ITEM 1: BUSINESS
First Pulaski National Corporation, (the "Corporation") is a financial corporation engaged in general commercial and retail banking business through its subsidiary bank First National Bank of Pulaski ("First National" or the "Bank"). On June 12, 2001, the Corporation signed a definitive agreement to acquire all of the outstanding common stock of Belfast Holding Company, a privately owned, Tennessee bank holding company with one bank subsidiary, the Bank of Belfast, with offices in Belfast and Lewisburg, Marshall County, Tennessee. On October 17, 2001, the Corporation consummated its acquisition of Belfast Holding Company pursuant to which Belfast Holding Company merged with and into the Corporation with the Corporation surviving the merger.
The Corporation merged the Bank of Belfast with and into First National Bank of Pulaski on April 12, 2002.
During the third quarter of 2001, First National's wholly-owned subsidiary, First Pulaski Reinsurance Company ("FPRC") received it insurance license. FPRC is engaged in the business of reinsuring credit insurance written by the Corporation's subsidiaries.
On November 1, 2002, the Bank formed FNBP Holdings, Inc ("FNBP Holdings"), a corporation organized and existing under the laws of the state of Nevada. FNBP Investments, Inc. ("FNBP Investments") was also formed on November 1, 2002 and was organized and existed under the laws of the state of Nevada. The principal activity of FNBP Investments was to manage the investment securities portfolio. Both FNBP Holdings and FNBP Investments ceased operations and were dissolved during the fourth quarter of 2003. FNBP Holdings'only major activity was the ownership of stock in FNBP Investments.
The Corporation was organized under the laws of the state of Tennessee in 1981 and its only significant asset is the common stock of First National, headquartered in Pulaski, Tennessee.
The Corporation, through its subsidiaries, offers a diversified range of financial services to its customers. These include activities related to general banking business with complete services in the commercial, corporate and retail banking field.
The Bank offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit and loans for consumer, commercial and real estate purposes. The Bank does not have a concentration of deposits obtained from a single person or entity or a small group of persons or entities, the loss of which would have a material adverse effect on the business of the Bank.
The Corporation owns all of the common stock of the Bank. At December 31, 2004, the Corporation and its subsidiaries had combined total assets of $426,929,185.
At December 31, 2004, the Bank had long-term indebtedness of approximately $4.34 million in the form of advances payable to the Federal Home Loan Bank of Cincinnati. Note G to the Corporation's Consolidated Financial Statements, includes a detailed analysis of this debt. The Corporation derives its primary source of funds from deposits acquired through the Bank. First National is the largest financial institution in Giles County, Tennessee, measured by county deposits. It has established two branches in Lincoln County, Tennessee, where it is also the largest financial institution, measured by county deposits. The Bank is the fifth largest financial institution in Marshall County, Tennessee, measured by county deposits.
As of March 8, 2005, First National had 157 employees, 17 of whom were part-time. The Corporation has no employees other than those employed by First National and its subsidiaries.
COMPETITION
First National operates principally in three market areas, Giles County, Tennessee, Lincoln County, Tennessee and Marshall County, Tennessee. The following discussion of market areas contains the most recent information available from reports filed with the FDIC and the Office of Thrift Supervision.
Giles County. First National competes in Giles County with 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, 2002 to June 30, 2004, total deposits for all commercial banks in the Giles County market have increased 4.4% from $503.4 million to $525.4 million. The Bank has five (5) offices in Giles County and approximately 62% of its deposits are located there. As of June 30, 2004, First National had the largest market share of banks in Giles County with a 43.6% share of the bank deposits, over twice the market share of its nearest competitor.
Giles County is located in southern Middle Tennessee, approximately 70 miles from Nashville, Tennessee. Pulaski is the largest city in Giles County. Giles County had an estimated population of 29,390 in 2003 and a median household income of $34,581 in 2002, the latest available data.
Lincoln County. First National competes in Lincoln County with six (6) commercial banking organizations. Five (5) of the commercial banking competitors are owned by regional or national multi-bank holding companies. The other commercial banking competitor is a small community banking organization. From June 30, 2002 to June 30, 2004, total deposits for all commercial banks in Lincoln County increased 6.8% from $364.9 million to $389.6 million. The Bank has two (2) branch offices located in this market, and approximately 29% of its deposits are located there. As of June 30, 2004, First National had a 27.3% share of the Lincoln County bank deposit market, the largest market share in the county.
Lincoln County is also located in southern Middle Tennessee, approximately 80 miles from Nashville, Tennessee. The largest city in Lincoln County is Fayetteville. Lincoln County had an estimated population of 31,773 in 2003, and a median household income of $34,704 in 2002, the latest available data.
Marshall County. First National competes in Marshall County with five (5) commercial banking organizations. Four (4) of the five (5) commercial banking competitors are small community banking organizations. The other commercial banking competitor is owned by a national bank holding company. From June 30, 2002 to June 30, 2004, total deposits for all commercial banks in the Marshall County market increased 8.3% from $355.1 million to $384.7 million. The bank has two (2) offices in Marshall County and approximately 9% of its deposits are located there. As of June 30, 2004, First National Bank of Pulaski had the fifth largest market share of banks in Marshall County with a 9.0% share of the bank deposits.
Marshall County is located in southern Middle Tennessee, approximately 50 miles from Nashville, Tennessee. Lewisburg is the largest city in Marshall County. Marshall County had an estimated population of 27,537 in 2003 and a median household income of $39,509 in 2002, the latest available data.
The Bank has substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits are the range and quality of financial services offered, the ability to offer attractive rates and availability of convenient office locations. Direct competition for deposits comes from other commercial banks (as well as from credit unions and saving institutions in neighboring counties). Additional significant competition for savings deposits may come from other investment alternatives, such as money market mutual funds and corporate and government securities. The primary factors in competing for loans are the range and quality of the lending services offered, interest rates and loan origination fees. Competition for the origination of loans normally comes from other savings and financial institutions, commercial banks, credit unions, insurance companies and other financial service companies. The Corporation believes that its strategy in 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.
The Corporation does not maintain an internet website. As such, the Corporation does not make available on a website free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports. The Corporation will, however, provide paper copies of such filings free of charge upon request. To request any of these documents please write to First Pulaski National Corporation, Attention: Corporate Secretary, 206 South First Street, Pulaski, Tennessee 38478.
SUPERVISION AND REGULATION
Both the Corporation and First National are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of the Corporation's and First National's operations. These laws and regulations are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework which apply.
First Pulaski National Corporation
The Corporation is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, it is subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.
Acquisition of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve's prior approval before:
Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank's voting shares;
Acquiring all or substantially all of the assets of any bank; or
Merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserve's consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Corporation or any other bank holding company located in Tennessee may purchase a bank located outside of Tennessee. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Tennessee may purchase a bank located inside Tennessee. In each case, however, state law restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. For example, Tennessee law currently prohibits a bank holding company from acquiring control of a Tennessee-based financial institution until the target financial institution has been in operation for three years
.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or
No other person owns a greater percentage of that class of voting securities immediately after the transaction.
The Corporation's common stock is registered under the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.
Permitted Activities. Under the Bank Holding Company Act, a bank holding company, which has not qualified or elected to become a financial holding company, is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include: (i) factoring accounts receivable; (ii) acquiring or servicing loans; (iii) leasing personal property; (iv) conducting discount securities brokerage activities; (v) performing selected data processing services; (vi) acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and (vii) performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.
Support of Subsidiary Institutions. Under Federal Reserve policy, the Corporation is expected to act as a source of financial strength for First National, and to commit resources to support First National. This support may be required at times when, without this Federal Reserve policy, the Corporation might not be inclined to provide it. In the unlikely event of the Corporation's bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of First National would be assumed by the bankruptcy trustee and entitled to a priority of payment.
First National
First National is a national bank chartered under the federal National Bank Act. As a result, it is subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency (the "OCC"). The OCC regularly examines First National's operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, First National's deposits are insured by the FDIC to the maximum extent provided by law. First National also is subject to numerous state and federal statutes and regulations that will affect its business, activities and operations.
Branching. While the OCC has authority to approve branch applications, national banks are required by the National Bank Act to adhere to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee. First National and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states' laws. Tennessee law, with limited exceptions, currently permits branching across state lines either through interstate merger or branch acquisition. Tennessee, however, only permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through branch acquisition if the state of the out-of-state bank permits Tennessee based banks to acquire branches there.
