U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ]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
State of incorporation: Tennessee IRS Employer ID No.: 62-1110294
206 South First Street, Pulaski, Tennessee 38478
Registrant's telephone number: 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
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 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. [ ]
The aggregate market value (computed on the basis of the most recent trades
of which the Registrant was aware) of shares of Common Stock, par value $1
per share, held by nonaffiliates of the Registrant as of March 20, 2000
was $43,518,436. 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.
Shares of Common Stock outstanding on March 20, 2000 were 1,576,480.
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, 2000 are
incorporated by reference into Items 10, 11, 12 and 13.
PART I
ITEM 1: BUSINESS
First Pulaski National Corporation, (the Corporation) is a financial
corporation engaged in general commercial and retail banking business which
operates through one subsidiary bank. The Corporation also has engaged
in consumer finance through one nonbank subsidiary, Heritage Financial of the
Tennessee Valley, Inc.(Heritage Financial), which was opened on November 24,
1997.
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
Bank of Pulaski (the Bank), headquartered in Pulaski, Tennessee.
All of the common stock of the Bank is owned by the Corporation. At December 31,
1999, the Corporation and its subsidiaries had combined total assets of
$279,497,537.
The Corporation currently has long-term indebtedness of approximately $1.9
million in the form of notes payable to the Federal Home Loan Bank of
Cincinnati. Note G to the Corporation's Consolidated Financial Statements, Part
II, Item 8, includes a detailed analysis of this debt. The Bank derives its
primary source of funds from deposits and 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 the second largest financial
institution, measured by county deposits.
As of February 15, 2000 the First National Bank of Pulaski had 152 employees, 29
of whom were part-time. Heritage Financial had 2 full-time employees. The
Corporation has no employees other than those employed by the Bank and Heritage
Financial.
FIRST PULASKI NATIONAL CORPORATION
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (BHC Act), and is registered as such with the
Board of Governors of the Federal Reserve System (FRB). The Corporation is
subject to examination by the FRB and is restricted in its acquisitions.
Under the BHC Act, a bank holding company is, with limited exceptions,
prohibited from (i) acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank or (ii)
engaging in any activity other than managing or controlling banks. With the
prior approval of the FRB, however, a bank holding company may own more than
5% of the voting shares of a company engaged in activities which the FRB
determines to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
The Corporation, through its subsidiaries, projects 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, as well as a full range of services in consumer
finance through Heritage Financial.
FIRST NATIONAL BANK OF PULASKI
The First National Bank of Pulaski is subject to the supervision of and
regular examination by the Office of the Comptroller of the Currency (OCC)
and the FDIC. The OCC has broad supervisory authority over national banks
and conducts regular periodic examinations of the Bank. The Bank is also
subject to provisions of the Federal Reserve Act which limits loans or
extensions of credit to, and investments in the stock of, the Corporation,
as well as the amount of loans or advances that may be made to third parties
secured by the securities or obligations of the Corporation and its
subsidiary. The Securities Exchange Act of 1934 imposes regulatory
requirements on various securities activities conducted by banks. First
National Bank of Pulaski is registered with the Securities Exchange
Commission as a transfer agent for First Pulaski National Corporation's
stock and must comply with various recordkeeping and reporting requirements.
HERITAGE FINANCIAL OF THE TENNESSEE VALLEY, INC.
Heritage Financial of the Tennessee Valley, Inc. is a wholly owned subsidiary of
the Corporation formed in 1997 as a finance company. Heritage Financial is
engaged in extending credit and servicing loans to consumers and small
businesses in the Tennessee Valley. Heritage Financial is a Tennessee chartered
corporation operating under the Tennessee Industrial Thrift and Loan Companies
Act. Heritage Financial began operations November 24, 1997, and most of its
business thus far has been in the Giles County market. Heritage Financial is
regulated by the Tennessee Department of Financial Institutions and by the FRB.
COMPETITION
The Corporation operates principally in two market areas, Giles County,
Tennessee and Lincoln County, Tennessee. The following discussion of market
areas contains the most recent information available from reports filed with the
FDIC and the OTS.
Giles County. The Bank competes in Giles County with five (5) commercial
banking organizations. Three (3) of the five (5) 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 1997 to June 30, 1999, total deposits for all commercial banks
in the Giles County market have increased 5.4% from $415.5 million to $437.7
million. The Bank has five (5) offices in Giles County and approximately 70% of
its deposits are located there. As of June 30, 1999, the bank had the largest
market share of banks in Giles County with a 40.8% share of the bank deposits,
more than 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. As of
June 30, 1999, Giles County had an estimated population of 28,925, and a median
household income of $30,268.
Lincoln County. The Bank competes in Lincoln County with five (5) commercial
banking organizations. Three (3) of the five (5) commercial banking competitors
are small community banking organizations. The remaining two (2) commercial
banking competitors are owned by regional or national multi-bank holding
companies. From 1997 to June 30, 1999, total deposits for all commercial banks
in Lincoln County have increased 6.2% from $334.7 million to $355.3 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, 1999, the Bank had a
18.4% share of the Lincoln County bank deposit market, the second largest market
share in the county after Lincoln County Bank.
Lincoln County is also located in southern Middle Tennessee approximately 80
miles from Nashville, Tennessee. The largest city in Lincoln County is
Fayetteville. As of June 30, 1999, Lincoln County had an estimated population
of 29,761, and a median household income of $28,147.
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 saving
institutions in neighboring counties). Additional significant competition for
saving 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
relationship 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 with smaller community banks.
ITEM 2: PROPERTIES
The Corporation, the Bank, and Heritage Financial 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, 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 was completed in 1985. Other banking
facilities operated by the Bank include offices at Ardmore in the southeastern
corner of Giles County and at 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. The Lincoln County office, located on West College Street in
Fayetteville, Tennessee, was opened in September of 1991 in a leased facility
that the bank enlarged and renovated. The Lincoln County branch in Park City,
approximately seven miles south of Fayetteville was opened in the spring of
1993. Rapid growth in the Park City operation led to a decision to build a
significantly larger building. Construction began in mid-1996 and was completed
in the summer of 1997. Most recently, a facility on Flower Street near the main
office in Pulaski was opened. The building, already owned by the Corporation
and previously used for storage, was renovated and completed in 1998 primarily
for the prupose of mortgage lending. The cost of the renovation amounted to
$136, 107, including furniture and fixtures. 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 1999 amounted to $60,566.
ITEM 3: LEGAL PROCEEDINGS
The Bank filed suits in Giles County, Tennessee, Chancery Court against Carroll
M. Curry, John T. Curry, Connie Curry, Cathy Curry, C&C Partnership and C&T
Partnership (the "Curry Debtors") to collect promissory notes on which such
persons are liable as makers or guarantors. The Curry Debtors filed a counter-
complaint against the Bank and subsequently against the Corporation alleging (i)
that the Bank knew or should have known of certain activities of Mike Curry, the
Bank's former Chairman and Chief Executive Officer, and that the Bank had a duty
to inform the Curry's of these activities, (ii) that the Bank was negligent and
reckless in placing Mike Curry in a position to commit fraud on the Currys and
(iii) the Bank, through its officers, directors and employees, intentionally,
recklessly and fraudulently concealed Mike Curry's fraudulent conduct from the
Currys. The Currys' counter-complaint sought $8 million in compensatory and $20
million in punitive damages. The lawsuits were removed to the United States
District Court for the Middle District of Tennessee. The Court dismissed the
defendants' third party complaint against the Corporation and against all
officers and employees of the Corporation and the Bank except one. The
Corporation, the Bank, and the defendants have executed a written settlement
agreement resolving all claims between the parties. As part of the settlement,
the Corporation, the Bank and the defendants have agreed to submit a joint
motion asking that the litigation between them be dismissed with prejudice. It
is expected that the Court will enter an order dismissing the case as to these
parties in April 2000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET AND DIVIDEND INFORMATION
Common stock of First Pulaski National Corporation is not traded through an
organized exchange but is traded between local individuals. The following
trading prices for 1999 and 1998 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 Dividends
Prices Paid
1st Quarter, 1999 $25.60 - $55.00 $0.41
2nd Quarter, 1999 $27.60 - $55.00 $0.41
3rd Quarter, 1999 $25.60 - $55.00 $0.41
4th Quarter, 1999 $25.60 - $55.00 $0.42
ANNUAL DIVIDEND, 1999..................... $1.65
1st Quarter, 1998 $25.60 - $60.00 $0.38
2nd Quarter, 1998 $30.00 - $70.00 $0.40
3rd Quarter, 1998 $25.00 - $66.67 $0.40
4th Quarter, 1998 $27.60 - $50.00 $0.42
ANNUAL DIVIDEND, 1998..................... $1.60
There are approximately 1,360 stockholders of the Corporation's common stock
as of February 15, 2000.
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 the Bank. 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 of operations are conducted through its
subsidiaries, its ability to pay dividends also depends on the ability of the
Bank to pay dividends to it. The ability of the Bank to pay cash dividends is
restricted by applicable regulations of the TDFI and Federal Reserve.
ITEM 6: SELECTED FINANCIAL DATA
Basic earning per share figures in the tables which follow are based on weighted
average numbers of shares outstanding of 1,578,305 shares for 1999, 1,560,113
shares for 1998, 1,539,866 shares for 1997, 1,522,591 shares for 1996, and
1,532,245 shares for 1995, after giving retroactive effect to the five-for-one
stock split which was effective on July 1, 1996. Note O in Part II, Item 8 of
the financial statements which follow shows figures for basic earnings per share
and gives effect to dilutive stock options in determining diluted earnings per
share.
For Year Ended December 31,
1999 1998 1997 1996 1995
------ ------ ------- ------- -------
(Amounts in thousands, except per share data)
Interest income $22,070 $22,506 $22,104 $21,245 $19,776
Interest expense $9,138 $9,445 $9,296 $8,761 $8,435
Net interest income 12,931 13,061 12,809 12,484 11,342
Loan loss provision 791 1,652 508 783 259
Non-interest income $2,579 $2,624 $2,353 $2,125 $2,081
Non-interest expense $9,318 $8,321 $8,119 $7,668 $7,538
Income before income tax $5,401 $5,712 $6,536 $6,158 $5,626
Net income 3,681 3,803 4,320 4,063 3,705
Per Share Data:
Net income 2.33 2.44 2.81 2.67 2.42
Cash dividends paid 1.65 1.60 1.50 1.40 1.30
Total average equity 37,128 35,782 34,384 30,698 28,822
Total average assets 281,438 271,775 260,905 247,304 234,714
Total year-end assets 279,498 275,005 266,616 248,792 241,552
Total long-term debt 1,849 2,028 2,196 1,847 1,313
Ratios:
Assets to equity 7.62% 7.50% 7.71% 7.80% 7.96%
Return on average
equity 9.92% 10.63% 12.56% 13.24% 12.85%
Return on average
assets 1.31% 1.40% 1.66% 1.64% 1.58%
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 subsidiary bank being First National Bank of Pulaski, Tennessee. The
Corporation in late November of 1997 opened its first nonbank subsidiary,
Heritage Financial of the Tennessee Valley, Inc., which is a consumer
finance company. The following analysis reviews important factors affecting
the financial condition and results of operations of the Corporation for the
periods indicated. This review should be read in conjunction with the
consolidated financial statements and related notes.
