primarily used as a source of
liquidity. Total securities were $203.4 million at year-end 2003 compared to
$90.5 million at December 31, 2002, an increase of $112.9 million from year-end
2002. Much of this growth was a result of the leverage strategies facilitated
by the addition of new equity capital with the balance coming from more
efficient funds management and a corresponding decrease in federal funds sold.
Average investment securities were $154.7 million and $62.1 million,
respectively for the years ended December 31, 2003 and 2002. The securities
portfolio comprised 24.4% of total assets at year-end 2003. Growth of the
investment securities portfolio in 2004 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 2004. 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, 2003, the investment portfolio had a net unrealized gain of
$904,000 compared to $669,000 at December 31, 2002. Approximately 52.35% of
securities held at year-end 2003 were pledged to secure public deposits,
Federal Home Loan Bank borrowings, repurchase agreements and for other purposes
as required or permitted by law. Other than commitments to originate or sell
mortgage loans, our banks do not invest in off-balance sheet or derivative
financial instruments. We invest primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United States, other taxable
securities and in certain obligations of states, counties and municipalities
(SCM). The majority of the mortgage-backed securities are instruments of U.S. 18




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##### Table of Contents



Government agencies. In addition, we enter into federal funds transactions
with our principal correspondent banks, and act as a net seller of such funds.
We do not hold securities of any single issuer that exceeded ten percent of
shareholders equity. The following tables present, for the periods indicated, the carrying
amount of our securities portfolio, including mortgage-backed securities,
segregated into available for sale and held to maturity categories. At December 31,2003
    
    2002
    
    2001(Dollars in thousands)Available for sale:U.S. Government and agencies
    
    $
    10,116
    
    
    $
    6,923
    
    
    $
    25,222Obligations of SCM
    
    
    1,496
    
    
    
    723
    
    
    
    3,933Mortgage-backed
    
    
    127,641
    
    
    
    69,524
    
    
    
    10,467Marketable equity securities
    
    
    1,091
    
    
    
    1,108
    
    
    
    1,329Other debt securities
    
    
    500
    
    
    
    773
    
    
    
    1,863Total available for sale
    
    
    140,844
    
    
    
    79,051
    
    
    
    42,814Held to maturity:U.S. Government and agencies
    
    
    1,139
    
    
    
    3,398
    
    
    
    6,297Obligations of SCM
    
    
    17,748
    
    
    
    2,823
    
    
    
    918Mortgage-backed
    
    
    40,729
    
    
    
    2,651
    
    
    
    2,912Other debt securities
    
    
    2,911
    
    
    
    2,616
    
    
    
    2,608Total held to maturity
    
    
    62,527
    
    
    
    11,488
    
    
    
    12,735Total securities
    
    $
    203,371
    
    
    $
    90,539
    
    
    $
    55,549
 The following table indicates, for the year ended December 31, 2003, the
amount of investments due in (1) one year or less, (2) one to five years, (3)
five to ten years, and (4) over ten years: 1 yr or
    
    
    
    
    
    
    
    
    
    
    
    
    
    5 to 10
    
    
    
    
    
    Overless
    
    
    
    
    
    1 to 5 yrs
    
    
    
    
    
    yrs
    
    
    
    
    
    10 yrs
    
    
    
    
    
    TotalBalance
    
    Yield
    
    Balance
    
    Yield
    
    Balance
    
    Yield
    
    Balance
    
    Yield
    
    Balance(Dollars in Thousands)Available for sale:U.S. Government and agencies
    
    $
    4,504
    
    
    
    0.93
    %
    
    $
    5,500
    
    
    
    2.20
    %
    
    $
    
    
    
    
    
    
    
    $
    112
    
    
    
    7.86
    %
    
    $
    10,116Obligations of SCM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    4.68
    %
    
    
    1,032
    
    
    
    4.04
    %
    
    
    1,496Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    1,504
    
    
    
    5.08
    %
    
    
    19,563
    
    
    
    5.04
    %
    
    
    106,574
    
    
    
    4.89
    %
    
    
    127,641Marketable equity securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,091
    
    
    
    2.09
    %
    
    
    1,091Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    9.55
    %
    
    
    500Held to maturity:U.S. Government and agencies
    
    
    
    
    
    
    
    
    
    
    435
    
    
    
    4.83
    %
    
    
    698
    
    
    
    4.50
    %
    
    
    6
    
    
    
    2.25
    %
    
    
    1,139Obligations of SCM
    
    
    
    
    
    
    
    
    
    
    1,065
    
    
    
    4.59
    %
    
    
    1,241
    
    
    
    3.91
    %
    
    
    15,442
    
    
    
    3.73
    %
    
    
    17,748Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    7.00
    %
    
    
    10,236
    
    
    
    5.25
    %
    
    
    30,438
    
    
    
    5.45
    %
    
    
    40,729Other
    
    
    1,006
    
    
    
    5.36
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,905
    
    
    
    8.02
    %
    
    
    2,911Totals
    
    $
    5,510
    
    
    
    
    
    
    $
    8,559
    
    
    
    
    
    
    $
    32,202
    
    
    
    
    
    
    $
    157,100
    
    
    
    
    
    
    $
    203,371
  (1)
    
    Yields are presented based on adjusted cost basis of securities available
for sale.  (2)
    
    Marketable equity securities are included in the over 10 year category as
there is no maturity. 19




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##### Table of Contents



Deposits Deposits are our primary source of funding asset growth. Deposits were
$671.6 million at December 31, 2003 and averaged $645.0 million for the year
2003. This compares to year-end deposits of $593.0 and average deposits of
$572.8 in 2002. We believe we have the ability to generate deposit growth
within our local markets as loan demand dictates. Total deposits grew at a rate of 13.3% during 2003, an increase of $78.6
million, resulting from an increase in brokered deposits of $57.4 million which
were used to fund a portion of the leveraged transactions. Deposit growth was
greater than loan growth in 2003, resulting in a decrease in loan to deposit
ratio from 88.7% at year end 2002 to 82.0% at year end 2003. The increase in
deposit growth over loan growth resulted in an increase of securities of $54.2
million at the end of 2003. We will continue to target low-cost deposits to
minimize interest expense and for their potential for providing deposit fee
income. Average amount of and average rate paid for our deposits for year-end
2001, 2002 and 2003 are represented by deposit category on the table on pages
21 through 22. The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities for the year ended
December 31, 2003: Time Certificates of Deposit(In thousands)3 months or less
    
    $
    46,0093-6 months
    
    
    35,9306-12 months
    
    
    30,962Over 12 months
    
    
    90,609Total
    
    $
    203,510
 Borrowings In 2003, our bank subsidiaries began to offer repurchase agreements to
their customers. Repurchase agreements are short-term borrowings, generally
maturing overnight, where the bank sells investment securities with the intent
to repurchase them back with a predetermined maturity date. These short-term
borrowings averaged $11.2 million for 2003. See note 9 for more information
about repurchase agreements. We also use FHLB borrowings to complement our funding needs. Our
long-term strategy has been to be competitive on popular deposit products such
as money market demand accounts and certificates of deposit. FHLB advances,
while typically more costly than deposit funding, are typically the lowest cost
borrowed funds available to institutions such as our banks. As of December 31,
2003, the balance of FHLB borrowings totaled $51.9 million, of which $852,000
mature before December 31, 2004. 20




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##### Table of Contents



CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue andChanges in Interest Income and Interest Expense 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
    
    
    
    
    
    
    
    
    
    
    
    53,105
    
    
    
    
    
    
    
    Total deposits
    
    
    645,023
    
    
    
    1.93
    %
    
    
    12,434
    
    
    
    572,809
    
    
    
    2.60
    %
    
    
    14,920
    
    
    
    2,004
    
    
    
    (4,489
    )
    
    
    (2,485
    )Fed 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
    
    
    
    (2,906
    )
    
    
    922Net 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



CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue andChanges in Interest Income and Interest Expense 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. (Dollars in Thousands)December 31, 2002
    
    December 31, 2001
    
    2002 / 2001 ChangeAverage
    
    Interest
    
    Revenue/
    
    Average
    
    Interest
    
    Revenue/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate (1)
    
    TotalNet loans (2 and 3)
    
    $
    520,825
    
    
    
    7.48
    %
    
    $
    38,977
    
    
    $
    512,918
    
    
    
    9.39
    %
    
    $
    48,155
    
    
    
    742
    
    
    
    (9,920
    )
    
    
    (9,178
    )Securities
    
    
    62,135
    
    
    
    4.63
    %
    
    
    2,877
    
    
    
    32,344
    
    
    
    6.05
    %
    
    
    1,958
    
    
    
    1,802
    
    
    
    (883
    )
    
    
    919Federal funds sold
    
    
    38,060
    
    
    
    1.62
    %
    
    
    616
    
    
    
    37,222
    
    
    
    3.30
    %
    
    
    1,227
    
    
    
    28
    
    
    
    (639
    )
    
    
    (611
    )FHLB and FRB stock
    
    
    4,871
    
    
    
    4.78
    %
    
    
    233
    
    
    
    4,513
    
    
    
    8.27
    %
    
    
    373
    
    
    
    30
    
    
    
    (170
    )
    
    
    (140
    )Interest-bearing deposits in banks
    
    
    4,860
    
    
    
    2.98
    %
    
    
    145
    
    
    
    26,739
    
    
    
    4.31
    %
    
    
    1,152
    
    
    
    (943
    )
    
    
    (64
    )
    
    
    (1,007
    )Total earning assets
    
    
    630,751
    
    
    
    6.79
    %
    
    $
    42,848
    
    
    
    613,736
    
    
    
    8.61
    %
    
    $
    52,865
    
    
    
    1,659
    
    
    
    (11,676
    )
    
    
    (10,017
    )Cash and due from banks
    
    
    22,576
    
    
    
    
    
    
    
    
    
    
    
    20,295Allowance for loan losses
    
    
    (9,078
    )
    
    
    
    
    
    
    
    
    
    
    (7,027
    )Other assets
    
    
    46,361
    
    
    
    
    
    
    
    
    
    
    
    44,686Total assets
    
    $
    690,610
    
    
    
    
    
    
    
    
    
    
    $
    671,690Deposits:NOW investments
    
    $
    64,558
    
    
    
    1.20
    %
    
    $
    774
    
    
    
    40,467
    
    
    
    2.29
    %
    
    $
    925
    
    
    $
    552
    
    
    $
    (703
    )
    
    $
    (151
    )Money market investments
    
    
    116,840
    
    
    
    2.30
    %
    
    
    2,692
    
    
    
    106,954
    
    
    
    3.42
    %
    
    
    3,656
    
    
    
    338
    
    
    
    (1,302
    )
    
    
    (964
    )Savings
    
    
    23,488
    
    
    
    1.99
    %
    
    
    467
    
    
    
    15,819
    
    
    
    2.86
    %
    
    
    453
    
    
    
    219
    
    
    
    (205
    )
    
