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)

(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.

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.

Table of Contents

CROSS REFERENCE INDEX
TO
FORM 10-K

PART I

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:

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Cumberland Bank, a Tennessee state chartered bank with nine (9) offices in Macon, Robertson, Smith, Sumner and Warren Counties, Tennessee;

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BankTennessee, a Tennessee state chartered bank with five (5) offices in Shelby and Lauderdale Counties, Tennessee;

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Cumberland Bank South, a Tennessee state chartered bank, with four (4) offices in Davidson and Williamson Counties, Tennessee;

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Bank of Dyer, a Tennessee state chartered bank with four (4) offices in Gibson and Madison County, Tennessee; and

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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 novo status, 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.

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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.

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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 novo branching 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.

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     Tier 2 capital is generally considered to be an amount equal to the sum of the following:

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the allowance for possible credit losses in an amount up to 1.25 % of risk-weighted assets;

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cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus;

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hybrid capital instruments defined as instruments with characteristics of both debt and equity, perpetual debt and mandatory convertible debt securities; and

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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.

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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

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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

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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.

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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.

     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.”

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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.

Per share amounts adjusted to reflect the effect of stock splits and stock dividends.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion in conjunction with our financial statements and the notes to those statements appearing elsewhere in this document.

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.

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     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

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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.

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     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:

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     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:

     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.

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An analysis of our loss experience is furnished in the following table for the periods indicated:

     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.

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     The following table presents information regarding nonaccrual, past due and restructured loans, and foreclosed properties at the dates indicated:

     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.

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     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, 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.

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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.

     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)

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.

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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:

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.

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CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes 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.

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.

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CIVITAS BANKGROUP, INC.
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes 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.