FDIC Insurance. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described below, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution's primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Capital Adequacy
The Corporation and First National are required to comply with the capital adequacy standards established by the Federal Reserve, in the Corporation's case, and the OCC, in the case of First National. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. First National is also subject to risk-based and leverage capital requirements adopted by the OCC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. For a more detailed discussion of capital requirements and the Corporation's and the Bank's capital levels see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources, Capital and Dividends" and Note L to the Notes to Consolidated Financial Statements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital
restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2004, First National was considered well capitalized by its primary regulator.
Payment of Dividends
The Corporation is a legal entity separate and distinct from First National. The principal sources of the Corporation's cash flow, including cash flow to pay dividends to its shareholders, are dividends that First National pays to it as its sole shareholder. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Corporation as well as to the Corporation's payment of dividends to its shareholders.
The payment of dividends by the Corporation and the Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. If, in the opinion of the OCC, First National was engaged in or about to engage in an unsafe or unsound practice, the OCC could require, after notice and a hearing, that First National stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See "Prompt Corrective Action" above.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation's financial institutions. The Corporation cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Corporation's business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
The Corporation's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve's statutory power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The Corporation cannot predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 2:
ITEM 2: PROPERTIES
The Corporation and the Bank are headquartered at 206 South First Street, Pulaski, Tennessee, in Giles County. The banking facility housing the headquarters was completed in 1966 and has undergone several major renovation and expansion projects over the years. The most recent expansion at this facility was completed in early 1995. An expansion and renovation of the Bank's Industrial Park Road office, which is owned by the Bank and is on the western edge of Pulaski, was completed in early 1996. The Minor Hill Road office, in the southern part of Pulaski, operates in a facility that is owned by the bank and was completed in 1985. Other banking facilities operated by the Bank include owned offices at Ardmore in the southeastern corner of Giles County and in Fayetteville and Park City in adjacent Lincoln County, Tennessee. The Ardmore office, in existence since 1963, has also undergone several major expansions, with the most recent being completed in early 1993. In 2001, the Bank built a new facility that is owned by the Bank in Fayetteville. Construction of the Park City branch was completed in 1997. A facility on Flower Street near the main office in Pulaski, already owned by the Corporation and previously used for
storage, was renovated and completed in 1998 primarily for the purpose of housing the Bank's mortgage lending operations. The Belfast office, which is owned by the Bank, was acquired by the Bank during the merger with the Bank of Belfast in 2002 and was last renovated in 1980. The Bank also assumed a leased facility in Lewisburg, Tennessee during the Bank of Belfast merger. 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 2004 amounted to $28,140.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved, from time to time, in ordinary routine litigation incidental to the banking business. Neither the registrant nor its subsidiaries is currently involved in any material pending legal proceedings.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Common stock of First Pulaski National Corporation is not traded through an organized exchange but is traded between local individuals. As such, price quotations are not available on NASDAQ or any other quotation service. The following trading prices for 2004 and 2003 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.
There are approximately 1,492 shareholders of record of the Corporation's common stock as of February 28, 2005.
The Corporation reviews its dividend policy at least annually. The amount of the dividend, while in the Corporation's sole discretion, depends in part upon the performance of First National. The Corporation's ability to pay dividends is restricted by federal laws and regulations applicable to bank holding companies, and by Tennessee laws relating to the payment of dividends by Tennessee corporations. Because substantially all operations are conducted through its subsidiaries, the Corporation's ability to pay dividends also depends on the ability of the subsidiaries to pay dividends to the Corporation. The ability of First National to pay cash dividends to the Corporation is restricted by applicable regulations of the OCC and the FDIC. For a more detailed discussion of these limitations see "Supervision and Regulation - Payment of Dividends."
The table below sets forth the number of shares repurchased by the registrant during the fourth quarter of 2004 and the average prices at which these shares were repurchased.
Total Number
of Shares
Maximum Number
Purchased as
of Shares that May
Part of Publicly
Yet Be Purchased
Total Shares
Average Price
Announced Plans
Under the Plans
Purchased
Paid per Share
or Programs
Or Programs
October 1-31, 2004
13,351
$45.00
-
-
November 1-30, 2004
2,250
$49.00
-
-
December 1-31, 2004
1,696
$48.50
-
Total
17,297
$45.86
-
-
===========
===========
=============
==============
The above shares were not repurchased as part of a publicly announced plan or program, but rather were purchased by the registrant in isolated transactions with its shareholders.
On December 21, 2004, the Board of Directors of the Corporation approved a plan authorizing the management of the company, beginning on December 31, 2004, to repurchase up to $5,000,000 of the Corporation's common stock from shareholders desiring to liquidate their shares in either the open market or through privately negotiated transactions.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The table below contains selected financial data for the Corporation for the last five years. All weighted average outstanding share data is computed after giving retroactive effect of the merger of the Corporation and Belfast Holding Company in 2001. Note N to the Consolidated Financial Statements which follows shows figures for basic earnings per share and gives effect to dilutive stock options in determining diluted earnings per share. Total average equity and total average assets exclude unrealized gains or losses on investment securities.
The basic earnings per share data and the diluted earnings per share data in the above table are based on the following weighted average number of shares outstanding:
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Pulaski National Corporation is a one-bank holding company with its only direct subsidiary being First National in Pulaski, Tennessee. During October 2001, the Corporation acquired Belfast Holding Company located in Belfast, Tennessee. In April 2002, the Corporation merged the Bank of Belfast, its wholly owned subsidiary into First National. The Corporation closed its nonbank subsidiary, Heritage Financial of the Tennessee Valley, Inc., which was a consumer finance company in 2001. On November 1, 2002, the bank formed FNBP Holdings, Inc ("FNBP Holdings"), which was a corporation organized and existed under the laws of the state of Nevada. FNBP Holdings only major activity was the ownership of stock in FNBP Investments, Inc ("FNBP Investments"). FNBP Investments was also formed on November 1, 2002 and was organized and existed under the laws of the state of Nevada. The principal activity of FNBP Investments was to manage the investment securities portfolio. Both FNBP Holdings and FNBP Investments ceased operations and were dissolved during the fourth quarter of 2003.
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. Prior period amounts have been restated to reflect the acquisition of Belfast Holding Company.
FORWARD-LOOKING STATEMENTS
Certain of the statements in this discussion may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, (the "Exchange Act"), as amended. The words "expect," "anticipate," "intend," "should," "may," "could," "plan," "believe," "likely," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Corporation to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, 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, (v) risks inherent in originating loans, including prepayment risks, (vi) the fluctuations in collateral values, the rate of loan charge-offs and the level of the provision for losses on loans, (vii) changes in the legislative and regulatory environment and (viii) loss of key personnel. Many of such factors are beyond the Corporation's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Corporation cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Corporation. The Corporation disclaims any obligation to update or revise any forward-looking statements contained in this discussion, whether as a result of new information, future events or otherwise.
OVERVIEW
Management looks at several key performance indicators in evaluating the results of operations of the Corporation and the Bank. One key item is the volume and quality of loans. The Bank experienced strong loan demand in 2004, especially in the latter half of the year, leading to an increase in loans in excess of $27.5 million from December 31, 2003 to December 31, 2004. Nonaccrual loans decreased almost $1.9 million from the end of year 2003 to the end of 2004, indicating improving loan quality. However, other real estate owned remained at historically high levels although the balance decreased by over $1.1 million from year-end 2003 to year-end 2004. Other real estate owned includes a large piece of commercial real estate that was obtained through foreclosure in 2003. Management anticipates that other real estate owned will continue at higher than normal historic levels until this property is sold. Another key item is the growth of deposits, which grew over $10.8 million in 2004. Most of the growth in deposit was in interest-bearing balances. There was a move in deposits away from savings/money market balances in 2004 as interest rates began to increase and toward time deposits. Balances in savings/money market accounts decreased over $18.5 million while time deposit balances increased $28.3 million from year-end
2003 to year-end 2004. Management anticipates this trend continuing into 2005 as short-term interest rates are expected to continue rising and more customers likely will lock in the higher rates on time deposits. Net income increased by over $317,000 to $5.32 million in 2004 as compared to 2003, while the net interest margin fell to 4.44% in 2004 from 4.60% in 2003. Aggressive competition in deposit pricing was the primary contributor to the decrease in the net interest margin in 2004. Management anticipates that this aggressive competition will continue into 2005 and that the Corporation's net interest margin may continue to experience compression in the rising rate environment. Management monitors the Corporation's net interest margin closely and strives to maintain the Corporation's net interest margin at acceptable levels. Mortgage banking fees decreased over $313,000 in 2004 as compared to 2003 as mortgage refinancing activity peaked in 2003. Management anticipates that the mortgage banking fees in 2005 will remain near 2004 levels and will not return to 2003 levels in the foreseeable future. Also, the provision for loan losses decreased almost $856,000 in 2004 as compared to 2003 as the overall condition of the Bank's loan portfolio improved.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles conform to accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles to the determination of our allowance for loan losses, we have made judgements and estimates which have significantly impacted our financial position and results of operations.
