UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

Commission File Number 0-27393

CIVITAS BANKGROUP, INC.

(615) 263-9500
(Registrant’s Telephone Number, Including Area Code)

None
(Former name, Former address and Former Fiscal Year, if Changed since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Common stock outstanding: 15,659,095 shares at April 30, 2005

CIVITAS BANKGROUP, INC.
TABLE OF CONTENTS

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CIVITAS BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004

See accompanying notes to unaudited consolidated financial statements.

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CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

See accompanying notes to unaudited consolidated financial statements.

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CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (continued)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

See accompanying notes to unaudited consolidated financial statements.

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CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

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CIVITAS BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

See accompanying notes to unaudited consolidated financial statements.

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CIVITAS BANKGROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005

Note 1. Basis of Presentation

The unaudited consolidated financial statements as of March 31, 2005 and for the three month periods ended March 31, 2005 and 2004 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”), and in the opinion of management, include all adjustments, consisting of normal recurring adjustments, to present fairly the information. They do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the 2004 consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K. Effective March 1, 2005, the Company consummated the sale of its BankTennessee subsidiary. As such, unless otherwise noted, all amounts presented, including all note disclosures, relate only to the Company’s continuing operations.

Note 2. Earnings per Share of Common Stock

Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Stock options are regarded as potential common shares to the extent that the exercise price for the option is less than the fair market value of our common stock. For the three months ended March 31, 2005 the Company included 1,391,052 shares of common stock issuable upon exercise of stock options in the diluted EPS calculation.

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Note 3. Stock Compensation

Employee compensation expense under stock options is reported using the intrinsic value method. The following table illustrates the effect on net income and earning per share for the three months ended March 31, 2005 and 2004 if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

Note 4. Subsequent Events

On April 22, 2005, the Company entered into a written agreement with the Federal Reserve Bank of Atlanta (the “Written Agreement”). The Written Agreement contains provisions similar to those in existing relationships with the Federal Reserve Bank of Atlanta, including provisions to enhance credit administration policies and procedures, independent loan review, internal audit and earnings and capital maintenance. The Written Agreement also provides that the Company will conduct a management, directorate and organizational review. The Written Agreement shall remain effective and enforceable against the Company until such time as it is stayed, modified, terminated or suspended in writing by the Federal Reserve Bank of Atlanta.

Note 5. Discontinued Operations

Effective March 1, 2005, the Company consummated the sale of all of the outstanding stock of BankTennessee to a group of investors including certain of its and BankTennessee’s directors in exchange for the members of this group surrendering 2,000,000 shares of Company common stock. The Company has agreed to provide data processing, accounting and other transition services to BankTennessee for a six month period following the effective date.

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CIVITAS BANKGROUP, INC.
FORM 10-Q, CONTINUED

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion is to provide insight into the financial condition and results of operations of Civitas BankGroup, Inc. and its subsidiaries (the “Company”). This discussion should be read in conjunction with the consolidated financial statements. Reference should also be made to the Company’s Annual Report on Form 10-K, for a more complete discussion of factors that impact liquidity, capital and the results of operations.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of the Company. The words “anticipate,” “could,” “expects,” and “believes” and similar expressions are intended to identify such forward-looking statements but other statements not based on historical information may also be considered forward-looking. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those identified in the Company’s Annual Report on Form 10-K and: (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 loan losses; (vii) changes in the legislative and regulatory environment; (viii) the ability to successfully complete the disposition of the Bank of Mason (ix) loss of key personnel. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions and other important factors that could cause actual results to differ materially from those projected in forward-looking statements.

CRITICAL ACCOUNTING POLICIES

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles to the determination of our allowance for loan losses (ALL), we have made judgments and estimates which have significantly impacted our financial position and results of operations.

Our management assesses the adequacy of the ALL on a regular basis. This assessment includes procedures to estimate the ALL and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience, and (2) an unallocated amount representative of inherent loss

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which is not readily identifiable. Even though the ALL is composed of two components, the entire allowance is available to absorb any credit losses.

