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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, 2000.
[ ]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
$1.00 per share, held by nonaffiliates of the Registrant as of February 28,
2001 was $66,445,900. 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 February 28, 2001 were 1,533,138.
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 26, 2001
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
through its subsidiary bank, First National Bank of Pulaski (the "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 the Bank,
headquartered in Pulaski, Tennessee.
All of the common stock of the Bank is owned by the Corporation. At
December 31, 2000, the Corporation and its subsidiaries had combined total
assets of $303,439,816.
The Corporation currently has long-term indebtedness of approximately $1.7
million in the form of advances 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 28, 2001 the First National Bank of Pulaski had 144 employees,
22 of whom were part-time. Heritage Financial had 1 full-time employee. 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 Bank 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. The Bank 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.
The Bank offers a wide range of banking services, including checking, savings,
and money market deposit accounts, certificates of deposit and loans for
consumer, commercial and real estate purposes. The Bank does not have a
concentration of deposits obtained from a single person or entity or a small
group of persons or entities, the loss of which would have a material adverse
effect on the business of the Bank. Furthermore, no concentration of loans
exists with a single industry or group of related industries.
HERITAGE FINANCIAL OF THE TENNESSEE VALLEY, INC.
Heritage Financial 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. Heritage Financial is
a Tennessee chartered corporation operating under the Tennessee Industrial
Thrift and Loan Companies Act. Heritage Financial began operations on
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. Two (2) of the five (5) commercial banking competitors
are small community banking organizations. The other three (3) commercial
banking competitors are owned by large regional and super-regional multi-bank
holding companies. From June 30, 1998 to June 30, 2000, total deposits for
all commercial banks in the Giles County market have increased 6.5% from
$427.5 million to $455.4 million. The Bank has five (5) offices in Giles
County and approximately 70% of its deposits are located there. As of June
30, 2000, the Bank had the largest market share of banks in Giles County with
a 38.0% share of the bank deposits, almost 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 29,036, and a
median household income of $31,855.
Lincoln County. The Bank competes in Lincoln County with five (5) commercial
banking organizations. All five (5) of the commercial banking competitors are
owned by regional or national multi-bank holding companies. From June 30,
1998 to June 30, 2000, total deposits for all commercial banks in Lincoln
County have increased 4.5% from $344.7 million to $360.9 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, 2000, the Bank had a 20.7% share
of the Lincoln County bank deposit market, the second largest market share in
the county after Regions 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 29,773, and a median household income of $30,178.
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
the 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 purpose of mortgage lending. The cost of the
renovation amounted to $136,107, including furniture and fixtures. The
Bank began construction of a new banking facility in Fayetteville in the
year 2000. This facility will replace the leased facility and should be
completed in the third or fourth quarter of 2001. 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 2000 amounted to $62,052.
ITEM 3: LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved, from time to time, in
ordinary routine litigation incidental to the banking business. Neither
the registrant nor its subsidiaries is involved in any material pending
legal proceedings.
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 2000 and 1999 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, 2000 $25.60 - $52.50 $0.41
2nd Quarter, 2000 $49.00 - $55.00 $0.41
3rd Quarter, 2000 $30.00 - $51.49 $0.41
4th Quarter, 2000 $34.60 - $50.00 $0.42
ANNUAL DIVIDEND, 2000................. $1.65
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
There are approximately 1,351 stockholders of record of the Corporation's
common stock as of February 28, 2001.
The Corporation reviews 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 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 Comptroller of the Currency.
ITEM 6: SELECTED FINANCIAL DATA
Basic earnings per share figures in the tables which follow are based on
weighted average numbers of shares outstanding of 1,551,478 shares for
2000, 1,578,305 shares for 1999, 1,560,113 shares for 1998, 1,539,866
shares for 1997, and 1,522,591 shares for 1996, 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,
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Amounts in thousands, except per share data)
Interest income $23,691 $22,070 $22,506 $22,104 $21,245
Interest expense 11,117 9,138 9,445 9,296 8,761
Net interest income 12,574 12,931 13,061 12,809 12,484
Loan loss provision 341 791 1,652 508 783
Non-interest income 2,928 2,579 2,624 2,353 2,125
Non-interest expense 9,162 9,318 8,321 8,119 7,668
Income before income tax 5,999 5,401 5,712 6,536 6,158
Net income 4,072 3,681 3,803 4,320 4,063
Per Share Data:
Net income-Basic 2.63 2.33 2.44 2.81 2.67
Net income-Diluted 2.61 2.32 2.43 2.80 2.67
Cash dividends paid 1.65 1.65 1.60 1.50 1.40
Total average equity 36,672 37,128 35,782 34,384 30,698
Total average assets 290,536 281,438 271,775 260,905 247,304
Total year-end assets 303,440 279,498 275,005 266,616 248,792
Total long-term debt 1,659 1,849 2,028 2,196 1,847
Ratios:
Equity to assets 12.62% 13.19% 13.17% 13.18% 12.41%
Return on average
equity 11.10% 9.92% 10.63% 12.56% 13.24%
Return on average
assets 1.40% 1.31% 1.40% 1.66% 1.64%
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.
Certain of the statements in this discussion may constitute forward-looking
statements within the meaning of Section 27A of the Securities Exchange Act
of 1933, (the "Securities Act"), as amended . The words "expect,"
"anticipate," "intend," "should," "may," "could," "plan," "believe,"
"likely," "seek," "estimate" and similar expressions are intended to
identify such forward-looking statements, but other statements not based on
historical information may also be considered forward-looking. All
forward-looking statements are subject to risks, uncertainties and other
facts that may cause the actual results, performance or achievements of the
Corporation to differ materially from any results expressed or implied by
such forward-looking statements. Such factors include, without limitation,
(i) increased competition with other financial institutions, (ii) lack of
sustained growth in the economy in the Corporation's market area, (iii)
rapid fluctuations in interest rates, (iv) significant downturns in the
businesses of one or more large customers, and (v) changes in the
legislative and regulatory environment. Many of such factors are beyond
the Corporation's ability to control or predict, and readers are cautioned
not to put undue reliance on such forward-looking statements. The
Corporation disclaims any obligation to update or revise any forward-
looking statements contained in this discussion, whether as a result of new
information, future events or otherwise.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 2000 was approximately $4.1 million or $2.61 per diluted
share, compared with approximately $3.7 million or $2.32 per diluted share
in 1999 and approximately $3.8 million or $2.43 per diluted share in 1998.
Return on average assets was 1.40% in 2000, 1.31% in 1999 and 1.40% in
1998. The return on average equity was 11.1%, 9.9% and 10.6% for 2000,
1999 and 1998, 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 involving members of the family of the Corporations former Chief
Executive Officer. This litigation was settled in the second quarter of
2000, resulting in a significant reduction in legal and professional fees
in 2000.
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 2000,
net interest income decreased by 2.8% to $12,573,661 from $12,931,098 in
1999, following a decrease of 1.0% in 1999 from $13,061,004 in 1998. The
net decrease in 2000 is primarily attributable to the general rise in the
level of interest rates that occurred in 2000. Since the Corporation is
liability sensitive, this rising interest rate environment caused the
average interest rate paid on deposits to increase faster than the average
rate earned on loans and investments. Also, the local market in which the
Corporation competes saw intense competition for deposits throughout much
of the year 2000, thus increasing the cost of those deposits. The decrease
in net interest income of $331,000 in 2000, on a taxable equivalent basis,
resulted from an increase of $177,000 due to increased volumes which was
offset by a decrease of $508,000 as a result of rates paid on deposits
increasing more than rates earned on loans and investments.
