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W&tm Agreement by and b e t w e ) 1 1 C I W A S BANKGROUP, INC. Franlclin, Tennessee 1 1 Docket NO 05-01 I-WARE-HC 1 and 1 1 1 1\ FEDERAL RESERVE BANK OF ATLANTA Arlanta, Georgia J WHEREAS, in recognition of their common goal to restore and maintain the financial soundness of Civitas BankGroup, Inc ,Franklin,Tennessee (“Civitas”), a registered bank holding company that has or formerly had ownership interests i q and provides operational oversight and sevlces to, subsidiary banks (each individually, a “SubsidiaryBank,”&d collectively, the “Subsidiary Banks”), Civitas and the Federal Reserve Bank of Atlanta (the “Reserve Bad?) have mutually agreed to enter into this WritLen Agreement (the ”Ageement”); WHEREAS, Civitas oversees the activities and operations of the Subsidiary Banks and services provided by Civitas to the Subsidiary Banks include bur are not fimitzd zo, risk management, crdit administration, loan review, audit, and deposit operations; WHEREAS, as a result of the identification of deficiencies in various areas by the Reserve Bank, Civitas is taking steps to enhance and improve the cemralized functions and services it provides to the Subsidiary Banks; and TNHEP;AS,on 8@ / -t 2/ 2005,the board of directors of Civitas, at a duly ~ ionstitmed meeting, adopted a resolution authcrizing and ~ ~ ~f +A? i v(h&, . = ~ , ~ somd condition; and to comply with the requirements of this Ageement and all applicable laws and regulations; and (iv) an evaluation ofthe infomation being provided IDthe board of directors to enable it to carry OUT i t s responsibility to oversee tbe operations and management o f the consolidated organization. @) Witbin 10 days of the engagement of the independent consultant, but prior to the commencement of the Management Review, Civitas shall submit to the Reserve Bank for approval an engagement letter that sets forth the scope of the Management Remew and the date of submission of the Consultarrt’s Repoc not to exceed 90 days after the date of fie Reserve Bank’s approval of the engagement letter (c) Upon receipt of the Consultant’s Report, Civitas shall forward a copy to the Reserve Bank. 2 Within 30 days of Cwitas’s receipt ofthe Consultant’s Report, Civitas shall submit to the Reserve Bank a waitten management plan that fully addresses the findings and recommendations in the Consultant’s Report and describes the specific actions that the board of directors proposes to take in order& strengthen Civitas’s management and improve the board of directors’ supervision of Civitas. The plan shall, at a minimum, address, consider, and include actions to improve and strengthen: (a) The consolidated organization’s risk management program; (b) Civitas’s oversight of the lending policies and procedures of the Subsidiary Banks; and (c) Civitas’s planning process and skates$ direction. Jniemal Audit 3. Within 40 days of thk Agreement, Chitas shall submit to the Reserve Bank an acceptable written plan to enhance the enterprise-wide internal audit function. The plan shall address internal audit staffing in tams of the rypes, number, md qualifications of smneeded to provide an effective audit program for the org&ation in light of its size and compleety. The plan shall also at a minimum, address, consider. and include: (a) Compliance with regulatory guidance regarding the internal audit functioq includmg but not limited to, the requirements of the lnteragency Policy Statement on the Internal Audit Function and its Outsourcing, issued March 17,2003; establishment of an audit schedule that ensures that all areas, including but I ) ) not limited to, the Subsidiary Banks’ wire transfer, teller operations, lending, investment securities, and the organization’s consolidatedbalance sheet, and income and expenses, are audited at least yearly; (c) procedures for management to review audit reports quarterly, formaily respond in writing to criticisms in audit reports, and promptly impkment corrective actions that are responsive to audit findings; (d) procedures for tracking audit issues and the internal audit funcrion’s review of management’s corrective action; and (e) submission of quarteriy audit reports and management responses to the Audit Committee of the board of directors. 4. (a) Within 60 days of this Ageemen& Civitas shall complete a review of its enterprise-wide deposit operations. The purposes of the raiew shall be to assess cument intilema1 conmlls over deposit operations and to make %dings, conclusions, and recommendations for J improvements to the internal controls, polides; and procedures in the area o‘i6epos:i operations. The review shall address, consider, and include, a? a minimum, the processes for issuing and controlling lofiicial checks, reactivating d o m t accounts, and controls over items held for customer picbp. Civitas shall provide a copy ofr;ke findings, conclusions, and recommendations of the review to the Reserve Bank upon completion. @) Within 30 days of the completion of its review of Ciitas’s enterprise-wide deposit operations, Civitas shall submit to the Reserve Bank an acceptable written plan to strenghen deposit operations. The plan shall, at a minimum, take into consideration the findings, conclusions, and recommendations of the review completed pursuant to paragraph 4(a). Credit Administration 5. Within 60 days of this Agreement, Civitas shall submit to the R e s e r v e B d an acceptable written plan to strengthen Civitas’s enterprise-wide credit administration