The allowance for loan losses is maintained at a level that is considered to be adequate to reflect estimated credit losses for specifically identified loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. Our methodology of assessing the appropriateness of the allowance consists of several elements, which include the formula allowance, as well as specific allowances.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. For purposes of the quarterly review, the loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred in excess of the amount determined by the application of the above formula. Every substandard or worse loan
in excess of $25,000 and all loans criticized as "Special Mention" over $100,000 are reviewed quarterly by the Executive and Loan Committee of the Bank's Board of Directors to review the level of loan losses required to be specifically allocated.
For a more detailed description of other accounting policies the Corporation considers significant in the determination of its results of operations, statement of condition and cash flows, see Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 2004 was approximately $5.33 million or $3.22 per diluted share, compared with approximately $5.01 million or $3.03 per diluted share in 2003 and approximately $4.07 million or $2.47 per diluted share in 2002. Return on average assets was 1.25% in 2004, 1.25% in 2003 and 1.10% in 2002. The return on average equity was 11.7%, 11.7% and 9.9% for 2004, 2003 and 2002, respectively. Increased depreciation expenses in 2002 related to major data and computer systems upgrades by the Bank in 2001 negatively impacted earnings in 2002. Also, the downturn in the economy generally and the Bank's target market adversely affected a particular large credit, causing a significant increase in the provision for loan losses in 2002.
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 2004, net interest income increased by 0.7% to $16,628,168 from $16,512,255 in 2003, following an increase of 5.2% in 2003 from $15,702,064 in 2002. Total assets of the Corporation increased approximately $8.5 million from December 31, 2003 to December 31, 2004. Loans net of unearned income increased approximately $27.5 million from December 31, 2003 to December 31, 2004 with a substantial amount of this increase occurring in the second half of 2004.. Deposits increased approximately $10.8 million over the same period, resulting in an approximate $23.4 million decrease in investments as the Corporation funded its loan growth with maturing investment securities and by liquidating certain investment securities. Total assets of the Corporation increased approximately $36.8 million from December 31, 2002 to December 31, 2003. Deposits increased approximately $31.3 million, while loans decreased approximately $5.0 million from December 31, 2002 to December 31, 2003. Although loans decreased in 2003 from 2002 levels, the Corporation allocated the increase in deposits primarily to tax-exempt investment securities, which helped the Corporation to earn interest on such amounts, albeit at a rate lower than had the funds been used to fund higher earning loans, leading to the increase in net interest income in 2003 as compared to 2002.
Net interest income on a fully taxable equivalent basis increased $414,000 from 2003 to 2004. This increase resulted from a $1,150,000 increase due to increased volumes offset by a $736,000 decrease due to changes in interest rates. The increase in net interest income of $1,036,000 in 2003, on a taxable equivalent basis, as compared to 2002, resulted from an increase of $1,274,000 due to increased volumes, particularly in tax-exempt investment securities, offset by a decrease of $238,000 due to interest changes in interest rates.
Net interest income is a function of the average balances of interest-earning assets and interest-bearing liabilities and the yields earned and rates paid on those balances. Management strives to maintain an acceptable spread between the yields earned on interest-earning assets and rates paid on interest-bearing liabilities to maintain an adequate net interest margin.
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 2004, 2003 and 2002.
Note: The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.
Loans include nonaccrual loans for all years presented. Interest on loans includes loan fees. Loan fees included above amounted to $1,048,243 for 2004, $959,652 for 2003 and $1,160,456 for 2002.
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.
The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding from one year to the next. The change in interest due to rate has been determined by applying the change in rate from one year to the next to the average balances outstanding in the later year. The computation of the taxable equivalent adjustment has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.
NON-INTEREST INCOME
Non-interest income totaled $3,490,449 in 2004, a decrease of $678,753, or 16.3% from 2003. The decrease is primarily attributable to a $313,005 decrease in mortgage banking fees as well as a loss on the sale of other assets of $199,905 in 2004 as compared to a gain on the sale of other assets of $148,746 in 2003, resulting in a decrease in the gain on the sale of other assets of $348,651 in 2004 as compared to 2003. Almost all of the loss on the sale of other assets in 2004 was attributable to losses or write-downs on other real estate owned that was acquired through foreclosure. The decrease in mortgage banking fees in 2004 was primarily a result of fewer mortgage refinancings as mortgage interest rates halted their decline in 2004. Also, security gains decreased $39,259, or 17.2%, in 2004 as compared to 2003.
Non-interest income equaled $4,169,202 in 2003, an increase of $557,871, or 15.4% from 2002. The increase is attributable primarily to an increase of $297,464 in mortgage banking fees, a $200,694 gain on sale of other assets and an $52,183 increase in other service charges. The increase in mortgage banking fees was primarily related to increased mortgage refinancing activity in 2003 due to the historically low mortgage interest rate level that was present throughout much of 2003. However, these increases were partially offset by a $32,462 decrease in gains on the sale of investment securities.
NON-INTEREST EXPENSE
Non-interest expense in 2004 was $12,121,246, up $175,313, or 1.5% from 2003. This increase is primarily attributable to a $173,901, or 2.6% increase in salaries and employee benefits and a $69,309, or 12.9% increase in advertising and public relations expense in 2004 as compared to 2003. The increase in salaries and employee benefits was largely due to increased personnel expenses per employee and the increase in advertising and public relations expense was primarily due to a new advertising campaign the Bank began in 2004. These increases were offset by a decrease of $96,214, or 3.7%, in other operating expenses in 2004 as compared to 2003.
Non-interest expense in 2003 was $11,945,933, up $186,906, or 1.6 % from 2002. This increase is attributable primarily to a $352,361, or 5.5% increase in salaries and employee benefits. The increase in salaries and employee benefits was primarily due to increased personnel expenses per employee. The increase in personnel expenses was offset by a $207,315, or 19.2% decrease in furniture and fixtures expense. The large decrease in furniture and fixtures expense was mainly due to decreased depreciation expenses related to major data and computer upgrades in 2001.
LOAN LOSS PROVISION
The provision for loan losses is the charge to earnings which management feels is necessary to maintain the allowance for loan losses at a level considered adequate to absorb potential future losses on existing loans and to provide for uncertainties in the economy. The adequacy of the allowance for loan losses is determined by a continuous evaluation of the loan portfolio. The Bank utilizes an independent loan review function which considers loans on their own merits based on factors which include past loan experience, collateral value, off-balance sheet credit risk, and possible effects of prevailing economic conditions. Findings are presented regularly to management, where other factors such as actual loan loss experience relative to the size and characteristics of the loan portfolio, deterioration in concentrations of credit, trends in portfolio volumes, delinquencies and non-performing loans and, when applicable, reports of the regulatory agencies are considered. Management performs calculations for the minimum allowance level needed and a final evaluation is made. Note A to the Notes to Consolidated Financial Statements provides a detailed description of the Corporation's loan loss methodology.
The provision for loan losses was $664,320 in 2004 compared to $1,520,318 in 2003 and $1,614,345 in 2002. The decrease in provision for loan losses in 2004 was primarily a result of an improvement in the overall condition of the Bank's loan portfolio. Although general economic conditions in the Bank's local markets still appear weak, they seemed to have stabilized somewhat in 2004. The higher level of the provision for loan losses in 2003 was primarily due to an increase in non-performing loans as a result of the general economic downturn in the local markets in which the Bank competes. The Bank had experienced an increase in "substandard" and nonperforming loans, primarily in commercial real estate loans, throughout 2003 and 2002. In 2002, a large customer of the Bank experienced financial difficulty, resulting in additional provisions for loan losses in the fourth quarter of 2002. This additional provision in the fourth quarter of 2002 resulted primarily from a construction and land development loan. Note C to the Notes to Consolidated Financial Statements provides a detailed analysis of components of Loans and Allowance for Loan Losses and is incorporated herein by reference.
