UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________.
Commission file number 0-10974
FIRST PULASKI NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 62-1110294
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
206 South First Street, Pulaski, Tennessee 38478
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (931)-363-2585
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock Par Value $1.00 Per Share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [ X ]
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 past 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of shares of Common Stock, par value $1.00 per share, held by nonaffiliates of the Registrant as of June 30, 2005 was $73,425,750. The market value calculation assumes that all shares beneficially owned by members of the Board of Directors of the Registrant are shares owned by "affiliates", a status which each of the directors individually disclaims. Given that there is no active trading market for the registrant's common stock, this calculation was made using $50 per share, the price at what the registrant's common stock was traded on June 28, 2005, the closest trade, of which the registrant has knowledge, to June 30, 2005.
Shares of Common Stock outstanding on March 8, 2006 were 1,574,834.
Documents Incorporated by Reference:
Part III. Portions of the Registrant's Proxy Statement relating to the Registrant's Annual Meeting of Shareholders to be held on April 27, 2006 are incorporated by reference into Items 10, 11, 12, and 13.
page 1
PART I
ITEM 1. BUSINESS.
First Pulaski National Corporation, (the "Corporation") is a financial corporation engaged in general commercial and retail banking business through its subsidiary bank First National Bank of Pulaski ("First National" or the "Bank"). On June 12, 2001, the Corporation signed a definitive agreement to acquire all of the outstanding common stock of Belfast Holding Company, a privately owned, Tennessee bank holding company with one bank subsidiary, the Bank of Belfast, with offices in Belfast and Lewisburg, Marshall County, Tennessee. On October 17, 2001, the Corporation consummated its acquisition of Belfast Holding Company pursuant to which Belfast Holding Company merged with and into the Corporation with the Corporation surviving the merger.The Corporation merged the Bank of Belfast with and into First National Bank of Pulaski on April 12, 2002.
During the third quarter of 2001, First National's wholly-owned subsidiary, First Pulaski Reinsurance Company ("FPRC") received its insurance license. FPRC is engaged in the business of reinsuring credit insurance written by the Corporation's subsidiaries.
The Corporation was organized under the laws of the state of Tennessee in 1981 and its only significant asset is the common stock of First National, headquartered in Pulaski, Tennessee.
The Corporation, through its subsidiaries, offers a diversified range of financial services to its customers. These include activities related to general banking business with complete services in the commercial, corporate and retail banking field.
The Bank offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit and loans for consumer, commercial and real estate purposes. The Bank does not have a concentration of deposits obtained from a single person or entity or a small group of persons or entities, the loss of which would have a material adverse effect on the business of the Bank.
The Corporation owns all of the common stock of the Bank. At December 31, 2005, the Corporation and its subsidiaries had combined total assets of $450,393,007.
At December 31, 2005, the Bank had long-term indebtedness of approximately $4.10 million in the form of advances payable to the Federal Home Loan Bank of Cincinnati. Note G to the Corporation's Consolidated Financial Statements, includes a detailed analysis of this debt. The Corporation derives its primary source of funds from deposits acquired through the Bank. First National is the largest financial institution in Giles County, Tennessee, measured by county deposits. It has established two branches in Lincoln County, Tennessee, where it is also the largest financial institution, measured by county deposits. The Bank is the fifth largest financial institution in Marshall County, Tennessee, measured by county deposits.
As of March 8, 2006, First National had 156 employees, 17 of whom were part-time. The Corporation has no employees other than those employed by First National and its subsidiaries.
COMPETITION
First National operates principally in three market areas, Giles County, Tennessee, Lincoln County, Tennessee and Marshall County, Tennessee. The following discussion of market areas contains the most recent information available from reports filed with the FDIC and the Office of Thrift Supervision.
Giles County. First National competes in Giles County with six (6) commercial banking organizations. Four (4) of the six (6) commercial banking competitors are small community banking organizations. The other two (2) commercial banking competitors are owned by large regional and super-regional multi-bank holding companies. From June 30, 2003 to June 30, 2005, total deposits for all commercial banks in the Giles County market have increased 7.1% from $513.7 million to $550.1 million. The Bank has six (6) offices in Giles County and
page 2
approximately 62% of its deposits are located there. As of June 30, 2005, First National had the largest market share of banks in Giles County with a 43.2% share of the bank deposits, over twice the market share of its nearest competitor.
Giles County is located in southern Middle Tennessee, approximately 70 miles from Nashville, Tennessee. Pulaski is the largest city in Giles County. Giles County had an estimated population of 29,255 in 2004 and a median household income of $34,978 in 2003, the latest available data.
Lincoln County. First National competes in Lincoln County with five (5) commercial banking organizations. Three (3) of the commercial banking competitors are owned by regional or national multi-bank holding companies. The other two (2) commercial banking competitors are small community banking organizations. From June 30, 2003 to June 30, 2005, total deposits for all commercial banks in Lincoln County increased 10.5% from $384.8 million to $425.3 million. The Bank has two (2) branch offices located in this market, and approximately 30% of its deposits are located there. As of June 30, 2005, First National had a 27.9% share of the Lincoln County bank deposit market, the largest market share in the county.
Lincoln County is also located in southern Middle Tennessee, approximately 80 miles from Nashville, Tennessee. The largest city in Lincoln County is Fayetteville. Lincoln County had an estimated population of 32,141 in 2004, and a median household income of $35,636 in 2003, the latest available data.
Marshall County. First National competes in Marshall County with five (5) commercial banking organizations. Four (4) of the five (5) commercial banking competitors are small community banking organizations. The other commercial banking competitor is owned by a national bank holding company. From June 30, 2003 to June 30, 2005, total deposits for all commercial banks in the Marshall County market increased 5.4% from $369.7 million to $389.7 million. The bank has two (2) offices in Marshall County and approximately 8% of its deposits are located there. As of June 30, 2005, First National had the fifth largest market share of banks in Marshall County with a 8.6% share of the bank deposits.
Marshall County is located in southern Middle Tennessee, approximately 50 miles from Nashville, Tennessee. Lewisburg is the largest city in Marshall County. Marshall County had an estimated population of 27,911 in 2004 and a median household income of $38,544 in 2003, the latest available data.
The Bank has substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits are the range and quality of financial services offered, the ability to offer attractive rates and availability of convenient office locations. Direct competition for deposits comes from other commercial banks (as well as from credit unions and savings institutions in neighboring counties). Additional significant competition for savings deposits may come from other investment alternatives, such as money market mutual funds and corporate and government securities. The primary factors in competing for loans are the range and quality of the lending services offered, interest rates and loan origination fees. Competition for the origination of loans normally comes from other savings and financial institutions, commercial banks, credit unions, insurance companies and other financial service companies. The Corporation believes that its strategy in relati onship banking and local autonomy in the communities it serves allows flexibility in rates and products offered in response to local needs. The Corporation believes this is its most effective method of competing with both the larger regional bank holding companies and the smaller community banks.
The Corporation does not maintain an internet website. As such, the Corporation does not make available on a website free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports. The Corporation will, however, provide paper copies of such filings free of charge upon request. To request any of these documents please write to First Pulaski National Corporation, Attention: Corporate Secretary, 206 South First Street, Pulaski, Tennessee 38478.
SUPERVISION AND REGULATION
Both the Corporation and First National are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of the Corporation's and First National's operations. These laws and regulations are generally intended to protect depositors, not shareholders. The following discussion describes the material elements of the regulatory framework which apply.
page 3
First Pulaski National Corporation
The Corporation is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, it is subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.
Acquisition of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve's prior approval before:
| | |
| | Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank's voting shares; |
| | |
| | Acquiring all or substantially all of the assets of any bank; or |
| | |
| | Merging or consolidating with any other bank holding company. |
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserve's consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Corporation or any other bank holding company located in Tennessee may purchase a bank located outside of Tennessee. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Tennessee may purchase a bank located inside Tennessee. In each case, however, state law restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. For example, Tennessee law currently prohibits a bank holding company from acquiring control of a Tennessee-based financial institution until the target financial institution has been in operation for three years.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
| | |
| | The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or |
| | |
| | No other person owns a greater percentage of that class of voting securities immediately after the transaction. |
The Corporation's common stock is registered under the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.
Permitted Activities. Under the Bank Holding Company Act, a bank holding company, which has not qualified or elected to become a financial holding company, is generally prohibited from engaging in or acquiring direct or indirect
page 4
control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include: (i) factoring accounts receivable; (ii) acquiring or servicing loans; (iii) leasing personal property; (iv) conducting discount securities brokerage activities; (v) performing selected data processing services; (vi) acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and (vii) performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.
Support of Subsidiary Institutions. Under Federal Reserve policy, the Corporation is expected to act as a source of financial strength for First National, and to commit resources to support First National. This support may be required at times when, without this Federal Reserve policy, the Corporation might not be inclined to provide it. In the unlikely event of the Corporation's bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of First National would be assumed by the bankruptcy trustee and entitled to a priority of payment.
First National
First National is a national bank chartered under the federal National Bank Act. As a result, it is subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency (the "OCC"). The OCC regularly examines First National's operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, First National's deposits are insured by the FDIC to the maximum extent provided by law. First National also is subject to numerous state and federal statutes and regulations that will affect its business, activities and operations.
Branching. While the OCC has authority to approve branch applications, national banks are required by the National Bank Act to adhere to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee. First National and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states' laws. Tennessee law, with limited exceptions, currently permits branching across state lines either through interstate merger or branch acquisition. Tennessee, however, only permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through branch acquisition if the state of the out-of-state bank permits Tennessee based banks to acquire branches there.
FDIC Insurance. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described below, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution's primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insur ance funds.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
page 5
In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund and the Savings Association Insurance Fund, increasing retirement account coverage to $250,000 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund's reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. The new statute grants banks an assessment credit based on their share of the assessment base on December 31, 1996, and the amount of the credit can be used to reduce assessments in any year subject to certain limitations.
Capital Adequacy
The Corporation and First National are required to comply with the capital adequacy standards established by the Federal Reserve, in the Corporation's case, and the OCC, in the case of First National. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. First National is also subject to risk-based and leverage capital requirements adopted by the OCC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. For a more detailed discussion of capital requirements and the Corporation's and the Bank's capital levels see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources, Capital and Dividends" and Note L to the Notes to Consolidated Financial Statements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital l evel for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2005, First National was considered "well capitalized" by its primary regulator.
page 6
Payment of Dividends
The Corporation is a legal entity separate and distinct from First National. The principal sources of the Corporation's cash flow, including cash flow to pay dividends to its shareholders, are dividends that First National pays to it as its sole shareholder. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Corporation as well as to the Corporation's payment of dividends to its shareholders.
The payment of dividends by the Corporation and the Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. If, in the opinion of the OCC, First National was engaged in or about to engage in an unsafe or unsound practice, the OCC could require, after notice and a hearing, that First National stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. S ee "Prompt Corrective Action" above.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation's financial institutions. The Corporation cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Corporation's business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
The Corporation's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve's statutory power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The Corporation cannot predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 1A. RISK FACTORS.
Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.
The Corporation could sustain losses if its asset quality declines.
The Corporation's earnings are significantly affected by its ability to properly originate, underwrite and service loans. The Corporation could sustain losses if it incorrectly assesses the creditworthiness of its borrowers or fails to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause the Corporation's interest income and net interest margin to decrease and its provisions for loan losses to increase, which could adversely affect its results of operations and financial condition.
page 7
An inadequate allowance for loan losses would reduce the Corporation's earnings.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and takes a charge against earnings with respect to specific loans when their ultimate collectibility is considered questionable. If management's assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulat ory authorities require First National to increase the allowance for loan losses as a part of their examination process, First National's earnings and capital could be significantly and adversely affected.
Liquidity needs could adversely affect the Corporation's results of operations and financial condition.
The Corporation relies on dividends from First National as its primary source of funds. The primary source of funds of First National are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, the Corporation may be required from time to time to rely on secondary sources of liquidity to meet withdrawal dema nds or otherwise fund operations. Such sources include Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks. While the Corporation believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.
The Corporation is geographically concentrated in Giles, Lincoln and Marshall Counties, Tennessee, and changes in local economic conditions impact its profitability.
The Corporationoperates primarily in Giles, Lincoln and Marshall counties, and substantially all of its loan customers and most of its deposit and other customers live or have operations in this same geographic area. Accordingly, the Corporation's success significantly depends upon the growth in population, income levels, and deposits in these areas, along with the continued attraction of business ventures to the area, and its profitability is impacted by the changes in general economic conditions in this market. In addition, unfavorable local or national economic conditions could reduce the Corporation's growth rate, affect the ability of its customers to repay their loans and generally affect its financial condition and results of operations. The Corporation is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies.
Competition from financial institutions and other financial service providers may adversely affect the Corporation's profitability.
The banking business is highly competitive and the Corporation experiences competition in each of its markets from many other financial institutions. The Corporation competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in the Corporations' primary market areas and elsewhere. Many of the Corporation's competitors are well-established, larger financial institutions that have greater resources and lending limits and a lower cost of funds than the Corporation has.
Additionally, the Corporation faces competition from de novo community banks, including those with senior management who were previously affiliated with other local or regional banks or those controlled by investor
page 8
groups with strong local business and community ties. These de novo community banks may offer higher deposit rates or lower cost loans in an effort to attract the Corporation's customers, and may attempt to hire the Corporation's or First National's management and employees.
The Corporation competes with these other financial institutions both in attracting deposits and in making loans. In addition, the Corporation has to attract its customer base from other existing financial institutions and from new residents. This competition has made it more difficult for the Corporation to make new loans and at times has forced the Corporation to offer higher deposit rates. Price competition for loans and deposits might result in the Corporation earning less interest on its loans and paying more interest on its deposits, which reduces the Corporation's net interest income. The Corporation's profitability depends upon its continued ability to successfully compete with an array of financial institutions in its market areas.
Loss of the Corporation's senior executive officers or other key employees could impair its relationship with its customers and adversely affect its business.
The Corporation has assembled a senior management team which has a substantial background and experience in banking and financial services in the Corporation's market. Loss of these key personnel could negatively impact the Corporation's earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
The Corporation, as well as First National, operate in a highly regulated environment and are supervised and examined by various federal and state regulatory agencies who may adversely affect the Corporation'sability to conduct business.
The Tennessee Department of Financial Institutions and the Board of Governors of the Federal Reserve supervise and examine First National and the Corporation, respectively. Because First National's deposits are federally insured, the FDIC also regulates its activities. These and other regulatory agencies impose certain regulations and restrictions on First National, including:
- explicit standards as to capital and financial condition;
- limitations on the permissible types, amounts and extensions of credit and investments;
- restrictions on permissible non-banking activities; and
- restrictions on dividend payments.
Federal and state regulatory agencies have extensive discretion and power to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. As a result, the Corporation must expend significant time and expense to assure that it is in compliance with regulatory requirements and agency practices.
The Corporation, as well as First National, also undergoes periodic examinations by one or more regulatory agencies. Following such examinations, the Corporation or First National may be required, among other things, to make additional provisions to its allowance for loan loss or to restrict its operations. These actions would result from the regulators' judgments based on information available to them at the time of their examination. First National's operations are also governed by a wide variety of state and federal consumer protection laws and regulations. These federal and state regulatory restrictions limit the manner in which the Corporationand First National may conduct business and obtain financing. These laws and regulations can and do change significantly from time to time, and any such change could adversely affect the Corporation'sresults of operations.
page 9
The Corporation's common stock is thinly traded, and recent prices may not reflect the prices at which the stock would trade in an active trading market.
The Corporation's common stock is not traded through an organized exchange, but rather is traded in individually-arranged transactions between buyers and sellers. Therefore, recent prices may not necessarily reflect the actual value of the Corporation's common stock. A shareholders ability to sell the shares of common stock in the Corporation in a timely manner may be substantially limited by the lack of a trading market for the common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable
ITEM 2. PROPERTIES.
The Corporation and the Bank are headquartered at 206 South First Street, Pulaski, Tennessee, in Giles County. The banking facility housing the headquarters was completed in 1966 and has undergone several major renovation and expansion projects over the years. The most recent expansion at this facility was completed in early 1995. An expansion and renovation of the Bank's Industrial Park Road office, which is owned by the Bank and is on the western edge of Pulaski, was completed in early 1996. The Minor Hill Road office, in the southern part of Pulaski, operates in a facility that is owned by the bank and was completed in 1985. Other banking facilities operated by the Bank include owned offices at Ardmore in the southeastern corner of Giles County and in Fayetteville and Park City in adjacent Lincoln County, Tennessee. The Ardmore office, in existence since 1963, has also undergone several major expansions, with the most recent being completed in early 1993. In 2001, the Bank built a ne w facility that is owned by the Bank in Fayetteville. Construction of the Park City branch was completed in 1997. A facility on Flower Street near the main office in Pulaski, already owned by the Corporation and previously used for storage, was renovated and completed in 1998 primarily for the purpose of housing the Bank's mortgage lending operations. The Belfast office, which is owned by the Bank, was acquired by the Bank during the merger with the Bank of Belfast in 2002 and was last renovated in 1980. The Bank also assumed a leased facility in Lewisburg, Tennessee during the Bank of Belfast merger. In 2005, the Bank purchased land in Lewisburg for the construction of a new banking office that would replace the leased facility in that town. Also, in October 2005, the Bank opened an office in Lynnville, Tennessee in a renovated facility. Additional properties for parking, storage and expansion in the various locations are leased through the year 2015. Rental expenses for these properties during the year 2005 amounted to $28,005.
ITEM 3. LEGAL PROCEEDINGS.
The Corporation and its subsidiaries are involved, from time to time, in ordinary routine litigation incidental to the banking business. Neither the registrant nor its subsidiaries is currently involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
page 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
REPURCHASES OF EQUITY SECURITIES.
Common stock of First Pulaski National Corporation is not traded through an organized exchange but is traded between local individuals. As such, price quotations are not available on NASDAQ or any other quotation service. The following trading prices for 2005 and 2004 represent trades of which the Corporation was aware, primarily through its officers and directors and those of the Bank, and do not necessarily include all trading transactions for the period and may not necessarily reflect actual stock values.
| Trading Prices | Dividends Paid |
|
|
1st Quarter, 2005 | $50.00 - 50.00 | $0.41 |
2nd Quarter, 2005 | $46.00 - 50.00 | $0.41 |
3rd Quarter, 2005 | $50.00 - 50.00 | $0.41 |
4th Quarter, 2005 | $50.00 - 50.00 | $0.42 |
|
Total Annual Dividend, 2005 | | $1.65 |
| | |
| | |
| | |
1st Quarter, 2004 | $49.00 - 50.00 | $0.41 |
2nd Quarter, 2004 | $49.00 - 50.00 | $0.41 |
3rd Quarter, 2004 | $48.50 - 50.00 | $0.41 |
4th Quarter, 2004 | $45.00 - 50.00 | $0.42 |
|
Total Annual Dividend, 2004 | | $1.65 |
There are approximately 1,520 shareholders of record of the Corporation's common stock as of February 28, 2006.
The Corporation reviews its dividend policy at least annually. The amount of the dividend, while in the Corporation's sole discretion, depends in part upon the performance of First National. The Corporation's 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 operations are conducted through its subsidiaries, the Corporation's ability to pay dividends also depends on the ability of the subsidiaries to pay dividends to the Corporation. The ability of First National to pay cash dividends to the Corporation is restricted by applicable regulations of the OCC and the FDIC. For a more detailed discussion of these limitations see "Item 1. Business - Supervision and Regulation - Payment of Dividends."