policies, procedures, and practices. At a minimum Civitas s h d ensure that its credit administration program includes (a) Uniform underwriting standads for all new and renewed loans that emphasize the importance of cash flow analysis of the borrower rather than collateral-based lendmg and ensure that comprehensive financial statements, tax r m s , and other financial data indicating the borrower’s capacity to repay the loan are current at the time that rhe loan 1s extended are reg&uly updated &ng (b) the period that the loan remains outstanding; procedures for excepbors to the loan polmes, including required domentabon by The account officer and approval by each o€the Subsidiary Bank’s board of drrectofs 01committee, as appropriate, that each exception to tbe poliaes is in the best Interest of the Subsidiwj Bani& (c) internal controls ?;lax are designed fo ensure uniform adherence to loan policies and procedures; (d) procedures for controlling and rnonitoirg concentrations of credit, including (i) establishing concentration of credit limits for acceptable industries and types of loans; and (5) managingrhe risk associated with asset concentrations; (e) monthly reviews by Civitas’s board of directors and senior management of the level and trend of criticized assets (classified an8 special mention loans) at each of the Subsidiary Banks, and the establishment of benchmarks and timeframes for reducing the level of classified assets to acceptable levels as determined by the board of.directors and senior management; . (f) . collection policies and procedures tbat are designed to ensure that the i organization’s consolidated past due and n o n a c d loan ratio remains at an acceptable, manageable level as determined by Civitas’s board of directors and senior management; and (g) monthly reviews by Civitas’s board of directors ofthe aggregate dollar level and volume of all internally graded loans k a d e s 1- 81, and all past due and nonaccrual loans, as a percentage of total loans of each wholly-owned Subsidiary Bank. Loan Review 6 Within 60 days of this Agreement, Civitas shall submit to the Reserve Bank an acceptable enhanced independenr loan review program. The program shall, at a minimum, address, consider, and include the following: (a) The qualifications of the persori or fiim engaged TO perform loan reviews; 6 Co) zhe periodic m i e w ofeach loan in excess of$500,@06for complimze with h e original repaymart scheaule. veri.licazion of collateral values md the Subsidiary Bank's interest in the collatera the current financial condition o f the borrower and guarantor,and compliance with the Subsidiary 3ank's loan policy; (c) procedures to confirm the accuracy of all risk gades assigned by loan (d) monitoring and repoflng ofpast due loans; (e) periodic reporting to the Subsidiary Bank's board of directors of the status officers; of the loan reviews and the action(s) taken by management to improve the Subsidiary Bank's position On each adversely graded loan; and (9 documentation of any deviations from the recommendationsmade by loan rwiew in the minutes of the Subsidiary Bank's board of directors and maintained for subsequent regulatory review. Capital Plan 7. (a) Within 90 days of this Agreement, Civitas shall submit to the Reserve Bank an acceptable writien plan to maintain a sufficient capital position for the consolidated organization. The plan shall, at a minimum, address, consider, and include: (i) The current and future capital requirements of each wholly-owned Subsidiary Bank and the consolidated organization, including compliance with the Capital Adequacy Guidelines for Bank Holding Companies: RiskBased Measure and Tier 1 Leverage Measure. Appendices A and D of Regplation Y of the Board of Governors (12 C.F.R. Part 225, App- A and D); $1 ihe a s m qudiq, condition, and risk profile of each wholly-owxed (iii] the anticipated level of retained earnings and dividmds of each Subsidiary Bank; wholly-owned SubsidiaryBank and Civitas; (iv) actions to be taken and the source and timing of additional h n d s to fuliiil the consolidated 0rganization.s fume capital requirements and to maintain the adequacy of the consolidated orginization’s ALLL and each wholly-owned Subsidiary Bank‘s ALLL; and (v) @) projected or anticipated growth of the consolidated organization The board of directors shall nao&tor and review the sufficiency of the consolidated organization’s capital posifion on a iparterly basis and shall reflect such reviews in the minutes of the meetings of the board o€directors. Eardtngs and Cash Flow 8. Wit?in90 days ofthis Agreement, Civitas shall submit to rhe Reserve Bank a i written strategic plan that includes the goals and strategies for improving consolidated earnings for 2 minimum ofthree years aRer the date of this Agreement. The mitt& plan shall at 2 minimum, address, consider, and include: (a) Identification of the major areas and means by which Civitas’s board of directors will seek to improve the operating performance of each wholly-owned Subsidiary B2* @) financial pdormance objectives, including plans for asset pow& earnings, liquidity, and capital supported by quarterly and 4pro forma financial statements and assumptions; a d (c) a budget review process that m s u i q at a minimum: 9. (a) (1) Timely reperkg of discrepancies behween budget and pedormanccr (ii) documentation of variances &-ombudget; and (iii) timely and appropriate revisions to budget Within 90 days of this Agreement, Civitas shall submit to the Reserve Bank a comprehensive