We establish the allocated amount separately for two different risk groups (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogenous loans (generally consumer loans). We base the allocation for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Each risk-rating grade is assigned an estimated loss ratio, which is determined based on the experience of management, discussions with banking regulators, historical and current economic conditions and our independent loan review process. We estimate losses on impaired loans based on estimated cash flows discounted at the loan’s original effective interest rate or the underlying collateral value. We also assign estimated loss ratios to our consumer portfolio. However, we base the estimated loss ratios for these homogenous loans on the category of consumer credit (e.g., automobile, residential mortgage, home equity) and not on the results of individual loan reviews.

The unallocated amount is particularly subjective and does not lend itself to the exact mathematical calculation. We use the unallocated amount to absorb inherent losses which may exist as of the balance sheet date for such matters as changes in the local or national economy, the depth or experience of the lending staff, any concentrations of credit in any particular industry group, and new banking laws or regulations. After we assess applicable factors, we evaluate the aggregate unallocated amount based on our management’s experience.

We then test the resulting ALL balance by comparing the balance in the allowance account to historical trends and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the ALL in its entirety. The loan review and the finance committee of our board of directors review the assessment prior to the filing of financial information

COMPANY OVERVIEW

General. Civitas BankGroup, Inc. is a Tennessee corporation and registered bank holding company headquartered in Franklin, Tennessee with $735.6 million in total assets at March 31, 2005. We provide banking and other financial services through the following two (2) bank subsidiaries in seven (7) markets throughout Middle and West Tennessee:

In January 2005, the Company entered into an agreement to sell the Bank of Mason to a group of investors. Pursuant to the terms of the purchase agreement, the investors will purchase all of the outstanding shares of stock in the Bank of Mason from the Company. Consummation of this transaction is subject to receipt of regulatory approval and the satisfaction of certain customary closing conditions. The Company expects this transaction to close during the second quarter 2005.

Effective March 1, 2005, the Company consummated the sale of all of the outstanding stock of BankTennessee to a group of investors including certain of its and BankTennessee’s directors in exchange for the members of this group surrendering 2,000,000 shares of Company common stock. The Company has agreed to provide data processing, accounting and other transition services to BankTennessee for a six month period following the effective date.

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Joint Ventures. The Company owns a 50% interest in both The Murray Banc Holding Company, LLC in Murray, Kentucky and Insurors Bank of Tennessee, headquartered in Nashville, Tennessee. Only the Company’s initial investment, adjusted for the pro rata share of operating results of each entity, is included in the consolidated financial statements. The Company’s portion of earnings is recorded in other noninterest income. The Murray Banc Holding Company is a joint venture with BancKentucky, a Kentucky savings and loan holding company. The Murray Banc Holding Company is a single bank holding company owning 100% of The Murray Bank which opened in 1999. The Murray Banc Holding Company had $147.4 million in total assets at March 31, 2005 and for the three months ended March 31, 2005 contributed income of $123,000 to the Company. The Company also owns 50% of Insurors Bank, which opened November 2000 and had $66.8 million in assets at March 31, 2005. The remaining ownership interest in Insurors Bank is owned by InsCorp, a Tennessee corporation owned predominately by Tennessee insurance agents. Year to date, Insurors Bank has contributed $42,000 of income to the Company.

Description of Business. Our principal operations include traditional banking services incorporating commercial and residential real estate lending, commercial business lending, consumer lending, construction lending and other financial services, including depository services. Net interest income is our principal source of earnings. We serve both metropolitan and rural areas, targeting local consumers, professionals and small businesses.