The table below sets forth the number of shares repurchased by the registrant during the fourth quarter of 2005 and the average prices at which these shares were repurchased.
| | | | | Total Number | | |
| | | | | of Shares | | Maximum Number |
| | | | | Purchased as | | of Shares that May |
| | | | | Part of Publicly | | Yet Be Purchased |
| Total Shares | | Average Price | | Announced Plans | | Under the Plans |
| Purchased | | Paid per Share | | or Programs | | or Programs |
|
| |
| |
| |
|
October 1-31, 2005 | 3,325 | | $50.00 | | 3,325 | | $2,839,620 |
November 1-30, 2005 | 990 | | $50.00 | | 990 | | $2,790,120 |
December 1-31, 2005 | - | | $0.00 | | - | | $2,790,120 |
|
| |
| |
| |
|
Total | 4,315 | | $50.00 | | 4,315 | | $2,790,120 |
| =========== | | =========== | | ============= | | ============== |
page 11
On December 21, 2004, the Board of Directors of the Corporation approved a plan authorizing the management of the Corporation, beginning on December 31, 2004, to repurchase up to $5,000,000 of the Corporation's common stock from shareholders desiring to liquidate their shares in either the open market or through privately negotiated transactions. The above shares were purchased by the registrant in privately negotiated transactions with its shareholders.
ITEM 6: SELECTED FINANCIAL DATA
The table below contains selected financial data for the Corporation for the last five years. All weighted average outstanding share data is computed after giving retroactive effect of the merger of the Corporation and Belfast Holding Company in 2001. Note N to the Consolidated Financial Statements which follows shows figures for basic earnings per share and gives effect to dilutive stock options in determining diluted earnings per share. Total average equity and total average assets exclude unrealized gains or losses on investment securities.
| For Year Ended December 31, |
| 2005 | 2004 | 2003 | 2002 | 2001 |
|
|
| (dollars in thousands) |
Interest income | $25,319 | $23,217 | $23,393 | $24,664 | $26,919 |
Interest expense | 9,371 | 6,589 | 6,881 | 8,962 | 12,756 |
Net interest income | 15,948 | 16,628 | 16,512 | 15,702 | 14,163 |
Loan loss provision | 601 | 664 | 1,520 | 1,614 | 1,047 |
Non-interest income | 3,944 | 3,490 | 4,169 | 3,611 | 3,868 |
Non-interest expense | 12,261 | 12,121 | 11,946 | 11,759 | 10,762 |
Income before income tax | 7,030 | 7,333 | 7,215 | 5,940 | 6,222 |
Net income | 5,258 | 5,328 | 5,010 | 4,066 | 4,255 |
| | | | | |
Total assets | $450,393 | $426,929 | $418,428 | $381,670 | $363,632 |
Loans, net of unearned income | 272,948 | 255,824 | 228,303 | 233,255 | 208,917 |
Securities | 133,920 | 136,464 | 159,907 | 114,161 | 115,550 |
Deposits | 397,412 | 373,401 | 362,591 | 331,248 | 316,634 |
| | | | | |
Per Share Data: | | | | | |
Net Income-Basic | $3.29 | $3.24 | $3.05 | $2.49 | $2.61 |
Net Income-Diluted | 3.28 | 3.22 | 3.03 | 2.47 | 2.60 |
Cash dividends paid | 1.65 | 1.65 | 1.65 | 1.65 | 1.57 |
| | | | | |
Total average equity | $45,685 | $45,527 | $42,934 | $41,083 | $39,461 |
Total average assets | 442,729 | 426,067 | 400,811 | 370,669 | 347,191 |
Total year-end assets | 450,393 | 426,929 | 418,428 | 381,670 | 363,632 |
Total long-term debt | 4,096 | 4,335 | 4,640 | 3,562 | 1,456 |
| | | | | |
Ratios | | | | | |
Avg equity to avg assets | 10.32% | 10.69% | 10.71% | 11.08% | 11.37% |
Return on average equity | 11.51% | 11.70% | 11.67% | 9.90% | 10.78% |
Return on average assets | 1.19% | 1.25% | 1.25% | 1.10% | 1.23% |
Dividend payout ratio | 50.02% | 50.99% | 54.23% | 66.38% | 61.05% |
The basic earnings per share data and the diluted earnings per share data in the above table are based on the following weighted average number of shares outstanding:
| For Year Ended December 31, |
| 2005 | 2004 | 2003 | 2002 | 2001 |
|
|
Basic | 1,596,695 | 1,646,422 | 1,644,008 | 1,635,777 | 1,632,054 |
Diluted | 1,603,908 | 1,655,415 | 1,653,943 | 1,646,949 | 1,636,311 |
page 12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Pulaski National Corporation is a one-bank holding company with its only direct subsidiary being First National in Pulaski, Tennessee. During October 2001, the Corporation acquired Belfast Holding Company located in Belfast, Tennessee. In April 2002, the Corporation merged the Bank of Belfast, its wholly owned subsidiary into First National.
This review should be read in conjunction with the consolidated financial statements and related notes. Prior period amounts have been restated to reflect the acquisition of Belfast Holding Company.
FORWARD-LOOKING STATEMENTS
Certain of the statements in this discussion may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, (the "Exchange Act"), as amended. The words "expect," "anticipate," "intend," "should," "may," "could," "plan," "believe," "likely," "seek," "estimate" 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. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Corporation to differ materially from any results expressed or implied by such forward-looking statements. Such factors include those identified in "Item 1A. Risk Factors" above and, without limitation, (i) increased competition with other financial institutions, (ii) lack of sustained growth in the economy in the Corporation's market area, (iii) rapid fl uctuations 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 of the provision for losses on loans, (vii) changes in the legislative and regulatory environment and (viii) loss of key personnel. Many of such factors are beyond the Corporation's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Corporation 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 Corporation. The Corporation disclaims any obligation to update or revise any forward-looking statements contained in this discussion, whether as a result of new informa tion, future events or otherwise.
OVERVIEW
Management looks at several key performance indicators in evaluating the results of operations of the Corporation and the Bank. Key items include the volume and quality of loans. The Bank continued to experience strong loan demand in 2005 leading to an increase in loans of $17.1 million from December 31, 2004 to December 31, 2005. Nonaccrual loans increased $478,000 from the end of year 2004 to the end of year 2005, but still remained near historical normal levels. However, other real estate owned decreased over $2.1 million from year-end 2004 to year-end 2005 as the Bank sold a large commercial property that it held in other real restate owned at the end of 2004. The sale of this property returned the balance of other real estate owned to normal historical levels. Net charged-off loans in 2005 decreased almost $270,000 in 2005 as compared to 2004. The ratio of net charge-offs to loans outstanding fell to 0.13%, a historically low level, indicating that the loan portfolio remains st rong. Another key item is the growth of deposits, which grew over $24.0 million in 2005. Most of the growth in deposit was in interest-bearing balances. The move away from savings/money market balances and toward time deposits that began in 2004 as interest rates began to increase continued in 2005. Balances in savings/money market accounts decreased $16.0 million while time deposit balances increased $32.8 million from year-end2004 to year-end 2005. This trend began to slow in the latter half of 2005, but management anticipates that this trend will likely continue but at a decreased pace in 2006 as short-term interest rates are expected to continue rising and more customers likely will lock in the higher rates on time deposits.
page 13
Net income decreased by $70,000 to $5.26 million in 2005 as compared to 2004, primarily due to a decrease in the net interest margin to 4.09% in 2005 from 4.44% in 2004. Intense local competition in both loan and deposit pricing and a flat yield curve were the primary contributors to the decrease in the net interest margin in 2005. Management anticipates that this aggressive competition will continue into 2006 and that the Corporation's net interest margin may continue to experience compression, especially if short-term interest rates continue to rise and the yield curve remains flat or inverts. Management monitors the Corporation's net interest margin closely and strives to maintain the Corporation's net interest margin at acceptable levels.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles conform to 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, we have made judgements and estimates which have significantly impacted our financial position and results of operations.
The allowance for loan losses is maintained at a level that is considered to be adequate to reflect estimated credit losses for specifically identified loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. Our methodology of assessing the appropriateness of the allowance consistsof the formula allowance and specific allowances.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. For purposes of the quarterly review, the loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed, and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on our historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred in excess of the amount determined by the application of the above formula. Every substandard or worse loan in excess of $250,000 and all loans criticized as "Special Mention" over $400,000 are reviewed quarterly by the Executive and Loan Committee of the Bank's Board of Directors to review the level of loan losses required to be specifically allocated.
For a more detailed description of other accounting policies the Corporation considers significant in the determination of its results of operations, statement of condition and cash flows, see Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 2005 was approximately $5.26 million, or $3.28 per diluted share, compared with approximately $5.33 million, or $3.22 per diluted share, in 2004 and approximately $5.01 million, or $3.03 per diluted share, in 2003. Although net income decreased in 2005 as compared to 2004, the earnings per share increased due to the retirement of shares of the Corporation's common stock in 2005. In 2005, the Corporation repurchased and retired 44,500 shares of its common stock. Return on average assets was 1.19% in 2005, 1.25% in2004 and 1.25% in
page 14
2003. The return on average equity was 11.5%, 11.7% and 11.7% for 2005, 2004 and 2003, respectively. A flattening yield curve and increased competition in the Corporation's local market led to a decrease in the net interest margin in 2005, which was the primary cause for the decrease in net income in 2005 as compared to 2004.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on loans, securities and other interest-earning assets (interest income) and interest paid on deposits and borrowed funds (interest expense). In 2005, net interest income decreased by 4.1% to $16.0 million from $16.6 million in 2004, following an increase of 0.7% in 2004 from $16.5 million in 2003. Total assets of the Corporation increased approximately $23.5 million from December 31, 2004 to December 31, 2005. Loans net of unearned income increased approximately $17.1 million from December 31, 2004 to December 31, 2005. Deposits increased approximately $24.0 million over the same period, resulting in an approximate $2.5 million decrease in investments as the Corporation funded a portion of its loan growth with maturing investment securities. Also, the Corporation purchased $5.3 million in bank-owned life insurance ("BOLI") in 2005, contributing to the decrease in investment securities in 2005. Total assets of the Corporation increased approximately $8.5 million from December 31, 2003 to December 31, 2004. Deposits increased approximately $10.8 million and loans increased approximately $27.5 million from December 31, 2003 to December 31, 2004.
Much of the increase in loans in 2004 was funded with maturing investment securities and by liquidating certain investment securities, leading to a decrease in investment securities of approximately $23.4 million from December 31, 2003 to December 31, 2004.
Net interest income on a fully taxable equivalent basis decreased $866,000 from 2004 to 2005. This decrease resulted from an $890,000 increase due to increased volumes offset by a $1,756,000 decrease due to changes in interest rates. The increase in interest expense in 2005 was primarily a result of increased short-term interest rates, as well as intense local competition for interest-bearing deposits. In 2004, net interest income increased $414,000, on a taxable equivalent basis, as compared to 2003, resulting from an increase of $1,151,000 due to increased volumes, particularly in tax-exempt investment securities, offset by a decrease of $737,000 due to interest changes in interest rates.
Net interest income is a function of the average balances of interest-earning assets and interest-bearing liabilities and the yields earned and rates paid on those balances. Management strives to maintain an acceptable spread between the yields earned on interest-earning assets and rates paid on interest-bearing liabilities to maintain an adequate net interest margin.
page 15
The following tables summarize the changes in interest earned and interest paid for the given time periods and indicate the factors affecting these changes. The first table presents, by major categories of assets and liabilities, the average balances, the components of the taxable equivalent net interest earnings/spread, and the yield or rate for the years 2005, 2004 and 2003.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' |
EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL |
| | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | | 2005 | | | | | | 2004 | | | | | | 2003 | | |
| | Average | | | | Yield/ | | Average | | | | Yield/ | | Average | | | | Yield/ |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | | Balance | | Interest | | Rate |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| | (in thousands of dollars) |
ASSETS | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Interest-Earning Assets: | | | | | | | | | | | | | | | | | |
Loans and lease financing | $267,459 | | $20,500 | | 7.66% | | $238,903 | | $17,554 | | 7.35% | | $232,034 | | $17,921 | | 7.72% |
Taxable investment securities | 71,313 | | 2,500 | | 3.51% | | 81,056 | | 3,204 | | 3.95% | | 88,889 | | 3,855 | | 4.34% |
Non-taxable investment | | | | | | | | | | | | | | | | | |
securities | | 63,778 | | 2,888 | | 4.53% | | 69,041 | | 3,321 | | 4.81% | | 41,354 | | 2,164 | | 5.23% |
Federal funds sold | | 6,382 | | 194 | | 3.04% | | 7,168 | | 89 | | 1.24% | | 10,480 | | 109 | | 1.04% |
Time deposits in other banks | 204 | | 7 | | 3.43% | | 202 | | 5 | | 2.48% | | 108 | | 3 | | 2.78% |
|
| |
| |
| |
| |
| |
| |
| |
| |
|
Total Interest-Earning Assets | 409,136 | | 26,089 | | 6.38% | | 396,370 | | 24,173 | | 6.10% | | 372,865 | | 24,052 | | 6.45% |
| | | | | | | | | | | | | | | | | | |
Non-Interest Earning Assets: | | | | | | | | | | | | | | | | | |
Cash and due from banks | 11,387 | | | | | | 10,825 | | | | | | 11,000 | | | | |
Premises and equipment, net | 9,740 | | | | | | 9,842 | | | | | | 10,302 | | | | |
Other Assets | | 15,152 | | | | | | 13,720 | | | | | | 14,755 | | | | |
Less allowance for loan losses | (3,619) | | | | | | (3,373) | | | | | | (3,384) | | | | |
|
| | | | | |
| | | | | |
| | | | |
Total Non-Interest Earning Assets | 32,660 | | | | | | 31,014 | | | | | | 32,673 | | | | |
| |
| | | | | |
| | | | | |
| | | | |
| | | | | | | | | | | | | | | | | | |
TOTAL | | $441,796 | | | | | | $427,384 | | | | | | $405,538 | | | | |
| | ====== | | | | | | ====== | | | | | | ====== | | | | |
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Demand deposits | | $32,272 | | $314 | | 0.97% | | $33,489 | | $324 | | 0.97% | | $27,845 | | $269 | | 0.97% |
Savings deposits | | 79,606 | | 1,287 | | 1.62% | | 102,601 | | 1,327 | | 1.29% | | 108,192 | | 1,577 | | 1.46% |
Time deposits | | 224,964 | | 7,524 | | 3.34% | | 189,947 | | 4,697 | | 2.47% | | 174,691 | | 4,839 | | 2.77% |
Other borrowed money | 4,825 | | 246 | | 5.10% | | 4,766 | | 241 | | 5.06% | | 3,643 | | 197 | | 5.41% |
|
| |
| |
| |
| |
| |
| |
| |
| |
|
Total Interest-Bearing | | | | | | | | | | | | | | | | | |
Liabilities | | 341,667 | | 9,371 | | 2.74% | | 330,803 | | 6,589 | | 1.99% | | 314,371 | | 6,882 | | 2.19% |
| | | | | | | | | | | | | | | | | | |
Non-Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Demand deposits | 52,225 | | | | | | 47,406 | | | | | | 43,864 | | | | |
Other liabilities | 2,929 | | | | | | 2,980 | | | | | | 2,148 | | | | |
|
| | | | | |
| | | | | |
| | | | |
Total Non-Interest Bearing | | | | | | | | | | | | | | | | | |
Liabilities | | 55,154 | | | | | | 50,386 | | | | | | 46,012 | | | | |
Shareholders' Equity | 44,975 | | | | | | 46,195 | | | | | | 45,155 | | | | |
| |
| | | | | |
| | | | | |
| | | | |
TOTAL | | $441,796 | | | | | | $427,384 | | | | | | $405,538 | | | | |
| | ====== | | | | | | ====== | | | | | | ====== | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest earnings/spread, | | | | | | | | | | | | | | | | | |
on a taxable equivalent basis | | | 16,718 | | 4.09% | | | | 17,584 | | 4.44% | | | | 17,170 | | 4.60% |
Taxable equivalent adjustments: | | | | | | | | | | | | | | | | | |
Loans | | | 70 | | | | | | 47 | | | | | | 73 | | |
Investment securities | | | 700 | | | | | | 909 | | | | | | 585 | | |
| | |
| | | | | |
| | | | | |
| | |
Total taxable equivalent adjustment | | | 770 | | | | | | 956 | | | | | | 658 | | |
| | | |
| | | | | |
| | | | | |
| | |
| | | | | | | | | | | | | | | | | | |
Net interest earnings | | | | $15,948 | | | | | | $16,628 | | | | | | $16,512 | | |
| | | | ===== | | | | | | ===== | | | | | | ===== | | |
Note: The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets. Loans include nonaccrual loans for all years presented. Interest on loans includes loan fees. Loan fees included above amounted to $1,141,136 for 2005, $1,048,243 for 2004 and $959,652 for 2003.
page 16
The following table shows the change from year to year for each component of the taxable equivalent net interest margin separated into the amount generated by volume changes and the amount generated by changes in the yields earned or rates paid.
| 2005 Compared to 2004 | | 2004 Compared to 2003 |
| Increase (Decrease) Due to | | Increase (Decrease) Due to |
|
|
|
|
|
| |
|
|
|
|
|
| Volume | | Rate | | Net | | Volume | | Rate | | Net |
|
| |
| |
| |
| |
| |
|
| (in thousands of dollars) | | (in thousands of dollars) |
Interest Earned on: | | | | | | | | | | | |
Loans and lease financing | $2,098 | | $848 | | $2,946 | | $531 | | ($898) | | ($367) |
Taxable investment securities | (385) | | (319) | | (704) | | (340) | | (311) | | (651) |
Non-taxable investment securities | (253) | | (180) | | (433) | | 1,449 | | (292) | | 1,157 |
Federal funds sold | (10) | | 115 | | 105 | | (34) | | 14 | | (20) |
Time deposits | 0 | | 2 | | 2 | | 3 | | (1) | | 2 |
|
| |
| |
| |
| |
| |
|
Total Interest-Earning Assets | $1,450 | | $466 | | $1,916 | | $1,609 | | ($1,488) | | $121 |
| ======= | | ======= | | ======= | | ======= | | ======= | | ======= |
| | | | | | | | | | | |
Interest Paid On: | | | | | | | | | | | |
Demand deposits | ($12) | | $2 | | ($10) | | $55 | | $0 | | $55 |
Savings deposits | (297) | | 257 | | (40) | | (81) | | (169) | | (250) |
Time deposits | 866 | | 1,961 | | 2,827 | | 423 | | (565) | | (142) |
Other borrowed money | 3 | | 2 | | 5 | | 61 | | (17) | | 44 |
|
| |
| |
| |
| |
| |
|
Total Interest-Bearing Liabilities | $560 | | $2,222 | | $2,782 | | $458 | | ($751) | | ($293) |
| ======= | | ======= | | ======= | | ======= | | ======= | | ======= |
Net Interest Earnings, on a taxable | | | | | | | | | | | |
equivalent basis | $890 | | ($1,756) | | ($866) | | $1,151 | | ($737) | | $414 |
| ======= | | ======= | | ======= | | ======= | | ======= | | ======= |
Less: taxable equivalent adjustment | | | | (186) | | | | | | 298 |
| | | | | | | | | | | |
Net Interest Earnings | | | | | ($680) | | | | | | $116 |
| | | | | ======= | | | | | | ======= |
The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding from one year to the next. The change in interest due to rate has been determined by applying the change in rate from one year to the next to the average balances outstanding in the later year. The computation of the taxable equivalent adjustment has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.
NON-INTEREST INCOME
Non-interest income totaled $3,944,088 in 2005, an increase of $453,639, or 13.0%, from 2004. The increase is primarily attributable to a $191,719 increase in BOLI income and a decrease in the loss on the sale of other assets of $176,123 in 2005 as compared to 2004. The increase in BOLI income was attributable to increases in the cash surrender value on the purchase of $5.3 million of BOLI in 2005. Almost all of the losses on the sale of other assets in 2005 and 2004 were attributable to losses or write-downs on other real estate owned that was acquired through foreclosure. Also, service charges on deposit accounts increased $119,735 in 2005 as compared to 2004 primarily due to increased overdraft fees. These increases were offset however by a decrease in security gains of $172,335 in 2005 as compared to 2004 as the Bank sold fewer securities for gains in 2005 as compared to 2004.