The following discussion and this Annual Report on Form 10-K contains
forward-looking statements and should be read in conjunction with the
Corporation's Consolidated Financial Statements and Notes thereto included
elsewhere herein. Any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Numerous
factors could cause the Corporation's actual results to differ materially
from those indicated by such forward-looking statements.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1999 was approximately $3.7 million or $2.33 per share, compared
with approximately $3.8 million or $2.44 per share in 1998 and approximately
$4.3 million or $2.81 per share in 1997. Return on average assets was 1.31% in
1999, 1.40% in 1998 and 1.66% in 1997. The return on average equity was 9.9%,
10.6% and 12.6% for 1999, 1998 and 1997, respectively. The decline in net
income and returns in 1999 was primarily the result of a substantial increase in
other operating expenses largely due to legal and professional fees associated
with litigation with various Curry family members.
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 1999, net interest income
decreased by 1.0% following an increase of 2.0% in 1998. The net decrease is
attributable primarily to a reduction in earnings due to reduced interest rates
offsetting the increased volumes of earning assets. The total 1999 decrease in
net interest income of $154 thousand, on a taxable equivalent basis, resulted
from an increase of $483 thousand due to increased volumes which was offset by a
decrease of $637 thousand due to decreased rates.
Net interest earnings 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 must maintain the spread
between the yields earned and rates paid in managing the margin.
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 1999, 1998
and 1997.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
December 31,
1999 1998 1997
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- ----- --------- -------- -------- -------- -------- --------
ASSETS
- ------
Interest-Earning Assets:
Loans and lease financing.... $171,819 $17,108 9.96% $169,663 $17,805 10.49% $164,155 $17,610 10.73%
Taxable investment securities 62,746 3,800 6.06% 53,345 3,378 6.33% 50,267 3214 6.39%
Non-taxable investment
securities................. 17,095 939 5.49% 15,665 887 5.66% 13,476 764 5.67%
Federal funds sold............. 9,662 476 4.93% 13,477 717 5.32% 13,473 730 5.42%
Time deposits in other banks.... 0 0 0.00% 0 0 0.00% 0 0 0.00%
-------- -------- ------- --------- ------- -------- -------- -------- --------
Total Interest-Earning Assets.. 261,322 22,323 8.54% 252,150 22,787 9.04% 241,371 22,318 9.25%
Non-interest Earning Assets:
Cash and due from banks..... 9,392 8,805 9,076
Premises and equipment, net. 7,396 7,432 7,396
Other Assets................ 6,412 6,303 5,593
Less allowance for loan losses (3,084) (2,915) (2,531)
-------- --------- ---------
Total Non-Interest-Earning Assets 20,116 19,625 19,534
-------- --------- ---------
TOTAL.................... $281,438 $271,775 $260,905
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Liabilities:
Demand deposits............. $21,943 449 2.05% $20,691 396 1.91% $19,392 371 1.91%
Savings deposits.............. 30,040 733 2.44% 29,303 749 2.56% 28,060 717 2.56%
Time deposits................ 151,096 7,830 5.18% 147,760 8,166 5.53% 144,337 8,075 5.59%
Other borrowed money........ 1,937 126 6.50% 2,107 137 6.50% 2,115 133 6.29%
--------- -------- ------- --------- -------- -------- --------- -------- --------
Total Interest-Bearing
Liabilities................. 205,016 9,138 4.46% 199,861 9,448 4.73% 193,904 9,296 4.79%
Non-Interest-Bearing Liabilities:
Demand deposits.............. 36,679 33,389 30,868
Other liabilities............ 2,615 2,743 1,749
--------- --------- ---------
Total Non-Interest Bearing
Liabilities.................... 39,294 36,132 32,617
Shareholders' Equity............. 37,128 35,782 34,384
--------- --------- ---------
TOTAL.................... $281,438 $271,775 $260,905
========= ========= =========
Net interest earnings/spread,
on a taxable equivalent basis 13,185 5.05% 13,339 5.29% 13,022 5.40%
Taxable equivalent adjustments:
Loans....................... 57 44 48
Investment securities............ 197 193 165
-------- ------ --------
Total taxable equivalent adjustment 254 237 213
-------- -------- --------
Net interest earnings.............. $12,931 $13,102 $12,809
========== ========== ==========
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.
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.
1999 Compared to 1998 1998 Compared to 1997
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.......... $226 (923) ($697) 591 ($396) $195
Taxable investment securities....... 595 (173) 422 197 (33) 164
Non-taxable investment securities... 81 (29) 52 124 (1) 123
Federal funds sold................... (203) (38) (241) 0 (13) (13)
Time deposits....................... 0 0 0 0 0 0
----- ----- ----- ----- ----- -----
Total Interest-Earning Assets $699($1,163) ($464) $912 ($443) $469
====== ====== ====== ======= ====== =======
Interest Paid On:
Demand deposits....................... $ 24 $29 $53 $25 $0 $25
Savings deposits....................... 19 (35) (16) 32 0 32
Time deposits........................ 184 (520) (336) 192 (101) 91
Other borrowed money............... (11) 0 (11) 1 5 4
------- ------ ------ ------- ------ ------
Total Interest-Bearing Liabilities..... $216 ($526) ($310) $248 ($96) $152
======= ====== ====== ======= ======= =======
Net Interest Earnings, on a taxable
equivalent basis..................... $483 ($637) ($154) $664 ($347) $317
======= ====== ======= ======
Less: taxable equivalent adjustment.. 17 24
------ ------
Net Interest Earnings................ ($171) $293
====== ======
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.
SOURCES AND USES OF FUNDS
The following table outlines the sources and uses of funds for each of the
years 1999, 1998 and 1997, with the percent of change in each category from
year to year.
1999 1998 1997
---------------------------------- ------------------------------------
Increase Increase
Average ( Decrease) Percent Average (Decrease) Percent Average
Balance Amount Change Balance Amount Change Balance
--------- --------- --------- --------- --------- --------- ---------
(in thousands of dollars, except percents)
FUNDING USES:
Interest earning assets:
Loans-domestic.................... $171,819 $2,156 1.3% $169,663 $5,508 3.4% $164,155
Taxable investment securities..... 62,746 9,401 17.6% 53,345 3,078 6.1% 50,267
Non-taxable investment
securities...................... 17,095 1,430 9.1% 15,665 2,189 16.2% 13,476
Federal funds sold................ 9,662 (3,815) (28.3%) 13,477 4 0.0% 13,473
Time deposits in other
banks-domestic.................. .. 0 0 0% 0 0 0.0% 0
--------- -------- -------- -------- -------- -------- --------
Total Interest Earning Assets........ $261,322 $9,172 3.6% $252,150 $10,779 4.5% $241,371
========= ========= ========= ========= ========= ========= =========
FUNDING SOURCES:
Demand deposits - non-interest
bearing.......................... $36,679 $3,290 9.9% $33,389 $2,521 8.2% $30,868
Demand deposits - interest bearing... 21,943 1,252 6.1% 20,691 1,299 6.7% 19,392
Savings deposits.................... 30,040 737 2.5% 29,303 1,243 4.4% 28,060
Time deposits........................ 151,096 3,336 2.3% 147,760 3,423 2.4% 144,337
Other.............................. 21,564 557 2.7% 21,007 2,293 12.3% 18,714
--------- -------- -------- --------- --------- --------- ---------
Total Sources..................... $261,322 $9,172 3.6% $252,150 $10,779 4.5% $241,371
========= ========= ========= ========= ========= ========= =========
NON-INTEREST INCOME
Non-interest income amounted to approximately $2.6 million in 1999, a decrease
of 1.7% from 1998, which decrease is attributable primarily to decreases in
mortgage banking fees and other commissions and fees. Non-interest income in
1998 increased by 11.5% from 1997. Net gains on security transactions amounted
to $17.6 thousand in 1999, with no net gains or losses in security transactions
in 1998 and net losses realized totaling $30.8 thousand in 1997.
NON-INTEREST EXPENSE
Non-interest expense in 1999 was approximately $9.3 million, up 12.0% from
1998. This increase is attributable primarily to increased operating costs,
especially from increases in collection and professional fees. These increased
fees were primarily related to litigation involving members of the family of the
Corporation's former CEO, Robert M. Curry. Salaries, including employee
benefits, were higher than in 1998. Non-interest expense for 1998 had increased
by 2.5% over the previous year. This was due primarily to increases in
operating costs as well as those costs mentioned above related to the Curry-
family litigation.
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.
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. Bank
management performs calculations for the minimum allowance level needed and
a final evaluation is made.
The provision for loan losses was $791.3 thousand in 1999 compared to $1.6
million in 1998 and $507.5 thousand in 1997. Net loan losses were $888.3
thousand in 1999, $1.3 million in 1998, and $284.1 thousand in 1997. In August
of 1998, the Corporation discovered that Robert M. Curry, its Chairman and
Chief Executive Officer, had obtained several million dollars of cashier's
checks of the Corporation's subsidiary and deposited them in an account at
another bank over which he had signatory authority. Although he had repaid a
significant amount of these cashier's checks with the funds deposited, the
ultimate shortfall to the Corporation was approximately $1.1 million, a
substantial portion of which has been ultimately covered by the Bank's fidelity
bond carrier. However, in investigating these matters, the Corporation
determined that the former CEO, Mr. Curry, had provided false information to it
in connection with loans made by the Bank to him and to two of his brothers and
their farming operation. As a result, the Bank, in the fourth quarter of 1998,
charged off approximately $731 thousand of indebtedness to the CEO and his
brothers and substantially increased its provision to cover the charge-off and
the increased level of problem loans associated with this indebtedness. On
March 24, 2000 a written settlement agreement was executed in connection with
this matter. Note R of Notes to Consolidated Financial Statements provides
more discussion on the Curry litigation and other litigation involving the
Corporation. Note C to Financial Statements, Part II, Item 8 provides a
detailed analysis of components of Loans and Allowance for Loan Losses and is
incorporated herein by reference.
Net loan losses for 1999 consists of personal loans for $478.6 thousand, and
commercial and industrial loans for $431.6 thousand. Net recoveries in 1999
consists of agriculture loans of $17.9 thousand and real estate loans of $4.0
thousand. The allowance at the end of 1999 is $2.8 million, or 1.63% of
outstanding loans and leases, as compared to $2.9 million or 1.73% and $2.6
million or 1.54% in 1998 and 1997, respectively.