    
    14Time deposits $100,000 and over
    
    
    116,945
    
    
    
    3.70
    %
    
    
    4,326
    
    
    
    126,854
    
    
    
    5.40
    %
    
    
    6,581
    
    
    
    (535
    )
    
    
    (1,990
    )
    
    
    (2,525
    )Other time deposits
    
    
    197,873
    
    
    
    3.37
    %
    
    
    6,661
    
    
    
    211,014
    
    
    
    6.04
    %
    
    
    12,745
    
    
    
    (794
    )
    
    
    (5,290
    )
    
    
    (6,084
    )Total interest-bearing deposits
    
    
    519,704
    
    
    
    2.87
    %
    
    
    14,920
    
    
    
    501,108
    
    
    
    4.92
    %
    
    
    24,630
    
    
    
    (220
    )
    
    
    (9,490
    )
    
    
    (9,710
    )Noninterest-bearing demand deposits
    
    
    53,105
    
    
    
    
    
    
    
    
    
    
    
    49,461
    
    
    
    
    
    
    
    Total deposits
    
    
    572,809
    
    
    
    2.60
    %
    
    
    14,920
    
    
    
    550,569
    
    
    
    4.47
    %
    
    
    24,630
    
    
    
    (220
    )
    
    
    (9,490
    )
    
    
    (9,710
    )Fed Funds purchased
    
    $
    2,989
    
    
    
    1.81
    %
    
    $
    54
    
    
    $
    6,305
    
    
    
    4.23
    %
    
    $
    267
    
    
    $
    (140
    )
    
    $
    (73
    )
    
    $
    (213
    )Notes payable
    
    
    6,211
    
    
    
    7.55
    %
    
    
    469
    
    
    
    7,934
    
    
    
    8.00
    %
    
    
    635
    
    
    
    (138
    )
    
    
    (28
    )
    
    
    (166
    )FHLB advances and other
borrowings
    
    
    50,890
    
    
    
    4.99
    %
    
    
    2,538
    
    
    
    49,736
    
    
    
    5.29
    %
    
    
    2,629
    
    
    
    1
    
    
    
    (92
    )
    
    
    (91
    )Subordinated debentures
    
    
    12,000
    
    
    
    5.52
    %
    
    
    662
    
    
    
    9,600
    
    
    
    7.71
    %
    
    
    740
    
    
    
    2
    
    
    
    (80
    )
    
    
    (78
    )Total deposits and borrowed funds
    
    
    644,899
    
    
    
    2.89
    %
    
    
    18,643
    
    
    
    624,144
    
    
    
    4.63
    %
    
    
    28,901
    
    
    
    (495
    )
    
    
    (9,763
    )
    
    
    (10,258
    )Other liabilities
    
    
    5,744
    
    
    
    
    
    
    
    
    
    
    
    7,490Shareholders equity
    
    
    39,967
    
    
    
    
    
    
    
    
    
    
    
    40,056Total liabilities and shareholders
Equity
    
    $
    690,610
    
    
    
    
    
    
    
    
    
    
    $
    671,690Net interest income
    
    
    
    
    
    
    
    
    
    $
    24,205
    
    
    
    
    
    
    
    
    
    
    $
    23,964
    
    
    $
    2,154
    
    
    $
    (1,913
    )
    
    $
    241Net yield on earning assets
    
    
    
    
    
    
    3.84
    %
    
    
    
    
    
    
    
    
    
    
    3.90
    %
  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 $2,057 in 2002 and $2,283 in 2001. 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. 22




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##### Table of Contents



Equity and Capital Resources Shareholders equity totaled $54.7 million at year-end 2003. The increase
in equity is attributable to the proceeds of the issuance of common stock of
$8.9 million, net earnings of $1.1 million, and proceeds from the exercise of stock
options totaling $398,000, offset by dividends paid of $973,000 and a decrease
in other comprehensive income of $163,000. The Companys principal regulators have established minimum risk-based
capital requirements and leverage capital requirements. 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.
Subordinated debentures are allowed to be counted in Tier I capital, subject to
certain limitations. At December 31, 2003, the Companys total risk-based
capital ratio was 13.53% and its Tier I risk-based capital ratio was
approximately 12.27% compared to ratios of 12.18% and 10.92%, respectively at
December 31, 2002. At December 31, 2003, the Company had a leverage ratio of
7.86%, compared to 7.95% at December 31, 2002. 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, 2003. The Company and its subsidiaries intend
to continue to comply with these agreements, and the Company
received approval to pay its fourth quarter dividend which was paid in the
first quarter of 2004. The Company believes that the proceeds of its private
placement, 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 2004. 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. The Company issued $8 million of subordinated debentures in December 2000,
and another $4 million during July 2001. As disclosed in note 12 to the
consolidated financial statements, these securities are included in Tier I
Capital, with certain limitations. Their holders are also entitled to receive
distributions based on a variable interest rate applied to the original
investment. Items that represent common stock equivalents include 645,890 common stock
options outstanding at December 31, 2003. We plan to continue granting stock
options to selected officers, directors, and other key employees. 23




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##### Table of Contents



Return on Equity and Assets Returns on average consolidated assets and average consolidated equity for
the periods indicated are as follows: Years EndedDecember 31,2003
    
    2002
    
    2001Return on average assets
    
    
    0.14
    %
    
    
    0.08
    %
    
    
    0.03
    %Return on average equity
    
    
    2.25
    %
    
    
    1.30
    %
    
    
    0.52
    %Average equity to average assets ratio
    
    
    6.27
    %
    
    
    5.79
    %
    
    
    5.96
    %Dividend payout ratio
    
    
    88
    %
    
    
    160
    %
    
    
    397
    %
 Liquidity It is a primary concern to depositors, creditors, and regulators that the
Company and its subsidiaries demonstrate the ability to have readily available
funds sufficient to repay fully-maturing liabilities, fund loan commitments,
pay operating expenses, debt service and provide funds for dividends. Our
liquidity, represented by cash and cash equivalents, is a result of our
operating, investing and financing activities. In order to ensure funds are
available at all times, we devote resources to projecting on a monthly basis
the amount of funds that will be required and maintain relationships with a
diversified customer base so funds are accessible. Liquidity requirements can
also be met through short-term borrowings or the disposition of short-term
assets, which are generally matched to correspond to the maturity of
liabilities. Federal Reserve guidelines do not require a minimum level of
liquidity. Funds are primarily provided by our banking subsidiaries through cash
flows from operating activities, expansion of our deposit base, short-term
borrowings, and the sale or maturity of assets. Correspondent relationships
are maintained with several larger regional banks enabling our subsidiaries to
purchase federal funds when needed. Additionally, our subsidiaries have access
to liquidity at the Federal Home Loan Bank. This additional capacity is
secured by blanket collateral agreements on the mortgage loan portfolio,
specific loans and securities held by our banking subsidiaries. Sales and
maturities of securities are other sources of liquidity. Securities designated
as available for sale may be sold in response to changes in liquidity needs,
interest rates or prepayment risks. The parent companys liquidity is provided through cash dividends from its
subsidiaries and its ability to raise additional funds. On August 18, 2003,
the Company concluded a private placement of its common stock and
received $8.9 million after expenses from the subscription of 1,613,922 shares
at $5.625 per share for its common stock. The proceeds of this private
placement have been utilized to maintain capital at the Companys subsidiary
banks and for general working capital purposes. As part of the Companys
agreements with bank regulatory officials, regulatory approval must be
obtained prior to the payment of future dividends to the holding company by
certain of the Companys bank subsidiaries. The Companys bank borrowings and subordinated debentures have certain
interest payment requirements and the Company has certain operating expenses,
which require dividends or management fees from the Companys bank subsidiaries
in order to be funded. As discussed above, the Companys recent asset quality
problems have resulted in regulatory restrictions (approval) on its
subsidiaries ability to make dividends to the Company. 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 and the additional capital raised in the private placement of its
common stock described elsewhere in this document. However, the Companys
regulators have considerable discretion in 24




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##### Table of Contents



determining whether to grant required approvals, and no assurance can be given
that such approvals will be forthcoming. Off Balance Sheet Activities At December 31, 2003, the Company had unfunded loan commitments
outstanding of $72.8 million and unfunded lines of credit and letters of credit
of $26.9 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. Contractual Obligations Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1  3 years
    
    3  5 years
    
    5 yearsLong-Term Debt Obligations
    
    $
    56,552
    
    
    $
    1,652
    
    
    $
    4,600
    
    
    $
    11,600
    
    
    $
    38,700Capital Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    2,564
    
    
    
    474
    
    
    
    961
    
    
    
    931
    
    
    
    198Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-term Liabilities
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Total
    
    $
    71,116
    
    
    $
    2,126
    
    
    $
    5,561
    
    
    $
    12,531
    
    
    $
    50,898
 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 2003 follows: 25




---



##### Table of Contents



Dollars in thousands
    
    1-90 Days
    
    91-365 Days
    
    1-5 years
    
    Over 5 Years
    
    TotalInterest earning assets:Loans, net
    
    $
    225,778
    
    
    $
    83,743
    
    
    $
    203,791
    
    
    $
    37,253
    
    
    $
    550,565Securities available for sale
    
    
    12,461
    
    
    
    28,759
    
    
    
    65,676
    
    
    
    33,948
    
    
    
    140,844Securities held to maturity
    
    
    3,137
    
    
    
    7,958
    
    
    
    24,452
    
    
    
    26,980
    
    
    
    62,527Federal funds sold
    
    
    15,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,081Interest-earning deposits
    
    
    3,099
    
    
    
    460
    
    
    
    392
    
    
    
    95
    
    
    
    4,046Total interest earning assets
    
    
    259,556
    
    
    
    120,920
    
    
    
    294,311
    
    
    
    98,276
    
    
    
    773,063Interest bearing liabilities:Interest bearing demand
deposits
    
    
    189,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,257Savings deposits
    
    
    29,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,734Time deposits
    
    
    94,091
    
    
    
    147,877
    
    
    
    142,645
    
    
    
    
    
    
    
    384,613FHLB borrowings
    
    
    0
    
    
    
    852
    
    
    
    13,000
    
    
    
    38,000
    
    
    
    51,852Notes payable
    
    
    50
    
    
    
    750
    
    
    
    3,200
    
    
    
    700
    
    
    
    4,700Federal funds purchased and repurchase agreements
    
    
    33,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,886Subordinated debentures
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Total interest bearing liabilities
    
    
    359,018
    
    
    
    149,479
    
    
    
    158,845
    
    
    
    38,700
    
    
    
    706,042Rate sensitive gap
    
    
    (99,462
    )
    
    
    (28,559
    )
    
    
    135,466
    
    
    
    59,576
    
    
    
    67,021Rate sensitive cumulative gap
    
    
    (99,462
    )
    
    
    (128,021
    )
    
    
    7,445
    
    
    