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OVERVIEW

General. Set forth below are significant items that occurred from continuing operations during the three months ended March 31, 2005:

	•		Net income for the three months ended March 31, 2005, totaled $903,000 compared to $600,000 for the same period for 2004, a 50.4% increase.
	•		Net earnings per diluted share increased to $0.06 per share for the quarter ended March 31, 2005 compared to $0.03 for the comparable period in 2004.
	•		The provision for loan losses decreased 39.7% from $552,000 for the three months ended March 31, 2004 to $333,000 for the three months ended March 31, 2005.
	•		Assets decreased from $904.2 million at December 31, 2004, to $735.6 million at March 31, 2005, a $168.6 million or 18.6% decrease. The sale of one of the Company’s subsidiaries, BankTennessee, reduced assets by $200.5 million, which was offset by $31.9 million in asset growth of the surviving entities.
	•		Loans increased to $447.8 million, up 2.3% from $437.6 million at year end 2004.
	•		Nonperforming assets were $5.9 million at March 31, 2005, down 9.1% from December 31, 2004.
	•		Deposits totaled $597.6 million, up 5.4% from $566.9 million at year end 2004.
	•		Effective March 1, 2005, the Company consummated the sale of all of the outstanding stock of BankTennessee to a group of investors including certain of its and BankTennessee’s directors in exchange for the members of this group surrendering 2,000,000 shares of Company common stock. The Company has agreed to provide data processing, accounting and other transition services to BankTennessee for a six month period following the effective date.
	•		The Company recorded a gain of $2.7 million on the sale of its BankTennessee subsidiary.
	•		The Company entered into an agreement to sell all of the stock of its Bank of Mason subsidiary, in a transaction that the Company expects to close in the second quarter of 2005.
	•		On April 22, 2005, the Company entered into a written agreement with the Federal Reserve Bank of Atlanta (the “Written Agreement”), the terms of which are more particularly described below under “Subsequent Events”.

EARNINGS HIGHLIGHTS—FIRST QUARTER RESULTS

During the quarter ended March 31, 2005, the Company’s management continued to address improvements in the Company’s performance. Management’s primary short-term objectives continue to be the resolution of problem assets, the creation of operating efficiencies and building for future growth. The ongoing evaluation of its operations and related operational improvements includes the continued centralization of certain backroom operations, reduction of duplicate operational processes and consideration of the disposal of underperforming branches or subsidiaries in markets offering limited growth potential.

Net Income. The Company recorded net income from continuing operations for the first quarter of 2005 of $903,000 compared with net income of $600,000 in the first quarter of 2004. Diluted earnings from continuing operations per share for the first quarter of 2005 were $0.06 as compared $0.03 for first quarter 2004.

Key performance indicators for the first quarter of 2005 showed annualized return on average assets (ROA) of 0.56% compared to 0.40% in the comparable period of 2004. The annualized return on average shareholders’ equity (ROE) for the first quarter of 2005 was 6.63% compared to 4.30% for the first quarter of 2004.

Net Interest Income. Net interest income for the first quarter of 2005, decreased $12,000 as compared to the first quarter of 2004. This decrease is primarily attributable to a 49 basis point increase in cost of funds,

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partially offset by an 11 basis point increase in the yield on total earning assets. The changes in net interest income and net interest margin for the three months ended March 31, 2005 as compared to the same period in 2004 were primarily the result of the following:

Rate:

	•		The yield on loans increased 31 basis points as compared to 2004.
	•		Investment security yield increased 2 basis points over the 2004 period levels to 4.43%.
	•		Yields on deposits increased 51 basis points.
	•		Federal funds purchased and repurchase agreements yield increased 196 basis points.
	•		The yield on notes payable declined 112 basis points as the Company refinanced its debt in late 2004, resulting in a $15,000 savings for the Company in 2005.
	•		Interest expense on subordinated debentures increased $43,000 due to 145 basis point increase in the rate.

Volume:

	•		Total average earning assets increased $75.4 million, or 12.9%, with the significant amount of this increase being in the Company’s average securities portfolio, which increased by $42.1 million or 25.9%. The remainder of the increase was in loans in the amount of $26.8 million or 6.5%.
	•		Average Federal Funds sold increased $762,000 or 15.2%.
	•		Average deposits and borrowed funds increased $70.4 million, or 11.9%, as compared to the first quarter of 2004. Average interest-bearing deposits increased $78.3 million while repurchase agreements increased $16.4 million or 100.0%.