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,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(amounts in thousands of dollars)
Allowance applicable to:
Real estate loans $453 319 $240 $422 $634
Commercial loans 792 473 165 80 58
Agriculture loans 449 409 176 238 173
Individual loans 1,144 1,735 2,023 1,639 1,191
Other loans 0 0 0 2 2
-------- -------- -------- -------- --------
Total $2,838 $2,936 $2,604 $2,381 $2,058
======== ======== ======== ======== ========
Percentages of loans by
category to total loans:
Real estate loans 56.48% 53.23% 52.66% 51.76% 51.11%
Commercial loans 15.66% 17.24% 15.42% 14.77% 13.34%
Agriculture loans 4.98% 5.83% 6.68% 7.33% 8.00%
Individual loans 19.45% 22.29% 23.25% 24.92% 26.00%
Other loans 3.43% 1.41% 1.99% 1.22% 1.55%
------- ------- ------- ------- -------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
INCOME TAXES
Income tax expense includes federal and state taxes on earnings. Income taxes
were $1.720,123, $1,909,215, and $2,215,867 in 1999, 1998 and 1997,
respectively. The effective tax rates were 31.9%, 33.4%, and 33.9%
respectively. Note I to Financial Statements, Part II, Item 8, provides a
detailed analysis of the components of income tax expense.
QUARTERLY RESULTS OF OPERATIONS
Quarter-by-quarter income and expense data for the years 1999 and 1998 are
presented in the following table.
For The Three Months Ended
Mar 31 Jun 30 Sep 30 Dec 31
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
1999:
Total interest income....... $5,449 $5,634 $5,662 $5,234
Total interest expense...... 2,283 2,274 2,292 2,289
Net interest income......... 3,166 3,360 3,370 3,035
Provision for loan losses... 164 165 177 285
Other income................ 538 690 612 739
Other expense............... 2,301 2,349 2,359 2,309
Income before income tax.... 1,239 1,536 1,446 1,180
Income taxes................ 419 490 479 332
Net income.................. 820 1,046 967 848
Net income per share........ $0.52 $0.66 $0.61 $0.54
1998:
Total interest income....... $5,746 $5,840 $5,758 $5,162
Total interest expense...... 2,370 2,377 2,365 2,333
Net interest income......... 3,376 3,463 3,393 2,829
Provision for loan losses... 180 234 590 648
Other income................ 550 584 545 945
Other expense............... 1,995 2,013 2,117 2,196
Income before income tax.... 1,751 1,800 1,231 930
Income taxes................ 649 651 335 274
Net income.................. 1,102 1,149 896 656
Net income per share........ $0.71 $0.74 $0.57 $0.42
The 1999 provisions for loan losses shown in the table above reflects the
decision of management in the latter part of the year to insure that provision
for loan losses reflect the increase in net charge-offs during the last quarter
of 1999. Note C to Financial Statements, Part II, Item 8, provides more
detailed analysis of loan loss provision. In 1998, provisions for loan losses
shown in the table were increased each quarter, resulting from an increase in
charge-offs and nonaccruals associated with loans to family members of the
former CEO of the Corporation as reported in the 1998 Form 10-K.
BALANCE SHEET
LOANS
Management's focus is to promote loan growth in the bank's target market,
emphasizing the expansion of business and the enhancement of the quality of life
in the bank's trade area. Efforts are taken to maintain a fairly diversified
portfolio without significant concentration of risk. Loan growth during 1999
resulted primarily from increases in real estate loans, including agriculture,
residential and commercial real estate. Also, other loans, mainly nontaxable
loans, increased significantly from last year. Loans for land development,
commercial and industrial and automobiles showed decreases as compared to 1998.
Over the last three years, average total loans and leases increased by $2.2
million or 1.3% in 1999, by $5.5 million or 3.4% in 1998 and by $6.5 million or
4.1% in 1997. The growth in deposits has been used to support the continuing
increase in loan demand.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan and lease balances at the end of each
period and monthly 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,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands of dollars)
Amount of net loans
and lease financing
outstanding at end
of period................ $174,748 $169,651 $168,738 $157,903 $152,993
======== ======== ======== ======== ========
Monthly average amount
of loans and leases...... $171,819 $169,663 $164,155 $157,697 $142,825
======== ======== ======== ======== ========
Balance of allowance
for possible loan
losses at beginning
of period................ $2,936 $2,604 $2,381 $2,058 $2,024
Loans charged off........ 1,192 1,577 708 740 433
Recoveries of loans
previously charged off... 304 257 424 280 209
-------- -------- -------- -------- --------
Net loans charged off.... 888 1,320 284 460 224
-------- -------- -------- -------- --------
Additions to allowance
charged to expense....... 791 1,652 507 783 258
-------- -------- -------- -------- --------
Balance at end of
period................... $2,838 $2,936 $2,604 $2,381 $2,058
======== ======== ======== ======== ========
Ratio of net charge
offs during period to
average loans
outstanding.............. 0.51% 0.78% 0.17% 0.29% 0.16%
======== ======== ======== ======== ========
Reference is made to Note C to Financial Statements, Part II, Item 8, for
further detail regarding charge-offs and recoveries by category.
LOAN QUALITY
The amounts of loans and leases outstanding at the indicated dates are shown
in the following table according to type of loan.
LOAN PORTFOLIO
December 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands of dollars)
Construction and land
development $3,811 $5,108 $3,341 $3,548 $2,929
Commercial, industrial 23,732 24,606 23,122 20,219 17,911
Agricultural 8,760 10,053 11,461 11,799 12,503
Real est. farmland 20,015 19,577 19,142 17,314 15,615
Real est. residential 43,227 41,307 40,177 38,708 37,811
Real est. commercial 36,158 30,891 31,033 27,255 26,410
Installment-individuals 34,218 38,426 9,890 40,096 40,610
Other loans(1) 6,037 2,445 3,426 1,943 2,402
-------- -------- -------- -------- --------
TOTAL $175,958 $172,413 $171,592 $160,882 $156,191
======== ======== ======== ======== ========
(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 and interest
sensitivity of selected loan categories (excluding residential mortgage,
home equity, consumer loans, and lease financing).
Due in Due after
1 year 1 year
or less but before Due after
5 years 5 years Total
--------- --------- --------- ---------
(in thousands of dollars)
Construction, land development $3,170 $35 $606 $3,811
Commercial, industrial $13,965 $8,290 $1,477 $23,732
Agricultural $5,067 $1,568 $2,125 $8,760
Real estate farmland $8,921 $7,734 $3,360 $20,015
Real estate commercial $7,135 $19,358 $9,665 $36,158
-------- -------- -------- ---------
Total selected loans $38,258 $36,985 $17,233 $92,476
======== ======== ======== =========
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.
Due after
Due in 1 year
1 year but before Due after
or less 5 years 5 years Total
-------- --------- -------- ------
Percent of total selected loans...... 41.37% 40.00% 18.63% 100.00%
Cumulative percent of total......... 41.37% 81.37% 100.00%
Sensitivity of loans to changes
in interest rates-loans due after one year:
Fixed rate loans................... $35,470 $16,526 $51,996
Variable rate loans................ 1,515 707 2,222
-------- -------- -------
$36,985 $17,233 $54,218
======== ======== =======
NON-PERFORMING ASSETS
Non-performing assets include non-accrual loans, loans restructured because
of debtor's financial difficulties, other real estate owned, and loans past
due ninety days or more as to interest or principal payment.
From 1998 to 1999, non-accruing loans increased by 2.81% to $3.3 million
following an increase of 352.0% in 1998 from 1997. Non-accruing loans in 1999
included approximately $2.1 million of loans to relatives and certain entities
of these relatives of the former CEO of the Corporation, as discussed above in
more detail in the 1998 Form 10-K. There were no restructured loans at year-end
1999 or 1998. Other real estate owned, consisting of properties acquired
through foreclosures or deeds in lieu thereof, totaled $99.2 thousand for a
decrease of 48.6%, following a decrease of 67.2% in 1998. Loans past due ninety
days or more totaled $35.7 thousand for a decrease of 85.9% over same period
last year, following an increase of 43.5% in 1998. All major credit lines and
troubled loans are reviewed regularly by a committee of the Board of Directors.
Except for the loans to the farming operation associated with family members of
the former CEO of the Corporation, non-performing loans are not concentrated in
any particular category of loans and contain no losses that would materially
affect the allowance.
The following table summarizes the company's non-performing assets and loans
past due ninety days or more.
December 31,
1999 1998 1997
--------- --------- ---------
(in thousands of dollars)
Non-accrual loans $3,262 $3,173 $702
Troubled debt restructurings $0 $0 $0
Other real estate owned $99 $193 $115
Loans past due ninety days or more as to
interest or principal payment $36 $253 $176
The amount of interest income actually recognized on these loans during 1999,
1998 and 1997, was $19,760, $126,213 and $7,971, respectively. The additional
amount of interest income that would have been recorded during 1999, 1998 and
1997, if the above amounts had been current in accordance with their original
terms was $265,505, $177,994 and $44,427, respectively. As of December 31,
1999, management was not aware of any specifically identified loans, other than
those included in the categories discussed above, that represent significant
potential problems. The Corporation believes that it maintains adequate audit
standards, exercises appropriate internal controls and conducts regular and
thorough loan reviews. However, the risk inherent in the lending business
results in periodic charge-offs of loans. The Corporation maintains an
allowance for loan losses which it believes to be adequate to absorb reasonably
foreseeable losses in the loan portfolio. The executive officers of the Bank
evaluate, 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 bank policy, internal classifications of loans are performed on a routine and
continuing basis.
SECURITIES
The securities portfolio consists primarily of U.S. Treasury obligations,
federal agency securities and marketable bonds of states, counties and
municipalities. 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 securities at the dates
indicated:
December 31,
1999 1998 1997
--------- --------- ---------
Available-for-sale (in thousands of dollars)
- -------------------
U. S. Treasury securities.......... $4,014 $16,363 $18,311
Obligations of state and
Political subdivisions .......... 420 0 0
Other U.S. Debt .......... 6,140 0 0
U.S. Government Agencies........... 35,035 29,610 32,701
--------- --------- ---------
$45,609 $45,973 $51,012
--------- --------- ---------
Held-to-maturity
- -----------------
States and political subdivisions.. $14,912 $17,937 $13,948
Other securities................... 14,436 7,653 6,255
--------- --------- ---------
$29,348 $25,590 $20,203
--------- --------- ---------
TOTAL $74,957 $71,563 $71,215
========= ========= =========
The following table sets forth the maturities of securities at December 31,
1999 and the average yields of such securities (calculated on the basis of
the cost and effective yields).