Non-interest income equaled $3,490,449 in 2004, a decrease of $678,753, or 16.3%, from 2003. The decrease is attributable primarily to a $313,005 decrease in mortgage banking fees as well as a loss on the sale of other assets
page 17
of $199,905 in 2004 as compared to a gain on the sale of other assets of $148,746 in 2003, resulting in a decrease in the gain on the sale of other assets of $348,651 in 2004 as compared to 2003. Almost all of the loss on the sale of other assets in 2004 was attributable to losses or write-downs on other real estate owned that was acquired through foreclosure. The decrease in mortgage banking fees in 2004 was primarily a result of fewer mortgage refinancings as mortgage interest rates halted their decline in 2004. Also, security gains decreased $39,259, or 17.2%, in 2004 as compared to 2003.
NON-INTEREST EXPENSE
Non-interest expense in 2005 was $12,260,988, up $139,742, or 1.2%, from 2004. This increase is primarily attributable to a $243,194, or 3.5%, increase in salaries and employee benefits that was offset by decreases in most other non-interest expense categories in 2005 as compared to 2004. The increase in salaries and employee benefits was largely due to increased personnel expenses per employee. The largest decrease was a $48,573, or 1.9%, decrease in other operating expenses in 2005 as compared to 2004.
Non-interest expense in 2004 was $12,121,246, up $175,313, or 1.5%, from 2003. This increase is primarily attributable to a $173,901, or 2.6%, increase in salaries and employee benefits and a $69,309, or 12.9%, increase in advertising and public relations expense in 2004 as compared to 2003. The increase in salaries and employee benefits was largely due to increased personnel expenses per employee, and the increase in advertising and public relations expense was primarily due to a new advertising campaign the Bank began in 2004. These increases were offset by a decrease of $96,214, or 3.7%, in other operating expenses in 2004 as compared to 2003.
LOAN LOSS PROVISION
The provision for loan losses is the charge to earnings which management feels is necessary to maintain the allowance for loan losses at a level considered adequate to absorb potential future losses on existing loans and to provide for uncertainties in the economy. The adequacy of the allowance for loan losses is determined by a continuous evaluation of the loan portfolio. The Bank utilizes an independent loan review function which considers loans on their own merits based on factors which include past loan experience, collateral value, off-balance sheet credit risk, and possible effects of prevailing economic conditions. Findings are presented regularly to management, where other factors such as actual loan loss experience relative to the size and characteristics of the loan portfolio, deterioration in concentrations of credit, trends in portfolio volumes, delinquencies and non-performing loans and, when applicable, reports of the regulatory agencies are considered. Management performs c alculations for the minimum allowance level needed and a final evaluation is made. Note A to the Notes to Consolidated Financial Statements provides a detailed description of the Corporation's loan loss methodology.
The provision for loan losses was $600,942 in 2005 compared to $664,320 in 2004 and $1,520,318 in 2003. The decreases in provision for loan losses in 2005 and 2004 were primarily a result of an improvement in the overall condition of the Bank's loan portfolio in those years as compared to 2003. The higher level of the provision for loan losses in 2003 was primarily due to an increase in non-performing loans as a result of the general economic downturn in the local markets in which the Bank competes. The Bank had experienced an increase in "substandard" and nonperforming loans, primarily in commercial real estate loans, throughout 2003 and 2002.
INCOME TAXES
Income tax expense includes federal and state taxes on earnings. Income taxes were $1,772,601, $2,005,482, and $2,205,371 in 2005, 2004 and 2003, respectively. The effective tax rates were 25.2%, 27.3%, and 30.6% in 2005, 2004 and 2003, respectively. The decrease in the effective tax rates in 2005 and 2004 were primarily due to increased holdings in nontaxable securities in 2005 and 2004, as well as the purchase of $5.3 million in BOLI in 2005.
page 18
The Corporation had net deferred tax assets of $2,098,308 at December 31, 2005, as compared to a net deferred tax asset of $714,316 at December 31, 2004. The deferred tax asset resulting from the allowance for loan losses was the largest deferred tax asset in both periods; however, in 2005 the Corporation also had a large deferred tax asset resulting from the Financial Accounting Standards Board ("FASB") Statement 115 equity adjustment (adjustment made to shareholders' equity for unrealized gains/losses on investment securities). Note H to the Consolidated Financial Statements provides a detailed analysis of the components of income tax expense.
FINANCIAL CONDITION
LOANS
Management's focus is to promote loan growth in the Corporation's target market, emphasizing the expansion of business in the Corporation's trade area. Efforts are taken to maintain a diversified portfolio without significant concentration of risk. Overall loans increased $17,124,008 from December 31, 2004 to December 31, 2005. The increase in loans was primarily due to a $6.9 million increase in commercial and industrial loans and a $6.0 million increase in commercial real estate loans as well as a $2.4 million increase in construction and land development loans. However, these increases were offset by a decrease of $1.5 million in agricultural loans as of December 31, 2005 as compared to December 31, 2004.
Over the last three years, average total loans and leases increased by $28.6 million, or 12.0%, in 2005, by $6.9 million, or 3.0%, in 2004 and by $10.0 million, or 4.5%, in 2003, in each case over the prior year. The growth in deposits was the primary funding source for this continuing increase in loan demand; however, in the latter half of 2004 and 2005, investment maturities and sales were also a significant funding source for the increase in loans.
LOAN QUALITY
Credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk or types of collateral arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Corporation does not have a significant concentration to any individual customer or counterparty. The major concentrations of credit risk for the Corporation arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by real estate and agricultural related loans. Among loans secured by real estate, the Corporation has concentrations of credit, defined as 25 percent or more of Tier I capital plus the allowance for credit losses, of loans to lessors of residential buildings and dwellings (56% of Tier I capital plus the allowance for credit losses), loans to lessors of non-residential buildings (36% of Tier I capital plus the allowance for credit losses) and loans secured by hotel and motel properties (25% of Tier I capital plus the allowance for credit losses). Although the registrant has a loan portfolio diversified by type of risk, the ability of its customers to honor their contracts is to some extent dependent upon their regional economic condition. A geographic concentration arises because the registrant makes commercial, real estate and consumer loans primarily to customers in Giles, Marshall and Lincoln Counties, Tennessee. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses at a level manag ement believes is sufficient to cover inherent losses in the loan portfolio.
page 19
The amounts of loans and leases outstanding, including unearned income, at the indicated dates are shown in the following table according to type of loan.
LOAN PORTFOLIO |
| December 31, |
| 2005 | 2004 | 2003 | 2002 | 2001 |
|
|
| (in thousands of dollars) |
Construction and land development | $9,654 | $7,211 | $7,859 | $10,901 | $8,879 |
Commercial and Industrial | 26,680 | 19,814 | 21,803 | 20,999 | 19,169 |
Agricultural | 5,804 | 7,298 | 7,014 | 7,871 | 8,233 |
Real estate - farmland | 23,334 | 21,845 | 19,463 | 24,019 | 23,474 |
Real estate - residential | 75,544 | 74,913 | 60,619 | 59,479 | 52,311 |
Real estate - nonresidential, nonfarm | 104,828 | 98,862 | 84,236 | 78,784 | 60,773 |
Installment - individuals | 22,974 | 23,228 | 24,077 | 26,845 | 31,040 |
Other loans(1) | 4,432 | 2,935 | 3,473 | 4,660 | 5,482 |
|
|
| $273,250 | $256,106 | $228,544 | $233,558 | $209,361 |
| ========= | ========= | ========= | ========= | ========= |
(1) Includes student loans, non-taxable loans, overdrafts, and all other loans not included in any of the designated categories.
The following table presents the maturity distribution of selected loan categories at December 31, 2005 (excluding residential mortgage, home equity, installment-individual loans, and lease financing).
| Due in one year or less
| Due after one year but before five years | Due after five years
|
Total
|
|
|
|
|
|
| (in thousands of dollars) |
Construction and land development | $6,724 | $2,424 | $506 | $9,654 |
Commercial and industrial | 15,930 | 7,751 | 2,999 | 26,680 |
Agricultural | 5,017 | 787 | - | 5,804 |
Real estate-farmland | 12,948 | 9,508 | 878 | 23,334 |
Real estate-nonresidential, nonfarm | 24,586 | 61,759 | 18,483 | 104,828 |
|
|
|
|
|
Total selected loans | $65,205 | $82,229 | $22,866 | $170,300 |
| ========== | ========== | ========== | ========== |
The table below summarizes the percentages of the loans selected for use in the preceding table falling into each of the indicated maturity ranges and the sensitivity of such loans to interest rate changes for those with maturities greater than one year, all as of December 31, 2005.
| Due in one year or less
| Due after one year but before five years | Due after five years
|
Total
|
|
|
Percent of total selected loans | 38.29% | 48.28% | 13.43% | 100.00% |
Cumulative percent of total | 38.29% | 86.57% | 100.00% | |
| | | | |
Sensitivity of loans to changes in interest rates-loans due after one year | | | | |
| | | | |
Fixed rate loans | | $68,501 | $5,030 | $73,531 |
Variable rate loans | | 13,728 | 17,836 | 31,564 |
| |
|
Total | | $82,229 | $22,866 | $105,095 |
| | ========== | ========== | ========== |
page 20
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan and lease balances at the end of each period and daily averages, changes in the allowance for possible losses arising from loans charged off and recoveries on loans previously charged off, and additions to the allowance which have been charged to expense.
| For year ended December 31, |
| 2005 | | 2004 | | 2003 | | 2002 | | 2001 |
|
| |
| |
| |
| |
|
| (in thousands of dollars) |
Amount of net loans and | | | | | | | | | |
lease financing outstanding | | | | | | | | | |
at end of period | $272,948 | | $255,824 | | $228,303 | | $233,255 | | $208,917 |
| ========= | | ========= | | ========= | | ========= | | ========= |
Daily average amount of | | | | | | | | | |
loans and leases | $267,459 | | $238,903 | | $232,034 | | $221,996 | | $198,347 |
| ========= | | ========= | | ========= | | ========= | | ========= |
Balance of allowance for | | | | | | | | | |
possible loan losses at | | | | | | | | | |
beginning of period | $3,489 | | $3,449 | | $3,810 | | $3,088 | | $2,884 |
Less charge-offs: | | | | | | | | | |
Construction and land | | | | | | | | | |
development | 56 | | - | | 731 | | 11 | | - |
Commercial and industrial | 15 | | 155 | | 433 | | 335 | | 156 |
Agricultural | - | | 8 | | 286 | | 85 | | 61 |
Real estate-farmland | - | | 19 | | 35 | | 2 | | - |
Real estate-residential | 226 | | 50 | | 45 | | 117 | | 81 |
Real estate-nonresidential, | | | | | | | | | |
nonfarm | - | | 393 | | 181 | | 60 | | - |
Installment-Individuals | 455 | | 372 | | 511 | | 612 | | 858 |
Other loans | - | | - | | 14 | | - | | - |
|
| |
| |
| |
| |
|
| 752 | | 997 | | 2,236 | | 1,222 | | 1,156 |
Add recoveries: | | | | | | | | | |
Construction and land | | | | | | | | | |
development | - | | - | | 13 | | 11 | | - |
Commercial and Industrial | 15 | | 88 | | 63 | | 47 | | 67 |
Agricultural | 15 | | 21 | | 14 | | 13 | | 26 |
Real estate-farmland | 12 | | 22 | | - | | 2 | | - |
Real estate-residential | 58 | | 22 | | 4 | | 4 | | 1 |
Real estate-nonresidential, | | | | | | | | | |
nonfarm | 6 | | 33 | | 1 | | 8 | | - |
Installment-Individuals | 290 | | 186 | | 259 | | 245 | | 219 |
Other loans | 1 | | 1 | | 1 | | - | | - |
|
| |
| |
| |
| |
|
| 397 | | 373 | | 355 | | 330 | | 313 |
| | | | | | | | | |
Net loans charged off | 355 | | 624 | | 1,881 | | 892 | | 843 |
| | | | | | | | | |
Provision charged to expense | 601 | | 664 | | 1,520 | | 1,614 | | 1,047 |
|
| |
| |
| |
| |
|
Balance at end of period | $3,735 | | $3,489 | | $3,449 | | $3,810 | | $3,088 |
| ========= | | ========= | | ========= | | ========= | | ========= |
Net charge-offs as percent of | | | | | | | | | |
average loans outstanding: | 0.13% | | 0.26% | | 0.81% | | 0.40% | | 0.43% |
| | | | | | | | | |
Net charge-offs as percent of: | | | | | | | | | |
Provision for loan losses | 59.1% | | 94.0% | | 123.8% | | 55.3% | | 80.5% |
Allowance for loan losses | 9.5% | | 17.9% | | 54.5% | | 23.4% | | 27.3% |
| | | | | | | | | |
Allowance at end of period to | | | | | | | | | |
loans, net of unearned income | 1.37% | | 1.36% | | 1.51% | | 1.63% | | 1.48% |
page 21
Net loans charged-off decreased to $355,177 in 2005 from $623,506 in 2004 following a decrease from $1,881,267 in 2003. An overall improvement in the Bank's loan portfolio led to the decreases in net charge-offs in 2005 and 2004. Net loan losses in 2005 consisted of net losses on real estate loans of $205,120, net losses on loans to individuals of $164,957, net losses on commercial and industrial loans of $63 and net recoveries on agricultural loans of $13,913. This compares to net loan losses in 2004 which consisted of net losses on real estate loans of $384,537, net losses on loans to individuals of $185,367, net losses on commercial and industrial loans of $67,287 and net recoveries on agricultural loans of $13,685. The allowance for loan and lease losses at the end of 2005 was $3.74 million, or 1.37% of outstanding loans and leases, as compared to $3.49 million, or 1.36% of outstanding loans and leases, and $3.45 million, or 1.51% of outstanding loans and leases, in 2004 and 2003, res pectively.Net loans charged-off amounted to 0.13% of average total loans outstanding in 2005, 0.26% in 2004 and 0.81% in 2003. Reference is made to Note Cto the Consolidated Financial Statements for further detail regarding charge-offs and recoveries by category.
The allowance for loan losses was 3.78 times the balance of nonaccrual loans at the end of 2005, 6.83 in 2004 and 1.43 in 2003. Nonaccrual loans increased $478,080 to $989,178 from December 31, 2004 to December 31, 2005. The increase in nonaccrual loans during 2005 resulted primarily from an increase in commercial real estate loans and commercial and industrial loans that were classified as nonaccrual. Nonaccrual loans decreased $1.90 million to $511,098 from December 31, 2003 to December 31, 2004. The decrease in nonaccrual loans during 2004 resulted primarily from a decrease in commercial real estate loans that were classified as nonaccrual. This change from nonaccrual status resulted from pay-offs of some loans and the foreclosure on the real estate securing others that led to the loan balance being transferred to other real estate owned. Management believes that the allowance for possible loan losses as of December 31, 2005 is adequate.
The following table sets out respectively the allocation of the Allowance for Loan Losses and the percentage of loans by category to total loans outstanding at the end of each of the years indicated.
| December 31, |
| 2005 | | 2004 | | 2003 | | 2002 | | 2001 |
|
| |
| |
| |
| |
|
| (amounts in thousands of dollars) |
Allowance applicable to : | | | | | | | | | |
Construction and land development | $376 | | $177 | | $111 | | $559 | | $16 |
Commercial loans | 658 | | 456 | | 454 | | 581 | | 669 |
Agriculture loans | 64 | | 188 | | 177 | | 88 | | 142 |
Real estate-farmland | 267 | | 203 | | 160 | | 109 | | 195 |
Real estate-residential | 833 | | 804 | | 613 | | 470 | | 425 |
Real estate-nonresidential | | | | | | | | | |
nonfarm | 1,084 | | 1,080 | | 1,229 | | 766 | | 281 |
Individual loans | 428 | | 558 | | 699 | | 1,221 | | 1,342 |
Other loans | 25 | | 23 | | 6 | | 16 | | 18 |
|
| |
| |
| |
| |
|
| $3,735 | | $3,489 | | $3,449 | | $3,810 | | $3,088 |
| ======= | | ======= | | ======= | | ======= | | ======= |
Percentages of loans by | | | | | | | | | |
category to total loans: | | | | | | | | | |
Construction and land development | 3.53% | | 2.81% | | 3.44% | | 4.67% | | 4.24% |
Commercial loans | 9.77% | | 7.74% | | 9.54% | | 8.99% | | 9.15% |
Agriculture loans | 2.12% | | 2.85% | | 3.07% | | 3.37% | | 3.93% |
Real estate-farmland | 8.54% | | 8.53% | | 8.52% | | 10.28% | | 11.21% |
Real estate-residential | 27.65% | | 29.25% | | 26.52% | | 25.47% | | 24.99% |
Real estate-nonresidential | | | | | | | | | |
nonfarm | 38.36% | | 38.60% | | 36.86% | | 33.73% | | 29.03% |
Individual loans | 8.41% | | 9.07% | | 10.53% | | 11.49% | | 14.83% |
Other loans | 1.62% | | 1.15% | | 1.52% | | 2.00% | | 2.62% |
|
| |
| |
| |
| |
|
| 100.00% | | 100.00% | | 100.00% | | 100.00% | | 100.00% |
| ======= | | ======= | | ======= | | ======= | | ======= |
page 22
NON-PERFORMING ASSETS
Non-performing assets include nonaccrual loans, loans restructured because of a debtor's financial difficulties, other real estate owned, and loans past due ninety days or more as to interest or principal payment.
Nonaccrual loans are those loans for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest, unless such loans are well secured and in the process of collection.
From December 31, 2004 to December 31, 2005, nonaccruing loans increased by 93.5% to $1.0 million following a decrease of 78.8% at year-end 2004 as compared to year-end 2003. The changes in each year were primarily a result of the items discussed previously under the section titled "Summary of Loan Loss Experience." There were approximately $61,000 in restructured loans that were in compliance with the modified terms at year-end 2005. This compares to approximately $59,000 in loans restructured and in compliance with the modified terms at year-end 2004. Other real estate owned, consisting of properties acquired through foreclosures or deeds in lieu thereof, totaled $1,059,000 at December 31, 2005, a decrease of 66.9% from $3,198,000 at December 31, 2004. The decrease in other real estate owned during 2004 was primarily the result of the sale of several properties held by the Bank during the year, especially certain commercial real estate.
Loans past due ninety days or more and accruing interest totaled $107,287 as of December 31, 2005, a decrease of $197,779, or 64.8%, as compared to December 31, 2004. Loans past due ninety days or more totaled $305,066 as of December 31, 2004, an increase of 23.0% when compared to December 31, 2003. All major credit lines and troubled loans are reviewed regularly by a committee of the Board of Directors. Management believes that the Bank's non-performing loans have been accounted for in the methodology for calculating the allowance for loan and lease losses.
The following table summarizes the company's non-performing assets, loans past due ninety days or more and restructured loans.
| December 31, |
| 2005 | | 2004 | | 2003 | | 2002 | | 2001 |
|
| |
| |
| |
| |
|
| (in thousands of dollars) |
Nonaccrual loans | $989 | | $511 | | $2,410 | | $7,237 | | $2,166 |
Troubled debt restructurings | 61 | | 59 | | 62 | | 464 | | 0 |
Other real estate owned | 1,059 | | 3,198 | | 4,329 | | 1,129 | | 296 |
Loans past due ninety days or | | | | | | | | | |
more as to interest or | | | | | | | | | |
principal payment | 107 | | 305 | | 248 | | 395 | | 402 |
The amount of interest income actually recognized on the nonaccrual loans above during 2005, 2004 and 2003, was $13,457, $10,942 and $96,324 respectively. The additional amount of interest income that would have been recorded during 2005, 2004 and 2003, if the above amounts had been current in accordance with their original terms was $14,915, $41,586 and $219,738, respectively.