    67,021Cumulative gap as a percentage
of earnings assets
    
    
    -12.87
    %
    
    
    -16.56
    %
    
    
    0.96
    %
    
    
    8.67
    %
 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 77.3% of net revenues (net
interest income and noninterest income) for 2003. 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. Although our gap table shows a
liability sensitive bias, our position is a bias towards asset sensitivity.
The change in rate our deposit base realizes in relation to the total change in
market interest rates is significantly less than that of the 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. At
December 31, 2004, with rates unchanged, net interest income is projected to
increase 1.78% over 2003, resulting from the continued repricing of funding
sources. The 100 basis points immediate rise in interest rates produces a
6.81% increase in net interest income. This assumes managements ability to
control interest expense. 26




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##### Table of Contents



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. 
 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Our primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of our assets and liabilities, and the
market value of all interest-earning assets and interest-bearing liabilities,
other than those which possess a short term to maturity. Based upon the nature
of our operations, we do not maintain any foreign currency exchange or
commodity price risk. The following table provides information about our financial instruments
that are sensitive to changes in interest rates as of December 31, 2003. These
market risk sensitive instruments have been entered into by us for purposes
other than trading. We do not hold market risk sensitive instruments for
trading purposes. Amounts described below do not take into account possible
loan, security, or interest bearing deposit renewals or repricing for such
renewals. The information provided by this table should be read in connection
with our audited consolidated financial statements and Managements Discussion
and Analysis of Financial Condition and Results of Operation. 27




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##### Table of Contents



EXPECTED MATURITY DATEYEAR ENDING DECEMBER 31,2005 to
    
    2007 to
    
    2009
    
    
    
    
    
    Fair(Dollars in Thousands)
    
    2004
    
    2006
    
    2008
    
    Thereafter
    
    Total
    
    ValueINTEREST-EARNING ASSETS:Loans, net of unearned
interest:(1)Variable rate
    
    $
    216,268
    
    
    
    5,508
    
    
    
    2,287
    
    
    
    147
    
    
    
    224,211
    
    
    
    223,632Average interest rate
    
    
    4.60
    %
    
    
    5.92
    %
    
    
    4.38
    %
    
    
    0.00
    %
    
    
    4.63
    %Fixed rate
    
    $
    93,253
    
    
    
    109,124
    
    
    
    86,872
    
    
    
    37,105
    
    
    
    326,354
    
    
    
    327,754Average interest rate
    
    
    6.56
    %
    
    
    7.01
    %
    
    
    6.47
    %
    
    
    4.92
    %
    
    
    6.50
    %Securities(2)
    
    $
    52,312
    
    
    
    57,504
    
    
    
    32,624
    
    
    
    60,928
    
    
    
    203,368
    
    
    
    203,828Average interest rate
    
    
    3.59
    %
    
    
    4.42
    %
    
    
    4.44
    %
    
    
    4.68
    %
    
    
    4.29
    %Federal funds sold
    
    $
    15,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,081
    
    
    
    15,081Average interest rate
    
    
    1.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.00
    %Interest-earning deposits
in financial institutions
    
    $
    3,559
    
    
    
    392
    
    
    
    0
    
    
    
    95
    
    
    
    4,046
    
    
    
    4,046Average interest rate
    
    
    2.38
    %
    
    
    3.54
    %
    
    
    0.00
    %
    
    
    5.00
    %
    
    
    2.55
    %INTEREST-BEARING LIABILITIES:Interest-bearing deposits
    
    $
    460,665
    
    
    
    83,659
    
    
    
    59,279
    
    
    
    
    
    
    
    603,603
    
    
    
    587,446Average interest rate
    
    
    1.49
    %
    
    
    3.42
    %
    
    
    3.39
    %
    
    
    
    
    
    
    1.94
    %Federal funds purchased
    
    $
    7,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,336
    
    
    
    7,336Average interest rate
    
    
    1.65
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.65
    %Other borrowings
    
    $
    13,652
    
    
    
    4,600
    
    
    
    11,600
    
    
    
    38,700
    
    
    
    68,352
    
    
    
    72,769Average interest rate
    
    
    4.83
    %
    
    
    5.36
    %
    
    
    5.73
    %
    
    
    4.84
    %
    
    
    5.02
    %
    (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. 28




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT AUDITORS The Board of Directors
Civitas BankGroup, Inc.
Franklin, Tennessee We have audited the consolidated balance sheets of Civitas BankGroup, Inc. as
of December 31, 2003 and 2002, and the related consolidated statements of
income, changes in shareholders equity, and cash flows for the years then
ended. 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 auditing standards generally
accepted in the United States of America. 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 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Civitas BankGroup, Inc. as of December 31, 2003 and 2002, and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC Brentwood, Tennessee
March 5, 2004 29




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors
Civitas BankGroup, Inc.
Franklin, Tennessee We have audited the consolidated statements of income, changes
in shareholders equity, and cash flows of Civitas BankGroup, Inc. for the year ended December 31, 2001. 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 audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 audit provides a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Civitas BankGroup, Inc. for the
year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. /s/ Heathcott & Mullaly, P.C. Brentwood, Tennessee
March 1, 2002 30




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##### Table of Contents



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




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##### Table of Contents



CIVITAS BANKGROUP, INC.
Consolidated Statements of Income
Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except share and per share amounts)  2003
    
    2002
    
    2001Interest income:Loans, including fees
    
    $
    35,542
    
    
    $
    38,977
    
    
    $
    48,155Securities
    
    
    5,302
    
    
    
    2,877
    
    
    
    1,958Deposits in financial institutions
    
    
    104
    
    
    
    145
    
    
    
    1,152Federal funds sold
    
    
    102
    
    
    
    616
    
    
    
    1,227Federal Home Loan Bank dividends
    
    
    226
    
    
    
    233
    
    
    
    373Total interest income
    
    
    41,276
    
    
    
    42,848
    
    
    
    52,865Interest expense:Deposits
    
    
    12,434
    
    
    
    14,920
    
    
    
    24,630Federal funds purchased and repurchase agreements
    
    
    117
    
    
    
    54
    
    
    
    267Advances
from Federal Home Loan Bank
    
    
    2,516
    
    
    
    2,538
    
    
    
    2,629Subordinated
debentures
    
    
    591
    
    
    
    662
    
    
    
    740Notes payable
    
    
    419
    
    
    
    469
    
    
    
    635Total interest expense
    
    
    16,077
    
    
    
    18,643
    
    
    
    28,901Net interest income
    
    
    25,199
    
    
    
    24,205
    
    
    
    23,964Provision for loan losses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Net interest income after provision for loan losses
    
    
    21,620
    
    
    
    17,405
    
    
    
    17,587Noninterest income:Service charges on deposit accounts
    
    
    3,875
    
    
    
    3,817
    
    
    
    3,551Other service charges, commissions and fees
    
    
    1,793
    
    
    
    2,298
    
    
    
    1,877Mortgage banking activities
    
    
    1,690
    
    
    
    1,645
    
    
    
    1,328Net gain on securities transactions
    
    
    274
    
    
    
    461
    
    
    
    Net gain (loss) on sale of real estate
    
    
    (224
    )
    
    
    190
    
    
    
    10Net gain on sale of SBA loans
    
    
    
    
    
    
    37
    
    
    
    282Total noninterest income
    
    
    7,408
    
    
    
    8,448
    
    
    
    7,048Noninterest expense:Salaries and employee benefits
    
    
    13,967
    
    
    
    12,461
    
    
    
    12,137Occupancy and equipment
    
    
    3,697
    
    
    
    3,374
    
    
    
    3,367Data processing expense
    
    
    1,499
    
    
    
    1,505
    
    
    
    1,606Other real estate expense
    
    
    714
    
    
    
    652
    
    
    
    479Deposit insurance premiums
    
    
    278
    
    
    
    130
    
    
    
    152Other
    
    
    7,177
    
    
    
    6,982
    
    
    
    8,273Total noninterest expenses
    
    
    27,332
    
    
    
    25,104
    
    
    
    24,408Income before income taxes
    
    
    1,696
    
    
    
    749
    
    
    
    227Income tax expense
    
    
    595
    
    
    
    228
    
    
    
    18Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Net earnings per share  basic
    
    $
    0.07
    
    
    $
    0.04
    
    
    
    0.02Net earnings per share  diluted
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.01
 See accompanying notes to consolidated financial statements. 32




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##### Table of Contents



CIVITAS BANKGROUP, INC.
Consolidated Statements of Changes in Shareholders Equity
Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except share and per share amounts)  Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedOther
    
    TotalPaid-In
    
    Retained
    
    Comprehensive
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    EquityBalance at January 1, 2001
    
    
    6,893,628
    
    
    $
    3,447
    
    
    $
    25,526
    
    
    $
    10,682
    
    
    $
    (179
    )
    
    $
    39,476Purchase and retirement of common stock
    
    
    (47,000
    )
    
    
    (24
    )
    
    
    (259
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )Issuance of common stock in connection with the
acquisition of minority interest of Bank of Mason
    
    
    53,250
    
    
    
    27
    
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    480Two for one stock split
    
    
    6,899,878
    
    
    
    3,450
    
    
    
    (3,450
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    8,480
    
    
    
    4
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    23Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (830
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    209Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $146 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    238Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447Balance at December 31, 2001
    
    
    13,808,236
    
    
    
    6,904
    
    
    
    22,289
    
    
    
    10,061
    
    
    
    59
    
    
    
    39,313Issuance of common stock
    
    
    1,342,710
    
    
    
    671
    
    
    
    4,700
    
    
    
    
    
    
    
    
    
    
    
    5,371Exercise of stock options
    
    
    231,680
    
    
    
    116
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    631Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833
    )
    
    
    
    
    
    
    (833
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    521
    
    
    
    
    
    
    
    521Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $307 in income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    754
    
    
    
    754Less: adjustment for gains included in net income,
net of $177 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284
    )
    
    
    (284
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    991Balance at December 31, 2002
    
    
    15,382,626
    
    
    
    7,691
    
    
    
    27,504
    
    
    
    9,749
    
    
    
    529
    
    
    
    45,473Issuance of common stock
    
    
    1,620,330
    
    
    
    811
    
    
    
    8,132
    
    
    
    
    
    
    
    
    
    
    
    8,943Exercise of stock options
    
    
    132,100
    
    
    
    66
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    360Dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (973
    )
    
    
    
    
    
    
    (973
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,101
    
    
    
    
    
    
    
    1,101Other comprehensive income:Change in unrealized loss on securities
available for sale, net of $2 in income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Less: adjustment for gains included in net income,
net of $105 in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169
    )
    
    
    (169
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    938Balance at December 31, 2003
    
    
    17,135,056
    
    
    $
    8,568
    
    
    $
    35,930
    
    
    $
    9,877
    
    
    $
    366
    
    
    $
    54,741
 See accompanying notes to consolidated financial statements 33




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CIVITAS BANKGROUP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except share and per share amounts)  2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Adjustments to reconcile net income to net cash from operating activities:Provision for loan losses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Depreciation and amortization
    
    
    1,779
    
    
    
    1,698
    
    
    
    1,876Operations of unconsolidated affiliates
    
    
    (465
    )
    