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 2000,
1999 and 1998.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
December 31,
2000 1999 1998
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- ------- ------- ------- ------- ------- ------- ------- ------
ASSETS
- ----------
Interest-Earning Assets:
Loans and lease financing $175,935 $18,086 10.28% $171,819 $17,108 9.96% $169,663 $17,764 10.47%
Taxable investment securities 69,854 4,386 6.28% 62,746 3,800 6.06% 53,345 3,378 6.33%
Non-taxable investment
Securities 17,640 809 4.59% 17,095 939 5.49% 15,665 887 5.66%
Federal funds sold 6,607 410 6.21% 9,662 476 4.93% 13,477 717 5.32%
------ ------- ------- ------- ------- ------- ------ ------- -------
Total Interest-Earning Assets 270,036 23,691 8.77% 261,322 22,323 8.54% 252,150 22,746 9.02%
Non-interest Earning Assets:
Cash and due from banks 9,472 9,392 8,805
Premises and equipment, net 7,346 7,396 7,432
Other Assets 6,477 6,412 6,303
Less allowance for loan losses (2,795) (3,084) (2,915)
------- ------- ------
Total Non-Interest-Earning Assets 20,500 20,116 19,625
------- ------- ------
TOTAL $290,536 $281,438 $271,775
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------
Interest-Bearing Liabilities:
Demand deposits $21,072 441 2.09% $21,943 449 2.05% $20,691 396 1.91%
Savings deposits 28,198 693 2.46% 30,040 733 2.44% 29,303 749 2.56%
Time deposits 162,999 9,868 6.05% 151,096 7,830 5.18% 147,760 8,166 5.53%
Other borrowed money 1,747 115 6.58% 1,937 126 6.50% 2,107 137 6.50%
------- ------- ------ ------- ------- ------- ------- ------- -------
Total Interest-Bearing
Liabilities 214,016 11,117 5.19% 205,016 9,138 4.46% 199,861 9,448 4.73%
Non-Interest-Bearing Liabilities:
Demand deposits 37,743 36,679 33,389
Other liabilities 2,015 2,615 2,743
------- ------- -------
Total Non-Interest Bearing
Liabilities 39,758 39,294 36,132
Shareholders' Equity 36,762 37,128 35,782
------- ------- -------
TOTAL $290,536 $281,438 $271,775
======= ======= =======
Net interest earnings/spread,
on a taxable equivalent basis 12,574 4.66% 13,185 5.05% 13,298 5.27%
Taxable equivalent adjustments:
Loans 156 57 44
Investment securities 124 197 193
------- ------- -------
Total taxable equivalent adjustment. 280 254 237
------- ------- -------
Net interest earnings $12,294 $12,931 $13,061
======= ======= =======
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.
2000 Compared to 1999 1999 Compared to 1998
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 $410 724 $1,134 $226 ($882) ($656)
Taxable investment securities 430 156 586 595 (173) 422
Non-taxable investment
Securities 30 (36) (6) 81 (29) 52
Federal funds sold (151) 85 (66) ($203) ($38) (241)
------- ------- ------- ------- ------- -------
Total Interest-Earning Assets $719 $929 $1,648 $699 ($1,122) ($423)
======= ======= ======= ======= ======= =======
Interest Paid On:
Demand deposits ($18) 10 ($8) $24 29 $53
Savings deposits (45) 5 (40) 19 (35) (16)
Time deposits 617 1,421 2,038 184 (520) (336)
Other borrowed money (12) 1 (11) (11) 0 (11)
------- ------- ------- ------- ------- -------
Total Interest-Bearing
Liabilities $542 $1,437 $1,979 $216 ($526) ($310)
======= ======= ======= ======= ======= =======
Net Interest Earnings, on a
taxable equivalent basis $177 ($508) ($331) $483 ($596) ($113)
======= ======= ======= ======= ======= =======
Less: taxable equivalent
Adjustment 26 17
------- -------
Net Interest Earnings ($357) ($130)
======= =======
The change in interest due to volume has been determined by applying the rate
from the earlier year to the change in average balances outstanding from one
year to the next. The change in interest due to rate has been determined by
applying the change in rate from one year to the next to the average balances
outstanding in the later year. The computation of the taxable equivalent
adjustment has given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
NON-INTEREST INCOME
Non-interest income amounted to $2,928,098 in 2000, an increase of 13.5% from
1999, which is attributable primarily to an increase of $477,515 in service
charges on deposit accounts. Non-interest income in 1999 decreased by 1.7 %
from 1998 due primarily to decreases in mortgage banking fees and other
service charges and fees. Security transactions led to a net loss of $71,268
in 2000, a net gain of $17,561 in 1999 and no net gains or losses in 1998.
NON-INTEREST EXPENSE
Non-interest expense in 2000 was $9,161,880, down 1.7 % from 1999. This
decrease is attributable primarily to an approximate $400,000 decrease in
other operating expenses. The decrease in other operating expenses was
caused mainly by a decrease in professional fees of approximately $530,000.
The higher fees in 1999 were primarily related to litigation involving
members of the family of the Corporation's former Chief Executive Officer.
Salaries, including employee benefits, increased approximately $180,000, or
3.9% to $4.76 million in 2000. Non-interest expense for 1999 had increased
by 12.0% over the previous year. This was due primarily to the increased
costs associated with professional fees related to the litigation mentioned
above.
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 approximately $341,000 thousand in 2000
compared to approximately $791,300 in 1999 and $1.65 million in 1998. Net
loan losses were $501,000 in 2000, $888,300 in 1999, and $1.32 million in
1998. In August of 1998, the Corporation discovered that R. Michael Curry,
its then Chairman and Chief Executive Officer, had obtained several million
dollars of cashier's checks of the Bank 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 fund's deposited,
the ultimate shortfall to the Corporation was approximately $1.1 million, a
substantial portion of which was ultimately covered by the Bank's fidelity
bond carrier. However, in investigating these matters, the Corporation
determined that, 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 $731,000 of indebtedness to the former
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. 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 loans charged-off fell to $501,000 in 2000 from $888,300 in 1999 and
$1,320,500 in 1998. Net loans charged-off in 1998 was extremely high due
to the activities of the former CEO discussed above. Improved loan
portfolio quality led to the drop in net loans charged-off in 2000. Net
loan losses for 2000 consist of personal loans for $275,100, commercial and
industrial loans for $54,000, agricultural loans for $112,100, and real estate
loans for $59,800. The allowance at the end of 2000 was $2.68 million, or
1.47% of outstanding loans and leases, as compared to $2.84 million or 1.62%
and $2.94 million or 1.73% in 1999 and 1998, respectively. Net loans charged-
off amounted to 0.28% of average total loans outstanding in 2000, 0.51% in
1999 and 0.78% in 1998.
The allowance for loan losses was 2.62 times the balance of nonaccrual
loans at the end of 2000, .87 in 1999 and .87 in 1998. This ratio was low
in 1999 and 1998 due to loans associated with certain entities and family
members of the Corporation's former Chief Executive Officer. These loans
were settled in 2000, greatly reducing the nonaccrual loans. Net loan
charge-offs exceeded the provision for loan losses by $159,956 in 2000 and
by $97,053 in 1999 due to the improving loan quality. The provision for
loan losses exceeded net loan charge-offs by $331,454 in 1998. Management
believes that the allowance for possible loan losses as of December 31, 2000
is adequate.
The following table sets out respectively the allocation of the Allowance
for Loan Losses and the percentage of loans by category to total loans
outstanding at the end of each of the years indicated.
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
(amounts in thousands of dollars)
Allowance applicable to :
Real estate loans 566 453 319 240 422
Commercial loans 527 792 473 165 80
Agriculture loans 46 449 409 176 238
Individual loans 1540 1,144 1,735 2,023 1,191
Other loans 0 0 0 0 2
----- ----- ----- ----- -----
2,679 2,838 2,936 2,604 1,933
===== ===== ===== ===== =====
Percentages of loans by
category to total loans:
Real estate loans 63.21% 56.48% 53.23% 52.66% 51.76%
Commercial loans 11.40% 15.66% 17.24% 15.42% 14.77%
Agriculture loans 3.77% 4.98% 5.83% 6.68% 7.33%
Individual loans 17.68% 19.45% 22.29% 23.25% 24.92%
Other loans 3.94% 3.43% 1.41% 1.99% 1.22%
----- ----- ----- ----- -----
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 $1,926,555, $1,720,123, and $1,909,215 in 2000, 1999 and 1998,
respectively. The effective tax rates were 32.1%, 31.8 %, and 33.4%
respectively. Note I to Financial Statements, Part II, Item 8, provides a
detailed analysis of the components of income tax expense.
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 2000 resulted primarily from increases in real estate loans,
especially commercial real estate, but also including agriculture and
residential real estate. However, commercial and industrial loans,
agricultural loans and loans to individuals each decreased approximately $2
million in 2000 as compared to 1999.
Over the last three years, average total loans and leases increased by $6.8
million or 3.9% in 2000, by $2.2 million or 1.3% in 1999 and by $5.5
million or 3.4% in 1998. The growth in deposits has been used to support
this 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 daily averages, changes in the allowance for possible losses
arising from loans charged off and recoveries on loans previously charged
off, and additions to the allowance which have been charged to expense.