INCOME TAXES
Income tax expense includes federal and state taxes on earnings. Income taxes were $2,005,482, $2,205,371, and $1,873,758 in 2004, 2003 and 2002, respectively. The effective tax rates were 27.3%, 30.6%, and 31.5% respectively. The decrease in the effective tax rates in 2004 and 2003 were primarily due to increased holdings in nontaxable securities in 2004 and 2003. The average non-taxable investment securities held by the Corporation in 2004 was $69.0 million as compared to $41.4 million in 2003 and $24.6 million in 2002. Note H to the Consolidated Financial Statements provides a detailed analysis of the components of income tax expense.
The Corporation had net deferred tax assets of $714,316 at December 31, 2004, as compared to a net deferred tax liability of $221,314 at December 31, 2003. The deferred tax asset resulting from the allowance for loan losses was the primary deferred tax asset in both periods. The deferred tax asset was offset in both periods primarily by the FASB Statement 115 equity adjustment. Note H to the Consolidated Financial Statements provides a detailed analysis of the components of income tax expense.
FINANCIAL CONDITION
LOANS
Management's focus is to promote loan growth in the Corporation's target market, emphasizing the expansion of business in the Corporation's trade area. Efforts are taken to maintain a fairly diversified portfolio without significant concentration of risk. Overall loans increased $27,520,153 from December 31, 2003 to December 31, 2004. The increase in loans was primarily due to a $14.6 million increase in commercial real estate loans as well as a $14.3 million increase in residential real estate loans at year-end 2004 as compared to year-end 2003. However, these increases were offset by a decrease of $2.0 million in commercial and industrial loans as of December 31, 2004 as compared to December 31, 2003.
Over the last three years, average total loans and leases increased by $6.9 million or 3.0% in 2004, by $10.0 million or 4.5% in 2003, by $23.6 million or 11.9% in 2002 in each case over the prior year. The growth in deposits was the primary funding source for this continuing increase in loan demand; however, in the latter half of 2004, investment maturities and sales were also a significant funding source for the increase in loans.
LOAN QUALITY
Credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk or types of collateral arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The registrant does not have a significant concentration to any individual customer or counterparty. The major concentrations of credit risk for the registrant arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by real estate and agricultural related loans. Among the loans secured by real estate, the registrant has a concentration of loans to lessors of residential buildings and dwellings, loans to lessors of non-residential buildings, and loans secured by hotel and motel properties. Although the registrant has a loan portfolio diversified by type of risk, the ability of its customers to honor their contracts is to some extent dependent upon their regional economic condition. A geographic concentration arises because the registrant makes commercial, real estate and consumer loans primarily to customers in Giles, Marshall and Lincoln Counties, Tennessee. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses at a level management believes is sufficient to cover inherent losses in the loan portfolio.
The amounts of loans and leases outstanding, including unearned income, at the indicated dates are shown in the following table according to type of loan.
(1) Includes student loans, non-taxable loans, overdrafts, and all other loans not included in any of the designated categories.
The following table presents the maturity distribution of selected loan categories at December 31, 2004 (excluding residential mortgage, home equity, installment-individual loans, and lease financing).
The table below summarizes the percentages of the loans selected for use in the preceding table falling into each of the indicated maturity ranges, and the sensitivity of such loans to interest rate changes for those with maturities greater than one year, all as of December 31, 2004.
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.
Net loans charged-off decreased to $623,506 in 2004 from $1,881,267 in 2003 after an increase from $892,306 in 2002. The stabilization of local economic conditions contributed to the decrease in net charge-offs in 2004 and following a slowing economy in the Corporation's market area in 2003. Net loan losses in 2004 consisted of net losses on real estate loans of $384,537, net losses on loans to individuals of $185,367 net losses on commercial and industrial loans of $67,287 and net recoveries on agricultural loans of $13,685. This compares to net loan losses for 2003 that consisted of net losses on real estate loans of $974,446, net losses on loans to individuals of $264,639, net losses on commercial and industrial loans of $370,489 and net losses on agricultural loans of $271,693. The allowance for loan and lease losses at the end of 2004 was $3.49 million, or 1.36% of outstanding loans and leases, as compared to $3.45 million or 1.51% of outstanding loans and leases and $3.81 million or 1.63% of outstanding loans and leases in 2003 and 2002, respectively
. Net loans charged-off amounted to 0.26% of average total loans outstanding in 2004, 0.81% in 2003 and 0.40% in 2002. Reference is made to Note C to the Consolidated Financial Statements for further detail regarding charge-offs and recoveries by category.
The allowance for loan losses was 6.83 times the balance of nonaccrual loans at the end of 2004, 1.43 in 2003 and 0.53 in 2002. Nonaccrual loans decreased $1.90 million to $511,098 from December 31, 2003 to December 31, 2004. The decrease in nonaccrual loans during 2004 resulted primarily from a decrease in commercial real estate loans that were classified as nonaccrual. This change from nonaccrual status resulted from pay-offs of some loans and the foreclosure on the real estate securing others that led to the loan balance being transferred to other real estate owned. Nonaccrual loans decreased $4.83 million from December 31, 2002 to December 31, 2003. The large nonaccrual loan balance in 2002 was principally related to two credit lines of the Bank. The largest line placed on non-accrual status was a large United States Department of Agriculture ("USDA") guaranteed loan that was placed on nonaccrual status in the second quarter of 2002. Eighty percent of the principal and accrued interest of the loan was guaranteed by the United States Department of Agriculture. During the second quarter of 2003, the bank foreclosed on the underlying collateral and received a payment from the USDA for eighty percent of the estimated shortfall between the remaining principal balance and the estimated net realizable value of the underlying collateral. This foreclosure led to the large increase in other real estate owned at December 31, 2003 as compared to December 31, 2002. Management had estimated the credit exposure on the remaining loan balance at June 30, 2003 and each subsequent quarter and included the exposure in its allowance for loan losses calculation quarterly. The remaining loan balance was charged off in the first quarter of 2004. The second large line placed on nonaccrual status consists primarily of commercial real estate and land development loans. This line was placed on nonaccrual status during the fourth quarter of 2002 and resulted in much of the charged-off real estate loans in 2003. The provision for loan losses exceeded the net loan charge-offs by $40,814 in 2004. Net charged-off loans exceeded the provision for loan losses by $360,949 in 2003. The provision for loan losses exceeded net loan charge-offs by $722,039 in 2002. Management believes that the allowance for possible loan losses as of December 31, 2004 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.
NON-PERFORMING ASSETS
Non-performing assets include nonaccrual loans, loans restructured because of a debtor's financial difficulties, other real estate owned, and loans past due ninety days or more as to interest or principal payment.
Nonaccrual loans are those loans for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest, unless such loans are well secured and in the process of collection.
From December 31, 2003 to December 31, 2004, nonaccruing loans decreased by 78.8% to $0.5 million following a decrease of 66.7% at year-end 2003 as compared to year-end 2002. The decreases in 2004 and 2003 were primarily a result of the items discussed previously under the section titled "Summary of Loan Loss Experience." There were approximately $59,000 in restructured loans that were in compliance with the modified terms at year-end 2004. There were approximately $62,000 in loans restructured and in compliance with the modified terms at year-end 2003. Other real estate owned, consisting of properties acquired through foreclosures or deeds in lieu thereof, totaled $3,198,000 at December 31, 2004, for a decrease of 26.1% from $4,329,000 at December 31, 2003. The decrease in other real estate owned during 2004 was primarily the result of the sale of several properties held by the Bank during the year. The large balance in other real estate owned in 2004 and 2003 was primarily related to the foreclosure on certain real estate involving the USDA guaranteed loan discussed previously. Management anticipates that other real estate owned will continue at higher than historical levels until this property is sold.
Loans past due ninety days or more and accruing interest totaled $305,066 as of December 31, 2004, for an increase of $57,092, or 23.0% as compared to the same period of 2003. Loans past due ninety days or more totaled $247,974 as of December 31, 2003, for a decrease of 37.2% over the same period of 2002. All major credit lines and troubled loans are reviewed regularly by a committee of the Board of Directors. Management believes that the Bank's non-performing loans have been accounted for in the methodology for calculating the allowance for loan and lease losses.
The following table summarizes the company's non-performing assets, loans past due ninety days or more and restructured loans.
The amount of interest income actually recognized on the nonaccrual loans above during 2004, 2003 and 2002, was $10,492, $96,324, and $227,489 respectively. The additional amount of interest income that would have been recorded during 2004, 2003 and 2002, if the above amounts had been current in accordance with their original terms was $41,586, $219,738, and $280,896, respectively.