    
    150
    
    
    
    505Origination of mortgage loans held for sale
    
    
    (79,912
    )
    
    
    (61,824
    )
    
    
    (47,277
    )Proceeds from sale of mortgage loans held for sale
    
    
    79,178
    
    
    
    60,464
    
    
    
    42,396Federal Home Loan Bank stock dividend
    
    
    (226
    )
    
    
    (233
    )
    
    
    (373
    )Net gain on securities transactions
    
    
    (274
    )
    
    
    (461
    )
    
    
    Net gain/loss on sale of other real estate
    
    
    224
    
    
    
    (190
    )
    
    
    (10
    )Net change in:Deferred income tax benefits
    
    
    221
    
    
    
    323
    
    
    
    (1,375
    )Accrued interest receivable
    
    
    26
    
    
    
    771
    
    
    
    951Accrued interest payable and other liabilities
    
    
    (550
    )
    
    
    (1,038
    )
    
    
    (716
    )Other, net
    
    
    1,425
    
    
    
    (9,393
    )
    
    
    (248
    )Total adjustments
    
    
    5,005
    
    
    
    (2,933
    )
    
    
    2,106Net cash from operating activities
    
    
    6,106
    
    
    
    (2,412
    )
    
    
    2,315Cash flows from investing activities:Net change in interest-bearing deposits in financial institutions
    
    
    5,420
    
    
    
    (4,903
    )
    
    
    10,425Purchases of securities available for sale
    
    
    (148,961
    )
    
    
    (83,088
    )
    
    
    (38,118
    )Proceeds from maturities, pay downs, and calls of securities
available for sale
    
    
    72,310
    
    
    
    23,918
    
    
    
    11,108Proceeds from sales of securities available for sale
    
    
    15,038
    
    
    
    23,865
    
    
    
    Purchases of securities held to maturity
    
    
    (70,645
    )
    
    
    (7,097
    )
    
    
    (11,632
    )Proceeds from maturities, pay downs, and calls of securities
held to maturity
    
    
    19,394
    
    
    
    8,344
    
    
    
    7,322Net change in loans
    
    
    (34,906
    )
    
    
    (9,431
    )
    
    
    (21,768
    )Investments in unconsolidated affiliates
    
    
    (395
    )
    
    
    (1,118
    )
    
    
    (212
    )Purchases of premises and equipment, net
    
    
    (693
    )
    
    
    (1,193
    )
    
    
    (2,166
    )Proceeds from sale of real estate
    
    
    9,384
    
    
    
    9,710
    
    
    
    3,942Net cash from investing activities
    
    
    (134,054
    )
    
    
    (40,993
    )
    
    
    (41,099
    )Cash flows from financing activities:Net change in deposits
    
    
    78,638
    
    
    
    43,574
    
    
    
    25,282Federal funds purchased
    
    
    1,000
    
    
    
    (1,675
    )
    
    
    (7,900
    )Proceeds from Federal Home Loan Bank advances
    
    
    1,000
    
    
    
    1,300
    
    
    
    24,652Repayments of Federal Home Loan Bank advances
    
    
    
    
    
    
    (1,300
    )
    
    
    (20,011
    )Proceeds from repurchase agreements
    
    
    32,886
    
    
    
    
    
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    Repayments of notes payable
    
    
    (800
    )
    
    
    (2,159
    )
    
    
    (1,090
    )Proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    
    
    
    
    4,000Dividends paid
    
    
    (927
    )
    
    
    (830
    )
    
    
    (795
    )Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (283
    )Proceeds from issuance of common stock
    
    
    9,303
    
    
    
    6,002
    
    
    
    23Net cash from financing activities
    
    
    121,100
    
    
    
    44,912
    
    
    
    23,878Net change in cash and cash equivalents
    
    
    (6,848
    )
    
    
    2
    
    
    
    (14,906
    )Cash and cash equivalents at beginning of year
    
    
    41,906
    
    
    
    40,399
    
    
    
    55,305Cash and cash equivalents at end of year
    
    $
    35,058
    
    
    $
    41,906
    
    
    $
    40,399Supplemental disclosure of cash flow information:Interest paid
    
    $
    16,856
    
    
    $
    19,508
    
    
    $
    29,601Income taxes paid
    
    
    30
    
    
    
    1,253
    
    
    
    1,627Non-Cash Activities:Issuance of common stock  due to acquisitions
    
    
    
    
    
    
    
    
    
    
    480Assets acquired through foreclosure
    
    
    7,063
    
    
    
    9,388
    
    
    
    8,130
 See accompanying notes to consolidated financial statements 34




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Civitas BankGroup, Inc. conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking and financial services industry. The significant
policies are summarized as follows: Basis of Presentation:The accompanying consolidated financial statements
include the accounts of Civitas BankGroup, Inc. (the Company) and its
subsidiaries. Material intercompany accounts and transactions have been
eliminated in consolidation. As further discussed in Note 12, a trust that had
previously been consolidated with the company is now reported separately. Nature of Operations:Substantially all of the assets, liabilities, and
operations presented in the consolidated financial statements are attributable
to the Companys five subsidiary banks: Cumberland Bank, BankTennessee,
Cumberland Bank South, Bank of Dyer, and Bank of Mason (collectively, the
Banks). The Banks provide a variety of banking services to individuals and
businesses through their 23 branches located across ten counties in Middle and
West Tennessee. Their primary deposit products are demand deposits, savings
deposits, and certificates of deposit, and their primary lending products are
commercial business, real estate mortgage, and installment loans. Other
financial services such as credit insurance, investment products, consumer loan
services, and property and casualty insurance are also provided by subsidiaries
or divisions of the Banks. Use of Estimates:The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Disclosures provided and
actual results could differ from those estimates. The allowance for loan
losses and fair value of financial instruments are particularly subject to
change. Cash Flows:Cash and cash equivalents include cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows
are reported for loans, deposit and short-term borrowing transactions. Cash and Due From Banks:Deposits in excess of $100 are not insured by the
Federal Deposit Insurance Corporation. Although the Company has several
deposit accounts with other banks in excess of this limit as of December 31, 2003, credit risk
is considered nominal. Included in cash and due from banks are legal reserve requirements, which must
be maintained on an average basis in the form of cash and balances due from the
Federal Reserve Banks. Cash on hand or on deposit with the Federal
Reserve Bank of $921 was required to meet regulatory reserve and clearing
requirements at year-end 2003. These balances do not earn interest. 35




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Securities:Debt securities are classified as held to maturity and carried at
amortized cost when the Company has the positive intent and ability to hold
them to maturity. Debt securities are classified as available for sale when
they might be sold before maturity. Securities available for sale are carried
at fair value, with unrealized holding gains and losses reported in other
comprehensive income. Equity securities with readily determinable fair values
are classified as available for sale. Interest income includes amortization of purchase premium or discount. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary. Loans:Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on
mortgage and commercial loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection.
Consumer loans are typically charged off no later than 180 days pas due. In
all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful. All interest accrued, but not
received, for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. Allowance for Loan Losses:The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. The Company
estimates the allowance balance required using past loan loss experience, the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in managements judgment,
should be charged off. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance for loan loss
reserve. The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as
impaired. The general component covers non-classified loans and is based on historical loss experience adjusted
for current factors. A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loans existing rate or at the fair value of collateral if
repayment is expected solely 36




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) from the collateral. Large groups of smaller balance homogeneous loans, such
as consumer and residential real estate loans, are collectively evaluated for
impairment, and accordingly, they are not separately identified for impairment
disclosures. Mortgage Banking Activities:The Banks originate mortgage loans for sale and
these loans are generally sold at origination. Loans held for sale are carried
at the lower of cost or fair value, on an aggregate basis. Origination fees
are recorded as income when the loans are sold to third party investors. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. Premises and Equipment:Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation has been computed
on straight-line method, based on the estimated useful lives of the respective
asset which range from 3 to 10 years for furniture, fixtures, and equipment and
5 to 40 years for buildings and improvements. Restricted Equity Securities:These amounts are stated at cost, and consist
primarily of Federal Home Loan Bank and Federal Reserve Bank Stock. Foreclosed Assets:Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. Goodwill: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets
and liabilities and identifiable intangible assets. Upon adopting new
accounting guidance in 2002, the Company ceased amortizing goodwill. Goodwill
is assessed at least annually for impairment and any such impairment will be
recognized in the period identified. Long-term Assets:Premises and equipment, goodwill, other intangible assets,
and other long-term assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair value. Loan Commitments and Related Financial Instruments:Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are
recorded when they are funded. Instruments, such as standby letters of credit,
that are considered financial guarantees in accordance with FASB Interpretation
No. 45 are recorded at fair value. 37




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Stock Compensation:Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation. 2003
    
    2002
    
    2001Net income as reported
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (208
    )
    
    
    (130
    )
    
    
    (202
    )Pro forma net income
    
    $
    893
    
    
    $
    391
    
    
    $
    7Basic earnings per share as reported
    
    
    .07
    
    
    
    0.04
    
    
    
    0.02Pro forma basic earnings per share
    
    
    .06
    
    
    
    0.01
    
    
    
    0.00Diluted earnings per share as reported
    
    
    .07
    
    
    
    0.04
    
    
    
    0.01Pro forma diluted earnings per share
    
    
    .05
    
    
    
    0.01
    
    
    
    0.01
 The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.44
    %
    
    
    4.71
    %
    
    
    4.31
    %Expected option life
    
    
    7 yrs.
    
    
    7 yrs.
    