Loans that are classified as "substandard" or worse by the Bank represent loans to which management questions the borrowers' ability to comply with the present loan repayment terms. As of December 31, 2005, there were approximately $8,880,000 in loans that were classified as "substandard" or worse and accruing interest. This compares to approximately $8,990,000 in loans that were classified as "substandard" or worse and accruing interest as of December 31, 2004. As of December 31, 2005, management was not aware of any specifically identified loans, other than those included in the categories discussed above that represent significant potential problems or that management has serious doubts as to the borrower's ability to comply with the present repayment terms. The Corporation believes that it and the Bank maintain adequate audit standards, exercise appropriate internal controls and conduct regular and thorough loan reviews. However, the risk inherent in the lending business results in
page 23
periodic charge-offs of loans. The Corporation maintains an allowance for loan losses that it believes to be adequate to absorb reasonably foreseeable losses in the loan portfolio. Management evaluates, on a quarterly basis, the risk in the portfolio to determine an adequate allowance for loan losses. The evaluation includes analyses of historical performance, the level of nonperforming and rated loans, specific analyses of problem loans, loan activity since the previous quarter, loan review reports, consideration of current economic conditions and other pertinent information. The evaluation is reviewed by the Audit Committee of the Board of Directors of the Bank. Also, as a matter of policy, internal classifications of loans are performed on a routine and continuing basis. The section of this report entitled - "Critical Accounting Policies" as well as Note A of the Notes to Consolidated Financial Statements contain more information pertaining to the Corporation's allowance for loan and lease losses.
SECURITIES
The securities portfolio consists primarily of U.S. Treasury obligations, U.S. government agency securities, marketable bonds of states, counties and municipalities, and corporate bonds. Management uses investment securities to assist in maintaining proper interest rate sensitivity in the balance sheet, to provide securities to pledge as collateral for certain public funds and to provide an alternative investment for available funds.
The following table sets forth the carrying amount of investment and other securities at the dates indicated:
| | | December 31, |
| | | 2005 | | 2004 | | 2003 |
| | |
| |
| |
|
| | | (in thousands of dollars) |
Available-for-sale | | | | | |
| U.S. Treasury securities | $- | | $98 | | $100 |
| U.S. Government Agencies | 61,876 | | 55,273 | | 68,028 |
| Obligations of states and | | | | | |
| political subdivisions | 63,584 | | 66,899 | | 65,662 |
| Other debt securities | 8,460 | | 14,194 | | 25,797 |
| Other securities | 1,920 | | 1,810 | | 2,066 |
| |
| |
| |
|
Total securities | | $135,840 | | $138,274 | | $161,653 |
| | | ========= | | ========= | | ========= |
Note: Other securities in the above table includes stock of government agencies, stock of corporations, and mutual funds. The Corporation does not have any securities classified as held-to-maturity.
page 24
The following table sets forth the maturities of securities at December 31, 2005 and the average yields of such securities (calculated on the basis of the amortized cost and effective yields).
| | U.S. Treasuries | | State and | | | | |
| | and Government | | Political | | Other | | |
| | Agencies | | Subdivisions | | Securities | | Total |
| |
| |
| |
| |
|
| | (in thousands of dollars) |
Available-for-sale | | | | | | | | |
Within one year: | | | | | | | | |
Amount | | $19,856 | | $3,668 | | $2,369 | | $25,893 |
Yield | | 2.81% | | 6.50% | | 4.30% | | 3.47% |
| | | | | | | | |
After one but within | | | | | | | | |
five years: | | | | | | | | |
Amount | | $41,805 | | $23,729 | | $6,580 | | $72,114 |
Yield | | 3.42% | | 5.15% | | 5.30% | | 4.16% |
| | | | | | | | |
After five but within | | | | | | | | |
ten years: | | | | | | | | |
Amount | | $380 | | $36,860 | | $0 | | $37,240 |
Yield | | 5.15% | | 4.81% | | 0.00% | | 4.81% |
| | | | | | | | |
After ten years: | | | | | | | | |
Amount | | $1,036 | | $0 | | $0 | | $1,036 |
Yield | | 4.33% | | 0.00% | | 0.00% | | 4.33% |
The above table shows yields on the tax-exempt obligations to be computed on a taxable equivalent basis. The maturity date used in the above table for amortizing securities (e.g. mortgage-backed securities) is the average maturity date.
Total average securities decreased by $15.0 million, or 10.0%, to $135.1 million during 2005 as compared to $150.1 million for 2004. Average non-taxable investment securities decreased by $5.3 million, or 7.6%, while average taxable investment securities decreased by $9.7 million, or 12.0%, to account for the overall decrease in average investments. The decrease in total average securities during 2005 was primarily a result of funding increased loan demand with maturing investments during 2005. Total average securities increased $19.9 million, or 15.2%, to $150.1 million at the end of 2004 as compared to $130.2 million at the end of 2003. The increase total average securities in 2004 resulted primarily from the higher deposit growth than loan growth experienced in early 2004.
During 2005, the Corporation saw deterioration in the market value of its investment securities portfolio. There was an unrealized loss on investment securities of $1,469,319 at December 31, 2005 as compared to an unrealized gain on investment securities of $293,058. The primary cause for unrealized losses within the portfolio is the impact movements in market rates have had in comparison to the underlying yields on these securities as well as a deterioration of the credit quality of certain corporate issues held by the Corporation.
DEPOSITS
The Corporation's primary source of funds is customer deposits, including large certificates of deposits. Aggregate average deposits increased by $15.6 million, or 4.2%, to $389.1 million in 2005, by $18.9 million, or 5.3%, to $373.4 million in 2004, and by $30.2 million, or 9.3%, to $354.6 million in 2003. Although the Corporation experienced a 10.2% growth in non-interest deposits in 2005 as compared to 2004, much of the dollar growth in
page 25
deposits experienced by the Corporation in 2005 was in accounts that are interest sensitive, especially time deposits. Average time deposits increased $35.0 million in 2005 and $15.3 million in 2004 as compared to the previous year. In 2003, most of the growth in deposits was in savings deposits. Average savings deposits increased $26.6 million in 2003 as compared to 2002.
The average amount of deposits for the periods indicated is summarized in the following table:
| | For year ended December 31, |
| |
|
| | 2005 | | 2004 | | 2003 |
| | Average | | Average | | Average | | Average | | Average | | Average |
| | Balance | | Rate | | Balance | | Rate | | Balance | | Rate |
| |
| |
| |
| |
| |
| |
|
| | (in thousands of dollars, except percents) |
Noninterest bearing | | | | | | | | | | | | |
demand deposits | | $52,225 | | 0.00% | | $47,406 | | 0.00% | | $43,864 | | 0.00% |
| | | | | | | | | | | | |
Interest bearing | | | | | | | | | | | | |
demand deposits | | 32,272 | | 0.97% | | 33,489 | | 0.97% | | 27,845 | | 0.97% |
Savings deposits | | 79,606 | | 1.62% | | 102,601 | | 1.29% | | 108,192 | | 1.46% |
Time deposits of | | | | | | | | | | | | |
$100,000 or more | | 120,636 | | 3.44% | | 95,843 | | 2.62% | | 77,566 | | 3.03% |
Other time deposits | | 104,328 | | 3.23% | | 94,104 | | 2.35% | | 97,125 | | 2.56% |
| |
| |
| |
| |
| |
| |
|
Total interest bearing | | | | | | | | | | | | |
deposits | | 336,842 | | 2.71% | | 326,037 | | 1.95% | | 310,728 | | 2.15% |
| |
| |
| |
| |
| |
| |
|
Total deposits | | $389,067 | | | | $373,443 | | | | $354,592 | | |
| | ======== | | | | ======== | | | | ======== | | |
Remaining maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 2005 are summarized as follows (in thousands of dollars):
3 months or less | | $43,482 |
Over 3 months through 6 months | | 25,805 |
Over 6 months through 12 months | | 23,737 |
Over 1 year | | 33,487 |
| |
|
Total | | $126,511 |
| | ========== |
Other funds were invested in other earning assets such as federal funds at minimum levels necessary for operating needs and to maintain adequate liquidity. A significant amount of the Corporation's deposits are time deposits greater than $100,000. A significant percentage of these time deposits mature within one year. If the Corporation is unable to retain these deposits at their maturity it may be required to find alternate sources of funds to fund any future loan growth, which may be more costly than these deposits and may as such negatively affect the Corporation's net interest margin.
page 26
OFF BALANCE SHEET ARRANGEMENTS
Neither the Corporation nor the Bank have historically incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments of structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts. However, the Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The following table summarizes the Bank's involvement in financial instruments with off-balance-sheet risk as of December 31:
| | Amount |
| |
|
| | 2005 | | 2004 | | 2003 |
| |
| |
| |
|
Commitments to extend credit | | $34,958,643 | | $41,843,249 | | $32,337,720 |
Standby letters of credit | | 1,305,755 | | 1,320,505 | | 1,696,848 |
Mortgage loans sold with repurchase | | | | | | |
requirements outstanding | | 6,774,798 | | 6,433,876 | | 7,749,111 |
| | | | | | |
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
Marketable investment securities, particularly those of shorter maturities, are the principal source of asset liquidity. Securities maturing in one year or less amounted to $25.6 million at December 31, 2005, representing 19.1% of the investment securities portfolio, an increase from the 9.8% level of 2004. Management believes that the investment securities portfolio, along with additional sources of liquidity, including federal funds sold and maturing loans provides the Corporation with adequate liquidity to meet its funding needs.
The Bank also has federal funds lines with some of its correspondent banks. These lines may be drawn upon if the bank has short-term liquidity needs. As of December 31, 2005, the Bank had $20.0 million available under these lines. At December 31, 2005, the Bank had no federal funds purchased from these lines. The average daily federal funds purchased for 2005 equaled $83,000 at an average interest rate of 3.86%. For 2004 the average daily federal funds purchased equaled $294,000 at an average interest rate of 1.71%. For 2003 the average daily federal funds purchased equaled $22,000 at an average interest rate of 1.49%.
In addition to the federal funds lines, the Bank also has the capacity to borrow additional funds from the Federal Home Loan Bank of Cincinnati that may be drawn upon for short-term or longer-term liquidity needs. At December 31, 2005, the Bank had total borrowings of $4,096,152 and had approximately $33,177,000 of available additional borrowing capacity from the Federal Home Loan Bank of Cincinnati.
On December 21, 2004, the Board of Directors of the Corporation approved a plan authorizing the management of the Corporation, beginning on December 31, 2004, to repurchase up to $5,000,000 of the Corporation's common stock from shareholders desiring to liquidate their shares in either the open market or through privately negotiated transactions. Management does not anticipate that this plan will reduce liquidity to unacceptable levels. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities".
Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate differ considerably from long term investment securities and fixed rate loans. Similarly, time deposits, especially those over $100,000, are much more interest-sensitive than are savings accounts. For its repricing gap analysis, the Bank classifies fifty percent of money market accounts as repricing in 4 to 12 months, with the remaining fifty percent classified as repricing in over one year but through three years. Regular savings and NOW accounts are classified by the Bank
page 27
as sixty percent repricing over one year through three years, twenty percent repricing over 3 years through 5 years, and the remaining twenty percent repricing over 5 years. At December 31, 2005, the Corporation had a total of $93.0 million in certificates of $100,000 or more which would mature in one year or less. In addition, consumer certificates of deposits of smaller amounts mature generally in two years or less, while money market deposit accounts mature on demand.
Interest rate sensitivity gaps by maturities are summarized below. Matured time deposits are included as time deposits maturing in 0-30 days in the following table.
December 31, 2005 | | | | | | 91-365 | | +1 - 3 | | +3 - 5 | | Over 5 | | |
$ in thousands | | 0-30 days | | 31-90 days | | days | | years | | years | | years | | Total |
|
| |
| |
| |
| |
| |
| |
| |
|
Interest-sensitive assets: | | | | | | | | | | | | | | |
| Loans and leases | | 63,752 | | 21,186 | | 68,966 | | 87,465 | | 25,886 | | 4,211 | | 271,466 |
| Taxable securities | | 1,400 | | 249 | | 22,083 | | 46,234 | | 1,176 | | 1,334 | | 72,476 |
| Nontaxable securities | | 135 | | 1,283 | | 2,227 | | 8,324 | | 15,350 | | 36,488 | | 63,807 |
| Federal funds sold | | 10,761 | | - | | - | | - | | - | | - | | 10,761 |
| | |
| |
| |
| |
| |
| |
| |
|
| Total | | $76,048 | | $22,718 | | $93,276 | | $142,023 | | $42,412 | | $42,033 | | $418,510 |
| | | | | | | | | | | | | | | |
Interest-sensitive liabilities: | | | | | | | | | | | | | |
| Demand deposits | | - | | - | | - | | 19,430 | | 6,477 | | 6,477 | | 32,384 |
| Savings | | - | | - | | 22,071 | | 39,816 | | 5,914 | | 5,914 | | 73,715 |
| Time | | 38,553 | | 36,723 | | 104,352 | | 39,907 | | 16,672 | | 80 | | 236,287 |
| Federal funds purchased | | - | | - | | - | | - | | - | | - | | - |
| Other borrowed funds | | 18 | | 36 | | 168 | | 483 | | 846 | | 2,545 | | 4,096 |
| | |
| |
| |
| |
| |
| |
| |
|
| Total | | 38,571 | | 36,759 | | 126,591 | | 99,636 | | 29,909 | | 15,016 | | 346,482 |
| | | | | | | | | | | | | | | |
| Interest sensitivity gap | | $37,477 | | $(14,041) | | $(33,315) | | $42,387 | | $12,503 | | $27,017 | | $72,028 |
| Cumulative gap | | 37,477 | | 23,436 | | (9,879) | | 32,508 | | 45,011 | | 72,028 | | 72,028 |
| Cumulative RSA/RSL | | 1.972 | | 1.311 | | 0.951 | | 1.108 | | 1.136 | | 1.208 | | 1.208 |
| Ratio of cumulative gap | | | | | | | | | | | | | | |
| to earning assets | | 8.95% | | 5.60% | | -2.36% | | 7.77% | | 10.76% | | 17.21% | | 17.21% |
As seen in the table above, the Corporation is in a slightly negative cumulative gap position in the one year or less interval, indicating that it has more rate sensitive liabilities which will reprice within one year than it has rate sensitive assets that will reprice within one year. This normally indicates that the Corporation would be in position to reprice its rate-sensitive liabilities (deposits) more quickly than it would its rate-sensitive assets (loans and investments). During periods of increasing interest rates the negative gap would theoretically work to the Corporation's disadvantage, narrowing the net interest spread between assets and liabilities, if the Corporation was able to increase the interest rate earned on assets at the same level as it increased the interest rates paid on its liabilities. To the contrary, however, during periods of decreasing interest rates the negative gap would be to the Corporation's advantage, with the net interest spread wid ening. Theoretically, a gap position of near zero would produce minimum fluctuations of the net interest spread over long periods of time, negating the effect of rising and falling interest rate environments. A positive gap position would essentially reverse the effects of rising and falling rates.
It is management's objective to minimize this gap through the asset/liability management process. The gap position is closely monitored, and investment decisions and deposit and loan pricing structures are configured with the gap position in mind. The gap table is updated at least monthly or more often if considered necessary. Asset/Liability management limits the ratio of rate sensitive assets to rate sensitive liabilities that mature or reprice in one year or less to not less than 0.70 and not more than 1.20. At December 31, 2005, the RSA/RSL was 0.951 at the one year or less level, a slightly negative gap position. If the RSA/RSL ratio is outside this parameter, management will take action to review asset and liability mixes, maturities, yields and costs, review objectives and strategies, and determine if changes are needed.
page 28
The Corporation has certain contractual obligations summarized in the table below.
| Payments due by period |
|
|
| | | Less than | | | | | | More than |
Contractual Obligations | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years |
|
| |
| |
| |
| |
|
Long-Term Debt Obligations | $4,096,152 | | $221,935 | | $482,697 | | $846,171 | | $2,545,349 |
Operating Lease Obligations | 57,700 | | 13,200 | | 12,000 | | 12,000 | | 20,500 |
|
| |
| |
| |
| |
|
Total | $4,153,852 | | $235,135 | | $494,697 | | $858,171 | | $2,565,849 |
| ========== | | ========== | | ========== | | ========== | | ========== |
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Regulatory requirements place certain constraints on the Corporation's capital. In order to maintain appropriate ratios of equity to total assets, a corresponding level of capital growth must be achieved. Growth in total average assets was 3.4% in 2005 and 5.4% in 2004. Average equity decreased 2.6% in 2005 and increased 2.3% in 2004. The causes of the decrease in average equity in 2005 are discussed below.
The Corporation's equity capital was $44,756,331 at December 31, 2005, as compared to $45,960,929 at December 31, 2004, a decrease of 2.6% over the period. The decrease in equity capital was primarily due to two factors. The first factor was the retirement of $2.2 million of the Corporation's common stock in 2005. The second factor in the decrease in equity capital was the unrealized gain on investment securities in 2004 changing to an unrealized loss in 2005, resulting in a $1,762,377 difference charged to unrealized loss on investment securities at December 31, 2005 as compared to the same period of 2004. The Corporation's equity-to-average asset ratio (net of unrealized gain/loss on investment securities) was 10.3% in 2005, as compared to 10.7% for 2004. Management believes that the Corporation's 2005 earnings were sufficient to keep pace with its growth in total assets. The Corporation expects to maintain a capital to asset ratio that reflects financial strength and conforms to current regulatory guidelines. The ratio of dividends to net income was 50.0% in 2005, 51.0% in 2004, and 54.2% in 2003.
As of December 31, 2005, the authorized number of common shares was 10 million shares, with 1,587,464 shares issued and outstanding.
Management is not aware of any known trends, events, uncertainties or current recommendations by the regulatory authorities that would have a material adverse effect on the Corporation's liquidity, capital resources or operations.
page 29
The FRB, the OCC and the FDIC have issued risk-based capital guidelines for U.S. banking organizations. These guidelines provide a uniform capital framework that is sensitive to differences in risk profiles among banking companies. Under these guidelines, total capital consists of Tier I capital (core capital, primarily stockholders' equity) and Tier II capital (supplementary capital, including certain qualifying debt instruments and the loan loss reserve). Assets are assigned risk weights ranging from 0% to 100% depending on the level of credit risk normally associated with such assets. Off-balance sheet items (such as commitments to make loans) are also included in assets through the use of conversion factors established by the regulators and are assigned risk weights in the same manner as on-balance sheet items. Banking institutions were expected to achieve a Tier I capital to risk-weighted assets ratio of at least 4.00%, a total capital (Tier I plu s Tier II) to risk-weighted assets ratio of at least 8.00%, and a Tier I capital to total assets ratio (leverage ratio) of at least 4.00%. As of December 31, 2005, the Corporation and the Bank, had ratios exceeding the regulatory requirements to be classified as "well capitalized," the highest regulatory capital rating. The Corporation's and the Bank's ratios are illustrated below.
| | | | | | | | | | To Be Well Capitalized |
| | | | | | | | | | Under Prompt |
| | | | | | For Capital | | Corrective Action |
| | | Actual | | Adequacy Purposes | | Provisions |
| | | Amount | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | (Dollars In thousands) |
As of December 31, 2005 | | | | | | | | | | |
| Total Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | $49,960 | 15.80% | | $25,296 | > | 8.00% | | $31,620 | > | 10.00% |
| | FNB | 49,145 | 15.54 | | 25,292 | > | 8.00 | | 31,615 | > | 10.00 |
| Tier I Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | 46,225 | 14.62 | | 12,648 | > | 4.00 | | 18,972 | > | 6.00 |
| | FNB | 45,410 | 14.36 | | 12,646 | > | 4.00 | | 18,969 | > | 6.00 |
| Tier I Capital (to average quarterly assets) | | | | | | | | | |
| | FPNC | 46,225 | 10.26 | | 18,027 | > | 4.00 | | 22,534 | > | 5.00 |
| | FNB | 45,410 | 10.08 | | 18,012 | > | 4.00 | | 22,515 | > | 5.00 |
| | | | | | | | | | | | |
As of December 31, 2004 | | | | | | | | | | |
| Total Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | $49,157 | 16.67% | | $23,590 | > | 8.00% | | $29,487 | > | 10.00% |
| | FNB | 48,183 | 16.37 | | 23,545 | > | 8.00 | | 29,431 | > | 10.00 |
| Tier I Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | 45,668 | 15.49 | | 11,795 | > | 4.00 | | 17,692 | > | 6.00 |
| | FNB | 44,694 | 15.19 | | 11,772 | > | 4.00 | | 17,658 | > | 6.00 |
| Tier I Capital (to average quarterly assets) | | | | | | | | | |
| | FPNC | 45,668 | 10.67 | | 17,126 | > | 4.00 | | 21,407 | > | 5.00 |
| | FNB | 44,694 | 10.45 | | 17,106 | > | 4.00 | | 21,382 | > | 5.00 |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. This SOP provides that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or "carried over" in the initial accounting for loans acquired. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not have a material impact on the Corporation's financial statements.
page 30
In March 2004, the FASB Emerging Issue Task Force ("EITF") released Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" which addresses how to determine the meaning of other-than temporary impairments and how that concept should be applied to investments accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations." Disclosures related to these investments are effective in annual financial statements for fiscal years ending after December 31, 2003. In November 2005, FASB issued FASB Staff Position ("FSP") Nos. 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This FSP addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and th e measurement of an impairment loss. The investment is impaired if the fair value is less than cost. The impairment is other-than-temporary for equity securities and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost. If other-than-temporary, an impairment loss shall be recognized in earnings equal to the difference between the investment's cost and its fair value. This statement specifically nullifies the requirements of paragraph 10-18 of EITF 03-1 and references existing other-than-temporary impairment guidance. The guidance under this FSP is effective in reporting periods beginning after December 15, 2005. The Corporation does not expect the adoption of this FSP to have a material impact on its results of operations, financial position or cash flows.