For year ended December 31,
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(in thousands of dollars)
Amount of net loans and
lease financing outstanding
at end of period $181,879 $174,748 $169,651 $168,738 $157,903
======= ======= ======= ======= =======
Daily average amount of
loans and leases $175,935 $171,819 $169,663 $164,155 $157,697
======= ======= ======= ======= =======
Balance of allowance for
possible loan losses at
beginning of period $2,838 $2,936 $2,604 $2,381 $2,058
Less charge-offs:
Real estate-residential 10 4 45 31 -
Real estate-agricultural 47 - - - -
Real estate-other 5 - - - -
Commercial 83 124 148 163 53
Agricultural 121 377 703 17 50
Individuals 485 687 681 497 637
------- ------- ------- ------- -------
751 1,192 1,577 708 740
Add recoveries:
Real estate-residential 2 8 23 23 2
Real estate-nonresidential,
Nonfarm - - - - 19
Commercial 29 45 45 51 13
Agricultural 9 42 10 3 3
Individuals 210 208 179 347 243
------- ------- ------- ------- -------
250 303 257 424 280
======= ======= ======= ======= =======
Net loans charged off 501 889 1,320 284 460
Provision charged to expense 341 791 1,652 507 783
------- ------- ------- ------- -------
Balance at end of period $2,678 $2,838 $2,936 $2,604 2,381
======= ======= ======= ======= =======
Net charge-offs as percent of
average loans outstanding: 0.28% 0.51% 0.78% 0.17% 0.29%
Net charge-offs as percent of:
Provision for loan losses 146.9% 112.4% 79.9% 56.0% 58.7%
Allowance for loan losses 18.7% 31.3% 45.0% 10.9% 19.3%
Allowance at end of period
to loans, net of unearned
income 1.47% 1.62% 1.73% 1.54% 1.51%
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,
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(in thousands of dollars)
Construction and land
Development $3,323 $3,811 $5,108 $3,341 $3,548
Commercial and industrial 20,836 23,732 24,606 23,122 20,219
Agricultural 6,896 8,760 10,053 11,461 11,799
Real estate-farmland 22,539 20,015 19,577 19,142 17,314
Real estate-residential 45,336 43,227 41,307 40,177 38,708
Real estate-nonresidential,
Nonfarm 44,368 36,158 30,891 31,033 27,255
Installment-individuals 32,319 34,218 38,426 39,890 40,096
Other loans(1) 7,210 6,037 2,445 3,426 1,943
------- ------- ------- ------- -------
$182,827 $175,958 $172,413 $171,592 $160,882
======= ======= ======= ======= =======
(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 after
Due in one year
one year but before Due after
or less five years five years Total
--------- --------- --------- ---------
(in thousands of dollars)
Construction and
land development $3,253 $14 $56 $3,323
Commercial and
Industrial 13,053 6,619 1,164 20,836
Agricultural 4,450 1,515 931 6,896
Real estate-farmland 13,177 7,750 1,612 22,539
Real estate-commercial 9,087 20,549 14,732 44,368
--------- --------- --------- ---------
Total selected loans $43,020 $36,447 $18,495 $97,962
========= ========= ========= =========
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 one year
one year but before Due after
or less five years five years Total
------- ---------- ---------- --------
Percent of total
selected loans 43.91% 37.21% 18.88% 100.00%
Cumulative percent
of total 43.91% 81.12% 100.00%
Sensitivity of loans to
changes in interest rates-
loans due after one year:
Fixed rate loans $34,730 $9,213 $43,943
Variable rate loans 1,717 9,282 10,999
---------- ---------- --------
Total $36,447 $18,495 $54,942
========== ========== ========
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 1999 to 2000, non-accruing loans decreased by 68.7% to $1.02 million
following an increase of 2.8% in 1999 from 1998. Non-accruing loans in
1999 included approximately $2.1 million of loans to relatives and certain
entities of these relatives of the former Chief Executive Officer of the
Corporation, as discussed above. There were no restructured loans at year-
end 2000 or 1999. Other real estate owned, consisting of properties
acquired through foreclosures or deeds in lieu thereof, totaled $237,400
for an increase of 139.4% from 1999, following a decrease of 48.6% in 1999.
Loans past due ninety days or more totaled $215,600 for an increase of 504%
over the same period last year, following a decrease of 85.9% in 1999. All
major credit lines and troubled loans are reviewed regularly by a committee
of the Board of Directors. 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,
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
(in thousands of dollars)
Nonaccrual loans $1,022 $3,262 $3,173 $702 $449
Toubled debt restructurings 0 0 0 0 0
Other real estate owned 237 99 193 115 219
Loans past due ninety days or
more as to interest or
principal payment 216 36 253 176 190
The amount of interest income actually recognized on the nonaccrual loans during
2000, 1999 and 1998, was $13,292, $19,760 and $126,213, respectively. The
additional amount of interest income that would have been recorded during 2000,
1999 and 1998, if the above amounts had been current in accordance with their
original terms was $64,212, $265,505 and $177,994, respectively. As of
December 31, 2000, management was not aware of any specifically identified
loans, other than those included in the categories discussed above that
represent significant potential problems or that management has serious doubts
as to the borrower's ability to comply with the present repayment terms.
The Corporation believes that it 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, marketable bonds of states, counties and
municipalities, and highly rated corporate bonds. Management uses investment
securities to assist in maintaining proper interest rate sensitivity in the
balance sheet, to provide securities to pledge as collateral for certain public
funds and to provide an alternative investment for available funds.
The following table sets forth the carrying amount of securities at the dates
indicated:
December 31,
2000 1999 1998
------- ------- -------
(in thousands of dollars)
Available-for-sale
- --------------------
U.S. Treasury securities $2,007 $4,014 $16,363
Obligations of states and
political subdivisions 18,227 420 0
Other debt securities 28,329 6,140 0
U.S Government Agencies 47,062 35,035 29,610
------- ------- -------
$95,625 $45,609 $45,973
------- ------- -------
Held-to-maturity
- --------------------
Obligations of states and $0 $14,912 $17,937
political subdivisions
Other debt securities 0 14,436 7,653
------- ------- -------
0 29,348 25,590
------- ------- -------
$95,625 $74,957 $71,563
======= ======= =======
The following table sets forth the maturities of securities at December 31, 2000
and the average yields of such securities (calculated on the basis of the cost
and effective yields).
U.S. Treasuries State and
and Government Political Other
Agencies Subdivisions Securities Total
------------- ------------ --------- ----------
(in thousands of dollars)
Available-for-sale
Within one year:
Amount 3,103 1,581 4,174 8,858
Yield 6.51% 6.89% 6.67% 6.66%
After one but within
five years:
Amount 38,300 9,330 20,291 67,921
Yield 6.19% 6.66% 6.72% 6.42%
After five but within
ten years:
Amount 6,248 6,216 3,560 16,024
Yield 6.83% 7.57% 6.28% 7.00%
After ten years:
Amount 955 784 - 1,739
Yield 7.74% 5.50% - 6.73%
The above table shows yields on the tax-exempt obligations to be computed on a
taxable equivalent basis.
Total average securities increased by $7.7 million or 9.6% to $87.5 million
during 2000 as compared $79.8 million for 1999. Average taxable investment
securities increased by $7.1 million or 11.3% and average non-taxable
investment securities increased by $545,000 or 3.2%, to account for the
overall increase in average investments. The total securities portfolio
increased $20.7 million or 27.6% to $95.6 million at the end of 2000 as
compared to the end of 1999. The large increase in the investment securities
was a result of deposits growing faster in 2000 than loan demand. Management
placed these excess deposits into investment securities in order to maximize
the yield on these funds.
DEPOSITS
The Bank's primary source of funds is customer deposits, including large
certificates of deposits. Aggregate average deposits increased by $10.1 million
or 4.3% to $250.0 million in 2000, by $8.4 million or 3.6% to $239.8 million in
1999 and by $8.5 million or 3.8% to $231.1 million in 1998. Most of the deposit
growth experienced by the Bank has been in accounts that are interest
sensitive.