Loans that are classified as "substandard" or worse by the Bank represent loans to which management questions the borrowers' ability to comply with the present loan repayment terms. As of December 31, 2004, there were approximately $8,990,000 in loans that were classified as "substandard" or worse and accruing interest. This compares to approximately $11,144,000 in loans that were classified as "substandard" or worse and accruing interest as of December 31, 2003. As of December 31, 2004, management was not aware of any specifically identified loans, other than those included in the categories discussed above that represent significant potential problems or that management has serious doubts as to the borrower's ability to comply with the present repayment terms. The Corporation believes that it and the Bank maintain adequate audit standards, exercise appropriate internal controls and conduct regular and thorough loan reviews. However, the risk inherent in the lending business results in periodic charge-offs of loans. The Corporation maintains an allowance for loan losses that it believes to be adequate to absorb reasonably foreseeable losses in the loan portfolio. Management evaluates, on a quarterly
basis, the risk in the portfolio to determine an adequate allowance for loan losses. The evaluation includes analyses of historical performance, the level of nonperforming and rated loans, specific analyses of problem loans, loan activity since the previous quarter, loan review reports, consideration of current economic conditions and other pertinent information. The evaluation is reviewed by the Audit Committee of the Board of Directors of the Bank. Also, as a matter of policy, internal classifications of loans are performed on a routine and continuing basis. The section of this report entitled - "Critical Accounting Policies" as well as Note A of the Notes to Consolidated Financial Statements contains more information pertaining to the Corporation's allowance for loan and lease losses.
SECURITIES
The securities portfolio consists primarily of U.S. Treasury obligations, U.S. government agency securities, marketable bonds of states, counties and municipalities, and 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:
Note: Other securities in the above table includes stock of government agencies, stock of corporations, and mutual funds. The Corporation does not have any securities classified as held-to-maturity.
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The following table sets forth the maturities of securities at December 31, 2004 and the average yields of such securities (calculated on the basis of the amortized cost and effective yields).
The above table shows yields on the tax-exempt obligations to be computed on a taxable equivalent basis. The maturity date used in the above table for amortizing securities (e.g. mortgage-backed securities) is the average maturity date.
Total average securities increased by $19.9 million or 15.2% to $150.1 million during 2004 as compared to $130.2 million for 2003. Average non-taxable investment securities increased by $27.7 million or 67.0% while average taxable investment securities decreased by $7.8 million or 8.8% to account for the overall increase in average investments. The total securities portfolio decreased $23.4 million or 14.7% to $136.5 million at the end of 2004 as compared to $159.9 million at the end of 2003. The large decrease in the total securities portfolio in 2004 resulted primarily from the higher loan growth than deposit growth experienced in 2004 as maturing investments and sales of investments were used to fund loan growth.
DEPOSITS
The Corporation's primary source of funds is customer deposits, including large certificates of deposits. Aggregate average deposits increased by $18.9 million or 5.3% to $373.4 million in 2004 by $30.2 million or 9.3% to $354.6 million in 2003, and by $24.3 million or 8.1% to $324.4 million in 2002. Most of the deposit growth experienced by the Corporation in 2004 was in accounts that are interest sensitive, especially time deposits. Average time deposits increased $15.3 million in 2004 as compared to 2003. In 2003 and 2002, most of the growth in deposits was in savings deposits. Average savings deposits increased $26.6 million in 2003 and $45.3 million in 2002.
The average amount of deposits for the periods indicated is summarized in the following table:
Remaining maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 2004, are summarized as follows (in thousands of dollars):
3 months or less
$42,318
Over 3 months through 6 months
16,944
Over 6 months through 12 months
9,913
Over 1 year
36,226
Total
$105,401
========
Other funds were invested in other earning assets such as federal funds at minimum levels necessary for operating needs and to maintain adequate liquidity. A significant amount of the Corporation's deposits are time deposits greater than $100,000. A significant percentage of these time deposits mature within one year. If the Corporation is unable to retain these deposits at their maturity it may be required to find alternate sources of funds to fund any future loan growth, which may be more costly than these deposits and may as such negatively affect the Corporation's net interest margin.
OFF BALANCE SHEET ARRANGEMENTS
Neither the Corporation nor the Bank have historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments of structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts. However, the Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The following table summarizes the Bank's involvement in financial instruments with off-balance-sheet risk as of December 31:
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 $13.3 million at December 31, 2004, representing 9.8% of the investment securities portfolio, a decrease from the 10.7% level of 2003. Management believes that the investment securities portfolio, along with additional sources of liquidity, including federal funds sold, and maturing loans provides the Corporation with adequate liquidity to meet its funding needs.
The Bank also has federal funds lines with several of its correspondent banks. These lines may be drawn upon if the bank has short-term liquidity needs. As of December 31, 2004, the Bank had $25 million available under these lines. At December 31, 2004, the Bank had no federal funds purchased from these lines. The average daily federal funds purchased for 2004 equaled $294,000 at an average interest rate of 1.71%, for 2003 the average daily federal funds purchased equaled $22,000 at an average interest rate of 1.49%. The Bank purchased no federal funds during 2002.
In addition to the federal funds lines, the Bank also has the capacity to borrow additional funds from the Federal Home Loan Bank of Cincinnati that may be drawn upon for short-term or longer-term liquidity needs. At December 31, 2004, the Bank had total borrowings of $4,335,364 and had approximately $30,218,000 of available additional borrowing capacity from the Federal Home Loan Bank of Cincinnati.
On December 21, 2004, the Board of Directors of the Corporation approved a plan authorizing the management of the company, beginning on December 31, 2004, to repurchase up to $5,000,000 of the Corporation's common stock from shareholders desiring to liquidate their shares in either the open market or through privately negotiated transactions. Management does not anticipate that this plan will reduce liquidity to unacceptable levels.
Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate differ considerably from long term investment securities and fixed rate loans. Similarly, time deposits, especially those over $100,000, are much more interest-sensitive than are savings accounts. For its repricing gap analysis, the Bank classifies fifty percent of money market accounts as repricing in 4 to 12 months, with the remaining fifty percent classified as repricing in over one year but through three years. Regular savings and NOW accounts are classified by the Bank as sixty percent repricing over one year through three years, twenty percent repricing over 3 years through 5 years, and the remaining twenty percent repricing over 5 years. At December 31, 2004 the Corporation had a total of $42.3 million in certificates of $100,000 or more which would mature in one year or less. In addition, consumer certificates of deposits of smaller amounts mature in generally in two years or less, while money market deposit accounts mature on demand.
The Corporation has certain contractual obligations summarized in the table below.
Interest rate sensitivity gaps by maturities are summarized below. Matured time deposits are included as time deposits maturing in 0-30 days in the following table.
As seen in the table above, the Corporation is in a slightly positive cumulative gap position in the one year or less interval, indicating that it has more rate sensitive assets which will reprice within one year than it has rate sensitive liabilities that will reprice within one year. This normally indicates that the Corporation would be in position to reprice its rate-sensitive assets (loans and investments) more quickly than it would its rate-sensitive liabilities (deposits). During periods of increasing interest rates the negative gap would theoretically work to the Corporation's advantage, widening the net interest spread between assets and liabilities, if the Corporation was able to increase the interest rate earned on assets at the same level as it increased the interest rates paid on its liabilities. To the contrary, however, during periods of rising rates the negative gap would be to the Corporation'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 negative gap position would essentially reverse the effects of rising and falling rates.
It is management's objective to minimize this gap through the asset/liability management process. The gap position is closely monitored, and investment decisions and deposit and loan pricing structures are configured with the gap position in mind. The gap table is updated at least monthly or more often if considered necessary. Asset/Liability management limits the ratio of rate sensitive assets to rate sensitive liabilities that mature or reprice in one year or less to not less than 0.70 and not more than 1.20. At December 31, 2004, the RSA/RSL was 1.03 at the one year or less level, a slightly positive gap position. If the RSA/RSL ratio is outside this parameter, management will take action to review asset and liability mixes, maturities, yields, and costs, review objectives and strategies, and determine if changes are needed.
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 5.4% in 2004 and 8.7% in 2003. The corresponding percentage increase in average equity amounted to 2.3% in 2004 and 5.3% in 2003.