In December 2004, FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No. 123R requires all forms of share-based payment to employees, including stock options, to be treated as compensation and recognized in the income statement. This statement applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. Under SFAS No. 123R, share-based payment awards result in a compensation cost that will be measured based on the grant-date fair value of the equity or liability instruments issued, over the period that the employee provides service in exchange for the award. Existing options that will vest after adoption date will result in additional compensation expense. SFAS No. 123R is effective for public companies as of the beginning of the Corporation's interim reporting period of the first fiscal year that begins on or after June 15, 2005. Existing options that will vest after adoption date will result in additional co mpensation expense. The Corporation does not expect a material impact on its results of operations or financial position as a result of the adoption of SFAS No. 123R.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions". SFAS No. 153 modifies an exception from fair value measurement of nonmonetary exchanges. Exchanges that are not expected to result in significant changes in cash flows of the reporting entity are not measured at fair value. This supersedes the prior exemption from fair value measurement for exchanges of similar productive assets, and applies for fiscal years beginning after June 15, 2005. The Corporation does not expect the adoption of SFAS No. 153 to have a material impact on its results of operations, financial position or cash flows.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20 "Accounting Changes", and SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not expect the adoption of SFAS No. 154 to have a material impact on its results of operations, financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Corporation's primary place of exposure to market risk is interest rate volatility of its loan portfolio, investment portfolio and interest bearing deposit liabilities. Fluctuations in interest rates ultimately impact both the level of income and expense recorded on a large portion of the Corporation's assets and liabilities, and the market
page 31
value of interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity.
Simulation modeling is used to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. Important elements in this modeling process include the mix of floating rate versus fixed rate assets and liabilities, the repricing/maturing volumes and rates of the existing balance sheet, and assumptions regarding future volumes, maturity patterns and pricing under varying interest rate scenarios. As of December 31, 2005, a +200 basis point rate shock is estimated to decrease net interest income approximately $553,000, or 3.9%, as compared to rates remaining stable over the next 12 months. This is within the Bank's Asset/Liability policy limit of -7.0%. Also, a +200 basis point rate shock was forecast to decrease the current present value of the Bank's equity by 0.5%, well within the policy limits of -25%. In addition, the -200 basis point rate shock is estimated to decrease the current present value of the Bank's equity by 1.3% and would decrease net inte rest income an estimated $193,000, or 1.4%, over the next twelve months, as compared to rates remaining stable, both within policy guidelines. This simulation analysis assumes that NOW and savings accounts have a lower correlation to changes in market interest rates than do loans, investment securities and time deposits. The simulation analysis takes into account the call features of certain investment securities based upon the rate shock, as well as estimated prepayments on loans. The simulation analysis assumes no change in the Bank's asset/liability composition due to the inherent uncertainties of specific conditions and corresponding actions of management.
More about market risk is included in Management's Discussion and Analysis under the heading "Liquidity and Interest Rate Sensitivity Management." All market risk sensitive instruments described within that section have been entered into by the Corporation for purposes other than trading. The Corporation does not hold market risk sensitive instruments for trading purposes. The Corporation is not subject to any foreign currency exchange or commodity price risk.
The following table provides information about the Corporation's financial instruments that are sensitive to changes in interest rates as of December 31, 2005. Matured time deposits are included as time deposits maturing in 2006 in the following table.
Expected Maturity Date for year ending December 31, 2005 |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | Fair Value |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| | | (in thousands of dollars) |
Interest-sensitive assets: | | | | | | | | | | | | | | |
| Loans and leases: | | | | | | | | | | | | | | | | |
| Variable rate | | $21,047 | | $1,175 | | $7,478 | | $3,866 | | $5,107 | | $29,573 | | $68,246 | | $67,821 |
| Average interest rate | 7.70% | | 7.46% | | 7.72% | | 7.79% | | 6.96% | | 7.50% | | 7.56% | | |
| | | | | | | | | | | | | | | | | |
| Fixed rate | | $77,655 | | $33,893 | | $49,555 | | $21,857 | | $15,485 | | $5,741 | | 204,186 | | 202,446 |
| Average interest rate | 7.51% | | 7.55% | | 7.52% | | 6.81% | | 7.11% | | 6.87% | | 7.40% | | |
| | | | | | | | | | | | | | | | | |
| Securities | | 27,377 | | 36,538 | | 18,020 | | 6,451 | | 10,075 | | 37,822 | | 136,283 | | 133,920 |
| Average interest rate | 3.50% | | 3.68% | | 4.20% | | 4.52% | | 5.27% | | 4.87% | | 4.20% | | |
| | | | | | | | | | | | | | | | | |
| Federal funds sold | | 10,761 | | | | | | | | | | | | 10,761 | | 10,761 |
| Average interest rate | 3.89% | | | | | | | | | | | | 3.89% | | |
| | | | | | | | | | | | | | | | | |
Interest-sensitive liabilities: | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | |
| Variable rate | | 106,695 | | 150 | | - | | - | | - | | - | | 106,845 | | 97,763 |
| Average interest rate | 1.76% | | 3.82% | | | | | | | | | | 1.76% | | |
| | | | | | | | | | | | | | | | | |
| Fixed rate | | 178,003 | | 28,817 | | 12,127 | | 10,761 | | 5,751 | | 80 | | 235,539 | | 235,091 |
| Average interest rate | 3.66% | | 4.10% | | 3.80% | | 4.33% | | 4.69% | | 4.78% | | 3.78% | | |
| | | | | | | | | | | | | | | | | |
| Long-term borrowings | 222 | | 235 | | 248 | | 612 | | 234 | | 2,545 | | 4,096 | | 4,127 |
Average interest rate | 5.57% | | 5.58% | | 5.59% | | 4.90% | | 5.70% | | 5.16% | | 5.22% | |
Securities in the above table with call features are shown as maturing on the call date if they are likely to be called in the current interest rate environment.
page 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements appear on the following pages for First Pulaski National Corporation and its subsidiaries.
page 33
PUTMAN & HANCOCK
Certified Public Accountants
219 East College Street 118 North Third Street
P.O. Box 722 P.O. Box 724
Fayetteville, Tennessee 37334 Pulaski, Tennessee 38478
(931) 433-1040 & nbsp; (931) 424-1040
Fax (931) 433-9290 & nbsp; Fax (931)-363-5222
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
First Pulaski National Corporation
Pulaski, Tennessee
We have audited the accompanying consolidated balance sheets of First Pulaski National Corporation and subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Pulaski National Corporation and subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/Putman & Hancock
Fayetteville, Tennessee
February 20, 2006
Members: American Institute and Tennessee Society of Certified Public Accountants
page 34
| FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| | | | | | |
| December 31, 2005 and 2004 |
| | | | | | |
| ASSETS |
| | | | 2005 | | 2004 |
| | | |
| |
|
| Cash and due from banks | $9,749,958 | | $9,599,559 |
| Federal funds sold | 10,761,000 | | 7,182,000 |
| | | |
| |
|
| | | Total cash and cash equivalents | 20,510,958 | | 16,781,559 |
| | | | | | |
| Interest bearing balances with banks | 329,818 | | 211,105 |
| Securities available for sale | 133,919,583 | | 136,464,481 |
| | | | | | |
| Loans | | | | | |
| | Loans net of unearned income | 272,947,529 | | 255,823,521 |
| | Allowance for loan losses | (3,735,255) | | (3,489,490) |
| | |
| |
|
| | Total net loans | 269,212,274 | | 252,334,031 |
| | | | | | |
| Bank premises and equipment | 10,272,393 | | 9,525,521 |
| Accrued interest receivable | 3,519,492 | | 3,630,896 |
| Other real estate owned | 1,058,686 | | 3,198,343 |
| Prepayments and other assets | 11,569,803 | | 4,783,249 |
| | | |
| |
|
| | | TOTAL ASSETS | $450,393,007 | | $426,929,185 |
| | | | ============ | | ============ |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| | | | | | |
LIABILITIES | | | | |
| Deposits: | | | | |
| | Noninterest bearing | $56,016,061 | | $48,272,937 |
| | Interest bearing | 341,395,718 | | 325,127,731 |
| | | |
| |
|
| | | Total deposits | 397,411,779 | | 373,400,668 |
| | | | | | |
| Other borrowed funds | 4,096,152 | | 4,335,364 |
| Accrued taxes | 67,263 | | 290,890 |
| Accrued interest on deposits | 2,155,917 | | 1,245,115 |
| Other liabilities | 1,905,565 | | 1,696,219 |
| | | |
| |
|
| | | TOTAL LIABILITIES | 405,636,676 | | 380,968,256 |
| | | |
| |
|
STOCKHOLDERS' EQUITY | | | |
| Common stock, $1 par value; authorized - 10,000,000 shares; | | | |
| | 1,587,464 and 1,627,460 shares issued and outstanding, respectively | 1,587,464 | | 1,627,460 |
| Capital surplus | 1,634,087 | | 3,664,270 |
| Retained earnings | 43,004,099 | | 40,376,141 |
| Accumulated other comprehensive income (loss), net | (1,469,319) | | 293,058 |
| | | |
| |
|
| | | TOTAL STOCKHOLDERS' EQUITY | 44,756,331 | | 45,960,929 |
| | | |
| |
|
| | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $450,393,007 | | $426,929,185 |
| | | | ============ | | ============ |
The accompanying notes are an integral part of these financial statements. |
page 35
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF INCOME |
| | | | | | | | |
Years Ended December 31, 2005, 2004 and 2003 |
| | | | | | | | |
| | | | 2005 | | 2004 | | 2003 |
|
| |
| |
|
INTEREST INCOME | | | | | |
| Loans, including fees | $20,429,662 | | $17,507,246 | | $17,847,891 |
| Securities: | | | | | | |
| | Taxable | 2,500,117 | | 3,203,619 | | 3,854,184 |
| | Non-taxable | 2,187,917 | | 2,411,813 | | 1,579,007 |
| Federal funds sold | 194,040 | | 89,033 | | 108,853 |
| Interest on deposits | 7,566 | | 5,403 | | 3,734 |
| | | |
| |
| |
|
| | | Total Interest Income | 25,319,302 | | 23,217,114 | | 23,393,669 |
| | | |
| |
| |
|
INTEREST EXPENSE | | | | | |
| Interest on deposits: | | | | | |
| | Transaction accounts | 313,321 | | 324,768 | | 269,613 |
| | Money market deposit accounts | 986,616 | | 1,028,371 | | 1,278,482 |
| | Other savings deposits | 300,084 | | 297,637 | | 297,524 |
| | Time certificates of deposit of $100,000 or more | 4,154,393 | | 2,508,857 | | 2,348,755 |
| | All other time deposits | 3,370,354 | | 2,188,103 | | 2,490,445 |
| Borrowed funds | 246,381 | | 241,210 | | 196,595 |
| | | |
| |
| |
|
| | | Total Interest Expense | 9,371,149 | | 6,588,946 | | 6,881,414 |
| | | |
| |
| |
|
| | | NET INTEREST INCOME | 15,948,153 | | 16,628,168 | | 16,512,255 |
| | | | | | | | |
| | | Provision for loan losses | 600,942 | | 664,320 | | 1,520,318 |
| | | |
| |
| |
|
| | | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 15,347,211
| | 15,963,848
| | 14,991,937
|
| | | |
| |
| |
|
NON-INTEREST INCOME | | | | | |
| Service charges on deposit accounts | 2,267,590 | | 2,147,855 | | 2,166,788 |
| Commissions and fees | 498,915 | | 510,010 | | 493,553 |
| Other service charges and fees | 329,898 | | 262,454 | | 231,797 |
| BOLI income | 203,113 | | 11,394 | | 29,888 |
| Security gains, net | 16,145 | | 188,480 | | 227,739 |
| Gains (losses) on sale of other assets, net | (23,782) | | (199,905) | | 148,746 |
| Dividends | 138,197 | | 94,016 | | 81,541 |
| Mortgage banking fees | 514,012 | | 476,145 | | 789,150 |
| | | |
| |
| |
|
| | | Total Other Income | 3,944,088 | | 3,490,449 | | 4,169,202 |
| | | |
| |
| |
|
NON-INTEREST EXPENSES | | | | | |
| Salaries and employee benefits | 7,145,073 | | 6,901,879 | | 6,727,978 |
| Occupancy expense, net | 1,162,751 | | 1,183,785 | | 1,182,152 |
| Furniture and equipment expense | 855,482 | | 898,087 | | 871,403 |
| Advertising and public relations | 614,139 | | 605,379 | | 536,070 |
| Other operating expenses | 2,483,543 | | 2,532,116 | | 2,628,330 |
| | | |
| |
| |
|
| | | Total Other Expenses | 12,260,988 | | 12,121,246 | | 11,945,933 |
| | | |
| |
| |
|
| | | Income before income taxes | 7,030,311 | | 7,333,051 | | 7,215,206 |
| | | Applicable income taxes | 1,772,601 | | 2,005,482 | | 2,205,371 |
| | | |
| |
| |
|
| | | NET INCOME | $5,257,710 | | $5,327,569 | | $5,009,835 |
| | | | ============ | | ============ | | ============ |
| | | Earnings per common share: | | | | | |
| | | Basic | $3.29 | | $3.24 | | $3.05 |
| | | | ============ | | ============ | | ============ |
| | | Diluted | $3.28 | | $3.22 | | $3.03 |
| | | | ============ | | ============ | | ============ |
The accompanying notes are an integral part of these financial statements. |
page 36
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | |
Years Ended December 31, 2005, 2004, and 2003 |
| | | | | | | | | |
| | | | | 2005 | | 2004 | | 2003 |
| | | | |
| |
| |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
| Net income | $5,257,710 | | $5,327,569 | | $5,009,835 |
| Adjustments to reconcile net income to net cash | | | | | |
| | provided by operating activities- | | | | | |
| | | Provision for loan losses | 600,942 | | 664,320 | | 1,520,318 |
| | | Depreciation | 878,410 | | 917,380 | | 927,807 |
| | | Amortization and accretion of investment securities, net | 466,895 | | 531,844 | | 610,906 |
| | | Deferred income tax expense (benefit) | (337,907) | | (129,152) | | 166,331 |
| | | (Gain) loss on sale of other assets | 23,782 | | 199,905 | | (148,746) |
| | | Security gains, net | (16,145) | | (188,480) | | (227,739) |
| | | Loans originated for sale | (18,956,065) | | (17,880,476) | | (27,666,250) |
| | | Proceeds from sale of loans | 18,926,635 | | 18,081,526 | | 27,683,850 |
| | | Decrease in interest receivable | 111,405 | | 21,443 | | 103,623 |
| | | (Increase) decrease in prepayments and other assets | (119,462) | | 514,321 | | (237,092) |
| | | Increase in accrued interest on deposits | 910,802 | | 241,315 | | 112,306 |
| | | Increase (decrease) in accrued taxes | (223,627) | | 56,622 | | (135,550) |
| | | Increase in other liabilities | 209,346 | | 255,554 | | 124,441 |
| | | | |
| |
| |
|
| | | | Cash Provided by Operating Activities, net | 7,732,721 | | 8,613,691 | | 7,844,040 |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchases of securities available for sale | (20,031,735) | | (47,842,922) | | (125,895,514) |
| Proceeds from sales of securities available for sale | 2,241,520 | | 11,259,666 | | 5,563,244 |
| Proceeds from maturities of securities available for sale | 17,075,899 | | 57,381,800 | | 73,533,346 |
| Increase in interest bearing balances with banks | (118,713) | | (11,105) | | (200,000) |
| Purchase of bank owned life insurance | (5,283,100) | | (307,100) | | (307,100) |
| Net increase in loans | (18,131,323) | | (28,374,494) | | (146,596) |
| Capital expenditures | (1,625,282) | | (343,471) | | (784,169) |
| Proceeds from sale of other assets | 2,797,444 | | 965,757 | | 192,588 |
| | | | |
| |
| |
|
| | | | Cash Used by Investing Activities, net | (23,075,290) | | (7,271,869) | | (48,044,201) |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Proceeds from borrowings | 3,500,000 | | - | | 1,400,000 |
| Borrowings repaid | (3,739,212) | | (304,609) | | (322,243) |
| Federal funds purchased (repaid) | - | | (2,217,000) | | 2,217,000 |
| Net increase in deposits | 24,011,111 | | 10,809,862 | | 31,343,058 |
| Cash dividends paid | (2,629,752) | | (2,716,469) | | (2,716,699) |
| Proceeds from issuance of common stock | 139,701 | | 178,229 | | 356,841 |
| Common stock repurchased | (2,209,880) | | (1,414,379) | | (127,047) |
| | | | |
| |
| |
|
| | | | Cash Provided by Financing Activities, net | 19,071,968 | | 4,335,634 | | 32,150,910 |
| | | | |
| |
| |
|
INCREASE (DECREASE) IN CASH, net | 3,729,399 | | 5,677,456 | | (8,049,251) |
CASH AND CASH EQUIVALENTS, beginning of year | 16,781,559 | | 11,104,103 | | 19,153,354 |
|
| |
| |
|
CASH AND CASH EQUIVALENTS, end of year | $20,510,958 | | $16,781,559 | | $11,104,103 |
| | | | | ========== | | ========== | | ========== |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements. |
page 37
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
| | | | | | | |
Years Ended December 31, 2005, 2004 and 2003 |
| | | | | | | |
| | | | | | Accumulated | |
| | | | | | Other | |
| | Common Stock | Capital | Retained | Comprehensive | |
| | Shares | Amount | Surplus | Earnings | Income (Loss), net | Total |
Balance at December 31, 2002 | 1,642,036 | $1,642,036 | $4,656,050 | $35,471,905 | $2,232,258 | $44,002,249 |
| | | | | | | |
Comprehensive income: | | | | | | |
| Net income | - | - | - | 5,009,835 | - | - |
| | | | | | | |
| Change in unrealized | | | | | | |
| gains (losses) on AFS | | | | | | |
| securities, net of tax | - | - | - | - | (295,039) | - |
| | | | | | | |
| Less reclassification | | | | | | |
| adjustment, net of income | | | | | | |
| tax of $77,431 | - | - | - | - | (150,308) | - |
| | | | | | | |
Comprehensive income | - | - | - | - | - | 4,564,488 |
| | | | | | | |
Cash dividends paid $1.65 | | | | | | |
| per share | - | - | - | (2,716,699) | - | (2,716,699) |
| | | | | | | |
Common stock issued | 11,738 | 11,738 | 345,103 | - | - | 356,841 |
| | | | | | | |
Common stock repurchased | (2,579) | (2,579) | (124,468) | - | - | (127,047) |
|
|
|
|
|
|
|
Balance at December 31, 2003 | 1,651,195 | 1,651,195 | 4,876,685 | 37,765,041 | 1,786,911 | 46,079,832 |
| | | | | | | |
Comprehensive income: | | | | | | |
| Net income | - | - | - | 5,327,569 | - | - |
| | | | | | | |
| Change in unrealized | | | | | | |
| gains (losses) on AFS | | | | | | |
| securities, net of tax | - | - | - | - | (1,369,456) | - |
| | | | | | | |
| Less reclassification | | | | | | |
| adjustment, net of income | | | | | | |
| tax of $64,083 | - | - | - | - | (124,397) | - |
| | | | | | | |
Comprehensive income | - | - | - | - | - | 3,833,716 |
| | | | | | | |
Cash dividends paid $1.65 | | | | | | |
| per share | - | - | - | (2,716,469) | - | (2,716,469) |
| | | | | | | |
Common stock issued | 6,063 | 6,063 | 172,166 | - | - | 178,229 |
| | | | | | | |
Common stock repurchased | (29,798) | (29,798) | (1,384,581) | - | - | (1,414,379) |
|
|
|
|
|
|
|
Balance at December 31, 2004 | 1,627,460 | 1,627,460 | 3,664,270 | 40,376,141 | 293,058 | 45,960,929 |
| | | | | | | |
Comprehensive income: | | | | | | |
| Net income | - | - | - | 5,257,710 | - | - |
| | | | | | | |
| Change in unrealized | | | | | | |
| gains (losses) on AFS | | | | | | |
| securities, net of tax | - | - | - | - | (1,773,033) | - |
| | | | | | | |
| Less reclassification | | | | | | |
| adjustment, net of income | | | | | | |
| tax of $5,489 | - | - | - | - | 10,656 | - |
| | | | | | | |
Comprehensive income | - | - | - | - | - | 3,495,333 |
| | | | | | | |
Cash dividends paid $1.65 | | | | | | |
| per share | - | - | - | (2,629,752) | - | (2,629,752) |
| | | | | | | |
Common stock issued | 4,504 | 4,504 | 135,197 | - | - | 139,701 |
| | | | | | | |
Common stock repurchased | (44,500) | (44,500) | (2,165,380) | - | - | (2,209,880) |
|
|
|
|
|
|
|
Balance at December 31, 2005 | 1,587,464 | $1,587,464 | $1,634,087 | $43,004,099 | $(1,469,319) | $44,756,331 |
| | ========= | ========= | ========= | ========== | ============== | =========== |
| | | | | | | |
The accompanying notes are an integral part of these financial statements. |
page 38
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
First Pulaski National Corporation (the "Corporation") through its subsidiaries provides domestic financial and insurance services in Giles, Marshall and Lincoln County, Tennessee, to customers who are predominantly small and middle-market businesses and middle-income individuals. The accounting and reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and to general practice within the financial services industry. The accounting policies of the Corporation and the methods of applying those policies that materially affect the accompanying financial statements are presented below.