Net Interest Margin. Net interest margin for the first quarter of 2005 decreased 31 basis points to 3.14% from 3.45% in the first quarter of 2004. A greater percentage of new loan originations are short-term real estate loans compared to our existing loan portfolio. Likewise, these loans are funded with short-term deposits. New loan production the Company has experienced has been offset by a concentrated effort to remove underperforming and less desirable risk characteristic loans from the portfolio. Management expects its average loan balances to increase throughout the remainder of 2005 as the Company takes advantage of recent bank mergers in its markets, and refocuses on managed growth.

The Company increased the volume of its securities portfolio by $42.1 million as a result of a $55.0 million or 10.5% increase in deposits. Deposit growth primarily stemmed from the opening of our downtown Franklin office which benefited from the hiring of key personnel from a Williamson County community bank, which was recently merged with a larger regional bank.

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities and net interest margin for the three months ended March 31, 2005 and 2004:

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Average Balances Sheet
(Dollars in thousands)

1.	Interest income includes loan fees.
2.	Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.
3.	No taxable equivalent adjustments have been made since the effect is insignificant.

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INVESTMENT PORTFOLIO

General. The Company invests primarily in obligations of the United States, obligations of states, counties, and municipalities and mortgage-backed securities. The following table presents, for the periods indicated, the carrying amount of our securities portfolio segregated into available for sale, or AFS, and held to maturity, or HTM, categories:

Composition of Investment Portfolio
Dollars in thousands

NOTE: Prior period figures have been adjusted for comparative purposes by excluding the securities portfolio of BankTennessee.

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The following table indicates the maturities of securities at March 31, 2005 at the carrying amount and the weighted average yields of such securities:

Maturity of Investment Portfolio
Dollars in thousands

NOTE: Mutual funds are included in other AFS securities over 10 years

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LOANS

General. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. The following table indicates loans outstanding net of unearned income and deferred fees, as of the dates indicated. The segregation used in compiling the following information is based on the collateral of the loan rather than the source of loan payments and is consistent with the method followed for regulatory reporting.

Composition of Loan Portfolio
Dollars in thousands

NOTE: Prior period figures have been adjusted for comparative purposes.

Totals loans grew $10.3 million since December 31, 2004 even though the Company experienced runoff of loans that do not meet the risk characteristics targeted by management. Management is placing greater emphasis on short-term real estate lending such as construction, acquisition and development, and commercial real estate loans. The Company has established internal targets for real estate secured loans of at least 75% of total loans, with an emphasis on variable interest rate loans or loans with maturities under five years if at fixed rates. As of March 31, 2005, 80.2% of the loan portfolio was secured by real estate.

Provision and Allowance for Loan Losses. The Company has placed a greater emphasis on identifying at-risk borrowers as our banks have experienced a higher than normal amount of borrower bankruptcies which account for a large portion of our loan charge-offs. Additionally, deteriorating economic conditions in some of the markets we serve have resulted in some of our commercial and consumer borrowers experiencing financial difficulty and in some cases the inability to pay their obligations to us. The provision for loan losses is based on past loan experience and other factors, which in management’s judgment deserve current recognition in estimating possible loan losses. Such factors include past loan loss experience, growth and composition of the loan portfolio, review of specific problem loans, trends in past due loans, the relationship of the allowance for loan losses to outstanding loans, and current economic conditions that may affect the borrower’s ability to repay their obligations to the company. Management has in place a risk rating system designed for monitoring its loan portfolio in an effort to identify potential problem loans. Additional provisions will likely be appropriate as a result of ongoing efforts to better assess problem loans.