US Treasuries, State and Political
and Government Subdivisions &
Agencies Other Total
-------------- ------------------ ------
(in thousands of dollars)
Available-for-sale
- ---------------------
Within one year:
Amount $3,494 - $3,494
Yield 6.59% - 6.59%
After one but within five years:
Amount $32,126 $6,139 $38,265
Yield 5.94% 6.68% 6.06%
After five through ten years:
Amount $3,408 $442 $3,850
Yield 6.30% 7.11% 6.40%
Held-to-maturity
- -------------------
Within one year:
Amount - $4,693 $4,693
Yield - 6.66% 6.66%
After one but within five years:
Amount - $22,638 $22,638
Yield - 6.16% 6.16%
After five but within ten years:
Amount - $2,017 $2,017
Yield - 5.37% 5.37%
The above table shows yields on the tax-exempt obligations to be computed on a
taxable equivalent basis.
Total average securities increased by $10.8 million or 15.7% during 1999 as
compared to the previous year. Average taxable investment securities increased
by $9.4 million or 17.6% and average non-taxable investment securities increased
by $1.4 million or 9.1%, to account for the overall increase in average
investments. The total securities portfolio was $3.4 million or 4.8% more at
the end of 1999 than at the end of 1998. This increase resulted primarily from
the increase in deposit growth and management's decision to decrease federal
funds sold in order to maximize investment yield.
DEPOSITS
The Bank's primary source of funds is customer deposits, including large
certificates of deposits. Aggregate average deposits increased by $8.6 million
in 1999, by $8.5 million in 1998 and by $10.8 million in 1997. Most of the
deposit growth experienced by the Bank has been in accounts which are interest
sensitive.
The average amount of deposits for the periods indicated is summarized in
the following table:
For Year Ended December 31,
1999 1998 1997
--------- --------- ---------
(in thousands of dollars)
Demand deposits - non-interest bearing.. $36,679 $33,389 $30,868
Demand deposits - interest bearing...... 21,943 20,691 19,392
Savings deposits........................ 30,040 29,303 28,060
Time deposits (excluding time CD's
of $100,000 or more).................. 97,471 100,848 102,211
Time CD's of $100,000 or more........... 53,625 46,912 42,126
--------- --------- ---------
TOTAL.............................. $239,758 $231,143 $222,657
========= ========= =========
Remaining maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1999, are summarized as follows (in thousands of
dollars):
3 months or less............................. $28,060
Over 3 months through 6 months............... 11,346
Over 6 months through 12 months.............. 12,003
Over 1 year ................................. 3,917
---------
TOTAL........................................ $55,326
=========
Other funds were invested in other earning assets such as federal funds and
bank time deposits at minimum levels necessary for operating needs for
liquidity.
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 $8.2 million at December 31, 1999, representing 10.9% of the
investment securities portfolio, a decrease from the 26.5% level of 1998.
Additional sources of liquidity include federal funds sold, maturing loans and
time deposits in other banks.
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 over $100,000 and money market certificates are much more interest-
sensitive than are savings accounts. Regular savings and NOW accounts are
classified by management as immediately rate sensitive. At December 31, 1999
the Bank had a total of $51.4 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 generally mature every six months, while money
market deposit accounts mature on demand.
Interest rate sensitivity gaps by maturities are summarized in the following
table:
INTEREST RATE SENSITIVITY GAPS
December 31, 1998 31-90 91-365 +1 - 3 +3 - 5 Over 5
$ in thousands Days Days years years years Total
- --------------------- -------- -------- -------- -------- -------- --------
Interest-sensitive assets:
Loans and leases........$26,489 $56,432 $75,647 $10,659 $6,731 $175,958
Taxable securities...... 0 3,494 6,307 25,819 3,430 $39,050
Nontaxable securities... 620 4,073 13,375 15,402 2,437 $35,907
Federal funds sold...... 6,723 0 0 0 0 $6,723
------- ------- ------- ------- ------- -------
Total...................$33,832 $63,999 $95,329 $51,880 $12,598 $257,638
Interest-sensitive liabilities:
Demand deposits.........$21,054 $0 $0 $0 0 $21,054
Savings................. 29,736 0 0 0 0 $29,736
Time.................... 57,110 80,598 13,320 675 0 $151,703
Other borrowed funds.... 47 144 419 419 821 $1,849
------- ------- ------- ------- ------- --------
Total..................$107,947 $80,742 $13,739 $1,094 $820 $204,342
Interest sensitivity gap.($74,115)($16,743) $81,590 $50,786 $12,516 $54,034
Cumulative gap...........($74,115)($90,858) ($9,268) $41,518 $54,034
Ratio of cumulative gap to
earning assets.......... -28.77% -35.27% 3.60% 16.12% 20.98%
The primary interest sensitive assets and liabilities in this maturity range are
commercial loans, which are included in loans and leases above and large
certificates of deposit, included above in time deposits. The Bank is in a
negative gap position in each of the intervals, with the exception of those with
maturities of one year or more, indicating that it has more rate sensitive
liabilities which it can reprice in the indicated time span than it has rate
sensitive assets. This normally indicates that the Bank would be in position
to reprice its rate-sensitive liability accounts (deposits) more quickly than it
would its rate-sensitive assets (loans and investments). During periods of
declining interest rates the negative gap works to the Bank's advantage,
widening the net interest spread between assets and liabilities. To the
contrary, however, during periods of rising rates the negative gap would be to
the Bank's disadvantage, with the net interest spread shrinking. 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 with maturities of one year or
less to not less than 0.50 and not more than 1.50. 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. Currently the RSA/RSL ratio
with maturities of one year or less is within the range the committee has
established.
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 3.6% in 1999 and 4.2% in 1998. The corresponding percentage increase
in average equity amounted to 3.8% in 1999 and 4.1% in 1998.
The Corporation's equity capital was $36,671,996 at December 31, 1999,
$36,686,195 at December 31, 1998, and $34,579,346 at December 31, 1997, for an
increase of 6.1% over the two-year period. The Corporation's equity-to-average
asset ratio was 13.0%, as compared to 14.2% for 1998 and 13.3% for 1997. The
maintenance of this ratio during 1999 indicates that the Corporation's 1999
earnings were sufficient to keep pace with its growth in total assets. The
Corporation plans to maintain a capital to asset ratio which reflects financial
strength and conforms to current regulatory guidelines. The ratio of dividends
to net income was 70.8% in 1999, 65.7% in 1998, and 53.5% in 1997.
As of December 31, 1999, the authorized number of common shares was 10 million
shares, with 1,583,961 shares issued and outstanding.
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 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 plus 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 3.00%. As of December 31, 1998, the Company and its subsidiary,
First National Bank of Pulaski, had ratios which exceeded the regulatory
requirements to be classified as "well capitalized," the highest regulatory
capital rating. The Company's and subsidiary's ratios are illustrated in Note M
to the financial statements.
FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards("SFAS") No.115 as explained in Note A to Financial Statements,
Part II, Item 8. Management has classified a majority of the investment
portfolio in the available-for-sale category and reports these investments at
fair value. Management does not anticipate the sale of a material amount of
investment securities classified as available-for-sale in the foreseeable
future. However, these securities may be sold in response to changes in the
interest rates, changes in prepayment risk, the need to increase regulatory
capital or asset/liability strategy.
On January 1, 1995, the Company adopted FASB Statements No. 114 and No. 118,
both of which deal with accounting by creditors for impairment of loans.
Statements No. 114 and No. 118, explained in Note A to Financial Statements,
Part II, Item 8, provide new rules for measuring impairment losses on loans.
As of the fourth quarter of 1999, the Company has identified those loans which
it deems to be impaired and has computed allowances which management believes to
be sufficient for those loans. The adoption of these statements had no material
effect on the earnings or financial condition of the Company.
Management is not aware of any known trends, events, uncertainties or current
recommendations by the regulatory authorities which will have a material effect
on the Corporation's liquidity, capital resources or operations.
YEAR 2000 CONSIDERATIONS
As of the date of this filing, the Corporation has not experienced any
significant year 2000 problems related to its computer systems, neither internal
nor third party. Also, the Corporation has not experienced any problems
regarding the ability of commercial customers to meet any debt service
obligations as a result of issues related to year 2000. The Corporation will
continue to monitor systems for problems and expects that costs related to this
process will be minimal.
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 its 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 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.