    7 yrs.Expected stock price volatility
    
    
    8.8
    %
    
    
    18
    %
    
    
    18
    %Dividend yield
    
    
    0.93
    %
    
    
    1.50
    %
    
    
    1.46
    %
 Income Taxes:Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized. Fair Value of Financial Instruments:Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates. Earnings Per Common Share:Basic earnings per common share is net income
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. 38




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Comprehensive Income:Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as separate
components of equity. Operating Segments:While the chief decision-makers monitor the revenue
streams of the various products and services, the identifiable segments are not
material and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating segment. Adoption of New Accounting Standards:During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations,FASB Statement 145,
Rescission of FAS Statement 4, 44 and 64, Amendment of FAS Statement 13, and
Technical Corrections,FASB Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities,FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Statement 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation
46, Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Companys operating results or financial
condition. Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
than will have a material effect on the financial statements. Reclassifications:Certain reclassifications have been made to prior year
amounts to conform to the current year presentation. Dividend Restrictions:Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the banks to the Company or
by the Company to shareholders. See Note 14 for more specific disclosure related to
dividend restrictions. NOTE 2  INTEREST BEARING DEPOSITS At December 31, 2003, the Company had demand deposits totaling $2.3 million at
the Federal Home Loan Bank (FHLB). Additionally, the Company held $1.4 million
in certificates of deposit with non-affiliated banks. 39




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




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




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 3  SECURITIES(Continued) Securities with unrealized loss at year end 2003 and the length of time they
have been in continuous unrealized loss positions are as follows: Less than 12 Months
    
    12 Months or More
    
    TotalDescription of Securities
    
    Fair Value
    
    Unrealized Loss
    
    Fair Value
    
    Unrealized Loss
    
    Fair Value
    
    Unrealized LossU.S. Treasury and
Government Agencies
    
    $
    1,598
    
    
    $
    (7
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,598
    
    
    $
    (7
    )Obligations of State and
Political
Subdivisions
    
    
    7,437
    
    
    
    (284
    )
    
    
    
    
    
    
    
    
    
    
    7,437
    
    
    
    (284
    )Mortgage Backed
    
    
    57,785
    
    
    
    (343
    )
    
    
    1,062
    
    
    
    (11
    )
    
    
    58,847
    
    
    
    (354
    )Equity Securities
    
    
    
    
    
    
    
    
    
    
    1,091
    
    
    
    (102
    )
    
    
    1,091
    
    
    
    (102
    )Total temporarily
impaired
    
    $
    66,820
    
    
    $
    (634
    )
    
    $
    2,153
    
    
    $
    (113
    )
    
    $
    68,973
    
    
    $
    (747
    )
 Unrealized losses on securities have not been recognized into income because
the securities are of high credit quality, management has the intent and
ability to hold for the foreseeable future, and the decline in fair value is
largely due to increases in market interest rates. The fair value is expected
to recover as the securities approach their maturity date or market
rate change. NOTE 4  LOANS A summary of loans outstanding by category follows: 2003
    
    2002Real estate:Construction and development
    
    $
    83,211
    
    
    $
    71,907One-to-four family residential properties
    
    
    158,116
    
    
    
    169,220Commercial
    
    
    106,483
    
    
    
    93,894Commercial
    
    
    157,470
    
    
    
    145,409Consumer
    
    
    39,258
    
    
    
    44,978Other
    
    
    6,385
    
    
    
    1,103Total loans
    
    
    550,923
    
    
    
    526,511Net unearned income and deferred fees
    
    
    (358
    )
    
    
    (296
    )Subtotal
    
    
    550,565
    
    
    
    526,215Allowance for loan losses
    
    
    (8,414
    )
    
    
    (9,062
    )Loans, net
    
    $
    542,151
    
    
    $
    517,153
 Loans serviced for others, which are not included in net loans, totaled $72,238
and $74,139 at December 31, 2003 and 2002. Loans held for
sale totaled $1,651 and $10,442 at December 31, 2003 and 2002 and are
included in one-to-four family residential properties in the table
above. 42




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 4  LOANS(Continued) Certain parties (principally, directors and officers of the Company or the
Banks, including their affiliates, families, and companies in which they hold
ten percent or more ownership) were customers of, and had loans and other
transactions with the Banks in the ordinary course of business. The
outstanding balances of such loans totaled $5,737 and $3,922 at December 31,
2003 and December 31, 2002. These loan transactions were made on
substantially the same terms as those prevailing at the time for comparable
loans to other persons. They did not involve more than the normal risk of
collectibility or present other unfavorable features. Activity in the allowance for loan losses was as follows: 2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    9,062
    
    
    $
    9,023
    
    
    $
    6,137Allowance for loan losses due to acquisition
    
    
    
    
    
    
    
    
    
    
    Provision charged to operating expenses
    
    
    3,579
    
    
    
    6,800
    
    
    
    6,377Loans charged off
    
    
    (5,143
    )
    
    
    (7,399
    )
    
    
    (3,903
    )Recoveries on previously charged off loans
    
    
    916
    
    
    
    638
    
    
    
    412Balance at end of year
    
    $
    8,414
    
    
    $
    9,062
    
    
    $
    9,023
 Impaired loans were as follows: 2003
    
    2002Year-end loans with no allocated allowance for loan losses
    
    $
    422
    
    
    $
    Year-end loans with allocated allowance for loan losses
    
    
    20,189
    
    
    
    18,435Total
    
    $
    20,611
    
    
    $
    18,435Amount of the allowance for loan losses allocated
    
    $
    3,772
    
    
    $
    2,765
 2003
    
    2002
    
    2001Average of impaired loans during the year
    
    $
    17,969
    
    
    $
    15,701
    
    
    $
    10,649
 Cash-basis interest income recognized on impaired loans for 2003, 2002 and 2001
was immaterial. 2003
    
    2002
    
    2001Nonperforming loans were as follows:Loans past due over 90 days still on accrual
    
    $
    3
    
    
    $
    
    
    
    
    1,168Nonaccrual loans
    
    
    12,362
    
    
    
    18,435
    
    
    
    12,625
 Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category. 43




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 5  PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 2003
and 2002. 2003
    
    2002Land
    
    $
    6,027
    
    
    $
    5,666Buildings and improvements
    
    
    15,568
    
    
    
    15,993Leasehold improvements
    
    
    844
    
    
    
    816Furniture, fixtures and equipment
    
    
    9,293
    
    
    
    8,291Automobiles
    
    
    157
    
    
    
    270Construction in process
    
    
    32
    
    
    
    51131,921
    
    
    
    31,547Less: Accumulated depreciation
    
    
    9,641
    
    
    
    8,181Net premises and equipment
    
    $
    22,280
    
    
    $
    23,366
 Depreciation expense related
to premises and equipment amounted to $1,779 in 2003, $1,698 in 2002 and
$1,876 in 2001. The Company has entered into various non-cancelable operating lease
arrangements in connection with its operating locations. Based upon these
agreements at December 31, 2003, future minimum lease commitments before
considering renewal options that generally are present are as follows: 2004
    
    $
    4742005
    
    
    4802006
    
    
    4822007
    
    
    4922008
    
    
    438Thereafter
    
    
    198$
    2,564
 Rent expense relating to these agreements which are included in occupancy
expense amounted to $381 in 2003, $264 in 2002 and $235 in 2001. During 2003, the subsidiaries of the Company leased certain premises from
related parties. The related expense from the leases totaled approximately
$19. 44




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 6  INVESTMENT IN UNCONSOLIDATED AFFILIATES Investments in unconsolidated affiliates consist of the following at December
31, 2003 and 2002: 2003
    
    2002Investment
in The Murray Banc Holding Company (50% ownership)
    
    $
    4,039
    
    
    $
    3,493Investment in Insurors Bank of Tennessee (50% ownership)
    
    
    2,677
    
    
    
    2,332Other investments in other unconsolidated affiliates
    
    
    261
    
    
    
    338$
    6,977
    
    
    $
    6,163
 The Company uses the equity
method of accounting for its investments in unconsolidated affiliates. The initial investment is recorded
at cost and the carrying amount of the investment is increased or decreased by
the Companys proportionate share of earnings or losses. Any dividends received
are recorded as a reduction in the investment. Condensed financial information for The Murray Banc Holding Company (TMB) and
Insurors Bank of Tennessee (IBOT) are as follows as of December 31, 2003 and
2002: CONDENSED BALANCE SHEETS TMB
    
    IBOT2003
    
    2002
    
    2003
    
    2002ASSETS:Cash and due from banks
    
    $
    4,367
    
    
    $
    4,152
    
    
    $
    1,716
    
    
    $
    757Federal funds sold
    
    
    6,991
    
    
    
    8,488
    
    
    
    
    
    
    
    325Securities available for sale
    
    
    21,320
    
    
    
    25,837
    
    
    
    11,170
    
    
    
    6,191Securities held to maturity
    
    
    31,491
    
    
    
    
    
    
    
    
    
    
    
    Loans, net
    
    
    66,028
    
    
    
    54,631
    
    
    
    41,319
    
    
    
    33,120Premises and equipment, net
    
    
    2,806
    
    
    
    2,303
    
    
    
    364
    
    
    
    515Accrued interest receivable
    
    
    738
    
    
    
    583
    
    
    
    167
    
    
    
    151Restricted equity securities
    
    
    337
    
    
    
    324
    
    
    
    473
    
    
    
    433Other assets
    
    
    4,134
    
    
    
    123
    
    
    
    351
    
    
    
    199Total assets
    
    $
    138,212
    
    
    $
    96,441
    
    
    $
    55,560
    
    
    $
    41,691LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Total deposits
    
    $
    115,532
    
    
    $
    87,541
    
    
    $
    43,319
    
    
    $
    30,971Borrowings
    
    
    9,894
    
    
    
    1,141
    
    
    
    6,731
    
    
    
    5,791Accrued interest payable
    
    
    303
    
    
    
    333
    
    
    
    73
    
    
    
    206Subordinated notes and debentures
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    406
    
    
    
    441
    
    
    
    83
    
    
    
    59Total liabilities
    
    
    130,135
    
    
    
    89,456
    
    
    
    50,206
    
    
    
    37,027Shareholders equity
    
    
    8,077
    
    
    
    6,985
    
    
    
    5,354
    
    
    
    4,664Total liabilities and shareholders equity
    
    $
    138,212
    
    
    $
    96,441
    
    
    $
    55,560
    
    
    $
    41,691
 45




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 6  INVESTMENT IN UNCONSOLIDATED AFFILIATES(continued) CONDENSED INCOME STATEMENT TMB
    
    IBOT2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Net interest income
    
    $
    2,969
    
    
    $
    2,482
    
    
    $
    1,835
    
    
    $
    1,538
    
    
    $
    1,077
    
    
    $
    419Provision for loan losses
    
    
    166
    
    
    
    128
    
    
    
    373
    
    
    
    75
    
    
    
    256
    
    
    
    Noninterest income
    
    
    976
    
    
    
    662
    
    
    
    492
    
    
    
    221
    
    
    
    77
    
    
    
    16Noninterest expense
    
    
    2,893
    
    
    
    2,249
    
    
    
    1,778
    
    
    
    1,649
    
    
    
    1,554
    
    
    
    1,622Income tax expense
    
    
    275
    
    
    
    261
    
    
    
    51
    
    
    
    (130
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    611
    
    
    $
    506
    
    
    $
    125
    
    
    $
    165
    
    
    $
    (656
    )
    
    $
    (1,187
    )
 NOTE 7  GOODWILL Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows: 2003
    
    2002
    
    2001Reported net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Add back: goodwill amortization, net of income tax
    
    
    
    
    
    
    
    
    
    
    70Adjusted net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    279Basic earnings per share:Reported net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.01Adjusted net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.03Diluted earnings per share:Reported net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.01Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.01Adjusted net income
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02
 46




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 8  DEPOSITS A summary of deposits at December 31, 2003 and 2002 is as follows: 2003
    
    2002Noninterest-bearing demand
    
    $
    68,032
    
    
    $
    56,639Interest-bearing demand
    
    
    189,257
    
    
    
    193,033Savings
    
    
    29,734
    
    
    
    28,562Certificates of deposit of $100 or more
    
    
    203,510
    
    
    
    120,796Other time
    
    
    181,103
    
    
    
    193,968Total deposits
    
    $
    671,636
    
    
    $
    592,998
 Scheduled maturities of time deposits for the next five years were as follows: 2004
    