The average amount of deposits for the periods indicated is summarized in the
following table:
For year ended December 31,
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- -------- ------
(in thousands of dollars, except percents)
Noninterest bearing
demand deposits $37,743 0.00% $36,679 0.00% $33,389 0.00%
Interest bearing
demand deposits 21,072 2.09% 21,943 2.05% 20,691 1.91%
Savings deposits 28,198 2.46% 30,040 2.44% 29,303 2.56%
Time deposits of
$100,000 or more 63,176 6.23% 53,625 5.29% 46,912 5.73%
Other time deposits 99,823 5.94% 97,471 5.13% 100,848 5.43%
------- ------- ------- ------- ------- -------
Total interest
bearing deposits 212,269 5.18% 203,079 4.44% 197,754 4.71%
------- ------- ------- ------- ------- ------
Total deposits $250,012 $239,758 $231,143
======= ======= =======
Remaining maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 2000, are summarized as follows (in thousands
of dollars):
3 months or less $32,413
Over 3 months through 6 months 13,614
Over 6 months through 12 months 12,939
Over 1 year 8,659
-------
Total $67,625
=======
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 $8.9 million at December 31, 2000, representing
9.4% of the investment securities portfolio, a decrease from the 10.9%
level of 1999. The smaller percentage of securities maturing in one year
or less is a result of management's decision to lengthen the average
maturity of the securities portfolio. This lengthening of the average
maturity has slightly decreased the liquidity but has increased the yield
of the portfolio. Management believes that the investment securities
portfolio, along with additional sources of liquidity, including federal
funds sold, and maturing loans provides the Corporation with adequate
liquidity to meet its funding needs.
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. Twenty percent of
money market, regular savings and NOW accounts are classified by management
as immediately rate sensitive. The remaining eighty percent of these
accounts are classified as repricing in one year or more. At December 31,
2000 the Bank had a total of $59.0 million in certificates of $100,000 or
more which would mature in one year or less. In addition, consumer
certificates of deposits of smaller amounts 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:
December 31, 2000 91-365 +1 - 3 +3 - 5 Over 5
$ in thousands 0-30 days 31-90 days days years years years Total
- ------------------------- --------- ---------- ------- ------- ------- ------- -------
Interest-sensitive assets:
Loans and leases $19,136 $15,914 $60,499 $63,170 $14,168 $6,828 $179,715
Taxable securities 0 1,000 8,518 25,761 32,029 9,325 76,634
Nontaxable securities 200 185 1,196 4,162 5,168 7,000 17,910
Federal funds sold 4,245 0 0 0 0 0 4,245
------- ------- ------- ------- ------- ------- -------
Total $23,581 $17,099 $70,213 $93,093 $51,365 $23,153 $278,504
Interest-sensitive liabilities:
Demand deposits 3,978 0 0 15,914 0 0 19,892
Savings 5,626 0 0 22,508 0 0 28,134
Time deposits 29,469 38,452 84,441 21,677 684 0 174,723
Other borrowed funds 16 34 153 446 307 703 1,659
------- ------- ------- ------- ------- ------- -------
Total 39,089 38,486 84,594 60,545 991 703 224,408
Interest sensitivity gap $(15,508) $(21,387) $(14,381) $32,548 $50,374 $22,450 $54,096
Cumulative gap $(15,508) $(36,895) $(51,276) $(18,728) $31,646 $54,096
Cumulative RSA/RSL 0.603 0.524 0.684 0.916 1.141 1.241
Ratio of cumulative gap
to earning assets 5.57% 13.25% -18.41% -6.72% 11.36% 19.42%
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 that mature or reprice in one year or less to not less than
0.70 and not more than 1.20. 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. As of December 31, 2000, the RSA/RSL
ratio in the one year or less category was .684, which is slightly below
the range the committee has established. Management has since taken action
to bring the RSA/RSL ratio into compliance with the prescribed parameters.
As of February 28, 2001, the RSA/RSL ratio was in compliance with the
asset/liability management limits of at least 0.70 and not more than 1.2 in
the one year and less category.
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 3.2% in 2000 and 3.6% in 1999. The corresponding
percentage decrease in average equity amounted to 1.0% in 2000 and a 3.8%
increase in 1999. The Corporation purchased approximately $3.5 million of
its stock, primarily in connection with the settlement of litigation
involving the family of the Corporation's former CEO. This repurchase and
retiring of stock led to the small decrease in the average equity for 2000.
The Corporation's equity capital was $36,959,178 at December 31, 2000,
$36,671,996 at December 31, 1999, and $36,686,195 at December 31, 1998, for
an increase of 0.1% over the two-year period. The Corporation's equity-to-
average asset ratio was 12.7%, as compared to 13.0% for 1999 and 14.2% for
1998. The Corporation believes that the maintenance of this ratio during
2000 indicates that the Corporation's 2000 earnings were sufficient to keep
pace with its growth in total assets. The Corporation expects to maintain a
capital to asset ratio that reflects financial strength and conforms to
current regulatory guidelines. The ratio of dividends to net income was
62.8% in 2000, 70.8% in 1999, and 65.7% in 1998.
As of December 31, 2000, the authorized number of common shares was 10
million shares, with 1,535,398 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, 2000, the Corporation and the Bank, had
ratios which exceeded the regulatory requirements to be classified as "well
capitalized," the highest regulatory capital rating. The Corporation's and
the Bank's ratios are illustrated in Note M to the financial statements.
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.
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.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December
31, 2000.
Expected Maturity Date for year ending December 31, 2000
(in thousands of dollars)
2001 2002 2003 2004 2005 Thereafter Total Fair Value
------ ------ ------ ------ ------ -------- ------ --------
Interest-sensitive assets:
Loans and leases:
Variable rate $3,883 $364 $345 $1,070 $1,737 $14,796 $22,195 22,195
Average interest rate 9.96% 10.62% 10.31% 9.83% 10.31% 10.28% 10.21%
Fixed rate 75,590 27,735 34,363 8,465 4,408 6,418 156,980 156,418
Average interest rate 10.10% 9.90% 9.90% 9.86% 9.68% 7.57% 9.89%
Securities 11,099 11,170 18,753 20,142 17,055 16,325 94,544 95,625
Average interest rate 6.77% 6.34% 5.94% 6.09% 7.29% 7.01% 6.54%
Federal funds sold 4,245 - - - - - 4,245 4,245
Average interest rate 6.37% - - - - - 6.37%
Interest-sensitive liabilities:
Interest-bearing deposits 200,388 20,203 1,474 282 402 - 222,749 221,657
Average interest rate 5.51% 6.87% 6.64% 6.11% 6.91% - 5.65%
Long-term borrowings - - - 428 138 1,093 1,659 1,787
Average interest rate - - - 5.95% 6.70% 6.72% 6.52%
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, 2000 and 1999
ASSETS
2000 1999
--------- ---------
Cash and due from banks $9,997,163 $12,120,521
Federal funds sold 4,245,000 6,722,897
--------- ---------
Total cash and cash equivalents 14,242,163 18,843,418
Securities available for sale 95,625,481 45,608,982
Securities held to maturity
(fair value - $28,800,260) - 29,348,246
Loans
Loans net of unearned income 181,879,294 174,734,214
Allowance for loan losses (2,678,525) (2,838,481)
--------- ---------
Total net loans 179,200,769 171,895,733
Bank premises and equipment 7,975,679 7,128,207
Accrued interest receivable 4,035,038 3,529,106
Other real estate owned 237,434 99,185
Prepayments and other assets 2,123,252 3,030,935
--------- ---------
TOTAL ASSETS $303,439,816 $279,483,812
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $40,580,118 $36,117,830
Interest bearing 220,501,518 202,492,439
---------- ----------
Total deposits 261,081,636 238,610,269
Other borrowed funds 1,658,505 1,849,090
Accrued taxes 354,528 130,687
Accrued interest on deposits 2,733,542 1,806,079
Other liabilities 652,427 415,691
---------- ----------
TOTAL LIABILITIES 266,480,638 242,811,816
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized -
10,000,000 shares; 1,535,398 and
1,583,961 shares issued and outstanding 1,535,398 1,583,961
Capital surplus 4,528,510 7,338,740
Retained earnings 30,180,266 28,663,995
Accumulated other comprehensive
income (loss), net 715,004 (914,700)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 36,959,178 36,671,996
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $303,439,816 $279,483,812
=========== ===========
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, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
INTEREST INCOME
Loans, including fees $18,086,540 $17,051,620 $17,718,313
Securities:
Taxable 4,385,782 3,800,275 3,377,514
Non-taxable 808,608 741,895 693,794
Federal funds sold 409,671 475,773 716,654
---------- ---------- ----------
Total Interest Income 23,690,601 22,069,563 22,506,275
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Transaction accounts 441,490 448,721 393,518
Money market deposit accounts 213,515 234,070 262,149
Other savings deposits 479,579 499,381 486,654
Time certificates of deposit of
$100,000 or more 3,938,338 2,834,338 2,687,855
All other time deposits 5,929,334 4,995,717 5,478,007
Borrowed funds 114,684 126,238 137,088
---------- ---------- ----------
Total Interest Expense 11,116,940 9,138,465 9,445,271
---------- ---------- ----------