The Corporation's equity capital was $45,960,929 at December 31, 2004 as compared to $46,079,832 at December 31, 2003, for a decrease of 0.3% over the period. The decrease in equity capital was primarily due to a $1,493,853 decrease in the unrealized gain on investment securities. The Corporation's equity-to-average asset ratio (net of unrealized gain/loss on investment securities) was 10.7% in 2004, as compared to 10.7% for 2003. Management believes that the Corporation's 2004 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 51.0% in 2004, 54.2% in 2003, and 66.4% in 2002.
As of December 31, 2004, the authorized number of common shares was 10 million shares, with 1,627,460 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 the regulators and are assigned risk weights in the same manner as on-balance sheet items. Banking institutions were expected to achieve a Tier I capital to risk-weighted assets ratio of at least 4.00%, a total capital (Tier I 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 4.00%. As of December 31, 2004, the Corporation and the Bank, had ratios exceeding the regulatory requirements to be classified as "well capitalized," the highest regulatory capital rating. The Corporation's and First National's ratios are illustrated in Note L to the Consolidated Financial Statements.
Management is not aware of any known trends, events, uncertainties or current recommendations by the regulatory authorities that would have a material adverse effect on the Corporation's liquidity, capital resources or operations
.
ITEM 7A.
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. As of December 31, 2004, a -200 basis point rate shock was forecast to decrease net interest income an estimated $754,000, or 5.3%, over the next twelve months, as compared to rates remaining stable. This is within the Bank's Asset/Liability policy limit of -7.0%. In addition, the -200 basis point rate shock is estimated to decrease the current present value of the Bank's equity by 0.6%, well within the policy limits of -25%. Also, a +200 basis point rate shock is estimated to increase net interest income approximately $450,000, or 3.2%, and would decrease the current present value of the Bank's equity by 2.1%, both within policy guidelines. This simulation analysis assumes that NOW and savings accounts have a lower correlation to changes in market interest rates than do loans, investment securities and time deposits.
The simulation analysis takes into account the call features of certain investment securities based upon the rate shock, as well as estimated prepayments on loans. The simulation analysis assumes no change in the Bank's asset/liability composition due to the inherent uncertainties of specific conditions and corresponding actions of management.
More about market risk is included in Management's Discussion and Analysis under the heading "Liquidity and Interest Rate Sensitivity Management." All market risk sensitive instruments described within that section have been entered into by the Corporation for purposes other than trading. The Corporation does not hold market risk sensitive instruments for trading purposes. The Corporation is not subject to any foreign currency exchange or commodity price risk.
The following table provides information about the Corporation's financial instruments that are sensitive to changes in interest rates as of December 31, 2004.
Securities in the above table with call features are shown as maturing on the call date if they are likely to be called in the current interest rate environment.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements appear on the following pages for First Pulaski National Corporation and its subsidiaries.
PUTMAN & HANCOCK
Certified Public Accountants 219 East College Street 118 North Third Street
P.O. Box 722 P.O. Box 724
Fayetteville, Tennessee 37334 Pulaski, Tennessee 38478
(931) 433-1040 (931) 424-1040
Fax (931) 433-9290 Fax (931)-363-5222
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
First Pulaski National Corporation
Pulaski, Tennessee
We have audited the accompa
nying consolidated balance sheets of First Pulaski National Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/Putman & Hancock
Fayetteville, Tennessee
February 11, 2005
Members: American Institute and Tennessee Society of Certified Public Accountants
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
First Pulaski National Corporation (the "Corporation") through its subsidiaries provides domestic financial and insurance services in Giles, Marshall and Lincoln County, Tennessee, to customers who are predominantly small and middle-market businesses and middle-income individuals. The accounting and reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and to general practice within the financial services industry. The accounting policies of the Corporation and the methods of applying those policies that materially affect the accompanying financial statements are presented below.
Basis of Presentation
The consolidated financial statements include the accounts of First Pulaski National Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts in the prior years' financial statements have been reclassified to conform to the 2004 presentation. These reclassifications are immaterial and had no effect on net income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant estimate relates to the adequacy of the allowance for losses on loans. Actual results could differ from those estimates.
Cash and Due From Banks
Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances from the Federal Reserve Bank and other banks. The average amount of those reserve requirements was approximately $5,501,000 and $4,389,000 for the years ended December 31, 2004 and 2003. From time to time throughout the year, the balances due from other financial institutions exceeded FDIC insurance limits. Management considers this to be a normal business risk.
Statements of Cash Flows
Cash and cash equivalents as presented in the consolidated statements of cash flows include cash and due from banks and federal funds sold. Cash flows from operating activities reflect interest paid of $6,348,255, $6,770,233 and $9,529,853 and income taxes paid of $2,125,000, $2,315,412, and $1,975,000 for the years ended December 31, 2004, 2003 and 2002, 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.
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, 2004 and 2003, totaling $502,850 and $703,900, 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, as well as specific allowances.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. For purposes of the quarterly review, the loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on the Corporation's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
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.
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 2004, 2003 or 2002.
Impairment of Long-Lived Assets
The Corporation periodically reviews long-lived assets. If indications of impairments exist and if the value of the assets is impaired, an impairment loss would be recognized.
Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosures and premises not used for business operations. These properties are valued at the lower of cost or estimated net realizable value. Cost includes loan principal, accrued interest, and foreclosure expense. Estimated net realizable value is the estimated selling price in an orderly disposition reduced by estimated selling costs and future carrying costs. The excess of cost over net realizable value at the time of foreclosure is charged to the allowance for loan losses. The estimated net realizable fair value is reviewed periodically and any write-downs are charged against current earnings as market adjustments.
Stock-Based Compensation
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". The Corporation has elected to continue to measure compensation cost for its stock option plans under the provisions in APB Opinion 25. Accordingly, no stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS No. 123.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note A - Summary of Significant Accounting Policies - (Continued)
Stock-Based Compensation (Continued)
Net income as reported
$5,327,569
$5,009,835
$4,066,265
Deduct: Stock based compensation expense
determined under fair value based method
-
12,814
17,490
$5,327,569
$4,997,021
$4,048,775
===========
===========
===========
Basic earnings per share as reported
$3.24
$3.05
$2.49
Pro-forma basic earnings per share
3.24
3.04
2.48
Diluted earnings per share as reported
3.22
3.03
2.47
Pro-forma diluted earnings per share
3.22
3.02
2.46
Using the Black-Scholes option-pricing model, the estimated weighted-average fair value assumptions of options granted during 2004, 2003, and 2002 are as follows:
Weighted Average Fair Value Assumptions:
Expected dividend yield
4.4%
4.4%
5.3%
Expected volatility
12.0%
12.0%
12.0%
Risk-free interest rates
3.7%
3.9%
4.5%
Expected lives
2 years
2 years
2 years
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 with its subsidiaries. Income tax expense is allocated among the parent company and its subsidiaries as if each had filed a separate return. The provision for income taxes is based on income reported for consolidated financial statement purposes and includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for tax reporting purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be realized or settled. Recognition of certain deferred tax assets is based upon management's belief that, based upon historical earnings and anticipated future earnings, normal operations will continue to generate sufficient future taxable income to realize these benefits. A valuation allowance is established for deferred tax assets when, in the opinion of management, it is more likely than not, that the asset will not be realized.
Earnings Per Share
Basic and diluted earnings per share (EPS) are shown on the face of the 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.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Segments Reporting
Segments are strategic business units that offer different products and services and are managed separately. At December 31, 2004, the Corporation and the Bank did not have any identified segments.
Insurance Subsidiary
Insurance premium and commission income and acquisition costs are recognized over the terms of the related policies. Losses are recognized as incurred.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes.
Effect of New Accounting Pronouncements
In January 2003, FASB issued FIN 46, "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a corporation's consolidated financial statements. A corporation that holds variable interests in an entity will need to consolidate the entity if the corporation's interest in the VIE is such that the corporation will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. The provisions of this interpretation became effective upon issuance. Management does not expect the requirements of FIN 46 to have any impact on the Corporation's results of operations, financial position, or liquidity.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149, which amends and clarifies existing accounting pronouncements, addresses financial accounting and reporting for derivative or other hybrid instruments to require similar accounting treatment for contracts with comparable characteristics. This statement became effective for contracts entered into or modified after June 30, 2003 and for hedging activities designed after June 30, 2003. This statement did not have an impact on our consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for classifying and measuring as liabilities certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability, or asset as appropriate. SFAS No. 150 became effective for financial instruments for interim periods beginning after June 15, 2003. The adoption of this statement did not have a material effect on the Corporation's financial position or results of operations or cash flows.