Basis of Presentation
The consolidated financial statements include the accounts of First Pulaski National Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts in the prior years' financial statements have been reclassified to conform to the 2005 presentation. These reclassifications are immaterial and had no effect on net income.
Use of Estimates
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 consolidated financial statements and accompanying notes. The most significant estimate relates to the adequacy of the allowance for losses on loans. Actual results could differ from those estimates.
Cash and Due From Banks
Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances from the Federal Reserve Bank and other banks. The average amount of those reserve requirements was approximately $5,633,000 and $5,501,000 for the years ended December 31, 2005 and 2004, respectively. From time to time throughout the year, the balances due from other financial institutions exceeded FDIC insurance limits. Management considers this to be a normal business risk.
Statements of Cash Flows
Cash and cash equivalents as presented in the consolidated statements of cash flows include cash and due from banks and federal funds sold. Cash flows from operating activities reflect interest paid of $8,460,347, $6,348,255 and $6,770,233 and income taxes paid of $2,293,089, $2,125,000, and $2,315,412 for the years ended December 31, 2005, 2004 and 2003, respectively.
Securities
Securities are classified at the time of purchase as either held to maturity or available for sale. The Corporation defines held to maturity securities as securities for which management has the positive intent and ability to hold to maturity. Held to maturity securities are carried at amortized cost. Securities available for sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors. Securities available for sale are carried at fair value. Unrealized holding gains and losses for available for sale securities are reported, net of tax, in other comprehensive income. The amortized cost of all securities is adjusted for amortization of premium and accretion of discount to maturity or earlier call date if appropriate. Such amortization and accretion is included in interest income from securities. Gains and losses from sales of available for sale securities are computed using the specific identification method.
page 39
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Mortgage Banking
The Corporation originates first-lien mortgage loans for the purpose of selling them in the secondary market. Mortgage loans held for sale are recorded at cost, which approximates market value. Gains and losses realized from the sale of these assets are included in noninterest income. Servicing rights related to the mortgages sold are not retained. Loans include loans held for sale at December 31, 2005 and 2004, totaling $532,280 and $502,850, respectively.
Loans and Allowance for Loan Losses
Loans are reported at the principal amounts outstanding, net of unamortized nonrefundable loan fees. Deferred net fees are recognized in loan interest income and fees over the loan term using a method that generally produces a level yield on the unpaid loan balance.
Impaired loans are specifically reviewed loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement. Impairment of a loan is measured by comparing the recorded investment in the loan with the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A valuation allowance is provided to the extent that the measure of the impaired loan is less than the recorded investment.
Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest unless such loans are well secured and in the process of collection.
Interest income is accrued principally on a simple interest basis. Payments received on impaired loans for which the ultimate collectibility of principal is uncertain are generally applied first as principal reductions. Interest collections on nonaccrual loans for which the ultimate collectibility of principal is uncertain are applied as principal reductions. Otherwise, such collections are credited to income when received.
The allowance for loan losses is maintained at a level which is considered to be adequate to reflect estimated credit losses for specifically identified loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The Corporation's methodology for assessing the appropriateness of the allowance consists of the formula allowance and specific allowances.
The formula allowance is calculated by applying historical loss factors to outstanding loans and certain unused commitments. For purposes of the quarterly review, the loan portfolio is separated by loan type and grade, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on the Corporation's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
page 40
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Loans and Allowance for Loan Losses - (Continued)
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred in excess of the amount determined by the application of the above formula. Every nonperforming loan in excess of $250,000 and all loans classified as "Other Assets Especially Mentioned" over $400,000 are reviewed quarterly by the Board's Executive and Loan Committee to review the level of loan losses required to be specifically allocated.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line and various accelerated methods at rates calculated to amortize the cost of assets over their estimated useful lives. Cost of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Estimated useful lives are twenty to thirty nine years for premises and five to seven years for equipment. No interest was capitalized in 2005, 2004 or 2003.
Impairment of Long-Lived Assets
The Corporation periodically reviews long-lived assets. If indications of impairments exist and if the value of the assets is impaired, an impairment loss would be recognized.
Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosures and premises not used for business operations. These properties are valued at the lower of cost or estimated net realizable value. Cost includes loan principal, accrued interest and foreclosure expense. Estimated net realizable value is the estimated selling price in an orderly disposition reduced by estimated selling costs and future carrying costs. The excess of cost over net realizable value at the time of foreclosure is charged to the allowance for loan losses. The estimated net realizable fair value is reviewed periodically, and any write-downs are charged against current earnings as market adjustments.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Corporation has elected to continue to measure compensation cost for its stock option plans under the provisions in APB Opinion 25. Accordingly, no stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS No. 123.
page 41
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note A - Summary of Significant Accounting Policies - (Continued)
Stock-Based Compensation (Continued)
| Year Ended December 31, |
|
|
| 2005 | | 2004 | | 2003 |
|
| |
| |
|
Net income as reported | $5,257,710 | | $5,327,569 | | $5,009,835 |
Deduct: Stock based compensation expense | | | | | |
determined under fair value based method | 25,514 | | - | | 12,814 |
|
| |
| |
|
| $5,232,196 | | $5,327,569 | | $4,997,021 |
| =========== | | =========== | | =========== |
Basic earnings per share as reported | 3.29 | | 3.24 | | 3.05 |
Pro-forma basic earnings per share | 3.28 | | 3.24 | | 3.04 |
| | | | | |
Diluted earnings per share as reported | 3.28 | | 3.22 | | 3.03 |
Pro-forma diluted earnings per share | 3.26 | | 3.22 | | 3.02 |
Using theBlack-Scholes option-pricing model, the estimated weighted-average fair value assumptions of options granted during 2005, 2004, and 2003 are as follows:
| Year Ended December 31, |
|
|
| 2005 | | 2004 | | 2003 |
|
| |
| |
|
Weighted Average Fair Value Assumptions: | | | | | |
Expected dividend yield | 3.5% | | 4.4% | | 4.4% |
Expected volatility | 12.0% | | 12.0% | | 12.0% |
Risk-free interest rates | 4.4% | | 3.7% | | 3.9% |
Expected lives | 6 years | | 2 years | | 2 years |
Advertising Costs
TheCorporation expenses the costs of advertising when these costs are incurred.
Income Taxes
The Corporation files a consolidated Federal income tax return with its subsidiaries. Income tax expense is allocated among the parent company and its subsidiaries as if each had filed a separate return. The provision for income taxes is based on income reported for consolidated financial statement purposes and includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for tax reporting purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be realized or settled. Recognition of certain deferred tax assets is based upon management's belief that based upon historical earnings and anticipated future earnings, normal operations will continue to generate sufficient future taxable income to realize these benefits. A valuation allowance is established for deferred tax assets when, in the opinion of management, it is more likely than not, that the asset will not be realized.
Earnings Per Share
Basic and diluted earnings per share (EPS) are shown on the face of the income statement. Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the year. No dilution for any potentially diluted securities is included. Diluted EPS assumes the conversion of all options.
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities
Accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities is based on an application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers of assets that are secured borrowings.
page 42
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Segments Reporting
Segments are strategic business units that offer different products and services and are managed separately. At December 31, 2005, the Corporation and the Bank did not have any identified segments.
Insurance Subsidiary
Insurance premium and commission income and acquisition costs are recognized over the terms of the related policies. Losses are recognized as incurred.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes.
Recent Accounting Developments
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. This SOP provides that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or "carried over" in the initial accounting for loans acquired. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not have a material impact on the Corporation's financial statements.
In March 2004, the Financial Accounting Standards Board ("FASB") Emerging Issue Task Force ("EITF") released Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" which addresses how to determine the meaning of other-than temporary impairments and how that concept should be applied to investments accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations." Disclosures related to these investments are effective in annual financial statements for fiscal years ending after December 31, 2003. In November 2005, FASB issued FASB Staff Position ("FSP") Nos. 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This FSP addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and the measu rement of an impairment loss. The investment is impaired if the fair value is less than cost. The impairment is other-than-temporary for equity securities and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost. If other-than-temporary, an impairment loss shall be recognized in earnings equal to the difference between the investment's cost and its fair value. This statement specifically nullifies the requirements of paragraph 10-18 of EITF 03-1 and references existing other-than-temporary impairment guidance. The guidance under this FSP is effective in reporting periods beginning after December 15, 2005. The Corporation does not expect the adoption of this FSP to have a material impact on its results of operations, financial position or cash flows.
In December 2004, FASB issued revised SFAS No. 123, "Share-Based Payment". SFAS No. 123R requires all forms of share-based payment to employees, including stock options, to be treated as compensation and recognized in the income statement. This statement applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. Under SFAS No. 123R, share-based payment awards result in a compensation cost that will be measured based on the grant-date fair value of the equity or liability instruments issued, over the period that the employee provides service in exchange for the award. Existing options that will vest after adoption date will result in additional compensation expense. SFAS No. 123R is effective for public companies as of the beginning of the Corporation's interim reporting period of the first fiscal year that begins on or after June 15, 2005. Existing options that will vest after adoption date
page 43
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Recent Accounting Developments - (Continued)
will result in additional compensation expense. The Corporation does not expect a material impact on its results of operations or financial position as a result of the adoption of SFAS No. 123R.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions". SFAS No. 153 modifies an exception from fair value measurement of nonmonetary exchanges. Exchanges that are not expected to result in significant changes in cash flows of the reporting entity are not measured at fair value. This supersedes the prior exemption from fair value measurement for exchanges of similar productive assets, and applies for fiscal years beginning after June 15, 2005. The Corporation does not expect the adoption of SFAS No. 153 to have a material impact on its results of operations, financial position or cash flows.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20 "Accounting Changes", and SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not expect the adoption of SFAS No. 154 to have a material impact on its results of operations, financial position or cash flows.
Note B - Securities
The following is a summary of the amortized cost and estimated fair value of securities at December 31:
| | | | | | Gross | | Gross | | Estimated |
| | | | Amortized | | Unrealized | | Unrealized | | Fair |
2005 | | | | Cost | | Gains | | Losses | | Value |
| | | |
| |
| |
| |
|
Available for Sale | | | | | | | | |
| U.S. Government agencies | | $61,652,540 | | $- | | $1,227,066 | | $60,425,474 |
| Obligations of states and | | | | | | | | |
| | political subdivisions | | 64,256,982 | | 239,004 | | 911,732 | | 63,584,254 |
| Mortgage-backed securities | | 1,424,420 | | 37,701 | | 11,651 | | 1,450,470 |
| Other debt securities | | 8,949,076 | | 15,732 | | 505,423 | | 8,459,385 |
| | | |
| |
| |
| |
|
| | | | $136,283,018 | | $292,437 | | $2,655,872 | | $133,919,583 |
| | | | ========== | | ========== | | ========== | | ========== |
2004 | | | | | | | | | | |
| | | | | | | | | | |
Available for Sale | | | | | | | | |
| U.S. Treasury securities | | $100,000 | | $- | | $1,750 | | $98,250 |
| U.S. Government agencies | | 53,742,655 | | 74,849 | | 519,968 | | 53,297,536 |
| Obligations of states and | | | | | | | | |
| | political subdivisions | | 66,242,481 | | 991,616 | | 334,945 | | 66,899,152 |
| Mortgage-backed securities | | 1,900,096 | | 75,196 | | - | | 1,975,292 |
| Other debt securities | | 14,034,222 | | 197,860 | | 37,831 | | 14,194,251 |
| | | |
| |
| |
| |
|
| | | | $136,019,454 | | $1,339,521 | | $894,494 | | $136,464,481 |
| | | | ========== | | ========== | | ========== | | ========== |
page 44
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities - (Continued)
The following is a summary of the amortized cost and estimated fair value of debt securities by contractual maturity (or average maturity for amortizing mortgage-backed securities) at December 31, 2005:
| | | | | Cost | | Fair Value |
| | |
| |
|
Due in one year or less | | | $25,893,337 | | $25,625,691 |
Due after one year through five years | 72,113,791 | | 70,677,009 |
Due after five years through ten years | 37,240,309 | | 36,598,509 |
Due after ten years | 1,035,581 | | 1,018,374 |
| | | | |
| |
|
| | TOTAL | | | $136,283,018 | | $133,919,583 |
| | | | | =========== | | =========== |
Net gains realized from securities transactions for 2005, 2004 and 2003 were:
| | | | | Book | | Gross Realized | | Net |
| 2005 | | Proceeds | | Value | | Gains | | Losses | | Realized |
Securities sold | $2,241,520 | | $2,225,375 | | $23,790 | | $7,645 | | $16,145 |
Securities matured or redeemed | 17,075,899 | | 17,075,899 | | - | | - | | - |
| | |
| |
| |
| |
| |
|
| | | $19,317,419 | | $19,301,274 | | $23,790 | | $7,645 | | $16,145 |
| | | ========= | | ========= | | ========= | | ========= | | ========= |
| 2004 | | | | | | | | | | |
Securities sold | $11,259,666 | | $11,071,186 | | $297,993 | | $109,513 | | $188,480 |
Securities matured or redeemed | 57,381,800 | | 57,381,800 | | - | | - | | - |
| | |
| |
| |
| |
| |
|
| | | $68,641,466 | | $68,452,986 | | $297,993 | | $109,513 | | $188,480 |
| | | ========= | | ========= | | ========= | | ========= | | ========= |
| 2003 | | | | | | | | | | |
Securities sold | $5,563,244 | | $5,335,505 | | $227,739 | | $- | | $227,739 |
Securities matured or redeemed | 73,533,346 | | 73,533,346 | | - | | - | | - |
| | |
| |
| |
| |
| |
|
| | | $79,096,590 | | $78,868,851 | | $227,739 | | $- | | $227,739 |
| | | ========= | | ========= | | ========= | | ========= | | ========= |
Income tax expense attributable to securities transactions was $5,489, $64,083 and $77,431 for 2005, 2004 and 2003, respectively.
Securities with a carrying value of $58,402,903 and $58,677,283 at December 31, 2005 and 2004, respectively, were pledged to secure public monies and for other purposes as required or permitted by law.
There were no securities of a single issuer, other than U.S. government agency securities that were payable from and secured by the same source of revenue or taxing authority that exceeded 10% of consolidated stockholders' equity at December 31, 2005 or 2004.