NET INTEREST INCOME 12,573,661 12,931,098 13,061,004
Provision for loan losses 341,011 791,294 1,651,925
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,232,650 12,139,804 11,409,079
---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 2,232,177 1,754,662 1,722,533
Commissions and fees 193,829 211,792 298,402
Other service charges and fees 231,227 215,882 126,569
Security gains (losses), net (71,268) 17,561 -
Gain on sale of other assets 34,152 3,940 11,962
Dividends 142,749 193,932 122,686
Mortgage banking fees 165,232 181,296 342,185
---------- ---------- ----------
Total Other Income 2,928,098 2,579,065 2,624,337
---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 4,764,171 4,583,632 4,420,812
Occupancy expense, net 1,101,671 1,075,441 932,698
Furniture and equipment expense 691,821 703,593 778,409
Advertising and public relations 534,449 486,892 461,570
Other operating expenses 2,069,768 2,467,951 1,727,780
---------- ---------- ----------
Total Other Expenses 9,161,880 9,317,509 8,321,269
---------- ---------- ----------
Income before income taxes 5,998,868 5,401,360 5,712,147
Applicable income taxes 1,926,555 1,720,123 1,909,215
---------- ---------- ----------
NET INCOME $4,072,313 $3,681,237 $3,802,932
========== ========== ==========
Earnings per common share:
Basic $2.63 $2.33 $2.44
========== ========== ==========
Diluted $2.61 $2.32 $2.43
========== ========== ==========
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, 2000, 1999, and 1998
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,072,313 $3,681,237 $3,802,932
Adjustments to reconcile net income
to net cash provided by
operating activities-
Provision for loan losses 341,011 791,294 1,651,925
Depreciation 827,826 838,840 771,879
Amortization and accretion of
investment securities, net 80,106 151,953 105,438
Deferred income tax expense (benefit) 31,976 54,480 (87,315)
Gain on sale of other assets (34,152) (3,940) (11,962)
Security (gains) losses, net 71,268 (17,561) -
Loans originated for sale (5,587,526) (6,880,161) (14,452,933)
Proceeds from sale of loans 5,440,329 8,133,659 13,187,740
(Increase) decrease in
interest receivable (505,932) (188,689) 71,541
(Increase) decrease in prepayments
and other assets (14,262) 851,004 (1,063,009)
Increase (decrease) in accrued
interest on deposits 927,463 (103,533) (99,454)
Increase (decrease) in accrued taxes 223,841 18,919 (5,518)
Increase (decrease) in other
Liabilities 236,736 (54,065) (78,463)
---------- ---------- ----------
Cash Provided by Operating
Activities, net 6,110,997 7,273,437 3,792,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available
for sale (35,189,450) (24,211,760) (10,000,910)
Proceeds from sales of securities
available for sale 8,814,906 6,527,758 -
Proceeds from maturities of
securities available for sale 8,024,166 16,511,155 15,160,001
Purchases of securities held to maturity - (10,059,004) (10,403,495)
Proceeds from maturities of
securities held to maturity - 5,680,900 4,925,600
Net increase in loans (7,862,260) (7,357,345) (1,221,664)
Capital expenditures (1,684,944) (445,702) (1,017,809)
Proceeds from sale of other assets 319,383 258,765 188,670
---------- ---------- ----------
Cash Used by Investing
Activities, net (27,578,199) (13,095,233) (2,369,607)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings repaid (190,585) (179,030) (168,180)
Net increase in deposits 22,471,367 4,810,744 6,634,031
Cash dividends paid (2,556,042) (2,607,706) (2,498,423)
Proceeds from issuance of common stock 628,700 635,292 714,351
Common stock repurchased (3,487,493) (391,230) -
---------- ---------- ----------
Cash Provided by Financing
Activities, net 16,865,947 2,268,070 4,681,779
---------- ---------- ----------
INCREASE (DECREASE) IN CASH, net (4,601,255) (3,553,726) 6,104,973
CASH AND CASH EQUIVALENTS,
beginning of year 18,843,418 22,397,144 16,292,171
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $14,242,163 $18,843,418 $22,397,144
========== ========== ==========
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, 2000, 1999 and 1998
Accumulated
Other
Common Stock Capital Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss), net Total
------ ------- ------- -------- ---------------- ----------
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 - -
Change in unrealized
gains (losses) on AFS
securities, net of tax - - - - (1,320,201) -
Less reclassification
adjustment, net of income
tax of $5,970 - - - - (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
Comprehensive income:
Net income - - - 4,072,313 - -
Change in unrealized
gains (losses) on AFS
securities, net of tax - - - - 1,582,667 -
Less reclassification
adjustment, net of income
tax of $24,234 - - - - 47,037 -
Comprehensive income - - - - - 5,702,017
Cash dividends paid $1.65
per share - - - (2,556,042) - (2,556,042)
Common stock issued 17,275 17,275 611,425 - - 628,700
Common stock repurchased (65,838) (65,838) (3,421,655) - - (3,487,493)
------ ------- ------- -------- ---------------- ----------
Balance at December 31, 2000 1,535,398 $1,535,398 $4,528,510 $30,180,266 $715,004 $36,959,178
========= ========= ========= ========== ======= ==========
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") 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 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 balances and transactions have been eliminated.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications
are immaterial and had no effect on net income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The most significant estimate relates to
the adequacy of the allowance for losses on loans. Actual results could
differ from those estimates.
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 $10,189,478,
$9,241,998 and $9,544,725 and income taxes paid of $1,745,000, $1,767,452
and $2,206,102 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Securities
Securities are classified at the time of purchase as either held to
maturity or available for sale. The Corporation defines held to maturity
securities as securities for which management has the positive intent and
ability to hold to maturity. Held to maturity securities are carried at
amortized cost. Securities available for sale represent those securities
intended to be held for an indefinite period of time, including securities
that management intends to use as part of its asset/liability strategy, or
that may be sold in response to changes in interest rates, changes in
prepayment risk, the need to increase regulatory capital or other similar
factors. Securities available for sale are carried at fair value.
Unrealized holding gains and losses for available for sale securities are
reported, net of tax, in other comprehensive income. The amortized cost of
all securities is adjusted for amortization of premium and accretion of
discount to maturity or earlier call date if appropriate. Such amortization
and accretion is included in interest income from securities. Gains and
losses from sales of available for sale securities are computed using the
specific identification method.
The Company early-adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as of January 1, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
is the policy of the Corporation not to invest in derivative instruments.
Concurrent with adoption, the Corporation transferred all of its investment
securities classified as held to maturity (total amortized cost of
$28,141,949) to available for sale. The unrealized loss on these
securities at the date of transfer was $547,986.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Mortgage Banking
The Corporation originates first-lien mortgage loans for the purpose of
selling them in the secondary market. Mortgage loans held for sale are
recorded at cost, which approximates market value. Gains and losses
realized from the sale of these assets are included in noninterest income.
Servicing rights related to the mortgages sold are not retained. Loans
include loans held for sale at December 31, 2000 and 1999, totaling
$205,603 and $352,800, respectively.
Loans and Allowance for Loan Losses
Loans are reported at the principal amounts outstanding, net of unamortized
nonrefundable loan fees. Deferred net fees are recognized in loan interest
income and fees over the loan term using a method that generally produces a
level yield on the unpaid loan balance.
Impaired loans are specifically reviewed loans for which it is probable
that the creditor will be unable to collect all amounts due according to
the terms of the loan agreement. Impairment of a loan is measured by
comparing the recorded investment in the loan with the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A valuation allowance is
provided to the extent that the measure of the impaired loan is less than
the recorded investment.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and
timely collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest unless
such loans are well secured and in the process of collection.
Interest income is accrued principally on a simple interest basis. Payments
received on impaired loans for which the ultimate collectibility of
principal is uncertain are generally applied first as principal reductions.
Interest collections on nonaccrual loans for which the ultimate
collectibility of principal is uncertain are applied as principal
reductions. Otherwise, such collections are credited to income when
received.