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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements appear on the following pages for First
Pulaski National Corporation and its subsidiaries, First National Bank of
Pulaski and Heritage Financial of the Tennessee Valley, Inc.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
Cash and due from banks $12,120,521 $9,427,069
Federal funds sold 6,722,897 12,970,075
---------- ----------
Total cash and cash equivalents 18,843,418 22,397,144
Securities available for sale 45,608,982 45,972,651
Securities held to maturity
(fair value - $28,800,260 and $25,880,236) 29,348,246 25,589,675
Loans 175,958,097 172,413,256
Unearned income (1,223,883) (2,762,195)
----------- -----------
Loans net of unearned income 174,734,214 169,651,061
Allowance for loan losses (2,838,481) (2,935,534)
----------- -----------
Total net loans 171,895,733 166,715,527
Bank premises and equipment 7,128,207 7,521,071
Accrued interest receivable 3,529,106 3,340,417
Other real estate owned 99,185 192,911
Prepayments and other assets 3,030,935 3,275,581
--------- ---------
TOTAL ASSETS $279,483,812 $275,004,977
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $36,117,830 $36,187,911
Interest bearing 202,492,439 197,611,615
----------- -----------
Total deposits 238,610,269 233,799,526
Other borrowed funds 1,849,090 2,028,120
Accrued taxes 130,687 111,768
Accrued interest on deposits 1,806,079 1,909,612
Accrued profit sharing expense 114,309 120,392
Other liabilities 301,382 349,364
--------- ---------
TOTAL LIABILITIES 242,811,816 238,318,782
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized -
10,000,000 shares; 1,583,961 and 1,573,515
shares issued and outstanding 1,583,961 1,573,515
Capital surplus 7,338,740 7,105,124
Retained earnings 28,663,995 27,590,464
Accumulated other comprehensive income (loss), net (914,700) 417,092
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 36,671,996 36,686,195
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $279,483,812 $275,004,977
=========== ===========
The accompanying notes are an integral part of these financial statements.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
INTEREST INCOME
Loans, including fees $17,051,620 $17,718,313 $17,562,095
Securities:
Taxable 3,800,275 3,377,514 3,214,076
Non-taxable 741,895 693,794 598,757
Federal funds sold 475,773 716,654 729,412
---------- ---------- ----------
Total Interest Income 22,069,563 22,506,275 22,104,340
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Transaction accounts 448,721 393,518 370,503
Money market deposit accounts 234,070 262,149 247,501
Other savings deposits 499,381 486,654 469,337
Time certificates of deposit of
$100,000 or more 2,834,338 2,687,855 2,756,024
All other time deposits 4,995,717 5,478,007 5,318,928
Borrowed funds 126,238 137,088 133,263
---------- --------- ---------
Total Interest Expense 9,138,465 9,445,271 9,295,556
---------- --------- ---------
NET INTEREST INCOME 12,931,098 13,061,004 12,808,784
Provision for loan losses 791,294 1,651,925 507,500
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,139,804 11,409,079 12,301,284
OTHER INCOME
Service charges on deposit accounts 1,754,662 1,722,533 1,619,134
Commissions and fees 211,792 298,402 264,581
Other service charges and fees 215,882 126,569 114,808
Security gains (losses), net 17,561 - (30,816)
Gain on sale of other assets 3,940 11,962 18,419
Dividends 193,932 122,686 248,136
Mortgage banking fees 181,296 342,185 119,206
--------- --------- ---------
Total Other Income 2,579,065 2,624,337 2,353,468
--------- --------- ---------
OTHER EXPENSES
Salaries and employee benefits 4,583,632 4,420,812 4,478,073
Occupancy expense, net 1,075,441 932,698 857,078
Furniture and equipment expense 703,593 778,409 741,509
Advertising and public relations 486,892 461,570 502,849
Other operating expenses 2,467,951 1,727,780 1,539,731
---------- --------- ---------
Total Other Expenses 9,317,509 8,321,269 8,119,240
Income before income taxes 5,401,360 5,712,147 6,535,512
Applicable income taxes 1,720,123 1,909,215 2,215,867
---------- --------- ---------
NET INCOME $3,681,237 $3,802,932 $4,319,645
========= ========= =========
Earnings per common share:
Basic $2.33 $2.44 $2.81
==== ==== ====
Diluted $2.32 $2.43 $2.80
==== ==== ====
The accompanying notes are an integral part of these financial statements.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,681,237 $3,802,932 $4,319,645
Adjustments to reconcile net income
to net cash provided by operating
activities-
Provision for loan losses 791,294 1,651,925 507,500
Depreciation 838,840 771,879 754,002
Amortization and accretion of
investment securities, net 151,953 105,438 165,380
Deferred income tax expense (benefit) 54,480 (87,315) (62,304)
Gain on sale of other assets (3,940) (11,962) (18,419)
Security (gains) losses, net (17,561) - 30,816
Loans originated for sale (6,880,161) (14,452,933) (4,987,503)
Proceeds from sale of loans 8,133,659 13,187,740 4,906,896
(Increase) decrease in interest
receivable (188,689) 71,541 (10,619)
(Increase) decrease in prepayments and
other assets 851,004 (1,063,009) (32,707)
Increase (decrease) in accrued interest
on deposits (103,533) (99,454) 324,160
Increase (decrease) in accrued taxes 18,919 (5,518) (229)
Decrease in other liabilities (54,065) (78,463) (25,839)
--------- --------- ---------
Cash Provided by Operating
Activities, net 7,273,437 3,792,801 5,870,779
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available
for sale (24,211,760) (10,000,910) 26,282,664)
Proceeds from sales of securities
available for sale 6,527,758 - 8,054,063
Proceeds from maturities of securities
available for sale 16,511,155 15,160,001 11,108,064
Purchases of securities held to maturity (10,059,004) (10,403,495) (7,176,105)
Proceeds from maturities of securities
held to maturity 5,680,900 4,925,600 6,505,000
Net increase in loans (7,357,345) (1,221,664) (11,102,349)
Capital expenditures (445,702) (1,017,809) (878,255)
Proceeds from sale of other assets 258,765 188,670 186,432
---------- --------- ----------
Cash Used by Investing
Activities, net (13,095,233) (2,369,607) (19,585,814)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - - 500,000
Borrowings repaid (179,030) (168,180) (150,513)
Net increase in deposits 4,810,744 6,634,031 14,479,159
Cash dividends paid (2,607,706) (2,498,423) (2,311,927)
Proceeds from issuance of common stock 635,292 714,351 587,022
Common stock repurchased (391,230) - -
--------- --------- ----------
Cash Provided by Financing
Activities, net 2,268,070 4,681,779 13,103,741
---------- ---------- ----------
INCREASE (DECREASE) IN CASH, net (3,553,726) 6,104,973 (611,294)
CASH AND CASH EQUIVALENTS, beginning
of year 22,397,144 16,292,171 16,903,465
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $18,843,418 $22,397,144 $16,292,171
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Unrealized
Gains/(Losses)
Common Stock Capital Retained on Securities,
Shares Amount Surplus Earnings Net of Taxes Total
Balance at December 31, 1995 1,532,220 1,532,220 5,895,046 24,278,237 181,899 31,887,402
Comprehensive income:
Net income - - - 4,319,645 -
Change in unrealized gains
(losses) on AFS securities,
net of tax - - - - 126,904
Less reclassification
Adjustment, net of deferred
Income tax benefit of $10,500 - - - 20,300
Comprehensive income - - - 4,466,849
Cash dividends paid $1.50
per share - - - (2,311,927) - (2,311,927)
Common stock issued 18,505 18,505 482,971 - - 501,476
Common stock repurchased 18,774 18,774 518,248 - - 537,022
--------- --------- --------- ---------- --------- ----------
Balance at December 31, 1997 1,550,994 1,550,994 6,413,294 26,285,955 329,103 34,579,346
Comprehensive income:
Net income - - - 3,802,932 -
Change in unrealized gains
(losses) on AFS securities,
net of tax - - - - 87,989
Comprehensive income - - - 3,890,921
Cash dividends paid $1.60
per share - - - (2,498,423) - (2,498,423)
Common stock issued 22,521 22,521 691,830 - - 714,351
--------- --------- --------- ---------- ------- ----------
Balance at December 31, 1998 1,573,515 1,573,515 7,105,124 27,590,464 417,092 36,686,195
Comprehensive income:
Net income - - - 3,681,237
Net change in
unrealized gains
on securities,
net of tax
- - - - (1,320,201)
Less reclassification
Adjustment, net of deferred
Income tax benefit of $10,500 - - - (11,591)
Comprehensive income - - - 2,349,445
Cash dividends paid $1.65
per share - - - (2,607,706) - (2,607,706)
Common stock issued 19,140 19,140 616,152 - - 635,292
Common stock repurchased (8,694) (8,694) (382,536) - - (391,230)
--------- --------- --------- ---------- ------- ----------
Balance at December 31, 1999 $ 1,583,961 $ 1,583,961 $ 7,338,740 $28,663,995 $ (914,700) $36,671,996
The accompanying notes are an integral part of these financial statements.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Pulaski National Corporation (the "Corporation") was organized under the
laws of Tennessee in 1981 and is registered under the Bank Holding Company Act
of 1956, as amended. The Corporation through its bank subsidiary provides
domestic financial services in Giles and Lincoln County, Tennessee, to customers
who are predominantly small and middle-market businesses and middle-income
individuals. The Corporation's finance company subsidiary, organized in November
1997, provides consumer financing services in Giles County, Tennessee. The
accounting and reporting policies of the Corporation and its subsidiaries
conform to generally accepted accounting principles and general practices within
the financial services industry. A description of the significant accounting
policies is presented below.
Note A - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of First Pulaski
National Corporation and its wholly-owned subsidiaries, First National Bank of
Pulaski and Heritage Financial of the Tennessee Valley, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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.
Loans and Allowance for Loan Losses
Loans which the Corporation has the positive intent and ability to hold to
maturity are stated at the principal amount outstanding, net of unearned income.
Loans include loans held for sale at December 31, 1999 and 1998, totaling
$352,800 and $1,606,298, respectively. These loans are recorded at cost, which
approximates market value.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. Because of uncertainties associated with the regional economic
conditions, collateral values, and future cash flows on impaired loans, it is
reasonably possible that management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change materially in the near term.
The allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries.
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)
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 based on the present value of
payments expected to be received, using the historical effective loan rate as
the discount rate. Loans that are to be foreclosed or that are solely dependent
on the collateral for repayment may alternatively be measured based on the fair
value of the collateral for such loans. Measurement may also be based on
observable market prices. If the recorded investment in the loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for loan losses.
Loans, including impaired loans, are generally placed on nonaccrual when
principal or interest is delinquent for 90 days or more or when doubt as to
timely collection of principal or interest exists unless such loans are well
secured and in the process of collection. The decision to place a loan on
nonaccrual status is based on an evaluation of the borrower's financial
condition, collateral, liquidation value, and other factors that affect the
borrower's ability to pay. Generally, at the time a loan is placed on a
nonaccrual status, all interest accrued and uncollected on the loan in the
current fiscal year is reversed from income, and all interest accrued and
uncollected from the prior year is charged off against the allowance for loan
losses. Thereafter, interest on nonaccrual loans is recognized in interest
income only to the extent that cash is received and future collection of
principal is not in doubt. If the collectibility of outstanding principal is
doubtful, such interest received is applied as a reduction of principal.
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 1999, 1998 or 1997.
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.
Advertising Costs
The Corporation expenses the costs of advertising when these costs are incurred.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Income Taxes
The Corporation files a consolidated Federal income tax return which includes
both of 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.
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 $9,241,998, $9,544,725 and
$8,971,397 and income taxes paid of $1,767,452, $2,206,102 and $2,273,590 for
the years ended December 31, 1999, 1998, and 1997, respectively.
Earnings Per Share
Basic and diluted earning per share (EPS) are shown on the face of the earnings
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.
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.
Reclassifications
Certain 1998 and 1997 financial information has been reclassified to conform its
presentation with the 1999 financial statements. None of these
reclassifications had any effect on net income or earnings per share.
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 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.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income". The
statement establishes standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general - purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. This statement requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the equity section of the statement of financial position. The
Corporation adopted the provisions of this statement in 1998. These disclosure
requirements had no impact on financial position or results of operations.
Prior year financial statements have been reclassified to conform to the SFAS
No. 130 requirements.
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". The provisions of this statement require
disclosure of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
shareholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Corporation operates in only
one operating segment (banking) therefore, the disclosure requirements of this
statement are not applicable.