At December 31, 2005, the Corporation had $112,483,323 of investments with $2,657,622 of unrealized losses on these investments. Of the investments with unrealized losses, $50,291,299 had been at a loss position at December 31, 2005 for less than 12 months, with losses of $827,192, and $62,192,024 of these investments, with losses of $1,830,430, had been at a loss position at December 31, 2005 for longer than 12 months. The Corporation believes that these securities are only temporarily impaired and that the full principal will be collected as anticipated. Of the total, $59,425,474, or 53%, is guaranteed by the U.S. Government or its agencies. As of December 31, 2005, $45,659,984, or 41%, are obligations of states and political subdivisions. All of the obligations of states and political subdivisions are investment grade securities. The primary cause for unrealized losses within the portfolio is the impact movements in market rates have had in comparison to the underlying yields on these securities as well as a deterioration of the credit quality of certain corporate issues.
page 45
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities - (Continued)
The following table summarizes the Corporation's investments which were at an unrealized loss position as of December 31:
2005 | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Longer | | Total |
| | |
| |
| |
|
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
Description of Securities | | Value | | Losses | | Value | | Losses | | Value | | Losses |
| |
| |
| |
| |
| |
| |
|
Obligations of U.S. Government | | | | | | | | | | | | |
Agencies | | $15,389,906 | | $144,066 | | $44,035,568 | | $1,083,000 | | $59,425,474 | | $1,227,066 |
Obligations of States and | | | | | | | | | | | | |
Political Subdivisions | | 29,875,033 | | 420,599 | | 15,784,951 | | 491,133 | | 45,659,984 | | 911,732 |
Mortgage-backed securities | | 517,295 | | 11,651 | | - | | - | | 517,295 | | 11,651 |
Corporate Bonds | | 4,410,815 | | 249,126 | | 2,371,505 | | 256,297 | | 6,782,320 | | 505,423 |
| |
| |
| |
| |
| |
| |
|
Total Temporarily Impaired | | | | | | | | | | | | |
Securities | | $50,193,049 | | $825,442 | | $62,192,024 | | $1,830,430 | | $112,385,073 | | $2,655,872 |
| | | ========== | | ======== | | ========= | | ======== | | ========== | | ======== |
| | | | | | | | | | | | | |
2004 | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Longer | | Total |
| | |
| |
| |
|
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
Description of Securities | | Value | | Losses | | Value | | Losses | | Value | | Losses |
| |
| |
| |
| |
| |
| |
|
Obligations of U.S. Government | | $98,250 | | $1,750 | | $- | | $- | | $98,250 | | $1,750 |
Obligations of U.S. Government | | | | | | | | | | | | |
Agencies | | 42,724,333 | | 505,268 | | 985,300 | | 14,700 | | 43,709,633 | | 519,968 |
Obligations of States and | | | | | | | | | | | | |
Political Subdivisions | | 19,076,362 | | 264,447 | | 2,876,063 | | 70,498 | | 21,952,425 | | 334,945 |
Corporate Bonds | | 2,127,923 | | 25,117 | | 525,400 | | 12,714 | | 2,653,323 | | 37,831 |
| |
| |
| |
| |
| |
| |
|
Total Temporarily Impaired | | | | | | | | | | | | |
Securities | | $64,026,868 | | $796,582 | | $4,386,763 | | $97,912 | | $68,413,631 | | $894,494 |
| | | ========== | | ======== | | ========= | | ======== | | ========== | | ======== |
Note C - Loans and Allowance for Loan Losses
Credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk or types of collateral arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Corporation does not have a significant concentration to any individual customer or counterparty. The major concentrations of credit risk for the Corporation arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by real estate and agricultural related loans. Although the Corporation has a loan portfolio diversified by type of ri sk, the ability of its customers to honor their contracts is to some extent dependent upon their regional economic condition. A geographic concentration arises because the Corporation grants commercial, real estate and consumer loans primarily to customers in Giles, Marshall and Lincoln County, Tennessee. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses to cover inherent losses in the loan portfolio.
page 46
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (Continued)
The following is a summary of loans at December 31:
| | | | 2005 | | 2004 |
| |
| |
|
Construction and land development | | $9,654,012 | | $7,210,903 |
Commercial and industrial | | 26,680,061 | | 19,814,571 |
Agricultural | | 5,804,008 | | 7,298,058 |
Real estate loans secured by: | | | | |
| Farmland | | 23,333,726 | | 21,845,038 |
| Residential property | | 75,544,527 | | 74,912,710 |
| Nonresidential, nonfarm | | 104,828,317 | | 98,861,998 |
Loans to individuals | | 22,973,787 | | 23,227,656 |
Other loans | | 4,431,717 | | 2,934,855 |
| | | |
| |
|
| | | | 273,250,155 | | 256,105,789 |
| Unearned income | | (302,626) | | (282,268) |
| | | |
| |
|
| | TOTAL | | $272,947,529 | | $255,823,521 |
| | | | =========== | | =========== |
At December 31, 2005, 2004 and 2003, impaired loans totaled $989,178, $511,098 and $2,409,729, respectively. The amount of interest income actually recognized on these loans during 2005, 2004 and 2003, was $13,457, $10,942, and $96,324, respectively. The additional amount of interest income that would have been recorded during 2005, 2004 and 2003, if the above amounts had been current in accordance with their original terms was $14,915, $41,586, and $219,738, respectively.
As of December 31, 2005, the Corporation's recorded investment in impaired loans and the related valuation allowance are as follows:
| | | | Recorded | | Valuation |
| | | | Investment | | Allowance |
| |
| |
|
Impaired Loans- | | | | |
| Valuation allowance required | $470,748 | | $158,316 |
| No valuation allowance required | 518,430 | | - |
| | | |
| |
|
| | Total Impaired Loans | $989,178 | | $158,316 |
| | | | ============ | | ============ |
The valuation allowance is included in the allowance for loan losses on the balance sheet.
The average recorded investments in impaired loans for the years 2005, 2004 and 2003 were $1,684,462, $1,663,104 and $3,924,287, respectively. At December 31, 2005, there were no outstanding commitments to advance funds to customers whose loans were not performing.
Loans past due 90 days or more and accruing interest were $107,287, $305,066 and $247,974 at December 31, 2005, 2004 and 2003, respectively.
Certain related parties (principally directors, including their families and companies in which they are principal owners) are loan customers of the Corporation's bank subsidiary. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than a normal risk of collectibility. The following table summarizes the changes in related party loans for 2005 and 2004:
| | | | 2005 | | 2004 |
| |
| |
|
Balance at beginning of year | | $1,241,043 | | $1,733,070 |
Additions | | 1,914,070 | | 1,800,887 |
Repayments | | (1,782,838) | | (1,951,471) |
No longer related | | (25,885) | | (341,443) |
| |
| |
|
Balance at end of year | | $1,346,390 | | $1,241,043 |
| | | | =========== | | =========== |
page 47
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (Continued)
Transactions in the allowance for loan losses were as follows:
| | | 2005 | | 2004 | | 2003 |
|
| |
| |
|
Balance at beginning of year | $3,489,490 | | $3,448,676 | | $3,809,625 |
|
| |
| |
|
Less-Charge-offs: | | | | | |
| Real estate - | | | | | |
| | Residential | 226,168 | | 50,040 | | 44,791 |
| | Agricultural | - | | 19,083 | | 35,580 |
| | Other | 55,977 | | 392,641 | | 911,817 |
| Commercial | 15,085 | | 155,350 | | 433,389 |
| Agricultural | 676 | | 8,280 | | 285,937 |
| Individuals | 454,647 | | 371,808 | | 525,106 |
| | |
| |
| |
|
| | | 752,553 | | 997,202 | | 2,236,620 |
|
| |
| |
|
Add-Recoveries: | | | | | |
| Real estate - | | | | | |
| | Residential | 58,421 | | 22,786 | | 3,758 |
| | Agricultural | 12,477 | | 21,618 | | - |
| | Other | 6,127 | | 32,823 | | 13,984 |
| Commercial | 15,022 | | 88,063 | | 62,900 |
| Agricultural | 14,589 | | 21,465 | | 14,244 |
| Individuals | 289,690 | | 186,441 | | 260,467 |
| Other | 1,050 | | 500 | | - |
| | |
| |
| |
|
| | | 397,376 | | 373,696 | | 355,353 |
|
| |
| |
|
Net Charge-offs | 355,177 | | 623,506 | | 1,881,267 |
| | |
| |
| |
|
Add-Provision charged to operations | 600,942 | | 664,320 | | 1,520,318 |
|
| |
| |
|
Balance at end of year | $3,735,255 | | $3,489,490 | | $3,448,676 |
| | | ========== | | ========== | | ========== |
Ratio of net charge-offs to average | | | | | |
| loans outstanding during the year | 0.13% | | 0.26% | | 0.81% |
| | | ========== | | ========== | | ========== |
Note D - Bank Premises and Equipment
The following is a summary of bank premises and equipment at December 31:
| | | | | Accumulated | | |
| | | | | Depreciation & | | Carrying |
2005 | | | Cost | | Amortization | | Amount |
| | |
| |
| |
|
| Land | | $2,351,246 | | $- | | $2,351,246 |
| Buildings | | 12,372,018 | | 5,426,382 | | 6,945,636 |
| Furniture and equipment | 6,356,703 | | 5,398,062 | | 958,641 |
| Leasehold improvements | 54,959 | | 38,089 | | 16,870 |
| | |
| |
| |
|
| | TOTAL | $21,134,926 | | $10,862,533 | | $10,272,393 |
| | | =========== | | =========== | | =========== |
2004 | | | | | | | |
| | | | | | | |
| Land | | $1,606,599 | | $- | | $1,606,599 |
| Buildings | | 11,864,137 | | 5,104,743 | | 6,759,394 |
| Furniture and equipment | 6,143,100 | | 5,002,688 | | 1,140,412 |
| Leasehold improvements | 54,959 | | 35,843 | | 19,116 |
| | |
| |
| |
|
| | TOTAL | $19,668,795 | | $10,143,274 | | $9,525,521 |
| | | =========== | | =========== | | =========== |
page 48
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Bank Premises and Equipment (Continued)
The following is a summary of non-cancelable minimum operating lease commitments for real property, excluding cancelable short-term commitments, principally for equipment.
| | Annual | | | | Annual |
Year | | Commitments | | Year | | Commitments |
| |
| |
| |
|
2006 | | $13,200 | | 2009 | | $6,000 |
2007 | | 6,000 | | 2010 | | 6,000 |
2008 | | 6,000 | | 2011 - 2014 | | 20,500 |
Rents charged to operations under operating lease agreements for the years 2005, 2004 and 2003 were $28,005, $28,140 and $28,140, respectively.
Note E - Prepayments and Other Assets
The following is a summary of prepayments and other assets at December 31:
| | | 2005 | | 2004 |
|
| |
|
Prepaid expenses | $210,959 | | $270,017 |
Federal Home Loan Bank stock, at cost | 1,385,000 | | 1,318,100 |
Federal Reserve Bank stock, at cost | 114,900 | | 114,900 |
Other investments | 420,132 | | 377,351 |
Bank-owned life insurance | 6,800,107 | | 1,313,894 |
Deferred income tax benefits | 2,098,308 | | 714,316 |
Deferred acquisition costs | 193,543 | | 200,562 |
Other | 346,854 | | 474,109 |
| | |
| |
|
| | TOTAL | $11,569,803 | | $4,783,249 |
| | | =========== | | =========== |
Note F - Deposits
The following is a summary of deposits at December 31:
| | | | 2005 | | 2004 |
| |
| |
|
| Noninterest bearing: | $56,016,062 | | $47,573,835 |
| Interest bearing: | | | |
| | Demand | 32,383,822 | | 33,619,910 |
| | Savings/Money Market | 73,714,698 | | 89,696,432 |
| | Other time | 108,786,563 | | 97,109,761 |
| | Certificates of deposit $100,000 and over | 126,510,634 | | 105,400,730 |
| | | |
| |
|
| | | TOTAL | $397,411,779 | | $373,400,668 |
| | | | =========== | | =========== |
The aggregate maturities of time deposits at December 31, 2005, are summarized as follows:
Year | | |
| | |
Due within 1 year | | $177,611,505 |
Due after 1 year through 3 years | 41,094,012 |
Due after 3 years | | 16,591,680 |
| |
|
| | $235,297,197 |
| | =========== |
page 49
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Other Borrowed Funds
The following is a summary of other borrowed funds at December 31:
Principal | | | | |
Amounts Outstanding | | | | |
December 31, | | Interest | | Maturity |
2005 | | 2004 | | Rates | | Dates |
$- | | $29,256 | | 6.70% | | 2005 |
55,341 | | 71,703 | | 5.95% | | 2008 |
448,770 | | 466,162 | | 4.46% | | 2009 |
165,417 | | 191,237 | | 6.25% | | 2011 |
1,884,381 | | 1,994,706 | | 4.09%-7.40% | | 2012 |
1,211,130 | | 1,230,301 | | 5.09% | | 2013 |
200,456 | | 213,793 | | 6.50% | | 2016 |
130,657 | | 138,206 | | 4.87% | | 2018 |
| |
| | | | |
$4,096,152 | | $4,335,364 | | | | |
========= | | ========= | | | | |
Other borrowed funds consist of Federal Home Loan Bank loans secured by a pledge of Federal Home Loan Bank stock with a par value of $1,385,000 and a blanket pledge of $5,529,805 first mortgage loans against single family, 1-4 unit residential properties.
As of December 31, 2005, aggregate debt maturities were as follows:
2006 | | $221,935 | | 2010 | | $233,679 |
2007 | | 234,625 | | 2011-2015 | | 2,507,643 |
2008 | | 248,072 | | 2016-2018 | | 37,706 |
2009 | | 612,492 | | | |
|
| | | | | | $4,096,152 |
| | | | | | ========= |
At December 31, 2005, First National Bank of Pulaski had unsecured lines of credit from correspondent banks for federal fund purchases and daylight overdrafts totaling $20,000,000. No advances had been made against these lines at December 31, 2005.
Note H - Income Taxes
The components of income taxes for the three years ended December 31 are as follows:
| | | | | 2005 | | 2004 | | 2003 |
| |
| |
| |
|
| Federal | | | | | |
| | Current | $1,598,875 | | $1,689,441 | | $1,594,090 |
| | Deferred tax | (134,077) | | (129,152) | | 166,331 |
| | | | |
| |
| |
|
| | | | | 1,464,798 | | 1,560,289 | | 1,760,421 |
| State | | | | | |
| | Current | 511,633 | | 445,193 | | 444,950 |
| | Deferred tax | (203,830) | | - | | - |
| |
| |
| |
|
| Provision for Income Taxes | $1,772,601 | | $2,005,482 | | $2,205,371 |
| | | | | ========== | | ========== | | ========== |
page 50
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Income Taxes (Continued)
Income taxes varied from the amount computed at the statutory federal income tax rate for the years ended December 31 as follows:
| | | | | 2005 | | 2004 | | 2003 | |
| | | | |
| |
| |
| |
| Federal taxes at statutory rate | $2,391,002 | | $2,493,237 | | $2,453,523 | |
| Increase (decrease) resulting from | | | | | | |
| | tax effect of: | | | | | | |
| | | Tax exempt interest on obligations | | | | | | |
| | | | of states and political subdivisions | (694,208) | | (775,986) | | (533,692) | |
| | | State income taxes, net of federal | | | | | | |
| | | | income tax benefit | 133,848 | | 293,827 | | 293,667 | |
| | | Others, net | (58,041) | | (5,596) | | (8,127) | |
| |
| |
| |
| |
| Provision for Income Taxes | $1,772,601 | | $2,005,482 | | $2,205,371 | |
| | | | | ========== | | ========== | | ========== | |
Significant components of the Corporation's deferred tax assets and liabilities on December 31 are as follows:
| | | | | 2005 | | 2004 |
| | | | |
| |
|
Deferred tax assets: | | | | |
| Allowance for loan losses | | $1,037,734 | | $804,236 |
| Director benefit plans | | 321,795 | | 203,765 |
| Merger costs | | 3,477 | | 6,454 |
| SFAS 115 equity adjustment | | 894,117 | | - |
| Other real estate | | 87,765 | | 62,374 |
| | | | |
| |
|
| | Gross Deferred Tax Assets | | 2,344,888 | | 1,076,829 |
| | | | |
| |
|
| | | | | | | |
Deferred tax liabilities: | | | | |
| Investment securities | | 16,394 | | 28,895 |
| SFAS 115 equity adjustment | | - | | 151,968 |
| Other securities | | 230,186 | | 181,650 |
| | | | |
| |
|
| | Gross Deferred Tax Liabilities | | 246,580 | | 362,513 |
| | | | |
| |
|
| | | Net Deferred Tax Asset | | $2,098,308 | | $714,316 |
| | | | | ========= | | ========= |
The Corporation has sufficient refundable taxes paid in available carryback years to fully realize its recorded deferred tax assets. Accordingly, no valuation has been recorded.
page 51
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Other Operating Expenses
The following table summarizes the components of other operating expenses for the years ended December 31:
| | | 2005 | | 2004 | | 2003 |
| |
| |
| |
|
| Directors' fees and expense | $398,524 | | $317,395 | | $313,155 |
| Stationery and supplies | 178,472 | | 194,024 | | 224,948 |
| Insurance | 136,855 | | 145,441 | | 148,245 |
| Collection and professional fees | 302,181 | | 208,650 | | 245,563 |
| Postage | 147,550 | | 143,653 | | 161,869 |
| Telephone | 129,948 | | 125,494 | | 136,715 |
| Other | 1,190,013 | | 1,397,459 | | 1,397,835 |
| |
| |
| |
|
| | $2,483,543 | | $2,532,116 | | $2,628,330 |
| | =========== | | =========== | | =========== |
Note J - Profit Sharing Plan
The Corporation's bank subsidiary has a non-contributory trusteed profit sharing retirement plan covering all officers and employees who have completed a year of service and are over the age of 21. The bank subsidiary's total payroll in 2005 was $5,307,576. Contributions for the current year were calculated using the base salary amount of $4,491,531. According to the plan, the bank subsidiary's contribution will not be less than 10% or no more than 15% of net income before taxes, with an overall limitation not to exceed 15% of the total salary of all the participants. The plan expense was $673,730, $671,331 and $672,081 in 2005, 2004 and 2003, respectively.
Note K - First Pulaski National Corporation (Parent Company Only) Financial Information
BALANCE SHEETS |
| | | | | | | December 31, |
| | | | | | |
|
ASSETS | | | | | | 2005 | | 2004 |
| | | | | |
| |
|
| Cash | | | | | $739,975 | | $575,898 |
| Investment in subsidiaries, at equity | | | 43,940,791 | | 44,986,874 |
| Other assets | | | | 77,105 | | 599,437 |
| | | | | | |
| |
|
| | | | TOTAL ASSETS | | | $44,757,871 | | $46,162,209 |
| | | | | | | ========= | | ========= |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
| Liabilities | | | | | | |
| | Accrued expenses | | | $1,540 | | $201,280 |
| | | | | | |
| |
|
| | | | Total Liabilities | | | 1,540 | | 201,280 |
| | | | | | | | | |
| Shareholders' Equity | | | 44,756,331 | | 45,960,929 |
| | | | | |
| |
|
| | | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $44,757,871 | | $46,162,209 |
| | | | | | | ========= | | ========= |
page 52
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - First Pulaski National Corporation (Parent Company Only) Financial Information (Continued)
STATEMENTS OF INCOME |
| | | | | | | | | |
| | | | | Years Ended December 31, |
| | | | |
|
| | | | | 2005 | | 2004 | | 2003 |
| | | | |
| |
| |
|
INCOME | | | | | | | |
| Dividends from subsidiaries | | $4,629,753 | | $2,716,468 | | $2,714,875 |
| Other dividends and interest | | - | | - | | 89 |
| Other | | 14,970 | | 217 | | 1,100 |
| | | | |
| |
| |
|
| | | | | 4,644,723 | | 2,716,685 | | 2,716,064 |
| | | | |
| |
| |
|
EXPENSES | | | | | | | | |
| Education | | - | | 6,560 | | 5,124 |
| Directors' fees and expense | | 90,550 | | 74,832 | | 70,785 |
| Stockholder's meeting | | 17,903 | | 20,037 | | 9,839 |
| Other | | 40,105 | | 46,948 | | 34,080 |
| | | | |
| |
| |
|
| | | | | 148,558 | | 148,377 | | 119,828 |
|
| |
| |
|
Income before applicable income taxes and equity in | | | | | |
| undistributed earnings of subsidiaries | 4,496,165 | | 2,568,308 | | 2,596,236 |
Applicable income taxes | 45,251 | | 53,017 | | 30,423 |
|
| |
| |
|
Income before equity in undistributed earnings of | | | | | |
| subsidiaries | 4,541,416 | | 2,621,325 | | 2,626,659 |
Equity in undistributed earnings of subsidiaries | 716,294 | | 2,706,244 | | 2,383,176 |
| | | | |
| |
| |
|
| | | | NET INCOME | $5,257,710 | | $5,327,569 | | $5,009,835 |
| | | | | ======= | | ======= | | ======= |
| | | | | | | | | |
| | | | | | | | | |
STATEMENTS OF CASH FLOWS |
| | | | | | | | | |
| | | | | Years Ended December 31, |
| | | | |
|
| | | | | 2005 | | 2004 | | 2003 |
|
| |
| |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | | $5,257,710 | | $5,327,569 | | $5,009,835 |
| Adjustments to reconcile net income to net cash provided | | | | | |
| | by operating activities - | | | | | |
| | | Equity in undistributed earnings of subsidiaries | (716,294) | | (2,706,244) | | (2,383,176) |
| | | Depreciation | 2,234 | | 2,234 | | 2,021 |
| | | (Increase) decrease in other assets | 520,098 | | (115,678) | | (145,265) |
| | | Increase (decrease) in other liabilities | (199,740) | | 47,720 | | 49,897 |
| | | | |
| |
| |
|
| | | | Cash Provided by Operating Activities | 4,864,008 | | 2,555,601 | | 2,533,312 |
| | | | |
| |
| |
|
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Cash dividends paid | | (2,629,753) | | (2,716,469) | | (2,716,699) |
| Proceeds from issuance of common stock | 139,702 | | 178,240 | | 356,841 |
| Common stock repurchased | (2,209,880) | | (1,414,390) | | (127,047) |
| | | | |
| |
| |
|
| | | | Cash Used by Financing Activities | (4,699,931) | | (3,952,619) | | (2,486,905) |
| | | | |
| |
| |
|
| | | | | | | | | |
INCREASE (DECREASE) IN CASH, net | 164,077 | | (1,397,018) | | 46,407 |
CASH, beginning of year | | 575,898 | | 1,972,916 | | 1,926,509 |
| |
| |
| |
|
CASH, end of year | | $739,975 | | $575,898 | | $1,972,916 |
| | | | | ======= | | ======= | | ======= |
page 53
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Regulatory Requirements and Restrictions
The primary source of funds for payment of dividends by the Corporation to its shareholders is dividends received from its bank subsidiary. The amount of dividends that a bank subsidiary may pay in any year is subject to certain regulatory restrictions. The amount available for payment of dividends without prior regulatory approval at December 31, 2005 to the Corporation was $5,803,891.