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Loan delinquencies, defined as loans greater than 30 days past due, were 2.0% of the total loan portfolio on March 31, 2005 as compared to 2.2% at December 31, 2004. Provision expense equaled $333,000 and $552,000 for the three months ended March 31, 2005 and 2004 respectively. As set out in the table below, the decline in the allowance for loan losses as a percentage of total loans outstanding since March 31, 2004 reflects loan charge-offs taken against specific allocated reserves. A summary of loan loss experience during the three-months ended March 31, 2005 and 2004 is provided below. Non-performing assets to total loans were 1.3% at March 31, 2005 as compared to 1.8% at March 31, 2004. The following is the activity in the allowance for loan losses:

NOTE: Prior period figures have been adjusted for comparative purposes.

Nonperforming Assets. For financial statement purposes, nonaccrual loans are included in loans outstanding, whereas repossessions and other real estate are included in other assets. Net credit losses include net charge-offs on loans and valuation adjustments.

The following is a summary of nonperforming loans as of March 31, 2005 and December 31, 2004:

Summary of Nonperforming Assets
Dollars in thousands

NOTE: Prior period figures have been adjusted for comparative purposes.

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Supplemental Loan Information as of March 31, 2005
Dollars in thousands

In addition to the nonaccrual loans, management has internally identified an additional $12.8 million in loans as potential problem credits. These loans are performing loans but are classified due to payment history, decline in the borrower’s financial position or decline in collateral value. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans classified as doubtful have all the weaknesses inherent in one classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The following table shows the amount in each classification.

Summary of Performing Classified Loans
As of March 31, 2005
Dollars in thousands

Management believes the balance of the allowance for loan losses to be adequate as of March 31, 2005 based on its internal evaluation of the allowance for loan losses and loan portfolio. Quarterly, the allowance for loan losses is evaluated under the provision of SFAS 114 and 118. Under these guidelines, specific reserves are allocated for loans considered impaired. A general reserve is also maintained for the Company’s homogenous loans. The level of the allowance and the amount of the provision involve evaluation of uncertainties and matters of judgment. Although management believes the allowance for loan losses at March 31, 2005 to be adequate, further deterioration in problem credits, the results of the loan review process, or the impact of deteriorating economic conditions on other businesses, could require increases in the provision for loan losses and could result in future charges to earnings which could have a significant negative impact on net earnings.

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DEPOSITS

The average daily amounts of deposits and rates paid on such deposits at March 31, 2005 and December 31, 2004 are summarized as follows:

Average Deposit Balance
Dollars in thousands

NOTE: Prior period figures have been adjusted for comparative purposes.

The amount of certificates of deposits of $100,000 or more and other time deposits of $100,000 or more outstanding at March 31, 2005 by time remaining until maturity is as follows:

Deposit Maturity
Dollars in thousands

Brokered certificates of deposit totaling $53.0 million are included in the above totals. These brokered deposits were used to purchase specific securities and have not been used as a general funding or liquidity source of the Company.

KEY RATIOS (Continuing Operations)

Returns on average consolidated assets and average consolidated equity for continuing operations for the periods indicated are as follows for the three months ended March 31, 2005 and March 31, 2004:

Performance Indicators

(1)

Annualized

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NONINTEREST INCOME

The components of the Company’s noninterest income include service charges on deposit accounts, other fees and commissions, mortgage banking activities, gain on sale of securities and gain on sale of assets. Noninterest income as a percent of total gross revenue was 17.7% in the first quarter 2005 compared to 15.8% in the first quarter 2004. Total noninterest income increased 31.3% to $2.0 million for the three month period ended March 31, 2005 compared to the same period in 2004. The largest component of the Company’s noninterest income is revenue generated on deposit accounts. Service charges on deposit accounts decreased $79,000 or 10.1% to $700,000 during the three months ended March 31, 2005 compared to the same period in 2004. This decrease is primarily due to a decrease in the volume of insufficient check fees charged to customers. Revenue from mortgage banking activities totaled $332,000 an increase of $167,000 or 101.2% during the three months ended March 31, 2005 compared to the same period last year. This increase in activity is primarily due to the strengthening of the Company’s in-house mortgage division during the second half of 2004. Other service charges, fees and commissions totaled $244,000 for the first three months of 2005, an increase of $177,000 or 264.2% over the first three months of 2004. This increase is partially attributable to a $50,000 increase in the premium income from Cumberland Life, the Company’s reinsurance subsidiary for credit insurance products. Profits from the sale of securities decreased from $300,000 to $15,000 for the three months ended March 31, 2005 as compared to the same period last year. Management does not anticipate significant security sales during the remainder of 2005. Other noninterest income increased $428,000 including $275,000 in nonrecurring income which was recorded for the nonrefundable advance payments received in connection with the pending sale of the Bank of Mason.