    $
    241,6752005
    
    
    51,7482006
    
    
    31,9112007
    
    
    34,5012008
    
    
    24,778
 NOTE 9  SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured by securities with a
carry amount of $29,590 at year-end 2003. There were no securities sold under
agreement to repurchase in 2002. Securities sold under agreements to repurchase are financing arrangements that
mature daily. At maturity, the securities underlying the agreements are
returned to the Company. Information concerning securities sold under
agreements to repurchase is summarized as follows: 2003Average daily balance during the year
    
    $
    11,223Average interest rate during the year
    
    
    0.89
    %Maximum month-end balance during the year
    
    $
    25,232Weighted average interest rate at year-end
    
    
    0.80
    %
 47




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 10  ADVANCES FROM FEDERAL HOME LOAN BANK The Federal Home Loan Bank (FHLB) of Cincinnati advances funds to the Company
with the requirement that the advances are secured by qualifying loans,
essentially home mortgages (1-4 family residential). To participate in this
program, the Company is required to be a member of the Federal Home Loan Bank
and own stock in the FHLB. The Company has $4.4 million of such stock at
December 31, 2003 to satisfy this requirement. At December 31, 2003 and
2002, advances from the FHLB totaled $51,852 and
$50,852. The interest rates on these advances ranged from 2.72% to
5.45%. Qualifying loans totaling $121,631 and $94,117 were pledged as security
under a pledge agreement with the FHLB at December 31, 2003 and 2002.
Securities totaling $16,814 and $21,670 were also pledged for these borrowings
at December 31, 2003 and 2002. Maturities of the advances from FHLB at December 31, 2003 are as follows: 2004
    
    $
    8522005
    
    
    1,0002006
    
    
    2,0002007
    
    
    2008
    
    
    10,000Later years
    
    
    38,000$
    51,852
 48




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 11  NOTES PAYABLE Notes payable consist of the
following at year-end: 2003
    
    2002$2,000
credit facility from a lending
institution which bears a variable
rate of interest equal to 90 day LIBOR Rate plus
225 basis points. This note is
currently at its floor rate of 7.50%.
Interest is payable quarterly.
Principal is payable in forty equal
quarterly payments of $50. The note
is secured by all of the outstanding
shares of the capital stock of
Cumberland Bank, BankTennessee,
Cumberland Bank South, The Bank of
Dyer and any shares of capital stock
the Company owns in any other banks.
    
    $
    1,700
    
    
    $
    1,900$6,000 credit from a lending
institution which bears interest at a
rate of 7.50%. Interest is payable
quarterly and principal is payable in
ten annual installments of $600
commencing April 1, 2000. The note is
secured by 100% of the common stock of
Cumberland Bank, BankTennessee, and
Cumberland Bank South.
    
    
    3,000
    
    
    
    3,600$
    4,700
    
    
    $
    5,500
 Minimum annual principal payments for future years are as follows: 2004
    
    $
    8002005
    
    
    8002006
    
    
    8002007
    
    
    8002008
    
    
    800Later years
    
    
    700$
    4,700
 The Company has agreed to certain covenants in connection with the notes
payable. These covenants include, among other
things, minimum financial ratios for the Banks. The Banks were in
compliance with all of the provisions of the loan covenants as of December 31,
2003. 49




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 12  SUBORDINATED DEBENTURES On December 29, 2000, Civitas BankGroup, Inc., through Cumberland Capital Trust
I and with the assistance of its Placement Agent, sold to institutional
investors $8,000,000 of capital securities. Cumberland Capital Trust I, a
business trust, issued $8,000,000 of Floating Rate Capital Securities. Holders
of the Capital Securities are entitled to receive preferential cumulative cash
distributions from the Trust, at a rate per annum reset quarterly equal to the
sum of three month LIBOR plus 350 basis points. The rate was 4.66% at December
31, 2003. Interest is payable quarterly. The Company can defer payment of the cash distributions on the
securities at any time or from time to time for a period not to exceed twenty
consecutive quarters. Civitas BankGroup, Inc. has, through various contractual arrangements, fully
and unconditionally guaranteed all of Cumberland Capital Trust Is obligations
with respect to the capital securities. These Capital Securities qualify as a
Tier I Capital, subject to certain limitations, and are presented in the
consolidated balance sheets as subordinated debentures. The sole asset of
Cumberland Capital Trust I is $8,000,000 of junior subordinated debentures
issued by Civitas BankGroup, Incorporated. These junior subordinated
debentures also carry the same floating rate as the Capital Securities and both
mature on December 25, 2025; however, the maturity of both may be shortened to
a date not earlier than December 25, 2005. On July 31, 2001, Civitas BankGroup, Inc., through Cumberland Capital Trust II
and with the assistance of its Placement Agent, sold to institutional investors
$4,000,000 of capital securities. Cumberland Capital Trust II, a Connecticut
business trust, issued $4,000,000 of Floating Rate Capital Securities. Holders
of the Capital Securities are entitled to receive preferential cumulative cash
distributions from the Trust, at a rate per annum reset quarterly equal to the
sum of three month LIBOR plus 358 basis points. The rate was 5.15% at
December 31, 2003. Interest is payable quarterly. The Company can defer payment on the securities at any time
or from time to time for a period not to exceed twenty consecutive quarters. Civitas BankGroup, Inc. has, through various contractual arrangements, fully
and unconditionally guaranteed all of Cumberland Capital Trust IIs obligations
with respect to the capital securities. These Capital Securities qualify as a
Tier I Capital, subject to certain limitations, and are presented in the
consolidated balance sheets as subordinated debentures. The sole asset of
Cumberland Capital Trust II is $4,000,000 of junior subordinated debentures
issued by Civitas BankGroup, Inc. These junior subordinated debentures also
carry the same floating rate as the Capital Securities and both mature on July
31, 2031; however, the maturity of both may be shortened to a date not earlier
than July 31, 2006. 50




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 12  SUBORDINATED DEBENTURES (continued) Prior to 2003, the trusts were consolidated in the Companys financial
statements, with the trust preferred securities issued by the trust reported in
liabilities as guaranteed preferred beneficial interests and the subordinated
debentures eliminated in consolidation. Under new accounting guidance, FASB
Interpretation No. 46, as revised in December 2003, the trusts are no longer
consolidated with the Company. Accordingly, the Company does not report the
securities issued by the trust as liabilities, and instead reports as
liabilities the subordinated debentures issued by the Company and held by the
trust, as these are no longer eliminated in consolidation. Amounts previously
reported as guaranteed preferred beneficial interests in liabilities have
been recaptioned subordinated debentures and continue to be presented in
liabilities on the balance sheet. The effect of no longer consolidating the
trust does not significantly change the amounts reported as the Companys
assets, liabilities, equity, or interest expense. NOTE 13  INCOME TAXES Income tax expense (benefit) consists of the following: 2003
    
    2002
    
    2001Current federal
    
    $
    124
    
    
    $
    14
    
    
    $
    1,279Current state
    
    
    40
    
    
    
    9
    
    
    
    255Total current
    
    
    164
    
    
    
    23
    
    
    
    1,534Deferred federal
    
    
    210
    
    
    
    166
    
    
    
    (1,283
    )Deferred state
    
    
    45
    
    
    
    39
    
    
    
    (238
    )Total deferred
    
    
    255
    
    
    
    205
    
    
    
    (1,521
    )Tax benefits
credited to shareholders equity
related to exercise of stock options
    
    
    176
    
    
    
    
    
    
    
    5Total income tax expense
    
    $
    595
    
    
    $
    228
    
    
    $
    18
 Temporary differences between tax and financial reporting that
result in deferred tax assets (liabilities) included in other assets on the
consolidated balance sheet are as follows at December 31, 2003 and 2002: 2003
    
    2002Allowance for loan losses
    
    $
    3,378
    
    
    $
    3,535Deferred loan fees
    
    
    138
    
    
    
    89Other
    
    
    224
    
    
    
    370Total deferred tax assets
    
    
    3,740
    
    
    
    3,994FHLB stock dividends
    
    $
    (844
    )
    
    $
    (734
    )Premises and equipment
    
    
    (492
    )
    
    
    (495
    )Unrealized gain on securities
    
    
    (171
    )
    
    
    (205
    )Loan servicing rights
    
    
    (33
    )
    
    
    (84
    )Other
    
    
    (189
    )
    
    
    (244
    )Total deferred tax liabilities
    
    
    (1,729
    )
    
    
    (1,762
    )Net deferred tax asset
    
    $
    2,011
    
    
    $
    2,232
 51




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 13  INCOME TAXES(continued) A reconciliation of income
tax expense with the amount of income
taxes computed by applying the federal statutory rate (34%) to earnings before
income taxes follows: 2003
    
    2002
    
    2001Computed expected provision for income taxes
    
    $
    577
    
    
    $
    256
    
    
    $
    77Increase (decrease) in taxes resulting from:State income taxes, net of federal tax benefit
    
    
    56
    
    
    
    32
    
    
    
    11Tax exempt interest
    
    
    (150
    )
    
    
    (77
    )
    
    
    (75
    )Other, net
    
    
    112
    
    
    
    17
    
    
    
    5Income tax expense
    
    $
    595
    
    
    $
    228
    
    
    $
    18
 During 1996, the subsidiary Banks began computing their tax bad debt reserves
under the rules which apply to commercial banks. In years prior to 1996, the
Banks obtained tax bad debt deductions of approximately $1.8 million in excess
of their financial statement allowance for loan losses for which no provision
for federal income tax was made. These amounts are subject to federal income
tax in future years if used for purposes other than to absorb bad debt losses.
This excess reserve is subject to recapture only if a bank ceases to qualify
as a bank as defined in the Internal Revenue Code. NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS The Company and its subsidiaries, Cumberland Bank, BankTennessee and Bank of
Dyer, have agreed with or committed to bank regulatory officials to
take various actions, including to reduce the level of criticized or
non-performing loans, to improve loan underwriting, problem loan resolution and
collection, and strategic and capital planning, to obtain prior regulatory
approval before incurring additional holding company indebtedness, repurchasing
shares, or paying dividends from certain subsidiary banks to the holding
company or from the holding company to shareholders, and to maintain certain
capital levels at subsidiary banks in excess of those required for well
capitalized status. The most restrictive of these provisions would require the
Company to maintain a Tier I leverage ratio of at least 7.0% at BankTennessee,
Bank of Dyer and Cumberland Bank at December 31, 2003. The Company and its
subsidiaries believe they were in compliance in all material respects with
these agreements at December 31, 2003. Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. As of December 31, 2003, the most recent notification from the Federal Reserve
Bank categorized the Company and all Bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Company and the Banks must maintain total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institutions category. 52




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS (Continued) The Company and the Banks actual capital amounts and ratios at December 31,
2003 and 2002 are as follows: To be wellcapitalized underprompt correctiveRequired Minimum
    
    action provisions
    
    ActualDecember 31, 2003
    
    Amount
    
    Ratios
    
    Amount
    
    Ratios
    
    Amount
    
    RatiosTier I to
average assets  leverageCivitas BankGroup, Inc.
    