The Corporation and the Bank are subject to federal regulatory risk-adjusted capital adequacy standards. Failure to meet capital adequacy requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that could have a direct material adverse effect on the consolidated financial statements of the Corporation and the Bank. The regulations require the Bankto meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes the Corporation and the Bank meet all the capital adequacy requirements to which they are subject to as of December 31, 2005.
As of December 31, 2005, the most recent notification from regulatory authorities categorized the Corporation and the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Corporation will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Corporation's category.
| | | | | | | | | | To Be Well Capitalized |
| | | | | | | | | | Under Prompt |
| | | | | | For Capital | | Corrective Action |
| | | Actual | | Adequacy Purposes | | Provisions |
| | | Amount | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | (Dollars In thousands) |
As of December 31, 2005 | | | | | | | | | | |
| Total Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | $49,960 | 15.80% | | $25,296 | > | 8.00% | | $31,620 | > | 10.00% |
| | FNB | 49,145 | 15.54 | | 25,292 | > | 8.00 | | 31,615 | > | 10.00 |
| Tier I Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | 46,225 | 14.62 | | 12,648 | > | 4.00 | | 18,972 | > | 6.00 |
| | FNB | 45,410 | 14.36 | | 12,646 | > | 4.00 | | 18,969 | > | 6.00 |
| Tier I Capital (to average quarterly assets) | | | | | | | | | |
| | FPNC | 46,225 | 10.26 | | 18,027 | > | 4.00 | | 22,534 | > | 5.00 |
| | FNB | 45,410 | 10.08 | | 18,012 | > | 4.00 | | 22,515 | > | 5.00 |
page 54
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Regulatory Requirements and Restrictions (Continued)
| | | | | | | | | | To Be Well Capitalized |
| | | | | | | | | | Under Prompt |
| | | | | | For Capital | | Corrective Action |
| | | Actual | | Adequacy Purposes | | Provisions |
| | | Amount | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | (Dollars In thousands) |
As of December 31, 2004 | | | | | | | | | | |
| Total Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | $49,157 | 16.67% | | $23,590 | > | 8.00% | | $29,487 | > | 10.00% |
| | FNB | 48,183 | 16.37 | | 23,545 | > | 8.00 | | 29,431 | > | 10.00 |
| Tier I Capital (to risk weighted assets) | | | | | | | | | |
| | FPNC | 45,668 | 15.49 | | 11,795 | > | 4.00 | | 17,692 | > | 6.00 |
| | FNB | 44,694 | 15.19 | | 11,772 | > | 4.00 | | 17,658 | > | 6.00 |
| Tier I Capital (to average quarterly assets) | | | | | | | | | |
| | FPNC | 45,668 | 10.67 | | 17,126 | > | 4.00 | | 21,407 | > | 5.00 |
| | FNB | 44,694 | 10.45 | | 17,106 | > | 4.00 | | 21,382 | > | 5.00 |
Note M- Stock Option and Stock Purchase Plans
Under the Corporation's stock option and employee stock purchase plans, bank subsidiary employees (and in prior years, non-employee directors) may be granted options or rights to purchase shares of the Corporation's common stock.
Shares available for grants of options or rights to purchase at December 31, 2005 include 37,418 shares under the 1994 employee purchase plan and 72,500 shares under the 1997 stock option plan.
The 1997 plan permits the Board of Directors to grant options to key employees. A total of 100,000 shares were reserved under the plan of which 27,500 shares have been granted and 10,000 shares have been exercised. These options expire generally 10 years from the date of grant.
The 1987 plan currently has 2,500 shares under option.
The 1994 outside directors' stock option plan permitted the granting of stock options to non-employee directors. A total of 150,000 shares were reserved under this plan. An option to purchase 500 shares was granted annually upon becoming a member of the Board of Directors, of which 250 shares was immediately exercisable and the remaining 250 shares were exercisable upon the first annual meeting of shareholders following the date of grant provided the optionee was still serving as an outside director. In addition, each outside director upon first becoming a board member received an immediately exercisable option to purchase 2,500 shares, less the number of shares of stock previously beneficially owned. These options expired ten years from the date of grant. During 2003, the Board terminated this plan. At the time of termination, options to purchase 66,160 shares under the plan had not been granted.
page 55
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option and Stock Purchase Plans (Continued)
The 1994 employee stock purchase plan permits the granting of rights to eligible employees of the Corporation to acquire stock. A total of 150,000 shares were reserved under this plan. The Board has established the following guidelines as to the number of shares employees are allowed to purchase on July 1, each year:
Years of Service and
Number of Shares
Position Under 10 years Over 10 years
Vice-Presidents and above 200 250
All other Officers 125 175
Non-Officers 75 125
The following is a summary of the stock option and purchase plans activity for 2005, 2004 and 2003:
| Stock Option Plans | | Employee Purchase Plan |
|
| |
|
| Shares | | Shares | | Shares | | |
| Available | | Under | | Available | | Shares |
| for Option | | Option | | for Purchase | | Purchased |
|
| |
| |
| |
|
Balance December 31, 2002 | 141,160 | | 44,786 | | 49,561 | | - |
| | | | | | | |
Granted | (10,000) | | 10,000 | | (3,519) | | 3,519 |
Exercised | - | | (11,022) | | - | | (3,519) |
Plan terminated | (66,160) | | - | | - | | - |
|
| |
| |
| |
|
Balance December 31, 2003 | 65,000 | | 43,764 | | 46,042 | | - |
| | | | | | | |
Granted | - | | - | | (4,118) | | 4,118 |
Exercised | - | | (6,063) | | - | | (4,118) |
Forfeited/expired | 7,500 | | (7,500) | | - | | - |
|
| |
| |
| |
|
Balance December 31, 2004 | 72,500 | | 30,201 | | 41,924 | | - |
| | | | | | | |
Granted | - | | - | | (4,506) | | 4,506 |
Exercised | - | | (4,504) | | - | | (4,506) |
|
| |
| |
| |
|
Balance December 31, 2005 | 72,500 | | 25,697 | | 37,418 | | - |
| ========== | | ========== | | ========== | | ========= |
The weighted-average fair value of options, calculated using the Black-Scholes option pricing model, granted during 2005, 2004 and 2003 is $0.00 in all years.
page 56
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option and Stock Purchase Plans (Continued)
The following table presents the weighted average remaining life and weighted average exercise price at December 31, 2005:
| | | Outstanding | | | | Exercisable |
| | |
| | | |
|
| | | | | Weighted | | Weighted | | | | Weighted |
| | | | | Average | | Average | | | | Average |
| Exercise Price | | Number | | Exercise Price | | Remaining Life | | Number | | Exercise Price |
|
| |
| |
| |
| |
| |
|
Employees | $27.60-$49.00 | | 20,000 | | $38.33 | | 5 | | 20,000 | | $38.33 |
Directors | $27.60-$35.00 | | 5,697 | | 31.13 | | 5 | | 5,697 | | 31.13 |
| | |
| |
| | | |
| |
|
| | | | | | | | | | | |
Outstanding at December 31, 2005 | | 25,697 | | $36.73 | | 5 | | 25,697 | | $36.73 |
| | | ======== | | ========== | | | | ======== | | ========== |
Note N - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| 2005 | | 2004 | | 2003 |
|
| |
| |
|
Numerator for basic and diluted earnings | | | | | |
Per share - income available to common shareholders | $5,257,710 | | $5,327,569 | | $5,009,835 |
| | | | | |
Denominator for basic earnings per share- | | | | | |
weighted-average basis | 1,596,695 | | 1,646,422 | | 1,644,008 |
Effect of dilutive stock options | 7,213 | | 8,993 | | 9,935 |
|
| |
| |
|
| | | | | |
Denominator for diluted earnings per share- | | | | | |
adjusted weighted-average shares | 1,603,908 | | 1,655,415 | | 1,653,943 |
| =========== | | =========== | | =========== |
| | | | | |
Basic earnings per share | $3.29 | | $3.24 | | $3.05 |
| =========== | | =========== | | =========== |
| | | | | |
Diluted earnings per share | $3.28 | | $3.22 | | $3.03 |
| =========== | | =========== | | =========== |
Note O - Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires entities to disclose the estimated fair value of its financial instrument assets and liabilities. Management is concerned that the required disclosures under SFAS No. 107 may lack reasonable comparability between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
The Corporation in estimating its fair value disclosures for financial instruments used the following methods and assumptions:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.
Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
page 57
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Values of Financial Instruments (Continued)
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposit liabilities: The fair values disclosed for demand deposits (e.g. non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposits approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Other borrowed funds: Market quotes are used for Federal Home Loan Bank borrowings.
Commitments to extend credit and standby letters of credit: The value of the unrecognized financial instruments is based on the related fee income associated with the commitments, which is not material to the Corporation's financial statements at December 31, 2005 and 2004.
The estimated fair values of the Corporation's financial instruments on December 31 were (dollars in thousands):
| | | 2005 | | 2004 |
| | |
| |
|
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
|
| |
| |
| |
|
Financial assets: | | | | | | | |
| Cash and short-term investments | $20,841 | | $20,841 | | $16,993 | | $16,993 |
| Securities | 133,920 | | 133,920 | | 136,464 | | 136,464 |
| Loans | 272,948 | | 270,783 | | 255,824 | | 255,295 |
| Less: allowance for loan losses | (3,735) | | - | | (3,489) | | - |
| | | | | | | | | |
Financial liabilities: | | | | | | | |
| Deposits | 397,412 | | 387,883 | | 373,401 | | 362,181 |
| Other borrowed funds | 4,096 | | 4,127 | | 4,335 | | 4,492 |
Note P - Other Financial Instruments, Commitments and Contingencies
The Corporation's bank subsidiaries are a party to financial instruments with off-balance-sheet-risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and residential mortgage loans sold with certain repurchase requirements. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the bank subsidiary has in those particular financial instruments.
The following summarizes the bank subsidiary's involvement in financial instruments with off-balance-sheet risk as of December 31:
| | Contract or Notional |
| | Amount |
| |
|
| | 2005 | | 2004 |
| | | | |
|
| |
|
Commitments to extend credit | $34,958,643 | | $41,843,249 |
Standby letters of credit | 1,305,755 | | 1,320,505 |
Mortgage loans sold with repurchase | | | |
| requirements outstanding | 6,774,798 | | 6,433,876 |
page 58
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - Other Financial Instruments, Commitments and Contingencies (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiary evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation. Collateral held varies but may include certificates of deposits, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the bank subsidiary to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The bank subsidiary may be required to repurchase residential mortgage loans sold if a default occurs with respect to the payment of any of the first four installments of principal and interest after a loan is sold and the default continues for a period of 90 days. These loans are considered in the computation of the allowance for loan losses to cover future defaults.
The Corporation and its subsidiaries are parties to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims will not be material to the Corporation's consolidated financial position or results of operations.
page 59
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31 are as follows:
| | Three Months Ended |
| |
|
| | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 |
| |
| |
| |
| |
|
| | (in thousands, except per share amounts) |
2005 | | | | | | | |
| Interest income | $5,953 | | $6,197 | | $6,508 | | $6,662 |
| Interest expense | 1,924 | | 2,225 | | 2,537 | | 2,685 |
| |
| |
| |
| |
|
| Net interest income | 4,029 | | 3,972 | | 3,971 | | 3,977 |
| Provision for loan losses | 93 | | 91 | | 129 | | 288 |
| Other income | 935 | | 1,050 | | 995 | | 964 |
| Other expense | 3,033 | | 3,131 | | 3,139 | | 2,958 |
| |
| |
| |
| |
|
| Income before income tax | 1,838 | | 1,800 | | 1,698 | | 1,695 |
| Income taxes | 510 | | 524 | | 447 | | 292 |
| |
| |
| |
| |
|
| Net income | $1,328 | | $1,276 | | $1,251 | | $1,403 |
| | ======== | | ======== | | ======== | | ======== |
| | | | | | | | |
| Earnings per common share | $0.82 | | $0.80 | | $0.79 | | $0.88 |
| Diluted earnings per common share | 0.82 | | 0.80 | | 0.78 | | 0.88 |
| Cash dividends declared per common share | 0.41 | | 0.41 | | 0.41 | | 0.42 |
| | | | | | | | |
2004 | | | | | | | |
| Interest income | $5,663 | | $5,754 | | $5,831 | | $5,969 |
| Interest expense | 1,598 | | 1,583 | | 1,654 | | 1,754 |
| |
| |
| |
| |
|
| Net interest income | 4,065 | | 4,171 | | 4,177 | | 4,215 |
| Provision for loan losses | 53 | | 221 | | 200 | | 190 |
| Other income | 1,132 | | 883 | | 831 | | 644 |
| Other expense | 3,158 | | 3,034 | | 2,968 | | 2,961 |
| |
| |
| |
| |
|
| Income before income tax | 1,986 | | 1,799 | | 1,840 | | 1,708 |
| Income taxes | 592 | | 527 | | 521 | | 365 |
| |
| |
| |
| |
|
| Net income | $1,394 | | $1,272 | | $1,319 | | $1,343 |
| | ======== | | ======== | | ======== | | ======== |
| | | | | | | | |
| Earnings per common share | $0.84 | | $0.77 | | $0.80 | | $0.83 |
| Diluted earnings per common share | 0.84 | | 0.77 | | 0.79 | | 0.82 |
| Cash dividends declared per common share | 0.41 | | 0.41 | | 0.41 | | 0.42 |
page 60
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. 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 Chief Executive Officer and Chief 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 Chief Executive Officer and its Chief 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 e valuation of these disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
There were no changes in the Company's internal controls over financial reporting during the Corporation's fiscal quarter ended December 31, 2005 that have materially affected, or are reasonable likely to materially affect, the Corporation's internal control over financial reporting.
Item 9B. OTHER INFORMATION.
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors is incorporated herein by reference to the section titled "Election of Directors" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders. The information required by this item with respect to executive officers is set forth below:
NON-DIRECTOR EXECUTIVE OFFICERS OF FIRST NATIONAL BANK
| | Has Held | | |
| Position | Office | Position with | Has Held This |
Name | with Bank | Since | the Corporation | Position Since |
|
Tracy Porterfield | Cashier and Chief | 04/24/03 | Chief Financial Officer | 04/24/03 |
| Financial Officer | | Secretary/Treasurer | 03/16/04 |
page 61
Mr. Porterfield began employment with the Bank on December 14, 1992 in the Accounting Department. He has been employed by the Bank in various accounting positions and was named the Cashier on June 13, 2000, Chief Financial Officer on April 24, 2003 and Secretary/Treasurer on January 1, 2004.
All officers serve at the pleasure of the Board of Directors. No officers are involved in any legal proceedings which are material to an evaluation of their ability and integrity.
The information required by this section with respect to transactions in the Corporation's common stock is incorporated herein by reference to the section titled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's definitive proxy material to be filed in connection with the Corporation's Annual Meeting of Shareholders.
The information required by this item with respect to the Corporation's audit committee is incorporated herein by reference to the section entitled "Description of the Board and Committees" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders.
The information required by this item with respect to the Company's audit committee financial expert is incorporated herein by reference to the section entitled "Description of the Board and Committees" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders.
The Corporation has a Code of Ethics which is applicable to the Corporation's principal executive officer and principal financial officer. The Corporation will provide to any person, without charge, upon request, a copy of the Code of Ethics. To request a copy of the Code of Ethics please write to First Pulaski National Corporation, Attention: Corporate Secretary, 206 South First Street, Pulaski, Tennessee 38478. The Company intends to disclose any amendments to or waivers from its Code of Ethics in the manner and as required by law.
Item 11. EXECUTIVE COMPENSATION.
Information required by this item is contained under the caption "Executive Compensation" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Information required by this item is contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders and is incorporated herein by reference.
page 62
The following table summarizes information concerning the Corporation's equity compensation plans at December 31, 2005:
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in first column) |
Equity compensation plans approved by shareholders | | 25,697 | | $36.73 | | 109,918(1) |
| | | | | | |
Equity compensation plans not approved by shareholders | | N/A | | N/A | | N/A |
| | ________ | | ________ | | ________ |
Total | | 25,697 | | $36.73 | | 109,918 |
(1) Includes 37,418 shares available for issuance under the Corporation's Employee Stock Purchase Plan at December 31, 2005.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is contained under the caption "Certain Relationships and Related Transactions" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item with respect to the fees paid to, and services provided by, the Corporation's principal account is incorporated herein by reference to the section entitled "Fees billed to Company by Putman & Hancock During 2005 and 2004" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2006 Annual Meeting of Shareholders
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements. See Item 8
(a)(2) Financial Statement Schedules. See Item 8
(a)(3) Exhibits. See Index to Exhibits
page 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST PULASKI NATIONAL CORPORATION
By:/s/Mark A. Hayes
Mark A. Hayes
March 21, 2006 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date |
| | |
/s/James T. Cox James T. Cox | Chairman of the Board and Director | March 21, 2006 |
| | |
/s/Mark A. Hayes Mark A. Hayes | CEO, President and Director | March 21, 2006 |
| | |
/s/ Tracy Porterfield Tracy Porterfield | Secretary/Treasurer | March 21, 2006 |
| | |
/s/David E. Bagley David E. Bagley | Director | March 21, 2006 |
| | |
/s/Johnny Bevill Johnny Bevill | Director | March 21, 2006 |
| | |
/s/James K. Blackburn James K. Blackburn, IV | Director | March 21, 2006 |
| | |
/s/Wade Boggs Wade Boggs | Director | March 21, 2006 |
| | |
/s/James H. Butler James H. Butler | Director | March 21, 2006 |
| | |
/s/ Greg G. Dugger Greg G. Dugger, DDS | Director | March 21, 2006 |
| | |
/s/Charles D. Haney Charles D. Haney, MD | Director | March 21, 2006 |
| | |
/s/James Rand Hayes James Rand Hayes | Director | March 21, 2006 |
| | |
/s/Bill Yancey Bill Yancey | Director | March 21, 2006 |
| | |
page 64
INDEX TO EXHIBITS
EXHIBIT
NUMBER
3.1 Charter of the First Pulaski National Corporation (incorporated by reference to Amendment No. 1 to
First Pulaski National Corporation's Registration Statement No. 2-73488 on Form S-14/A).
3.2 Amended Bylaws of First Pulaski National Corporation (Restated Electronically for SEC filing purposes
(incorporated by reference to the First Pulaski National Corporation's Registration Statement on
Form S-4 No. 33-68448)).
10.1 Form of First Pulaski National Corporation Incentive Stock Option Agreement (incorporated by reference
to the First Pulaski National Corporation Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004.
10.2 Directors and Named Executive Officer Compensation Summary.
21.1 List of Subsidiaries.
23.1 Consent of Putman and Hancock.
31.1 Certification of Mark A. Hayes, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Tracy Porterfield, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
32.1 Certification of Mark A. Hayes, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002.
32.2 Certification of Tracy Porterfield, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002.
page 65