The allowance for loan losses is maintained at a level which is considered
to be adequate to reflect estimated credit losses for specifically
identified loans as well as estimated probable credit losses inherent in
the remainder of the loan portfolio at the balance sheet date. The
allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of
charge-offs, net of recoveries. A formal review of the allowance for loan
losses is prepared quarterly to assess the risk in the portfolio and to
determine the adequacy of the allowance for loan losses. The Corporation's
methodology for assessing the appropriateness of the allowance consists of
several elements, which include the formula allowance, specific allowances
and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments. For purposes of the quarterly review,
the loan portfolio is separated by loan type, and each type is treated as a
homogeneous pool. Each loan is assigned a risk rating by loan officers
using established credit policy guidelines. These risk ratings are
periodically reviewed and all risk ratings are subject to review by an
independent Credit Review Department. Each risk rating is assigned an
allocation percentage which, when multiplied times the dollar value of
loans in that risk category, results in the amount of the allowance for
loan losses allocated to these loans. Allocation percentages are based on
the Corporation's historical loss experience and may be adjusted for
significant factors that, in management's judgement, affect the
collectibility of the portfolio as of the evaluation date.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Loans and Allowance for Loan Losses - (Continued)
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit
that management believes indicates the probability that a loss has been
incurred in excess of the amount determined by the application of the
above formula. Every nonperforming loan in excess of $25,000 and all
loans classified as "Other Assets Especially Mentioned" over $100,000
are reviewed quarterly by the Board's Executive and Loan Committee to
review the level of loan losses required to be specifically allocated.
The unallocated allowance is based upon management's evaluation of
various conditions that are not directly measured in the determination
of the formula and specific allowances. The conditions evaluated in
connection with the unallocated allowance may include existing economic
and business conditions affecting the key lending areas of the
Corporation, credit quality trends, collateral values, loan volumes and
concentrations and specific industry conditions.
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 2000, 1999 or
1998.
Other Real Estate Owned
Other real estate owned consists of properties acquired through
foreclosures and premises not used for business operations. These
properties are valued at the lower of cost or estimated net realizable
value. Cost includes loan principal, accrued interest, and foreclosure
expense. Estimated net realizable value is the estimated selling price
in an orderly disposition reduced by estimated selling costs and future
carrying costs. The excess of cost over net realizable value at the
time of foreclosure is charged to the allowance for loan losses. The
estimated net realizable fair value is reviewed periodically and any
write-downs are charged against current earnings as market adjustments.
Stock-Based Compensation
SFAS No. 123,"Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for an employee stock option or similar
equity instrument. However, SFAS No. 123 allows an entity to continue
to measure compensation costs for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with APB
Opinion No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting
defined in SFAS No. 123 had been applied. Under the fair value based
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Corporation has elected to
continue to measure compensation cost for its stock option plans under
the provisions in APB Opinion 25.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Advertising Costs
The Corporation expenses the costs of advertising when these costs are
incurred.
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.
Earnings Per Share
Basic and diluted earnings 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.
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities
Accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities is based on an
application of a financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from
transfers of assets that are secured borrowings.
Segments of an Enterprise and Related Information
The Corporation operates in only one operating segment (banking).
Therefore, no additional segment financial information or disclosures
are presented.
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
2000 Cost Gains Losses Value
- ----- --------- ---------- --------- ----------
Available for Sale
U.S. Treasury securities $1,997,377 $10,123 $- $2,007,500
Obligations of states and
political subdivisions 17,910,341 351,086 34,121 18,227,306
Other debt securities 28,026,311 377,737 75,435 28,328,613
U.S. Government agencies 46,608,189 577,595 123,722 47,062,062
--------- ---------- --------- ----------
$94,542,218 $1,316,541 $233,278 $95,625,481
========== ========= ========== ==========
1999
- -----
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
========== ========= ========== ==========
The following is a summary of the amortized cost and estimated fair
value of debt securities by contractual maturity at December 31, 2000:
Cost Fair Value
---------- ----------
Due in one year or less $8,857,677 $8,870,351
Due after one year through five years 67,920,306 68,522,826
Due after five years through ten years 16,024,903 16,437,898
Due after ten years 1,739,332 1,794,406
---------- ----------
TOTAL $94,542,218 $95,625,481
========== ==========
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities - (Continued)
Net gains realized from securities transactions for 2000, 1999 and 1998
were:
Book Gross Realized Net
2000 Proceeds Value Gains Losses Realized
---- ---------- ---------- ------- -------- --------
Securities sold $8,814,906 $8,886,174 $6,557 $77,825 $(71,268)
Securities matured or redeemed 8,024,166 8,024,166 - - -
----------- ----------- ------- -------- --------
$16,839,072 $16,910,340 $6,557 $77,825 $(71,268)
=========== ========== ======= ======== ========
1999
----
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 $- $- $-
=========== =========== ======= ======== ========
Income tax expense (benefit) attributable to securities transactions was
($24,231), $6,667 and $-0- for 2000, 1999 and 1998, respectively.
Securities with a book value of $31,698,620 and $32,812,104 at December 31, 2000
and 1999, 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 stockholders' equity at December 31, 2000 or 1999.
Note C - Loans and Allowance for Loan Losses
Credit risk represents the maximum accounting loss that would be recognized
at the reporting date if counterparties failed completely to perform as
contracted and any collateral or security proved to be of no value.
Concentrations of credit risk or types of collateral arising from financial
instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The
Corporation does not have a significant concentration to any individual
customer or counterparty. The major concentrations of credit risk for the
Corporation arise by collateral type in relation to loans and credit
commitments. The only significant concentration that exists is in loans
secured by real estate and agricultural related loans. Although the
Corporation has a loan portfolio diversified by type of 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:
2000 1999
---------- ----------
Construction and land development $3,323,311 $3,810,702
Commercial and industrial 20,836,273 23,732,371
Agricultural 6,895,684 8,760,561
Real estate loans secured by:
Farmland 22,539,107 20,014,610
Residential property 45,335,815 43,226,946
Nonresidential, nonfarm 44,367,816 36,157,861
Loans to individuals secured by:
Automobiles 16,645,542 18,805,969
Retail, consumer and personal expenditures 15,673,631 15,412,501
Other loans 7,209,543 6,036,576
182,826,722 175,958,097
---------- ----------
Unearned income (947,428) (1,223,883)
---------- ----------
TOTAL $181,879,294 $174,734,214
=========== ===========
The following is a summary of loan maturities carrying fixed and variable
interest rates as of December 31, 2000:
Within Over
One Year One Year Total
------------ ------------ ------------
Fixed rate loans $72,852,796 $87,223,087 $160,075,883
Variable rate loans 19,950,213 2,800,626 22,750,839
------------ ------------ ------------
TOTAL $92,803,009 $90,023,713 $182,826,722
============ ============ ============
At December 31, 2000, 1999 and 1998, impaired, nonaccrual and restructured
loans totaled $1,022,284, $3,262,208 and $3,173,107, respectively. The
amount of interest income actually recognized on these loans during 2000,
1999 and 1998, was $13,292, $19,760 and $126,213, respectively. The
additional amount of interest income that would have been recorded during
2000, 1999 and 1998, if the above amounts had been current in accordance
with their original terms was $64,212, $265,505 and $177,994, respectively.
As of December 31, 2000, 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 $538,822 $155,656
No valuation allowance required 483,462 -
---------- ----------
Total Impaired Loans $1,022,284 $155,656
========== ==========
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 2000, 1999
and 1998 were $971,553, $3,413,900 and $1,963,830, respectively. At December
31, 2000, 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 $ 215,646, $35,726,
and $252,637 at December 31, 2000, 1999 and 1998, 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 2000 and 1999:
2000 1999
---------- ----------
Balance at beginning of year $3,836,971 $4,975,157
Additions 2,326,492 2,603,396
Repayments (2,487,784) (2,652,135)
No longer related (315,613) (1,089,447)
---------- ----------
Balance at end of year $3,360,066 $3,836,971
========== ==========
Transactions in the allowance for loan losses were as follows:
2000 1999 1998
---------- ---------- ----------
Balance at beginning of year $2,838,481 $2,935,534 $2,604,080
---------- ---------- ----------
Less-Charge-offs:
Real estate -
Residential 9,542 3,926 45,133
Agricultural 47,377 - -
Other 5,094 - -
Commercial 83,508 123,892 148,425
Agricultural 120,857 377,360 702,594
Individuals 485,086 686,830 681,310
---------- ---------- ----------
751,464 1,192,008 1,577,462
---------- ---------- ----------
Add-Recoveries:
Real estate -
Residential 2,181 7,904 22,668
Commercial 29,555 45,691 45,298
Agricultural 8,797 41,866 9,866
Individuals 209,964 208,200 179,159
---------- ---------- ----------
250,497 303,661 256,991
---------- ---------- ----------
Net Charge-offs 500,967 888,347 1,320,471
---------- ---------- ----------
Add-Provision charged to operations 341,011 791,294 1,651,925
---------- ---------- ----------
Balance at end of year $2,678,525 $2,838,481 $2,935,534
========== ========== ==========
Ratio of net charge-offs to average
loans outstanding during the year 0.28% 0.51% 0.78%
========== ========== ==========
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
2000 Cost Amortization Amount
- ----- ---------- ------------ ----------
Land $1,155,863 $- $1,155,863
Buildings 9,383,874 3,787,380 5,596,494
Furniture and equipment 5,669,791 4,514,841 1,154,950
Leasehold improvements 408,300 339,928 68,372
---------- ------------ ----------
TOTAL $16,617,828 $8,642,149 $7,975,679
========== ============ ==========
1999
- -----
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
========== ============ ==========
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
---- ----------- ---- -----------
2001 $20,422 2006 - 2010 $30,000
2002 6,000 2011 - 2014 20,500
2003 6,000
2004 6,000
2005 6,000
Rents charged to operations under operating lease agreements for the years
2000, 1999 and 1998 were $60,032, $51,222 and $51,351, respectively.