    
    33,047
    
    
    
    4.00
    %
    
    
    41,308
    
    
    
    5.00
    %
    
    
    64,965
    
    
    
    7.86
    %Cumberland Bank
    
    
    11,978
    
    
    
    4.00
    %
    
    
    14,973
    
    
    
    5.00
    %
    
    
    21,591
    
    
    
    7.21
    %Cumberland Bank South
    
    
    11,254
    
    
    
    4.00
    %
    
    
    14,067
    
    
    
    5.00
    %
    
    
    19,636
    
    
    
    6.98
    %BankTennessee
    
    
    7,423
    
    
    
    4.00
    %
    
    
    9,278
    
    
    
    5.00
    %
    
    
    14,569
    
    
    
    7.85
    %Bank of Dyer
    
    
    1,969
    
    
    
    4.00
    %
    
    
    2,461
    
    
    
    5.00
    %
    
    
    3,527
    
    
    
    7.16
    %Bank of Mason
    
    
    363
    
    
    
    4.00
    %
    
    
    454
    
    
    
    5.00
    %
    
    
    964
    
    
    
    10.61
    %Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    21,173
    
    
    
    4.00
    %
    
    
    31,759
    
    
    
    6.00
    %
    
    
    64,965
    
    
    
    12.27
    %Cumberland Bank
    
    
    8,576
    
    
    
    4.00
    %
    
    
    12,863
    
    
    
    6.00
    %
    
    
    21,591
    
    
    
    10.07
    %Cumberland Bank South
    
    
    6,052
    
    
    
    4.00
    %
    
    
    9,078
    
    
    
    6.00
    %
    
    
    19,636
    
    
    
    12.98
    %BankTennessee
    
    
    5,069
    
    
    
    4.00
    %
    
    
    7,604
    
    
    
    6.00
    %
    
    
    14,569
    
    
    
    11.50
    %Bank of Dyer
    
    
    1,092
    
    
    
    4.00
    %
    
    
    1,638
    
    
    
    6.00
    %
    
    
    3,527
    
    
    
    12.92
    %Bank of Mason
    
    
    171
    
    
    
    4.00
    %
    
    
    256
    
    
    
    6.00
    %
    
    
    964
    
    
    
    22.60
    %Total capital to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    42,346
    
    
    
    8.00
    %
    
    
    52,932
    
    
    
    10.00
    %
    
    
    71,604
    
    
    
    13.53
    %Cumberland Bank
    
    
    17,151
    
    
    
    8.00
    %
    
    
    21,439
    
    
    
    10.00
    %
    
    
    24,189
    
    
    
    11.28
    %Cumberland Bank South
    
    
    12,105
    
    
    
    8.00
    %
    
    
    15,131
    
    
    
    10.00
    %
    
    
    21,534
    
    
    
    14.23
    %BankTennessee
    
    
    10,139
    
    
    
    8.00
    %
    
    
    12,673
    
    
    
    10.00
    %
    
    
    16,167
    
    
    
    12.76
    %Bank of Dyer
    
    
    2,184
    
    
    
    8.00
    %
    
    
    2,730
    
    
    
    10.00
    %
    
    
    3,872
    
    
    
    14.18
    %Bank of Mason
    
    
    341
    
    
    
    8.00
    %
    
    
    427
    
    
    
    10.00
    %
    
    
    1,013
    
    
    
    23.75
    %
 53




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 14  REGULATORY
AGREEMENTS AND CAPITAL REQUIREMENTS (Continued) To be wellcapitalized underprompt correctiveRequired Minimum
    
    action provisions
    
    ActualDecember 31, 2002
    
    Amount
    
    Ratios
    
    Amount
    
    Ratios
    
    Amount
    
    RatiosTier I to average assets leverageCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    4.00
    %
    
    
    34,933
    
    
    
    5.00
    %
    
    
    55,544
    
    
    
    7.95
    %Cumberland Bank
    
    
    11,024
    
    
    
    4.00
    %
    
    
    13,780
    
    
    
    5.00
    %
    
    
    20,255
    
    
    
    7.35
    %BankTennessee
    
    
    7,439
    
    
    
    4.00
    %
    
    
    9,299
    
    
    
    5.00
    %
    
    
    13,901
    
    
    
    7.47
    %Cumberland Bank South
    
    
    6,691
    
    
    
    4.00
    %
    
    
    8,363
    
    
    
    5.00
    %
    
    
    14,417
    
    
    
    8.62
    %Bank of Dyer
    
    
    2,024
    
    
    
    4.00
    %
    
    
    2,530
    
    
    
    5.00
    %
    
    
    3,777
    
    
    
    7.46
    %Bank of Mason
    
    
    426
    
    
    
    4.00
    %
    
    
    532
    
    
    
    5.00
    %
    
    
    1,088
    
    
    
    10.22
    %Tier I to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    4.00
    %
    
    
    34,933
    
    
    
    6.00
    %
    
    
    55,544
    
    
    
    10.92
    %Cumberland Bank
    
    
    11,024
    
    
    
    4.00
    %
    
    
    13,780
    
    
    
    6.00
    %
    
    
    20,255
    
    
    
    9.57
    %BankTennessee
    
    
    7,439
    
    
    
    4.00
    %
    
    
    9,299
    
    
    
    6.00
    %
    
    
    13,901
    
    
    
    10.49
    %Cumberland Bank South
    
    
    6,691
    
    
    
    4.00
    %
    
    
    8,363
    
    
    
    6.00
    %
    
    
    14,417
    
    
    
    11.91
    %Bank of Dyer
    
    
    2,024
    
    
    
    4.00
    %
    
    
    2,530
    
    
    
    6.00
    %
    
    
    3,777
    
    
    
    11.40
    %Bank of Mason
    
    
    426
    
    
    
    4.00
    %
    
    
    532
    
    
    
    6.00
    %
    
    
    1,088
    
    
    
    20.60
    %Total capital to risk-weighted assetsCivitas BankGroup, Inc.
    
    
    27,947
    
    
    
    8.00
    %
    
    
    34,933
    
    
    
    10.00
    %
    
    
    61,935
    
    
    
    12.18
    %Cumberland Bank
    
    
    11,024
    
    
    
    8.00
    %
    
    
    13,780
    
    
    
    10.00
    %
    
    
    22,911
    
    
    
    10.82
    %BankTennessee
    
    
    7,439
    
    
    
    8.00
    %
    
    
    9,299
    
    
    
    10.00
    %
    
    
    15,578
    
    
    
    11.76
    %Cumberland Bank South
    
    
    6,691
    
    
    
    8.00
    %
    
    
    8,363
    
    
    
    10.00
    %
    
    
    15,930
    
    
    
    13.16
    %Bank of Dyer
    
    
    2,024
    
    
    
    8.00
    %
    
    
    2,530
    
    
    
    10.00
    %
    
    
    4,198
    
    
    
    12.67
    %Bank of Mason
    
    
    426
    
    
    
    8.00
    %
    
    
    532
    
    
    
    10.00
    %
    
    
    1,154
    
    
    
    21.85
    %
 54




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 15  EMPLOYEE BENEFITS The Company maintains a 401(k) savings plan for all employees who have
completed six months of service and are 21 1/2 or more years of age. Employer
contributions to the plan are determined annually by the board of directors.
The Companys expenses related to the plan were $267 in 2003, $233 in 2002 and
$398 in 2001. NOTE 16  OFF-BALANCE-SHEET ACTIVITIES Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year end: 2003
    
    2002Commitments to make loans
    
    $
    72,769
    
    
    $
    58,789Unused lines of credit and letters of credit
    
    
    26,918
    
    
    
    26,156
 Commitments to make loans are generally made for periods of 60 days or less. 55




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

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

---

NOTE 17  FAIR VALUES OF FINANCIAL INSTRUMENTS

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

2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and due from banks
    
    $
    19,977
    
    
    $
    19,977
    
    
    $
    21,681
    
    
    $
    21,681Federal funds sold
    
    
    15,081
    
    
    
    15,081
    
    
    
    20,225
    
    
    
    20,225Interest-bearing deposits in
financial institutions
    
    
    4,046
    
    
    
    4,046
    
    
    
    9,466
    
    
    
    9,466Securities available for sale
    
    
    140,844
    
    
    
    140,844
    
    
    
    79,051
    
    
    
    79,051Securities held to maturity
    
    
    62,527
    
    
    
    62,984
    
    
    
    11,488
    
    
    
    11,616Loans, net of allowance
    
    
    542,151
    
    
    
    543,954
    
    
    
    517,153
    
    
    
    522,382Accrued interest receivable
    
    
    3,896
    
    
    
    3,896
    
    
    
    3,922
    
    
    
    3,922Restricted equity securities
    
    
    5,478
    
    
    
    5,478
    
    
    
    5,040
    
    
    
    5,040Investment in unconsolidated
affiliates
    
    
    6,977
    
    
    
    6,977
    
    
    
    6,163
    
    
    
    6,163Financial liabilities:Deposits
    
    $
    671,636
    
    
    $
    673,147
    
    
    $
    592,998
    
    
    $
    597,690Notes payable
    
    
    4,700
    
    
    
    4,830
    
    
    
    5,500
    
    
    
    5,766Federal
funds purchased and repurchase agreements
    
    
    33,886
    
    
    
    33,886
    
    
    
    
    
    
    
    Advances from FHLB
    
    
    51,852
    
    
    
    55,939
    
    
    
    50,852
    
    
    
    55,642Accrued interest payable
    
    
    2,350
    
    
    
    2,350
    
    
    
    3,129
    
    
    
    3,129Subordinated
debentures
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000 The methods and assumptions used to estimate fair value are described as
follows: Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. Fair value of debt is
based on current rates for similar financing. The fair value of
off-balance-sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements. 56




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

    ExercisableWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageRemaining
    
    
    
    
    
    RemainingExercise
    
    
    
    
    
    Contractual
    
    
    
    
    
    ContractualPrice
    
    Number
    
    Life in Years
    
    Number
    
    Life in Years$2.73
    
    
    328,290
    
    
    0.16
    
    
    328,290
    
    
    
    0.164.00
    
    
    106,000
    
    
    9.05
    
    
    26,500
    
    
    
    9.054.12
    
    
    39,100
    
    
    7.76
    
    
    18,640
    
    
    
    7.765.63
    
    
    30,000
    
    
    9.67
    
    
    15,000
    
    
    
    9.686.25
    
    
    142,500
    
    
    5.61
    
    
    99,900
    
    
    
    5.61Outstanding at year end
    
    
    645,890
    
    
    
    
    
    
    
    488,330
 57




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 19  EARNINGS PER SHARE The factors used in the earnings per share computation follow. 2003
    
    2002
    
    2001BasicNet income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Weighted average common shares
outstanding
    
    
    16,097,403
    
    
    
    14,018,715
    
    
    