Effect of New Accounting Pronouncements
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The provisions of this statement require that
derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings. The provisions of this statement become effective
for quarterly and annual reporting beginning January 1, 2000. It is the policy
of the Corporation not to invest in derivative instruments. The adoption of the
provisions of this statement is not expected to have an impact on the
Corporation.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". This statement was effective for the first
fiscal quarter beginning after December 15, 1998. Adoption of this statement
had no impact on the Corporation's financial position or results of operations.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities
The following is a summary of the amortized cost and estimated fair value of
securities at December 31:
Gross Gross Estimated
Unrealized Unrealized Fair
1999 Cost Gains Losses Value
Available for Sale
U.S. Treasury securities $3,989,489 $24,886 $- $4,014,375
Obligations of states and
political subdivisions 427,220 - 7,493 419,727
Other debt securities 6,243,726 4,567 108,713 6,139,580
U.S. Government agencies 36,334,457 4,461 1,303,618 35,035,300
---------- -------- --------- -----------
46,994,892 33,914 1,419,824 45,608,982
---------- -------- --------- -----------
Held to Maturity
Obligations of states and
political subdivisions 14,911,933 10,689 172,098 14,750,524
Other debt securities 14,436,313 569 387,146 14,049,736
---------- -------- --------- -----------
29,348,246 11,258 559,244 28,800,260
---------- -------- --------- -----------
TOTAL $76,343,138 $45,172 $1,979,068 $74,409,242
========== ====== ========= ==========
1998
Available for Sale
U.S. Treasury securities $16,030,692 $331,808 $- $16,362,500
U.S. Government agencies 29,306,212 305,371 1,432 29,610,151
---------- -------- --------- -----------
45,336,904 637,179 1,432 45,972,651
---------- -------- --------- -----------
Held to Maturity
Obligations of states and
political subdivisions 17,936,798 231,553 5,628 18,162,723
Other debt securities 7,652,877 72,196 7,560 7,717,513
---------- -------- --------- -----------
25,589,675 303,749 13,188 25,880,236
---------- -------- --------- -----------
TOTAL $70,926,579 $940,928 $14,620 $71,852,887
========== ======= ====== ==========
The following is a summary of the amortized cost and estimated fair value of
debt securities by contractual maturity at December 31, 1999:
Available for Sale Held to Maturity
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Due in one year or less $3,489,411 $3,493,664 $4,692,846 $4,697,867
Due after one year through
five years 39,521,600 38,265,486 22,638,411 22,146,293
Due after five years through
ten years 3,983,881 3,849,832 2,016,989 1,956,100
---------- ---------- ---------- ----------
TOTAL $46,994,892 $45,608,982 $29,348,246 $28,800,260
========== ========== ========== ==========
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities (Continued)
Net gains realized from securities transactions for 1999, 1998 and 1997 were:
Book Gross Realized Net
1999 Proceeds Value Gains Losses Realized
-------- ----- ----- ------ --------
Securities sold $6,527,758 $6,510,197 $21,563 $4,002 $17,561
Securities matured
or redeemed 22,192,055 22,192,055 - - -
---------- ---------- ------ ----- ------
$28,719,813 $28,702,252 $21,563 $4,002 $17,561
========== ========== ====== ===== ======
1998
Securities matured
or redeemed $20,085,601 $20,085,601 $- $- $-
========== ========== ====== ===== ======
1997
Securities sold $8,054,063 $8,084,879 $- $30,816 $(30,816)
Securities matured
or redeemed 17,613,064 17,613,064 - - -
---------- ---------- ------ ----- ------
$25,667,127 $25,697,943 $- $30,816 $(30,816)
========== ========== ====== ===== ======
Income tax expense (benefit) attributable to securities transactions was $6,667,
$-0- and $(12,326) for 1999, 1998 and 1997, respectively.
Securities with a book value of $32,812,104 and $18,667,681 at December 31, 1999
and 1998, 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. Treasury and other
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
shareholders' equity at December 31, 1999 or 1998.
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 concentrations
that exists is in loans secured by real estate and agricultural related loans.
Although the Corporation 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 Corporation grants commercial, real estate and consumer loans
primarily to customers in Giles 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.
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:
1999 1998
---- ----
Construction and land development $3,810,702 $5,108,089
Commercial and industrial 23,732,371 24,605,702
Agricultural 8,760,561 10,052,890
Real estate loans secured by:
Farmland 20,014,610 19,576,951
Residential property 43,226,946 41,307,489
Nonresidential, nonfarm 36,157,861 30,890,897
Loans to individuals secured by:
Automobiles 18,805,969 20,954,132
Retail, consumer and personal expenditures 15,412,501 17,471,836
Other loans 6,036,576 2,445,270
------------- ----------
175,958,097 172,413,256
Unearned income (1,223,883) (2,762,195)
----------- -----------
TOTAL $174,734,214 $169,651,061
=========== ===========
The following is a summary of loan maturities carrying fixed and variable
interest rates as of December 31, 1999:
Within Over
One Year One Year Total
-------- -------- ------
Fixed rate loans $68,869,324 $87,478,976 $156,348,300
Variable rate loans 15,833,367 3,776,430 19,609,797
---------- ---------- -----------
TOTAL $84,702,691 $91,255,406 $175,958,097
========== ========== ===========
At December 31, 1999, 1998 and 1997, impaired, nonaccrual and restructured loans
totaled $3,262,208, $3,173,107 and $701,867, respectively. The amount of
interest income actually recognized on these loans during 1999, 1998 and 1997,
was $19,760, $126,213 and $7,971, respectively. The additional amount of
interest income that would have been recorded during 1999, 1998 and 1997, if the
above amounts had been current in accordance with their original terms was
$265,505, $177,994 and $44,427, respectively.
As of December 31, 1999, 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 $2,013,333 $699,613
No valuation allowance required 1,248,875 -
--------- -------
Total Impaired Loans $3,262,208 $699,613
========= =======
The valuation allowance is included in the allowance for loan losses on the
balance sheet.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C - Loans and Allowance for Loan Losses (Continued)
The average recorded investments in impaired loans for the years 1999, 1998 and
1997 were $3,413,900, $1,963,830 and $535,018, respectively. At December 31,
1999, 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 $35,726, $252,637 and
$176,043 at December 31, 1999, 1998 and 1997, 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 1999 and 1998:
1999 1998
Balance at beginning of year $4,975,157 $9,322,014
Additions 2,603,396 5,356,897
Repayments (2,652,135) (6,329,186)
No longer related (1,089,447) (3,374,568)
---------- ---------
Balance at end of year $3,836,971 $4,975,157
========== ==========
Transactions in the allowance for loan losses were as follows:
1999 1998 1997
Balance at beginning of year $2,935,534 $2,604,080 $2,380,700
Less-Charge-offs:
Real estate -
Residential 3,926 45,133 31,028
Commercial 123,892 148,425 163,504
Agricultural 377,360 702,594 16,664
Individuals 686,830 681,310 496,788
--------- --------- -------
1,192,008 1,577,462 707,984
--------- --------- -------
Add-Recoveries:
Real estate -
Residential 7,904 22,668 23,020
Commercial 45,691 45,298 50,717
Agricultural 41,866 9,866 2,975
Individuals 208,200 179,159 347,152
--------- --------- -------
303,661 256,991 423,864
--------- --------- -------
Net Charge-offs 888,347 1,320,471 284,120
--------- --------- -------
Add-Provision charged to operations 791,294 1,651,925 507,500
--------- --------- -------
Balance at end of year $2,838,481 $2,935,534 $2,604,080
========= ========= =========
Ratio of net charge-offs to average
loans outstanding during the year 0.51% 0.78% 0.17%
==== ==== ====
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Bank Premises and Equipment
The following is a summary of bank premises and equipment at December 31:
Accumulated
Depreciation & Carrying
1999 Cost Amortization Amount
Land $798,480 $- $798,480
Buildings 8,652,894 3,555,083 5,097,811
Furniture and equipment 5,433,081 4,406,556 1,026,525
Leasehold improvements 408,299 202,908 205,391
TOTAL $15,292,754 $8,164,547 $7,128,207
1998
Land $708,480 $- $708,480
Buildings 8,625,610 3,276,547 5,349,063
Furniture and equipment 5,147,896 4,005,687 1,142,209
Leasehold improvements 408,299 86,980 321,319
TOTAL $14,890,285 $7,369,214 $7,521,071
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
2000 $49,532 2005 - 2009 $30,000
2001 20,422 2010 - 2014 26,500
2002 6,000
2003 6,000
2004 6,000
Rents charged to operations under operating lease agreements for the years 1999,
1998 and 1997 were $51,222, $51,351 and $55,014, respectively.
Note E - Prepayments and Other Assets
The following is a summary of prepayments and other assets at December 31:
1999 1998
Prepaid expenses $129,854 $242,970
Federal Home Loan Bank stock, at cost 946,100 883,798
Federal Reserve Bank stock, at cost 112,500 112,500
Investment in single premium whole life
insurance contract 590,181 567,554
Insurance receivable - 858,003
Investment in insurance limited partnership
and corporation 53,100 81,850
Deferred income tax benefits 1,150,970 518,087
Other 48,230 10,819
TOTAL $3,030,935 $3,275,581
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F - Deposits
The following is a summary of deposits at December 31:
1999 1998
Noninterest bearing:
Demand $36,117,830 $36,187,911
Interest bearing:
Demand 21,054,212 20,759,927
Savings 29,735,600 28,305,283
Other time 96,376,526 98,306,908
Certificates of deposit
$100,000 and over 55,326,101 50,239,497
TOTAL $238,610,269 $233,799,526
Note G - Other Borrowed Funds
The following is a summary of other borrowed funds at December 31:
1999 1998
Notes payable to Federal Home Loan Bank:
Dated 11-17-93, matures 12-01-08,
payable $1,682 per month including
interest at 5.95% $140,415 $151,875
Dated 6-22-94, matures 7-01-04, payable
$11,077 per month including interest
at 5.95% 532,078 630,153
Dated 10-16-95, matures 11-01-05,
payable $2,750 per month including
interest at 6.70% 160,808 182,243
Dated 2-2-96, matures 3-01-16,
payable $2,237 per month including
interest at 6.50% 268,922 277,962
Dated 2-12-96, matures 3-01-11,
payable $3,087 per month including
interest at 6.25% 298,732 316,494
Dated 4-16-97, matures 5-1-2012,
payable $4,607 per month including
interest at 7.40% 448,135 469,392
TOTAL $1,849,090 $2,028,120
The notes are secured by a pledge of Federal Home Loan Bank stock with a par
value of $946,100 and a blanket pledge of $2,773,635 first mortgage loans
against single family, 1-4 unit residential properties.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Other Borrowed Funds (Continued)
Notes payable are scheduled to mature December 31:
2000 $190,585
2001 202,890
2002 215,995
2003 229,952
2004 188,879
Thereafter 820,789
---------
$1,849,090
=========
At December 31, 1999, First National Bank of Pulaski had unsecured lines of
credit from correspondent banks for federal fund purchases and daylight
overdrafts totaling $12,000,000. Also at December 31, 1999, relative to Year
2000 concerns, the subsidiary bank had obtained from a correspondent bank a line
of credit in an amount up to $22,000,000 for borrowings related to securities
repurchase agreements and had executed a lending agreement with the Federal
Reserve Bank Discount Window by pledging securities with a par value of
$8,105,000. The correspondent bank lines of credit expire in May 2000 and the
lending agreement with the Federal Reserve Bank may be terminated at any time.