NONINTEREST EXPENSE

Noninterest expense consists primarily of salaries and employee benefits, occupancy expenses, furniture and equipment expenses, data processing expenses and other operating expenses. Total noninterest expense increased $376,000 or 7.4% to $5.4 million during the three months ended March 31, 2005 compared to the same period in 2004. Salaries and employee benefits, which totaled $3.2 million make up the largest category in noninterest operating expenses. These expenses increased $164,000 or 5.5% for the three month period as a result of staffing of the two new Williamson County branch offices, the development and staffing of a large-scale competitive mortgage banking division and continued infrastructure changes. Deposit insurance premiums decreased by $34,000 for the three months ended March 31, 2005 from the same period last year. Other operating expenses increased $324,000 as a result of bringing previously outsourced functions in-house. Efficiency ratios by time period are listed below.

Efficiency Ratio
Dollars in thousands

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INCOME TAXES

Income tax expense for the first three months of 2005 totaled $393,000 as compared to $274,000 for 2004. When measured as a percentage of income before taxes, the Company’s effective tax rate was 30.3% in 2005 as compared to 31.3% in 2004. Effective tax rates are lower than statutory rates due primarily to the interest from investment in tax exempt municipal bonds.

FINANCIAL CONDITION

Balance Sheet Summary

The Company’s total assets decreased $168.6 million or 18.6% to $735.6 million at March 31, 2005 from $904.2 million at December 31, 2004. This decrease was primarily the result of a $200.5 million reduction in assets resulting from the sale of BankTennessee. This decrease was partially offset by the increase in assets of continuing operations of $31.9 million, of which $23.1 million was growth of the securities portfolio and $10.2 million was loan growth. This growth was funded by the $30.7 million growth in deposits.

Total liabilities decreased $154.4 million or 18.2% to $692.1 million at March 31, 2005 compared to $846.5 million at December 31, 2004. The BankTennessee sale resulted in $186.4 million of this decline. Deposits from continuing operations, which are the Company’s primary source of funding growth, grew $30.7 million or 5.4% to $597.6 million. Repurchase agreements have remained relatively flat at $37.5 million since December 31, 2004. Outstanding Federal Home Loan Bank advances remained constant for the period at $36.0 million.

Shareholders’ equity decreased $14.2 million to $43.5 million at March 31, 2005 largely due to the BankTennessee sale. See “Capital Position and Dividends” for further analysis.

Liquidity and Asset Management

The Company’s management seeks to maximize net interest income by managing the Company’s assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers and fund attractive investment opportunities. Higher levels of liquidity bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities. Liquid assets including cash, due from banks and federal funds sold totaled $23.1 million. In addition, the Company has $55.3 million in unpledged securities to secure additional borrowing capacity for liquidity needs.

The Company’s primary source of liquidity is a stable core deposit base. Payments from the loan and investment portfolios provide a secondary source. Borrowing lines with correspondent banks, the Federal Home Loan Bank and the Federal Reserve augment these traditional sources. Repurchase agreements, brokered CDs, and public fund deposits are alternative sources of funding to which the Company has access. As of March 31, 2005, the Company had approximately $29.9 million of available borrowings from the Federal Home Loan Bank.