    13,813,774Basic earnings per common share
    
    $
    .07
    
    
    $
    0.04
    
    
    $
    0.02DilutedNet income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Weighted average common shares
outstanding for basic earnings per
common share
    
    
    16,097,403
    
    
    
    14,018,715
    
    
    
    13,813,774Add: Dilutive effects of assumed
exercise of stock options
    
    
    167,945
    
    
    
    124,281
    
    
    
    206,020Average shares and dilutive potential
common shares
    
    
    16,265,348
    
    
    
    14,142,996
    
    
    
    14,019,794Diluted earnings per common share
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.01
 NOTE 20  QUARTERLY FINANCIAL DATA (UNAUDITED) Net
    
    Provision
    
    Net
    
    Earnings (Loss) per shareInterest
    
    Interest
    
    For Loan
    
    IncomeIncome
    
    Income
    
    Losses
    
    (Loss)
    
    Basic
    
    Diluted2003First quarter
    
    $
    10,314
    
    
    $
    6,186
    
    
    $
    424
    
    
    $
    402
    
    
    $
    0.03
    
    
    $
    0.03Second quarter
    
    
    10,326
    
    
    
    6,373
    
    
    
    2,058
    
    
    
    (345
    )
    
    
    (0.02
    )
    
    
    (0.02
    )Third quarter
    
    
    9,942
    
    
    
    5,973
    
    
    
    583
    
    
    
    308
    
    
    
    0.02
    
    
    
    0.02Fourth quarter
    
    
    10,694
    
    
    
    6,667
    
    
    
    514
    
    
    
    736
    
    
    
    0.04
    
    
    
    0.042002First quarter
    
    $
    11,156
    
    
    $
    6,168
    
    
    $
    892
    
    
    $
    507
    
    
    $
    0.04
    
    
    $
    0.04Second quarter
    
    
    10,810
    
    
    
    6,114
    
    
    
    3,727
    
    
    
    (1,338
    )
    
    
    (0.10
    )
    
    
    (0.10
    )Third quarter
    
    
    10,573
    
    
    
    5,918
    
    
    
    494
    
    
    
    1,033
    
    
    
    0.07
    
    
    
    0.07Fourth quarter
    
    
    10,309
    
    
    
    6,005
    
    
    
    1,687
    
    
    
    319
    
    
    
    0.02
    
    
    
    0.02
 58




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31,2003
    
    2002ASSETS:Cash
    
    $
    1,896
    
    
    $
    1,644Investment in subsidiaries
    
    
    61,630
    
    
    
    55,173Investment in unconsolidated affiliates
    
    
    6,716
    
    
    
    5,825Premises and equipment
    
    
    977
    
    
    
    608Other assets
    
    
    1,678
    
    
    
    3,913$
    72,897
    
    
    $
    67,163LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Notes payable
    
    $
    4,700
    
    
    $
    5,500Accrued interest
    
    
    198
    
    
    
    902Other liabilities
    
    
    1,258
    
    
    
    3,288Subordinated
debentures
    
    
    12,000
    
    
    
    12,000Total liabilities
    
    
    18,156
    
    
    
    21,690Total shareholders equity
    
    
    54,741
    
    
    
    45,473$
    72,897
    
    
    $
    67,163
 59




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CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF INCOME Years Ended December 31,2003
    
    2002
    
    2001Income:Dividends from subsidiaries
    
    $
    
    
    
    $
    2,200
    
    
    $
    Other dividends
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    4,601
    
    
    
    768
    
    
    
    334,601
    
    
    
    2,968
    
    
    
    33Expenses:Interest
    
    
    1,010
    
    
    
    1,132
    
    
    
    1,375Other
    
    
    4,734
    
    
    
    2,033
    
    
    
    1,1225,744
    
    
    
    3,165
    
    
    
    2,497Loss before income taxes and equity in
undistributed earnings of subsidiaries
    
    
    (1,143
    )
    
    
    (197
    )
    
    
    (2,464
    )Income tax benefit
    
    
    434
    
    
    
    902
    
    
    
    1,112Income (loss) before equity in undistributed
earnings of subsidiaries
    
    
    (709
    )
    
    
    705
    
    
    
    (1,352
    )Equity in undistributed earnings of subsidiaries
    
    
    1,810
    
    
    
    (184
    )
    
    
    1,561Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209
 60




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##### Table of Contents



CIVITAS BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 (Dollars in thousands, except share and per share amounts)  NOTE 21  PARENT COMPANY ONLY FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    1,101
    
    
    $
    521
    
    
    $
    209Adjustments to reconcile net income to net
cash from operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (1,810
    )
    
    
    184
    
    
    
    (1,561
    )Income from investments in unconsolidated affiliates
    
    
    (388
    )
    
    
    98
    
    
    
    505Depreciation and amortization
    
    
    159
    
    
    
    47
    
    
    
    34Net change in accrued interest payable
    
    
    (704
    )
    
    
    98
    
    
    
    91Other, net
    
    
    (124
    )
    
    
    1,353
    
    
    
    (671
    )Net cash from operating activities
    
    
    (1,765
    )
    
    
    2,301
    
    
    
    (1,393
    )Cash flows from investing activities:Investment in commercial bank subsidiaries
    
    
    (5,050
    )
    
    
    (4,952
    )
    
    
    (3,749
    )Investment in unconsolidated affiliates
    
    
    (300
    )
    
    
    (995
    )
    
    
    (212
    )Purchase of premises and equipment, net
    
    
    (209
    )
    
    
    (416
    )
    
    
    (219
    )Net cash from investing activities
    
    
    (5,559
    )
    
    
    (6,363
    )
    
    
    (4,180
    )Cash flows from financing activities:Repayment of notes payable
    
    
    (800
    )
    
    
    (2,159
    )
    
    
    (1,090
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    
    
    
    
    4,000Proceeds from issuance of common stock
    
    
    9,303
    
    
    
    6,002
    
    
    
    23Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (283
    )Dividends paid on common stock
    
    
    (927
    )
    
    
    (830
    )
    
    
    (795
    )Net cash from financing activities
    
    
    7,576
    
    
    
    3,013
    
    
    
    1,855Net change in cash and cash equivalents
    
    
    252
    
    
    
    (1,049
    )
    
    
    (3,718
    )Cash and cash equivalents at beginning of year
    
    
    1,644
    
    
    
    2,693
    
    
    
    6,411Cash and cash equivalents at end of year
    
    $
    1,896
    
    
    $
    1,644
    
    
    $
    2,693
 61




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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. 
 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 20, 2004. 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 20, 2004. 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 at www.civitasbankgroup.com. The Company will make
any legally required disclosures regarding amendments to, or waivers of,
provisions of its Code of Conduct 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 20, 2004. 62




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##### Table of Contents



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 20, 2004. 
 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 20, 2004. The following table
summarizes information concerning the Companys equity
compensation plans at December 31, 2003: 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 inPlan Category
    
    and Warrants
    
    and Warrants
    
    First Column)*Equity compensation plans
approved by shareholders
    
    
    645,890
    
    
    $
    3.94
    
    
    
    1,597,702Equity compensation plans not
approved by shareholders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    645,890
    
    
    $
    3.94
    
    
    
    1,597,702
  *
    
    Includes 243,592 shares available for future issuance under our Employee Stock
Purchase Plan as of December 31, 2003, of which 8,430 shares were issued in January
2004. 
 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 20,
2004. 
 ITEM 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to the
section titled Independent Public Accountant Information in the Companys
definitive proxy materials relating to the Annual Meeting of Shareholders to be
held May 20, 2004. 63




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##### Table of Contents



ITEM 15. Exhibits and Reports on Form 8-K (a)(1) Financial Statements. See Item 8.   Registrant is a party to certain notes which are more fully described in
the notes to Registrants financial statements pursuant to which Registrant has
borrowed money from other financial institutions in principal amounts which
combined do not exceed ten percent (10%) of Registrants total consolidated
assets. Copies of these notes will be filed with the Commission upon request.
Registrant is also a party to certain agreements entered into in connection
with the Companys offering of $12,000,000 in subordinated debentures in
connection with the offering of Subordinated Debentures to institutional
investors by Cumberland Capital Trust I and Cumberland Capital Trust II.
Copies of the various transaction documents associated with the trust preferred
offerings will be filed with the Commission upon request. Reports on Form 8-K On October 23, 2003, the Company furnished a Current Report on Form 8-K
pursuant to Item 9 and Item 12 announcing the Companys results of operations
for the quarter ended September 30, 2003. Notwithstanding the foregoing,
information furnished under Item 9 or Item 12 of Form 8-K, including the
related exhibits, shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934. 64




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##### Table of Contents



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 HerringtonDate: March 30, 2004
    
    President 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 30, 2004/s/ Andy LoCascio
Andy LoCascio
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    March 30, 2004/s/ John Wilder
John Wilder
    
    Chairman
    
    March 30, 2004/s/ Danny Herron
Danny Herron
    
    Director
    
    March 30, 2004/s/ Tom E. Paschal
Tom E. Paschal
    
    Director
    
    March 30, 2004/s/ Tom Price
Tom Price
    
    Director
    
    March 30, 2004/s/ Ronald Gibson
Ronald Gibson
    
    Director
    
    March 30, 2004
 65




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Frank Inman, Jr.
Frank Inman, Jr.
    
    Director
    
    March 30, 2004/s/ Alex Richmond
Alex Richmond
    
    Director
    
    March 30, 2004/s/ John S. Shepherd
John S. Shepherd
    
    Director
    
    March 30, 2004/s/ James Rout
James Rout
    
    Director
    
    March 30, 2004/s/ Joel Porter
Joel Porter
    
    Director
    
    March 30, 2004/s/ Paul Pratt, Sr.
Paul Pratt, Sr.
    
    Director
    
    March 30, 2004/s/ R. Todd Vanderpool
R. Todd Vanderpool
    
    Director
    
    March 30, 2004/s/ William Wallace
William Wallace
    
    Director
    
    March 30, 2004
 66




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INDEX TO EXHIBITS 3.1
    
    Restated Charter of the Company (Restated for SEC electronic filing
purposes only).*3.2
    
    Amended and Restated Bylaws of the Company (Restated for SEC electronic
filing purposes only).*10.1
    
    Civitas BankGroup, Incorporated 1998 Stock Option Plan (incorporated
herein by reference to the Companys Registration Statements on Form S-8
(Registration No 333-105425) filed with the SEC on May 20, 2003.)10.2
    
    Civitas BankGroup, Inc. Employee Stock Purchase Plan (incorporated herein
by reference to the Companys Registration Statement on Form S-8
(Registration No. 333-105424) filed with the SEC on May 20,
2003.)21.1
    
    Subsidiaries of the Company.23.1
    
    Consent of Crowe Chizek and Company LLC.23.2
    
    Consent of Heathcott and Mullaly, P.C.31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  * Incorporated by reference
to the Companys Form 10-K for the year ended December 31, 2002
as filed with the SEC on March 31, 2003. 67