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. This SOP provides that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or "carried over" in the initial accounting for loans acquired. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies - (Continued)
Effect of New Accounting Pronouncements - (Continued)
not expected to have a material impact on our financial condition, results of operations, earnings per share or cash flows.
In March 2004, the FASB Emerging Issue Task Force (EITF) released Issue No. 03-1. The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Instruments which described the criteria to determine whether impairment of an investment was other-than-temporary and was effective for reporting periods beginning after June 15, 2004. Generally, impairment shall be deemed other-than-temporary unless positive evidence indicating that the investment's carrying value is recoverable within a reasonable period of time outweighs negative evidence to the contrary. FASB is in the process of proposing implementation guidance which is expected to discuss debt securities that have decline in fair value below cost due to increases in interest rates. Since the Corporation has significant balances of debt and mortgage-backed securities, it is possible that future increases in interest rates may effect the Corporation's financial position and results of operations. However, management has the intent and ability to hold debt and mortgage-backed securities until maturity or a recovery in fair value.
Effect of Recently-Issued Standards That Are Not Yet Adopted
SFAS 123, Revised, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first quarter or year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date will result in additional compensation expense. There will be no significant effect on financial position as total equity will not change.
SFAS 153 modifies an exception from fair value measurement of nonmonetary exchanges. Exchanges that are not expected to result in significant changes in cash flows of the reporting entity are not measured at fair value. This supersedes the prior exemption from fair value measurement for exchanges of similar productive assets, and applies for fiscal years beginning after June 15, 2005.
The effect of these other new standards on the Corporation's financial position and results of operations is not expected to be material upon and after adoption.
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:
The following is a summary of the amortized cost and estimated fair value of debt securities by contractual maturity (or average maturity for amortizing mortgage-backed securities) at December 31, 2004:
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Securities - (Continued)
Net gains realized from securities transactions for 2004, 2003 and 2002 were:
Income tax expense attributable to securities transactions was $64,083, $77,431 and $88,468 for 2004, 2003 and 2002, respectively.
Securities with a carrying value of $58,677,283 and $56,352,096 at December 31, 2004 and 2003, respectively, were pledged to secure public monies and for other purposes as required or permitted by law.
There were no securities of a single issuer, other than U.S. government agency securities that were payable from and secured by the same source of revenue or taxing authority that exceeded 10% of consolidated stockholders' equity at December 31, 2004 or 2003.
At December 31, 2004, the Corporation had $68,413,631 of investments with $894,494 of unrealized losses on these investments. Of the investments with unrealized losses, $64,026,868 had been at a loss position for less than 12 months, with losses of $796,582 and $4,386,763 of these investments, with losses of $97,912 have been at a loss position for longer than 12 months. The Corporation believes that these securities are only temporarily impaired and that the full principal will be collected as anticipated. Of the total, $43,807,883, or 64%, is guaranteed by the U.S. Government or its agencies. As of December 31, 2004, $21,952,425 or 32% are obligations of states and political subdivisions. All of the obligations of states and political subdivisions are investment grade securities. The primary cause for unrealized losses within the portfolio is the impact movements in market rates have had in comparison to the underlying yields on these securities. The following table summarizes the Corporation's investments which were at an unrealized loss position as of December 31, 2004:
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Marshall and Lincoln County, Tennessee. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses to cover inherent losses in the loan portfolio.
The following is a summary of loans at December 31:
At December 31, 2004, 2003 and 2002, impaired loans totaled $511,098, $2,409,729, and $7,236,654, respectively. The amount of interest income actually recognized on these loans during 2004, 2003 and 2002, was $10,942, $96,324, and $227,489, respectively. The additional amount of interest income that would have been recorded during 2004, 2003 and 2002, if the above amounts had been current in accordance with their original terms was $41,586, 219,738, and $280,896, respectively.
As of December 31, 2004, the Corporation's recorded investment in impaired loans and the related valuation allowance are as follows:
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 2004, 2003 and 2002 were $1,663,104, $3,924,287 and $4,831,765, respectively. At December 31, 2004, 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 $305,066, $247,974, and $394,898 at December 31, 2004, 2003 and 2002, 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 2004 and 2003:
Transactions in the allowance for loan losses were as follows:
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:
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
$27,600
$6,000
13,200
6,000
6,000
2010 - 2014
26,500
Rents charged to operations under operating lease agreements for the years 2004, 2003 and 2002 were $28,140, $28,140 and $32,066, respectively.
Note E - Prepayments and Other Assets
The following is a summary of prepayments and other assets at December 31:
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F - Deposits
The following is a summary of deposits at December 31:
The aggregate maturities of time deposits at December 31, 2004, are summarized as follows:
Note G - Other Borrowed Funds
The following is a summary of other borrowed funds at December 31:
Other borrowed funds consist of Federal Home Loan Bank loans secured by a pledge of Federal Home Loan Bank stock with a par value of $1,318,100 and a blanket pledge of $5,852,741 first mortgage loans against single family, 1-4 unit residential properties.
As of December 31, 2004, aggregate debt maturities were as follows:
$239,213
$612,492
221,935
2010-2014
2,703,548
234,625
2015-2018
75,481
248,070
$4,335,364
========
At December 31, 2004, First National Bank of Pulaski had unsecured lines of credit from correspondent banks for federal fund purchases and daylight overdrafts totaling $25,000,000. No advances had been made against these lines at December 31, 2004.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Income Taxes
The components of income taxes for the three years ended December 31 are as follows:
Income taxes varied from the amount computed at the statutory federal income tax rate for the years ended December 31 as follows:
Significant components of the Corporation's deferred tax assets and liabilities on December 31 are as follows:
The Corporation has sufficient refundable taxes paid in available carryback years to fully realize its recorded deferred tax assets. Accordingly, no valuation has been recorded.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Other Operating Expenses
The following table summarizes the components of other operating expenses for the years ended December 31:
Note J - Profit Sharing Plan
The Corporation's bank subsidiary has a non-contributory trusteed profit sharing retirement plan covering all officers and employees who have completed a year of service and are over the age of 21. The bank subsidiary's total payroll in 2004 was $5,204,181. Contributions for the current year were calculated using the base salary amount of $4,475,539. According to the plan, the bank subsidiary's contribution will not be less than 10% or no more than 15% of net income before taxes, with an overall limitation not to exceed 15% of the total salary of all the participants. The plan expense was $671,331, $672,081 and $546,112 in 2004, 2003 and 2002, respectively.
Note K - First Pulaski National Corporation (Parent Company Only) Financial Information
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - First Pulaski National Corporation (Parent Company Only) Financial Information (Continued)
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Regulatory Requirements and Restrictions
The primary source of funds for payment of dividends by the Corporation to its shareholders is dividends received from its bank subsidiary. The amount of dividends that a bank subsidiary may pay in any year is subject to certain regulatory restrictions. The amount available for payment of dividends without prior regulatory approval at December 31, 2004, to the Corporation was $6,532,538.
The Corporation and the Bank are subject to federal regulatory risk-adjusted capital adequacy standards. Failure to meet capital adequacy requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that could have a direct material adverse effect on the consolidated financial statements of the Corporation and the Bank. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes the Corporation and the Bank meet all the capital adequacy requirements to which they are subject to as of December 31, 2004.
As of December 31, 2004, the most recent notification from regulatory authorities categorized The Corporation and the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Corporation will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Corporation's category.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Regulatory Requirements and Restrictions (Continued)
Note M- 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.
Shares available for grants of options or rights to purchase at December 31, 2004 include 41,924 shares under the 1994 employee purchase plan and 72,500 shares under the 1997 stock option plan.
The 1997 plan permits the Board of Directors to grant options to key employees. A total of 100,000 shares were reserved under the plan of which 27,500 shares have been granted and 10,000 shares have been exercised. These options expire 10 years from the date of grant.
The 1987 plan currently has 2,500 shares under option.