Note E - Prepayments and Other Assets
The following is a summary of prepayments and other assets at December 31:
2000 1999
--------- ---------
Prepaid expenses $93,445 $129,854
Federal Home Loan Bank stock, at cost 1,018,000 946,100
Federal Reserve Bank stock, at cost 112,500 112,500
Investment in single premium whole
life insurance contract 614,121 590,181
Deferred income tax benefits 279,450 1,150,970
Other 5,736 101,330
--------- ---------
TOTAL $2,123,252 $3,030,935
========= =========
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F - Deposits
The following is a summary of deposits at December 31:
2000 1999
---------- ----------
Noninterest bearing:
Demand $40,580,118 $36,117,830
Interest bearing:
Demand 19,897,506 21,054,212
Savings 28,130,437 29,735,600
Other time 104,848,283 96,376,526
Certificates of deposit $100,000 and over 67,625,292 55,326,101
---------- ----------
TOTAL $261,081,636 $238,610,269
=========== ============
The aggregate maturities of time deposits at December 31, 2000, are summarized
as follows:
Year
----
2001 $148,764,089
2002 21,550,055
2003 1,473,312
2004 686,119
------------
$172,473,575
============
Note G - Other Borrowed Funds
The following is a summary of other borrowed funds at December 31:
Advances payable to Federal Home Loan Bank: 2000 1999
-------- --------
Dated 11-17-93, matures 12-01-08,
payable $1,682 per month including
interest at 5.95% $128,253 $140,415
Dated 6-22-94, matures 7-01-04, payable
$11,077 per month including interest
at 5.95% 428,005 532,078
Dated 10-16-95, matures 11-01-05,
payable $2,750 per month including
interest at 6.70% 137,891 160,808
Dated 2-2-96, matures 3-01-16,
payable $2,237 per month including
interest at 6.50% 259,278 268,922
Dated 2-12-96, matures 3-01-11,
payable $3,087 per month including
interest at 6.25% 279,826 298,732
Dated 4-16-97, matures 5-1-2012,
payable $4,607 per month including
interest at 7.40% 425,252 448,135
---------- ----------
TOTAL $1,658,505 $1,849,090
========== ==========
The advances are secured by a pledge of Federal Home Loan Bank stock with a
par value of $1,018,000 and a blanket pledge of $2,238,982 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)
Advances payable are scheduled to mature December 31:
2001 $202,890
2002 215,995
2003 229,952
2004 188,879
2005 117,868
Thereafter 702,921
----------
$1,658,505
==========
At December 31, 2000, First National Bank of Pulaski had an unsecured line
of credit from a correspondent bank for federal fund purchases and daylight
overdrafts totaling $5,000,000. No advances had been made against this
line at December 31, 2000.
Note H - Common Stock and Related Matters
In 1999 and 2000 the Board of Directors authorized the repurchase and
retirement of up to $4,061,850 of its outstanding common stock. The
following comprises repurchases and retirements of common stock for the
years ended December 31:
2000 1999
--------- ---------
Shares 65,838 8,694
Cost $3,487,493 $391,230
Note I - Income Taxes
The components of income taxes for the three years ended December 31 are as
follows:
2000 1999 1998
---------- ---------- ----------
Federal
Current $1,572,795 $1,367,614 $1,644,651
Deferred tax (benefit) 31,976 54,480 (87,315)
---------- ---------- ----------
1,604,771 1,422,094 1,557,336
State 321,784 298,029 351,879
---------- ---------- ----------
Provision for Income Taxes $1,926,555 $1,720,123 $1,909,215
========== ========== ==========
Income taxes varied from the amount computed at the statutory federal income
tax rate for the years ended December 31 as follows:
2000 1999 1998
---------- ---------- ----------
Federal taxes at statutory rate $2,039,615 $1,836,462 $1,942,130
Increase (decrease) resulting
from tax effect of:
Tax exempt interest on
obligations of states and
political subdivisions (298,680) (248,422) (228,102)
State income taxes, net of
federal income tax benefit 212,377 196,699 232,224
Dividend received deduction (15,209) (29,682) (13,190)
Others, net (11,548) (34,934) (23,847)
---------- ---------- -----------
Provision for Income Taxes $1,926,555 $1,720,123 $1,909,215
========== ========== ==========
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:
2000 1999
-------- --------
Deferred tax assets:
Allowance for loan losses $703,245 $768,264
Claim settlement 79,721 -
Other real estate 2,729 2,762
-------- --------
Gross Deferred Tax Assets 785,695 771,026
-------- --------
Deferred tax liabilities:
Investment securities 37,826 15,627
Statement 115 equity adjustment 368,335 (471,209)
Other securities 100,084 75,638
-------- --------
Gross Deferred Tax Liabilities 506,245 (379,944)
-------- --------
Net Deferred Tax Assets $279,450 $1,150,970
======== =========
Note J - Other Operating Expenses
The following table summarizes the components of other operating expenses
for the years ended December 31:
2000 1999 1998
--------- --------- ---------
Directors' fees $197,465 $239,303 $228,870
Stationery and supplies 231,109 204,851 182,799
Insurance 96,387 69,256 72,017
Collection and professional fees 155,183 684,512 260,796
Postage 132,752 132,190 133,017
Telephone 132,448 131,690 126,946
Other 1,124,423 1,006,149 723,335
--------- --------- ---------
$2,069,767 $2,467,951 $1,727,780
========= ========= =========
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 2000 was $3,603,266. Contributions for the current year were
calculated using the base salary amount of $3,107,485. 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
$466,123, $414,756 and $451,099 in 2000, 1999 and 1998, 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 2000 1999
------------ ------------
Cash $584,856 $2,757,509
Loans to subsidiary 1,571,555 919,770
Investment in subsidiaries, at equity 34,797,220 32,914,702
Other assets 29,915 80,015
------------ ------------
TOTAL ASSETS $36,983,546 $36,671,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accrued taxes $24,368 $-
------------ ------------
Total Liabilities 24,368 -
Stockholder's Equity 36,959,178 36,671,996
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,983,546 $36,671,996
============ ============
STATEMENTS OF INCOME
Years Ended December 31,
2000 1999 1998
---------- ---------- ----------
INCOME
Dividends from subsidiaries $3,743,542 $2,607,706 $2,498,423
Other dividends and interest 177,925 188,277 90,211
Gain on sale of other assets 31,900 - -
---------- ---------- ----------
3,953,367 2,795,983 2,588,634
---------- ---------- ----------
EXPENSES
Education 13,123 31,121 15,438
Directors' fees 64,100 103,400 69,700
Stockholder's meeting 14,382 17,470 15,902
Other 23,361 28,150 20,819
---------- ---------- ----------
114,966 180,141 121,859
---------- ---------- ----------
Income before applicable income
taxes and equity in undistributed
earnings of subsidiary 3,838,401 2,615,842 2,466,775
Applicable income taxes (18,902) 26,914 23,950
---------- ---------- ----------
Income before equity in
undistributed earnings of subsidiary 3,819,499 2,642,756 2,490,725
Equity in undistributed earnings of
Subsidiary 252,814 1,038,481 1,312,207
---------- ---------- ----------
NET INCOME $4,072,313 $3,681,237 $3,802,932
========== ========== ==========
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,
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,072,313 $3,681,237 $3,802,932
Adjustments to reconcile net income
to net cash provided by
operating activities-
Equity in undistributed earnings
of subsidiary (252,814) (1,038,480) (1,312,207)
Increase in other assets - (1,259) (12,105)
Increase in other liabilities 24,368 - -
(Gain) Loss on sale of other assets (31,900) 2,500 -
---------- ---------- ----------
Cash Provided by Operating Activities 3,811,967 2,643,998 2,478,620
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans (651,785) (181,210) (588,560)
Proceeds from sale of other assets 82,000 28,750 -
Investment in subsidiary - (50,000) (50,000)
---------- ---------- ----------
Cash Used by Investing Activities (569,785) (202,460) (638,560)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,556,042) (2,607,706) (2,498,423)
Proceeds from issuance of common stock 629,700 635,292 714,351
Common stock repurchased (3,488,493) (391,230) -
---------- ---------- ----------
Cash Used by Financing Activities (5,414,835) (2,363,644) (1,784,072)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH, net (2,172,653) 77,894 55,988
CASH, beginning of year 2,757,509 2,679,615 2,623,627
---------- ---------- ----------
CASH, end of year $584,856 $2,757,509 $2,679,615
========== ========== ==========
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 $2,672,000 and $2,788,000 for the years ended
December 31, 2000 and 1999, 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, 2000, to the Parent Company
was $2,698,055.