parent-only cash flow analysis detailing Civitas’s planned sources and uses of cash for debt retirement, operating expenses, and other purposes for 2005. (b) For each yea &er 2005, CiVitas shall by January 30 of such year submiz to the Reserve Bank a parent-only cash flow analysis for such year Dividends 10. . (a) Civitas shall not declare or pay any dividends, with the exception of stock dividends, without ?he prior written approval of the Reserve Bank and the Director of the Division of Banking Supervisionand Regulation ofthe Board of Governors. (b) Civitas shall not take dividends or any other f o r k of payment representing a reduction in capital from any wholly-owned Subsidiary Bank wi?hout the prior written approval of the Reserve Bark. (c) All requests for prior approval shall be received by the Reserve B a i at least 30 days prior to the proposed dividend declaration date and shaU contain, but not be limited TO,current and projected inf6rmation on consoiidated eaiiikss, and cadi fl~a, capitdl =set quality, and loan loss reserve needs o f each wholly-owned SubsidiaryBank. Debt and Stock Redemption 11. (a) Civitas shall not, di.ectly or indirectly, incur any debt without the prior wri~Ienapproval of the Reserve Bank. All requests for prier &%ten approval shall be received by the Reseme Bank at least 30 days before the company wishes to incUithe indebtedness and 9 shdi contain, at a minimum, a staiemem regaxling the purpose of the debt, the iems of he debt. the planned so~.~ce(s)€or drbt iepaynnent, and an analysis ofthe cash flow resouIccs available to meet such debt repayment. The foregoing restrictions equally apply to any refinancing of existing indfibtedneusthar affect a c h g e in maminials terms ofthe debt instrument (e-g.,interest rate, mtuiity date, and amortization schedule). @) Civitas shall not redeem my stock without the prior written approval of the Reserve Bank. Compliance with Agreement 12. (a) Within 30 days ofthis Agreement, theboard of directors of Civitas shall appoint a committee (the "Compliance Committee") to monitor and coordinate the company's compliance with the provisions of this Agreement. The Compliance Committee shall be comprised ofthree or more outside directors who are not executive officers or principaI shareholders, as defined in sections 215.2(e)(1) and (m)of Regulation 0 ofthe Board of Governors (I? C.F.R. 215.2(e)(l) and (m)), ofCivitas or any of its subsidiaries or &liates. At a minimum, the Compliance Committee shall meet monthly., keep detailed minut& of each meeting, and report to the boards of d m o r on a monthly basis on the actions taken to comply with this Agreement and the results of those actions. @) Within 30 days &er the end of each calendar quarter (June 30, September 30, December 31, and March 31) followingthe date ofthis Agreement, the board of directors of Civitas shall submit to the Reserve Bank written progress reports detailing the form and manner of all actions taken to secure compliance with this Agreement and the results thereof. Such reports m y be discontinued when the correcdons required by this Ageement have been accomplished and the Reseve Bark has, in witmg, released Civitas Fmm d n g hhex reports Approval of Plans, Policies, Procedures, and hograms 15. The engagement ierter, plms, and program required. by para&~aphs ICu), 3,4(b), 5, 6,and 7 of this Agreement shall be submitted to the R e m e Bank for review and approval. An acceptable engagement letter, acceprable progrw and acceptable plans shall be subnutted within the time periods set forth in this Agreement Civitas shall adopt the approved engagement letter, program, and plans within 10 days of approval by the Reserve Bank and then shall fully comply with them During the term of this Agreement, the approved program and plans shall not be amended or rescinded without the prior written approval of the Reserve Bank. Communications 14. All communicationsregarding this Agreement shall be sent to: (a) Mr. Ron Zimmerman Vice President Federal Reserve Bank of Atlanta 1000 Peachtree Street, N.E. Atlanta, Georgia 30309470 (b) Mr. Richard Herrington President and ChiefExecufive Officer Civitas BankGroup, Inc. 810 Crescent Centre Drive, Suite 320 Franklin, Tennessee 37067 Miscellaneous 15. Notwithstanding any provision ofthis Aseernent to the contrary, the Reserve 3ank may, in its sole discretion gant w&en extensions of time to Civitas to comply with any provision of this Apreement. 16. The provisions ~ftk. Agreement shall be bizding upon Civitas and its Institution- affiiiatedparties, in their capacities as suck and their successors and assigns. 17. Each provision of this Ageemeat shall remain effective and enforceableuntil €ormalily stayed, modified, teminated or suspended in writing by the Resave Bank. 18. The provisions of this Agreement shdl not bar, estop, or otherwise prevent the Board o f Governors of the Federal Reserve System (the ‘’Board of Governors”), the Reserve Bank, or any other federal or state agency from raking any other action affectins Civitas, the Subsidiary Banks, or any of their current or former institution-aEdiatedparties and their successors and assigns. 19. This Agreement is a ‘‘written agreement" for the purposes OK and is enhrceable by the Board of Governors as an order issued under, section 8 of t h e m 1 Act (12 U.S.C. 1818). IN WITNESS WJ4EREOF, the parties have caused this Agreement to be executed as .of this,&&day of J+&! Civitas BankGroup, Inc. . .2005. Federal Resave Bank of Atlanta Vice President