The 1994 outside directors' stock option plan permitted the granting of stock options to non-employee directors. A total of 150,000 shares were reserved under this plan. An option to purchase 500 shares was granted annually upon becoming a member of the Board of Directors, of which 250 shares was immediately exercisable and the remaining 250 shares were exercisable upon the first annual meeting of shareholders following the date of grant provided the optionee was still serving as an outside director. In addition, each outside director upon first becoming a board member received an immediately exercisable option to purchase 2,500 shares, less the number of shares of stock previously beneficially owned. These options expired ten years from the date of grant. During the prior year the Board terminated this plan. At the time of termination, 66,160 shares under the plan had not been granted.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option and Stock Purchase Plans (Continued)
The 1994 employee stock purchase plan permits the granting of rights to eligible employees of the Corporation to acquire stock. A total of 150,000 shares were reserved under this plan. The Board has established the following guidelines as to the number of shares employees are allowed to purchase on July 1, each year:
The following is a summary of the stock option and purchase plans activity for 2004, 2003 and 2002:
The weighted-average fair value of options, calculated using the Black-Scholes option pricing model, granted during 2004, 2003 and 2002 is $0.00 in all years.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option and Stock Purchase Plans (Continued)
The following table presents the weighted average remaining life and weighted average exercise price at December 31, 2004:
Note N - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Numerator for basic and diluted earnings
Per share - income available to common shareholders
$5,327,569
$5,009,835
$4,066,265
=========
=========
=========
Denominator for basic earnings per share-
weighted-average basis
1,646,422
1,644,008
1,635,777
Effect of dilutive stock options
8,993
9,935
11,172
Denominator for diluted earnings per share-
adjusted weighted-average shares
1,655,415
1,653,943
1,646,949
=========
=========
=========
Basic earnings per share
$3.24
$3.05
$2.49
=========
=========
=========
Diluted earnings per share
$3.22
$3.03
$2.47
=========
=========
=========
Note O - Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires entities to disclose the estimated fair value of its financial instrument assets and liabilities. Management is concerned that the required disclosures under SFAS No. 107 may lack reasonable comparability between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
The Corporation in estimating its fair value disclosures for financial instruments used the following methods and assumptions:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.
Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O - Fair Values of Financial Instruments (Continued)
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposit liabilities: The fair values disclosed for demand deposits (e.g. non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposits approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Other borrowed funds: Market quotes are used for Federal Home Loan Bank borrowings.
Commitments to extend credit and standby letters of credit: The value of the unrecognized financial instruments is based on the related fee income associated with the commitments, which is not material to the Corporation's financial statements at December 31, 2004 and 2003.
The estimated fair values of the Corporation's financial instruments on December 31 were (dollars in thousands):
Note P - Other Financial Instruments, Commitments and Contingencies
The Corporation's bank subsidiaries are a party to financial instruments with off-balance-sheet-risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and residential mortgage loans sold with certain repurchase requirements. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the bank subsidiary has in those particular financial instruments.
The following summarizes the bank subsidiary's involvement in financial instruments with off-balance-sheet risk as of December 31:
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - Other Financial Instruments, Commitments and Contingencies (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiary evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation. Collateral held varies but may include certificates of deposits, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the bank subsidiary to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The bank subsidiary may be required to repurchase residential mortgage loans sold if a default occurs with respect to the payment of any of the first four installments of principal and interest after a loan is sold and the default continues for a period of 90 days. These loans are considered in the computation of the allowance for loan losses to cover future defaults.
The Corporation and its subsidiaries are parties to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims will not be material to the Corporation's consolidated financial position or results of operations.
FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31 are as follows:
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		
None
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
There were no changes in the Company's internal controls over financial reporting during the Corporation's fiscal quarter ended December 31, 2004 that have materially affected, or are reasonable likely to materially affect, the Corporation's internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is incorporated herein by reference to the section titled "Election of Directors" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders. The information required by this item with respect to executive officers is set forth below:
NON-DIRECTOR EXECUTIVE OFFICERS OF FIRST NATIONAL BANK
Mr. Porterfield began employment with the Bank on December 14, 1992 in the Accounting Department. He has been employed by the Bank in various accounting positions and was named the Cashier on June 13, 2000 and Chief Financial Officer on April 24, 2003.
Mr. Haney began employment with the Bank on October 15, 2001 as Vice President and Director of Human Resources. Prior to serving as Vice President and Director of Human Resources for the Bank, Mr. Haney served as Human Resources Director with Magotteaux Corporation from July 1999 until October 2001. With Magotteaux, Mr. Haney was responsible for Human Resources, Purchasing and Logistics. He also worked with the Torrington Company from 1976 until 1999. He held various management positions during that time frame with the last being as Manager of Human Resources from 1988 until July 1999.
Donald A. Haney is the brother of Charles D. Haney, a member of the Corporation's and First National's Board. None of the other persons listed above are related to any of the Directors of either the Corporation's or First National's Board.
All officers serve at the pleasure of the Board of Directors. No officers are involved in any legal proceedings which are material to an evaluation of their ability and integrity.
The information required by this section with respect to transactions in the Corporation's common stock is incorporated herein by reference to the section titled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's definitive proxy material to be filed in connection with the Corporation's Annual Meeting of Shareholders.
The information required by this item with respect to the Corporation's audit committee is incorporated herein by reference to the section entitled "Description of the Board and Committees" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders.
The information required by this item with respect to the Company's audit committee financial expert is incorporated herein by reference to the section entitled "Description of the Board and Committees" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders.
The Corporation has a Code of Ethics which is applicable to the Corporation's principal executive officer and principal financial officer. The Corporation will provide to any person, without charge, upon request, a copy of the Code of Ethics. To request a copy of the Code of Ethics please write to First Pulaski National Corporation, Attention: Corporate Secretary, 206 South First Street, Pulaski, Tennessee 38478. The Company intends to disclose any amendments to or waivers from its Code of Ethics in the manner and as required by law.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is contained under the caption "Executive Compensation" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
The following table summarizes information concerning the Corporation's equity compensation plans at December 31, 2004:
Number of Shares to be Issued upon Exercise of Outstanding Options and Warrants
Weighted Average Exercise Price of Outstanding Options and Warrants
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in First Column)
Equity compensation plans
approved by shareholders
30,201
$35.88
114,424(1)
Equity compensation plans not
approved by shareholders
N/A
N/A
N/A
________
________
________
Total
30,201
$35.88
114,424
(1) Includes 41,924 shares available for issuance under the Corporation's Employee Stock Purchase Plan at December 31, 2004.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained under the caption "Certain Relationships and Related Transactions" in the Corporation's definitive proxy materials to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item with respect to the fees paid to, and services provided by, the Corporation's principal account is incorporated herein by reference to the section entitled "Fees Incurred by the Company from Putman & Hancock During 2004 and 2003" in the Corporation's definitive proxy material to be filed in connection with the Corporation's 2005 Annual Meeting of Shareholders
PART IV
Item 15.
Item 15. 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 on March 15, 2005.
						 						FIRST PULASKI NATIONAL CORPORATION
By:/s/Mark A. Hayes
Mark A. Hayes
						Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/James T. Cox
James T. Cox
Chairman of the Board and Director
March 15, 2005
/s/Mark A. Hayes
Mark A. Hayes
President and Director
March 15 , 2005
/s/Tracy Porterfield
Tracy Porterfield
Secretary/Treasurer
March 15, 2005
/s/David E. Bagley
David E. Bagley
Director
March 15, 2005
/s/Johnny Bevill
Johnny Bevill
Director
March 15, 2005
/s/James K. Blackburn, IV
James K. Blackburn, IV
Director
March 15, 2005
/s/Wade Boggs
Wade Boggs
Director
March 15, 2005
/s/James H. Butler
James H. Butler
Director
March 15, 2005
/s/Greg Dugger
Greg G. Dugger, DDS
Director
March 15, 2005
/s/Charles D. Haney
Charles D. Haney, MD
Director
March 15, 2005
/s/James Rand Hayes
James Rand Hayes
Director
March 15, 2005
/s/W. Harwell Murrey
W. Harwell Murrey, MD
Director
March 15, 2005
/s/Bill Yancey
Bill Yancey
Director
March 15, 2005
INDEX TO EXHIBITS
EXHIBIT
NUMBER
3.1 Charter of the First Pulaski National Corporation (incorporated by reference to Amendment No. 1 to
First Pulaski National Corporation's Registration Statement No. 2-73488 on Form S-14/A).
3.2 Amended Bylaws of First Pulaski National Corporation (Restated Electronically for SEC filing
purposes (incorporated by reference to the First Pulaski National Corporation's Registration Statement on
Form S-4 No. 33-68448))
10.1 Form of First Pulaski National Corporation Incentive Stock Option Agreement (incorporated by reference to the First Pulaski National Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
21.1 Subsidiaries
23.1 Consent of Independent Auditors
31.1 Certification of Mark A. Hayes, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Tracy Porterfield, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
32.1 Certification of Mark A. Hayes, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002.
32.2 Certification of Tracy Porterfield, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002.