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, 2000.
As of March 31, 2000, 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.
To Be
Well Capitalized
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ------ ------ ------
(In thousands)
As of December 31, 2000
Total Capital (to risk weighted assets)
Consolidated $38,923 17.67% $17,627 > 8.00% $22,034 > 10.00%
First National Bank 36,628 16.73 17,513 > 8.00 21,891 > 10.00
Tier I Capital (to risk weighted assets)
Consolidated 36,244 16.45 8,814 > 4.00 13,220 > 6.00
First National Bank 34,037 15.55 8,756 > 4.00 13,135 > 6.00
Tier I Capital (to average assets)
Consolidated 36,244 11.94 9,104 > 3.00 15,178 > 5.00
First National Bank 34,037 11.27 9,057 > 3.00 15,096 > 5.00
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
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 pro forma disclosures required under SFAS No. 123 by corporations which
follow APB Opinion 25 are indicated below:
2000 1999 1998
As Reported Proforma As Reported Proforma As Reported Proforma
----------- ----------- ----------- ----------- ----------- ----------
Net income $4,072,313 $3,934,688 $3,681,237 $3,659,637 $3,802,932 $3,778,332
Basic earnings
per share $2.63 $2.54 $2.33 $2.32 $2.44 $2.42
Diluted earnings
per share $2.61 $2.52 $2.32 $2.31 $2.43 $2.41
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
2000, 1999, and 1998, respectively: dividend yield of 5.0 percent for all
years; expected volatility of 11.0, 7.5 and 7.9 percent; risk-free interest
rates of 6.0 percent in all years; and expected lives of 4.4 years in all
years.
Shares available for grants of options or rights to purchase at December 31,
2000 include 76,410 shares under the 1994 outside directors stock option plan,
74,615 shares under the 1994 employee purchase plan and 75,000 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 25,000 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 2000, 1999 and 1998:
Stock Option Plans Employee Purchase Plan
------------------- ----------------------
Shares Shares Shares
Available Under Available Shares
for Option Option for Purchase Purchased
---------- -------- ----------- ---------
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 -
Granted (17,500) 17,500 (11,740) 11,740
Exercised - (5,535) - (11,740)
Previous expired, now
Reavailable 1,000 (1,000) - -
---------- -------- ----------- ---------
Balance December 31, 2000 151,410 47,864 74,615 -
========== ======== =========== =========
Exercisable at December 31, 2000 27,364
========
The weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 2000, 1999 and 1998 is $13.91, $2.27 and
$3.33, respectively.
Note O - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
---------- ---------- ----------
Numerator for basic and diluted
Earnings per share - income
available to common shareholders $4,072,313 $3,681,237 $3,802,932
========== ========== ==========
Denominator for basic earnings
per share-weighted-average basis 1,551,478 1,578,305 1,560,113
Effect of dilutive stock options 6,923 6,513 6,365
---------- ---------- ----------
Denominator for diluted
earnings per share-adjusted
weighted-average shares 1,558,401 1,584,818 1,566,478
========== ========== ==========
Basic earnings per share $2.63 $2.33 $2.44
========== ========== ==========
Diluted earnings per share $2.61 $2.32 $2.43
========== ========== ==========
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.
Commitments to extend credit and standby letters of credit: The value of
the unrecognized financial instruments is based on the related fee income
associated with the commitments, which is not material to the Corporation's
financial statements at December 31, 2000 and 1999.
The estimated fair values of the Corporation's financial instruments on
December 31 were (dollars in thousands):
2000 1999
---------------------------- ----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Financial assets:
Cash and short-term investments $14,242 $14,242 $18,843 $18,843
Securities 95,625 95,625 74,957 74,409
Loans 181,879 181,317 174,734 175,702
Less: allowance for loan losses (2,679) - (2,838) -
Financial liabilities:
Deposits 261,082 262,174 238,610 238,095
Other borrowed funds 1,659 1,787 1,849 2,068
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
--------------------------
2000 1999
------ ------
Commitments to extend credit $17,518,080 $14,189,130
Standby letters of credit 359,178 538,795
Mortgage loans sold with repurchase
requirements outstanding 1,570,773 1,550,526
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.
During the current year, all outstanding lawsuits and complaints previously
filed by the Corporation against relatives and certain entities of the
relatives of the former CEO of the Corporation and all counter-complaints
filed by the defendants against the Corporation were settled. The net
effect of the settlements was a $260,434 decrease in net earnings in the
current year.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note R - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended
December 31 are as follows:
Three Months Ended
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- ------- -------
(in thousands, except per share amounts)
2000:
Interest income $5,705 $5,858 $6,119 $6,009
Interest expense 2,418 2,644 2,935 3,120
----- ----- ----- -----
Net interest income 3,287 3,214 3,184 2,889
Provision for loan losses 159 21 58 103
Other income 609 710 725 884
Other expense 2,163 2,535 2,152 2,312
----- ----- ----- -----
Income before income tax 1,574 1,368 1,699 1,358
Income taxes 546 400 524 457
----- ----- ----- -----
Net income 1,028 968 1,175 901
===== ===== ===== =====
Earnings per common share $0.65 $0.63 $0.76 $0.59
Diluted earnings per common share 0.65 0.62 0.76 0.58
Cash dividends declared per common share 0.41 0.41 0.41 0.42
1999:
Interest income $5,449 $5,634 $5,662 $5,324
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
===== ===== ===== =====
Earnings per common share $0.52 $0.66 $0.61 $0.54
Diluted earnings per common share 0.52 0.66 0.61 0.53
Cash dividends declared per common share 0.41 0.41 0.41 0.42
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, 2000 and 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000.
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, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
generally accepted accounting principles.
[S]Putman and Hancock
Fayetteville, Tennessee
February 21, 2001
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
Position Has Held Position
with Office with the Has Held This
Name Bank Since Corporation Position Since
- ------------------------------------------------------------------------
Harold Bass Vice President 04/29/99 Secretary, 04/29/99
Treasurer
Mark Hayes Executive 04/29/99 None
Vice-President
Edwin Moore Senior 04/29/99 None
Vice-President
None of these persons are related to any of the Directors of either the
Board of Directors of the Bank or the Corporation.
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 RELATIONSHIPS 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: 3-14-01 /s/ James T. Cox
-------- ----------------------------------
James T. Cox, President & Chief
Executive Officer
Date: 3-14-01 /s/ Harold Bass
-------- ----------------------------------
Harold Bass, Secretary/Treasurer
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 Beveill
- --------------------------- ---------------------------
David E. Bagley, Director Johnny Bevill, Director
/s/James K. Blackburn /s/Wade Boggs
- --------------------------- ---------------------------
James K. Blackburn IV, Director Wade Boggs, Director
/s/James H. Butler /s/Joyce F. Chaffin
- --------------------------- ---------------------------
James H. Butler, Director Joyce F. Chaffin, Director
/s/James T. Cox /s/Parmenas Cox
- --------------------------- ---------------------------
James T. Cox, Director Parmenas Cox, Director
/s/Greg G, Dugger /s/Charles D. Haney
- --------------------------- ---------------------------
Greg G. Dugger DDS, Director Charles D. Haney MD, Director
/s/Morris Ed Harwell /s/James Rand Hayes
- --------------------------- ---------------------------
Morris Ed Harwell, Director James Rand Hayes, Director
/s/William A. McNairy /s/W. Harwell Murrey
- --------------------------- ---------------------------
William A. McNairy, Director W. Harwell Murrey MD, Director
/s/Bill Yancey
- -----------------------------
Bill Yancey, Director
INDEX TO EXHIBITS
EXHIBIT
NUMBER
21 Subsidiaries
23 Consent of Independent Auditors
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, 2000,
of our reports (and to all references to our firm) included in or made
part of this Report.
[S] Putman and Hancock
February 21, 2001