No advances had been made against these lines at December 31, 1999.
Note H - Common Stock and Related Matters
The Board of Directors authorized the repurchase and retirement of up to
$2,000,000 of its outstanding common stock. During the current year 8,694
shares were repurchased and retired at a total cost of $391,230.
Note I - Income Taxes
The components of income taxes for the three years ended December 31 are as
follows:
1999 1998 1997
Federal
Current $1,367,614 $1,644,651 $1,913,280
Deferred tax (benefit) 54,480 (87,315) (62,304)
---------- --------- ----------
1,422,094 1,557,336 1,850,976
State 298,029 351,879 364,891
--------- --------- ---------
Provision for Income Taxes $1,720,123 $1,909,215 $2,215,867
========== ========== ==========
Income taxes varied from the amount computed at the statutory federal income tax
rate for the years ended December 31 as follows:
1999 1998 1997
Federal taxes at statutory rate $1,836,462 $1,942,130 $2,222,074
Increase (decrease) resulting from
tax effect of:
Tax exempt interest on obligations
of states and political subdivisions (248,422) (228,102) (202,983)
State income taxes, net of federal
income tax benefit 196,699 232,224 240,828
Dividend received deduction (29,682) (13,190) (43,863)
Others, net (34,934) (23,847) (189)
--------- --------- ---------
Provision for Income Taxes $1,720,123 $1,909,215 $2,215,867
========= ========= =========
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Income Taxes (Continued)
Significant components of the Corporation's deferred tax assets and liabilities
on December 31 are as follows:
1999 1998
Deferred tax assets:
Allowance for loan losses $768,264 $812,637
Other real estate 2,762 2,795
Securities available for sale 471,209 -
Gross Deferred Tax Assets 1,242,235 815,432
Deferred tax liabilities:
Investment securities 15,627 25,103
Securities available for sale - 216,154
Other securities 75,638 56,088
Gross Deferred Tax Liabilities 91,265 297,345
Net Deferred Tax Assets $1,150,970 $518,087
Note J - Other Operating Expenses
The following table summarizes the components of other operating expenses for
the years ended December 31:
1999 1998 1997
Directors' fees $239,303 $228,870 $185,270
Stationery and supplies 204,851 182,799 189,936
FDIC insurance 27,480 27,580 26,935
Other insurance 41,776 44,437 45,470
Collection and professional fees 684,512 260,796 165,473
Postage 132,190 133,017 132,474
Telephone 131,690 126,946 112,618
Other 1,006,149 723,335 681,555
--------- --------- ---------
$2,467,951 $1,727,780 $1,539,731
========= ========= =========
Note K - 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 1999
was $3,478,167. Contributions for the current year were calculated using the
base salary amount of $2,765,040. The bank subsidiary's contribution is based,
in general, on 10% of earnings before taxes, not to exceed 15% of the total
salary of all the participants. The plan expense was $414,756, $451,099 and
$461,674 in 1999, 1998 and 1997, respectively.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - First Pulaski National Corporation (Parent Company Only) Financial
Information
BALANCE SHEETS
December 31,
ASSETS 1999 1998
Cash $2,757,509 $2,679,615
Loans to subsidiary 919,770 738,560
Investment in subsidiaries, at equity 32,914,702 33,160,514
Other assets 80,015 107,506
---------- ----------
TOTAL ASSETS $36,671,996 $36,686,195
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' Equity
Common stock, $1 par value; authorized - 10,000,000
shares; 1,583,961 and 1,573,515 shares issued
and outstanding $1,583,961 $1,573,515
Capital surplus 7,338,740 7,105,124
Retained earnings 28,663,995 27,590,464
Accumulated other comprehensive income (loss), net (914,700) 417,092
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,671,996 $36,686,195
========== ==========
STATEMENTS OF INCOME
Years Ended December 31,
1999 1998 1997
INCOME
Dividends from subsidiaries $2,607,706 $2,498,423 $2,311,927
Other dividends and interest 188,277 90,211 184,297
--------- --------- ---------
2,795,983 2,588,634 2,496,224
--------- --------- ---------
EXPENSES
Education 31,121 15,438 22,855
Directors' fees 103,400 69,700 47,400
Stockholder's meeting 17,470 15,902 16,528
Other 28,150 20,819 21,273
--------- --------- ---------
180,141 121,859 108,056
--------- --------- ---------
Income before applicable income taxes
and equity in undistributed earnings
of subsidiary 2,615,842 2,466,775 2,388,168
Reduction in consolidated income taxes
arising from parent company tax
operating loss 26,914 23,950 17,941
--------- --------- ---------
Income before equity in undistributed
earnings of subsidiary 2,642,756 2,490,725 2,406,109
Equity in undistributed earnings of
subsidiary 1,038,481 1,312,207 1,913,536
--------- --------- ---------
NET INCOME $3,681,237 $3,802,932 $4,319,645
========= ========= =========
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - First Pulaski National Corporation (Parent Company Only) Financial
Information (Continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,681,237 $3,802,932 $4,319,645
Adjustments to reconcile net income
to net cash provided by operating
activities -
Equity in undistributed earnings
of subsidiary (1,038,480) (1,312,207) (1,913,536)
(Increase) decrease in other assets (1,259) (12,105) 6,181
Loss on sale of other assets 2,500 - -
--------- --------- ---------
Cash Provided by Operating
Activities 2,643,998 2,478,620 2,412,290
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans (181,210) (588,560) (150,000)
Proceeds from sale of other assets 28,750 - -
Investment in subsidiary (50,000) (50,000) (50,000)
--------- --------- ---------
Cash Used by Investing Activities (202,460) (638,560) (200,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,607,706) (2,498,423) (2,311,927)
Proceeds from issuance of common stock 635,292 714,351 537,022
Common stock repurchased (391,230) - -
--------- --------- ---------
Cash Used by Financing Activities (2,363,644) (1,784,072) (1,774,905)
--------- --------- ---------
INCREASE IN CASH, net 77,894 55,988 437,385
CASH, beginning of year 2,679,615 2,623,627 2,186,242
--------- --------- ---------
CASH, end of year $2,757,509 $2,679,615 $2,623,627
========= ========= =========
Note M - Regulatory Requirements and Restrictions
The Corporation's bank subsidiary is required to maintain average reserve
balances with the Federal Reserve Bank. The average amount of those reserve
requirements was approximately $2,788,000 and $2,130,000 for the years ended
December 31, 1999 and 1998, respectively.
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, 1999, to the Parent Company was
$5,101,160.
The Corporation is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Comptroller of the
Currency (OCC). Failure to meet the minimum regulatory capital requirements
can initiate certain mandatory, and possible additional discretionary actions
by regulators, that if undertaken, could have a direct material affect on the
consolidated financial statements.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Regulatory Requirements and Restrictions (Continued)
Under the regulatory capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation must meet specific capital
guidelines involving quantitative measures of the Corporation's assets,
liabilities, and certain off balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classification under
the prompt corrective action guidelines are also subject to qualitative
judgements 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, 1999.
As of April 23, 1999, the most recent notification from regulatory authorities
categorized First Pulaski National Corporation and First National 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.
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands)
As of December 31, 1999
Total Capital
(to risk weighted assets)
Consolidated $40,160 19.75% $16,270 > 8.00% $20,338 > 10.00%
First National Bank 36,333 17.94 16,198 > 8.00 20,248 > 10.00
Tier I Capital (to risk
weighted assets)
Consolidated 37,614 18.49 8,135 > 4.00 12,203 > 6.00
First National Bank 33,799 16.69 8,099 > 4.00 12,149 > 6.00
Tier I Capital (to
average assets)
Consolidated 37,614 13.46 8,384 > 3.00 13,974 > 5.00
First National Bank 35,799 12.13 8,358 > 3.00 13,930 > 5.00
As of December 31, 1998
Total Capital (to
risk weighted assets)
Consolidated 38,662 20.24% $15,285 > 8.00% $19,106 > 10.00%
First National Bank 35,080 18.44 15,222 > 8.00 19,027 > 10.00
Tier I Capital (to risk
weighted assets)
Consolidated 36,267 18.98 7,642 > 4.00 11,464 > 6.00
First National Bank 32,695 17.48 7,611 > 4.00 11,416 > 6.00
Tier I Capital (to
average assets)
Consolidated 36,267 13.19 8,246 > 3.00 13,743 > 5.00
First National Bank 32,695 11.93 8,223 > 3.00 13,705 > 5.00
Note N - Stock Option and Stock Purchase Plans
Under the Corporation's stock option and employee stock purchase plans, non-
employee directors and bank subsidiary employees may be granted options or
rights to purchase shares of the Corporation's common stock. The option or
purchase price under all plans is equal to the fair market value of the stock at
the date of grant. The Corporation applies Accounting Principles Board (APB)
Opinion 25 in computing
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation costs related to its stock option plans. Under this method,
compensation is the excess, if any, of the market price of the stock at grant
date over the amount that must be paid to acquire the stock.
Note N - Stock Option and Stock Purchase Plans (Continued)
The Corporation's stock option plans have no intrinsic value at grant date,
therefore no compensation cost has been recognized.
However, under SFAS No. 123, "Accounting for Stock-Based Compensation,"
corporations which follow APB Opinion 25 are required to disclose the pro forma
amount for compensation costs for its stock option plans based on the fair value
at the grant dates for awards under those plans. Accordingly, the Corporation's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1999 1998 1997
As Reported Proforma As Reported Proforma As Reported Proforma
Net income $3,681,237 $3,659,637 $3,802,932 $3,778,332 $4,319,645 $4,312,645
Basic earnings
per share $2.33 $2.32 $2.44 $2.42 $2.81 $2.80
Diluted earnings
per share $2.32 $2.31 $2.43 $2.41 $2.80 $2.79
In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1999, 1998
and 1997, respectively: dividend yield of 4.7 percent for all years; expected
volatility of 7.5, 7.9 and 8.3 percent; risk-free interest rates of 6.0 percent
in 1999 and 1998, 7.0 percent in 1997; and expected lives of 4.4 years in all
years.
Shares available for grants of options or rights to purchase at December 31,
1999 include 82,910 shares under the 1994 outside directors stock option plan,
86,355 shares under the 1994 employee purchase plan and 85,000 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 15,000 shares
have been granted and none have been exercised. These options expire 10 years
from the date of grant.