The Company’s securities portfolio consists of earning assets that provide liquidity and/or interest income. For those securities classified as held-to-maturity the Company has the ability and intent to hold these securities to maturity. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rates, prepayment risk, the need or desire to increase capital and similar economic factors. Cash flows totaling

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approximately $60.8 million are projected to be generated from the securities portfolio within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At March 31, 2005, loans of approximately $298.5 million either will become due or will be subject to rate adjustments within twelve months. Continued emphasis will be placed on structuring adjustable rate loans.

As for liabilities, time deposits greater than $100,000 of approximately $84.2 million will become due during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit and regular savings. Management anticipates that there will be no significant withdrawals from these accounts in the future.

Management believes that with current liquid assets, present maturities, borrowing sources and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. However, the Company’s bank borrowings and subordinated debentures have certain interest payment requirements and the Company has certain operating expenses at the holding company level, which require dividends or management fees from the Company’s bank subsidiaries in order to be funded. The Company 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, however, the Company’s regulators have considerable discretion in determining whether to grant required approvals for our bank subsidiaries dividends, and no assurance can be given that such approvals will be forthcoming.

If the Company’s bank subsidiaries were unable to pay dividends to the Company as a result of a regulatory agency’s refusal to grant necessary approval, or for any other reason, the Company would be limited to parent company fees to fund its operating expenses and may need to obtain alternative financing sources, such as proceeds of an offering of its equity securities or the borrowing of additional amounts, upon receipt of prior regulatory approval, in order to fund these expenses and to meet its debt servicing obligations, including its senior bank debt and its subordinated debt obligation on the trust preferred securities issued by Cumberland Capital Trust I and Cumberland Capital Trust II.

Off Balance Sheet Arrangements

At March 31, 2005, the Company had unfunded loan commitments outstanding of $129.3 million and unfunded lines of credit and letters of credit of $7.0 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company’s bank subsidiaries have the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additionally, the Company’s bank subsidiaries could sell participations in these or other loans to correspondent banks.

Capital Position and Dividends

At March 31, 2005, total shareholders’ equity was $43.5 million or 5.9% of total assets. The decrease of $14.2 million in shareholders’ equity during the three months ended March 31, 2005 results from the Company’s net income of $3.7 million, the exercise of stock options totaling $57,000, and $170,000 in issuance of common stock through the Company’s Employee Stock Purchase Plan all offset by a $1.1 million decrease in accumulated other comprehensive income. Equity was further reduced $17 million by the retirement of common stock in connection with the sale of BankTennessee.

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The Company’s principal regulators have established minimum risk-based capital requirements and leverage capital requirements for the Company and its subsidiary banks. These guidelines classify capital into two categories of Tier I and total risk-based capital. Total risk-based capital consists of Tier I (or core) capital (essentially common equity less intangible assets) and Tier II capital (essentially qualifying long-term debt, of which the Company and subsidiary banks have none, and a part of the allowance for loan losses). In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending on regulatory assigned levels of credit risk associated with such assets. The risk-based capital guidelines require the subsidiary banks and the Company to have a total risk-based capital ratio of 8.0% and a Tier I risk-based capital ratio of 4.0%. Trust preferred securities are allowed to be counted in Tier I capital, subject to certain limitations. At March 31, 2005, the Company’s and its bank subsidiaries’ total risk-based capital ratio, Tier I risk-based capital ratio, and Tier I leverage capital ratio (Tier I capital to average assets for the most recent quarter) were as follows:

CAPITAL STANDARDS
Dollars in thousands

The Company and its subsidiary, Cumberland Bank, 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 Cumberland Bank to the holding company or from the holding company to shareholders, and to maintain certain capital levels at Cumberland Bank in excess of those required for well capitalized status. The most restrictive of these provisions would require the Company to maintain a Tier I leverage ratio of at least 7.0% at Cumberland Bank. The Company and its subsidiaries believe they were in compliance in all material respects with these agreements at March 31, 2005. The Company and its subsidiaries intend to continue to comply with these agreements. The Company believes that the earnings from operations and available funds will be sufficient to allow the Company to meet all these commitments and the requirements for well-capitalized status through the end of 2005. However, the Company’s regulators have considerable discretion in determining whether to grant required approvals, and no assurance can be given that such approvals will be forthcoming. If the Company or its subsidiaries are unable to maintain the required capital levels with earnings from operations and available funds, the Company may be required to raise additional capital or, upon receipt of prior regulatory approval, incur additional debt, to meet these requirements.