The 1994 outside directors' stock option plan permits 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 is granted upon becoming a
member of the Board of Directors, of which 250 shares is immediately exercisable
and the remaining 250 shares are exercisable upon the first annual meeting of
shareholders following the date of grant provided the optionee is still serving
as an outside director. In addition, each outside director receives an
immediately exercisable option to purchase 2,500 shares, less the number of
shares of stock previously beneficially owned. These options expire ten years
from the date of grant.
The 1994 employee stock purchase plan permits the granting of stock options to
eligible employees of the Corporation. 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:
Number of Shares
Years of Service Under 10 years Over 10 years
Vice-Presidents and above 200 250
All other Officers 125 175
Non-Officers 75 125
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Stock Option and Stock Purchase Plans (Continued)
The following is a summary of the stock option and purchase plans activity for
1999, 1998 and 1997:
Stock Option Plans Employee Purchase Plan
Shares Shares Shares
Available Under Available Shares
for Option Option for Purchase Purchased
---------- ------ ------------ ---------
Balance December 31, 1996 166,160 21,700 118,150 -
Additions 100,000
Granted (9,750) 9,750 (8,453) 8,453
Exercised - (10,045) - (8,453)
------- ------ ------- ------
Balance December 31, 1997 256,410 21,405 109,697 -
Granted (24,500) 24,500 (12,422) 12,422
Exercised - (9,836) - (12,422)
Expired (55,000) - - -
------- ------ ------- ------
Balance December 31, 1998 176,910 36,069 97,275 -
Granted (9,000) 9,000 (10,920) 10,920
Exercised - (8,170) - (10,920)
Balance December 31, 1999 167,910 36,899 86,355 -
======= ====== ====== ======
Exercisable at December 31, 1999 20,399
======
The weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1999, 1998 and 1997 is $2.27, $3.33 and
$4.79, respectively.
Note O - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
Numerator for basic and diluted earnings
Per share - income available to
common shareholders $3,681,237 $3,802,932 $4,319,645
Denominator for basic earnings per share-
weighted-average basis 1,578,305 1,560,113 1,539,866
Effect of dilutive stock options 6,513 6,365 3,356
Denominator for diluted earnings per share-
adjusted weighted-average shares 1,584,818 1,566,478 1,543,222
Basic earnings per share $2.33 $2.44 $2.81
Diluted earnings per share $2.32 $2.43 $2.80
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - 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 following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
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.
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.,
interest and 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.
Standby letters of credit: All standby letters of credit have original terms,
at their issuance of one year or less; therefore, the fair value of these
instruments does not materially differ from their stated value.
The estimated fair values of the Corporation's financial instruments on December
31 were (dollars in thousands):
1999 1998
Carrying Amount Fair Value Carrying Amount Fair Value
Financial assets:
Cash and short-term
investments $18,843 $18,843 $22,397 $22,397
Securities 74,957 74,409 71,562 71,853
Loans 174,734 175,702 169,651 171,788
Less: allowance for
loan losses (2,838) - (2,936) -
Financial liabilities:
Deposits 238,610 238,095 233,800 234,138
Other borrowed funds 1,849 2,068 2,028 2,432
Unrecognized financial instruments:
Standby letters of credit - (1) - (1)
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Other Financial Instruments, Commitments and Contingencies
The Corporation's bank subsidiary 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. 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
1999 1998
Commitments to extend credit $14,189,130 $18,178,885
Standby letters of credit 538,795 539,416
Mortgage loans sold with repurchase
requirements outstanding 1,550,526 3,023,651
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.
In the normal course of business, the Corporation and its subsidiaries are
involved in various legal proceedings. Management has concluded, based upon
advice of legal counsel, that the result of these proceedings will not have a
material effect on the consolidated financial statements of the Corporation and
its subsidiaries.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note R - Pending Litigation
The Bank filed suits for amounts owed on promissory notes and/or guaranty
agreements from relatives and certain entities of the relatives of the former
CEO of the Corporation. The defendants filed a counter-complaint against the
Corporation and its bank subsidiary (the "Bank") alleging (i) that the Bank knew
or should have known of certain activities of the former CEO, and that the Bank
had a duty to inform the defendants of these activities, (ii) that the Bank was
negligent and reckless in placing the CEO in a position to commit a fraud on the
defendants and (iii) the Bank, through its officers, directors and employees,
intentionally, recklessly and fraudulently concealed the CEO's fraudulent
conduct from the defendants. The defendants' counter-complaint sought $8
million in compensatory and $20 million in punitive damages. The lawsuits were
removed to the United States District Court for the Middle District of
Tennessee. The Court dismissed the defendants' third party complaint against
the Corporation and against all officers and employees of the Corporation and
the Bank except one. The Corporation, the Bank, and the defendants have
executed a written settlement agreement resolving all claims between the
parties. As part of the settlement, the Corporation, the Bank and the
defendants have agreed to submit a joint motion asking that the litigation
between them be dismissed with prejudice. It is expected that the Court will
enter an order dismissing the case as to these parties in April 2000.
In April 1999, AmSouth Bank served a complaint on First National Bank of Pulaski
(the "Bank"), Robert M. Curry, Deborah C. Curry, John T. Curry, Carroll M.
Curry, Johnnie M. Curry, C & C Partnership, Curry Farms, Curry Brothers and
Susan R. Limor, Chapter 7 Trustee for Robert M. Curry. The complaint sought to
recover a judgment on various promissory notes executed by some or all members
of the named Curry parties. The complaint also alleged that the Bank engaged in
tortious misconduct in its dealings with the Curry family and breached certain
presentment and transfer warranties pursuant to the Uniform Commercial Code in
connection with the negotiation and transfer of several loan proceed checks. In
addition, AmSouth sought to equitably subordinate any and all claims of First
National Bank against Robert M. Curry and his bankruptcy estate and to
subordinate any liens or security interests held by First National Bank in
connection with claims against Robert M. Curry. The Bank filed an answer
vigorously contesting the allegations asserted by AmSouth Bank. AmSouth Bank
and First National Bank have reached a settlement in principle to resolve all
claims in this litigation, one against the other. The settlement calls for
First National Bank to purchase those shares of stock held by AmSouth Bank as
collateral. Under the terms of the settlement, First National Bank is paying
AmSouth nothing other than the purchase price for the stock held by AmSouth Bank
as collateral. While First National Bank believes that this settlement in
principle will resolve all claims in this case, no written settlement agreement
has been executed as of March 27, 2000 and no assurance can be given that a
definitive settlement agreement will be executed and the case dismissed.
INDEPENDENT AUDITOR'S REPORT
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Fayetteville, Tennessee
February 18, 2000, except for Note R, as to which the date is March 27, 2000.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information required by this item with respect to directors is incorporated
by reference herein by reference to "Election of Directors" in the Corporation's
Proxy Statement. 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 Exec Officer Position Has Held This
Name with Bank Status Since with FPNC Position Since
- -------------------------------------------------------------------------------
Harold Bass Vice-President 04/29/99 Secretary/ 04/29/99
Treasurer
Mark Hayes Executive 04/29/99 None, officially, 04/29/99
Vice-President but attends mtgs
and has input,
without voting
authority
Edwin Moore Vice-President 04/29/99 None
None of these persons are related to any of the Directors of either the First
National Bank Board of the First Pulaski National Corporation Board.
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.
Item 11. Executive Compensation
----------------------
Information required by this item is contained under the caption "Executive
Compensation" in the Corporation's Proxy Statement and is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information required by this item is contained under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Corporation's
Proxy Statement and is incorporated by reference.
Item 13. Certain Relationship and Related Transactions
---------------------------------------------
Information required by this item is contained under the caption "Certain
Relationships and Related Transactions" in the Corporation's Proxy Statement and
is incorporated by reference.
PART IV
Item 14. Exhibits and Reports on Form 8-K
--------------------------------
(a)(1) Financial Statements. See Item 8
(a)(2) Financial Statement Schedules. See Item 8
(a)(3) Exhibits. See Index to Exhibits
(b) Reports on Form 8-K
- -------------------
None.
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
----------------------------------
(Registrant)
Date: 3-14-99 By: /s/ James T. Cox
----------------- ---------------------------------------
James T. Cox, Acting President & Chief
Executive Officer
Date: 3-14-99 By: /s/ Harold Bass
----------------- --------------------------------------
Harold Bass, Acting Secretary/Treasurer
(The Corporation's Acting Principal
Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below and on the succeeding page by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ David E. Bagley /s/ Johnny Bevill
- ------------------------------ ----------------------------
David E. Bagley, Director Johnny Bevill, Director
/s/ James K. Blackburn IV /s/ Wade Boggs
- ------------------------------ ----------------------------
James K. Blackburn IV, Director Wade Boggs, Director
/s/ James H. Butler /s/ Thomas L. Cardin
- ------------------------------ ----------------------------
James H. Butler, Director Thomas L. Cardin, Director
/s/ Joyce F. Chaffin /s/ James T. Cox
- ------------------------------ ----------------------------
Joyce F. Chaffin, Director James T. Cox, Director
/s/ Parmenas Cox /s/ G. G. Dugger DDS
- ------------------------------ ----------------------------
Parmenas Cox, Director Greg G. Dugger DDS, Director
/s/ Charles D. Haney MD /s/ Morris Ed Harwell
- ------------------------------ ----------------------------
Charles D. Haney MD, Director Morris Ed Harwell, Director
/s/ James Rand Hayes /s/ D. Clayton Lee
- ------------------------------ ----------------------------
James Rand Hayes, Director D. Clayton Lee, Director
/s/ Kenneth R. Lowry /s/ Beatrice J. McElroy
- ------------------------------ ----------------------------
Kenneth R. Lowry, Director Beatrice J.McElroy, DirectoR
/s/ William A. McNairy /s/ W. Harwell Murrey MD
- ------------------------------ ----------------------------
William A. McNairy, Director W. Harwell Murrey MD, Director
/s/ Bill Yancey
- ------------------------------
Bill Yancey, Director
INDEX TO EXHIBITS
EXHIBIT
NUMBER
3.1 Amended Charter of First Pulaski National Corporation (incorporated by
Reference to Exhibit 3.1 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999).
3.2 Ammended Bylaws of First Pulaski National Corporation(incorporated by
Reference to Exhibit 3.2 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999).
21 Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule(for SEC use only)
Exhibit 21
The Corporation has two wholly-owned subsidiaries:
(1) First National Bank of Pulaski, a national chartered bank incorporated under
the laws of the State of Tennessee and doing business under the same name; and
(2) Heritage Financial of the Tennessee Valley, Inc., a finance company
incorporated under the laws of the State of Tennessee and doing business under
the same name.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
First Pulaski National Corporation
Pulaski, Tennessee
As independent public accountants, we hereby consent to the incorporation by
reference to First Pulaski National Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, of our reports (and to all references
to our firm) included in or made part of this Report.
[S] Putman and Hancock
February 23, 1999