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Subsequent Events

Written Agreement. On April 22, 2005, the Company entered into the Written Agreement with the Federal Reserve Bank of Atlanta. The Written Agreement contains provisions similar to those in existing understandings with the Federal Reserve Bank of Atlanta, including provisions to enhance credit administration policies and procedures, independent loan review, internal audit and earnings and capital maintenance. The Written Agreement also provides that the Company will conduct a management, directorate and organizational review and that the Company will obtain the prior approval of the Federal Reserve Bank of Atlanta and of representatives of the Board of Governors of the Federal Reserve System before, among other things, paying cash dividends to the Company’s shareholders or incurring additional debt.

The Written Agreement is the result of an examination completed in October 2004 and management believes it is primarily related to the Company’s former troubled banks headquartered in West Tennessee, which have been sold since the examination date.

The Written Agreement will remain in effect and enforceable against the Company until such time as it is stayed, modified, terminated or suspended in writing by the Federal Reserve Bank of Atlanta.

Waiver of Registration Rights. On April 19, 2005, three investors that had purchased shares of the Company’s common stock in a private placement consummated on July 31, 2003 and who had been granted registration rights requiring the Company to register the shares of common stock purchased by the investors for resale agreed to waive the requirement that the Company cause a registration statement covering such shares filed with the Securities and Exchange Commission to become effective and to remain effective until July 31, 2005. As a result of this waiver, the Company intends to withdrawal the registration statement filed by it with the Securities and Exchange Commission on June 30, 2004. The withdrawal of the registration statement will become effective on the date a withdrawal request is filed with the Securities and Exchange Commission unless the Securities and Exchange Commission notifies the Company that its application will not be granted.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s 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 the Company’s 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 the Company’s operations, the Company does not maintain any foreign currency exchange or commodity price risk.

Interest rate risk (sensitivity) management focuses on risk to long-term earnings capacity and economic value of equity associated with changing interest rates. As the Company’s rate sensitivity position has an important impact on earnings, management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Responsibility for managing interest rate risk and liquidity rests with the Asset/Liability Committee (ALCO). ALCO reviews interest rate and liquidity exposures, adopts balance sheet strategies, and ensures policy compliance. Simulation and Gap analysis are utilized to measure the interest sensitivity of assets and liabilities. Cash flow, maturing and repricing information from the company’s balance sheet are quantified using a variety of potential interest rate environments to estimate earnings sensitivity and capital risk to changing interest rates.

Net interest income should benefit from an increase in market interest rates. This position reflects the asset sensitive bias of the balance sheet. Net interest income is exposed to falling interest rates. Market indicators suggest significant further declines in short-term interest rate are unlikely in the near future.

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Management believes there has been no significant changes in market risk as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities 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 in 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 its 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.

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2005 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

		As discussed in Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the Company’s ability to pay dividends is subject to its receipt of prior approval by bank regulatory officials.
		Other than the shares of Company common stock surrendered to the Company in connection with its sale of BankTennessee, the Company did not repurchase any shares of its common stock during the quarter ended March 31, 2005.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

(a)

Exhibits

	10.1		Formal Written Agreement with Federal Reserve Bank of Atlanta
	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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CIVITAS BANKGROUP, INC. (Registrant)
DATE: 05/10/05	/s/ Richard Herrington
	Richard Herrington,
	President and Chief Executive Officer

DATE: 05/10/05	/s/ Lisa Musgrove
	Lisa Musgrove, Chief Financial Officer
	(Principal Accounting and Financial Officer)