April 7, 2005 **Conditional Approval #683**

**May 2005**

C. Bradford Harris, Esq.

Frost, Brown, & Todd, LLC

Lexington Financial Center

250 West Main Street

S. 2700

Lexington, Kentucky 40507-1749

Re: Application for Reverse Stock Split by

> First National Bank of Mayfield, Mayfield, Kentucky

OCC CAIS Control Number: 2005-SO-12-0020

Dear Mr. Harris:

This responds to the application by First National Bank of Mayfield,
Mayfield, Kentucky (the "Bank") under 12 C.F.R. § 5.46 to elect the
corporate governance provisions of Kentucky law and complete a reverse
stock split in accordance with those provisions. Based on the
representations and commitments made by the Bank, the application is
hereby approved, subject to the conditions set forth below.

### I. [Background]{.underline} 

#### A. [Facts]{.underline} 

The Bank is amending its bylaws to elect the corporate governance
provisions of Kentucky law to engage in a reverse stock split (the
"Reverse Stock Split") as permitted by Kentucky law. The Bank proposes
the Reverse Stock Split to provide minority stockholders with a return
on their investments by allowing them to liquidate their shares for cash
at a fair value and to permit the Bank to decrease its administrative
expenses incurred in servicing many stockholders who own relatively
small numbers of shares, including corporate expenses associated with
stockholder communications and meetings.

The Bank currently has 40,000 shares of common stock issued and
outstanding, of which Jackson Financial Corporation owns approximately
39,516 shares, or 98.79%. On December 15, 2004, the Bank's board of
directors (i) approved an amendment to its bylaws to elect to be
governed by the corporate governance procedures of the Kentucky Business
Corporation Act ("KBCA") in accordance with 12 C.F.R. § 7.2000(b), and
(ii) approved a proposal to amend the Bank's articles of association,
which would combine its 40,000 shares of common stock, par value \$75
per share, that are currently issued and outstanding, into 200 shares of
common stock, par value \$100 per share, in a 1-for-200 Reverse Stock
Split.

In accordance with 12 C.F.R. § 5.67, each shareholder other than Jackson
Financial Corporation, who would otherwise hold a fractional share of
the common stock as a result of the Reverse Stock Split, will instead be
entitled to receive a cash payment equal to the shareholder's fractional
interest in the common stock after the Reverse Stock Split, multiplied
by \$75,000, which amount is equal to the value per share of common
stock before the Reverse Stock Split (\$375 per share) multiplied by 200
to reflect the Reverse Stock Split. The Bank obtained an independent
valuation of the fair value per share of common stock from Southard
Financial, Memphis, Tennessee. Southard Financial opined that the fair
value per share of the common stock was \$341. Upon consummation of the
Reverse Stock Split, Jackson Financial Corporation will own 100% of the
common stock. The proposed Reverse Stock Split is subject to shareholder
approval, which is anticipated to occur within 30 days of the OCC's
approval.

As a result of the Reverse Stock Split and pay out to holders of
fractional shares, capital levels will decline by \$181,000.
Specifically, after cashing out the fractional shares, the Bank's
capital stock account will decline to \$20,000, and the capital surplus
account will correspondingly increase by \$2,980,000. Consequently, the
Bank's total capital will remain in the "well-capitalized" category.

**B. [Corporate Governance]{.underline}**

National banks may adopt corporate governance procedures that comply
with applicable federal banking law and safe and sound banking
practices. OCC regulations provide that:

> > To the extent not inconsistent with applicable Federal banking
> > statutes or regulations, or bank safety and soundness, a national
> > bank may elect to follow the corporate governance procedures of the
> > law of the state in which the main office of the bank is located,
> > the law of the state in which the holding company of the bank is
> > incorporated, the Delaware General Corporation Law, Del. Code Ann.
> > tit. 8 (1991, as amended 1994, and as amended thereafter), or the
> > Model Business Corporation Act (1984, as amended 1994, and as
> > amended thereafter). A national bank shall designate in its bylaws
> > the body of law selected for its corporate governance
> > procedures.[^1]

The OCC has promulgated 12 C.F.R. § 7.2023 that codifies its decisions
permitting reverse stock splits. The OCC confirms in the regulation the
authority of national banks to conduct reverse stock splits where \"the
transaction serves a legitimate corporate purpose and provides adequate
dissenting shareholders\' rights.\"[^2] The regulation specifically
recognizes that reducing costs associated with shareholder
communications is an example of a legitimate corporate purpose
supporting a reverse stock split.[^3]

Counsel for the Bank represents that the KBCA authorizes Kentucky
corporations to effect reverse stock splits. KRS § 271B.13-020(1)(d)4 of
the KBCA grants a shareholder a right to dissent from and to obtain
payment of the fair value of the shareholder's shares if the company
amends its articles to reduce the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created
is to be acquired for cash under KRS § 271B.6-04. KRS

§ 271B.6-04(1)(a) permits a corporation to pay money for the value of
fractions of a share.

The KBCA's dissenters' rights provisions (KRS § 271B Subtitle 13)
contain the following elements that are required by OCC Advisory Letter
No. 2002-6:

1.  Advance notice of dissenters' rights to shareholders before the
    shareholder meeting;

2.  An independent third-party appraisal of the shares if the bank and
    any dissenting shareholders are unable to agree on the value of the
    dissenting shares; and

3.  Payment by the bank of the cost of appraising dissenting shares.

The Bank has provided a certification by the Bank's president that the
KBCA corporate governance procedures include the OCC required elements
described above and that the Bank will agree to be subject to binding
arbitration by an independent third party, to be paid for by the Bank,
if the court that would ordinarily hear a dissenters' rights appraisal
action under the KBCA refuses jurisdiction to appraise the shares of the
Bank. The certification also includes a statement that the Bank will
comply with 12 U.S.C. § 52, 12 U.S.C. § 59, and 12 C.F.R. § 5.67.

**II. [Discussion]{.underline}**

The Bank may adopt Kentucky corporate governance procedures to the
extent that those procedures are not inconsistent with applicable
Federal banking statutes or regulations. OCC regulations expressly
permit a national bank to elect the corporate governance procedures of
the law of the state in which the main office of the bank is located
(here the State of Kentucky).[^4]

The Bank represents that reverse stock split transactions are permitted
under Kentucky law, and are consistent with applicable Federal banking
statutes or regulations. No provision of Federal law expressly prohibits
reverse stock splits. Several provisions of the National Bank Act
authorize the elements of a reverse stock split and, when read together,
allow a national bank to engage in a reverse stock split for a
legitimate corporate purpose if the bank provides adequate dissenting
shareholder rights.[^5] Based on these authorities, the OCC has
promulgated a regulation expressly permitting reverse stock splits if
the transaction serves a legitimate corporate purpose and provides
adequate dissenting shareholders\' rights.[^6]

The Bank will increase the par value of the Bank\'s shares to comply
with 12 U.S.C. § 52 by amending its articles of association. Banks may
amend their articles of association by the vote of the holders of a
majority of the voting shares of stock to determine the number and par
value of bank shares.[^7] The National Bank Act permits a national bank
to reduce its capital upon the vote of shareholders holding two-thirds
of its capital stock and OCC approval.[^8]

The Bank next proposes to replace each of the outstanding shares of
common stock with new common stock at the rate of one share of new
common stock for each 200 shares of common stock outstanding. The Bank
will pay cash for the fractional shares outstanding. National banks have
express authority to pay the cash equivalent of fractional shares of
stock.[^9] The cash equivalent must be based on the market value of the
stock or, if no market exists, a reliable and disinterested
determination as to the fair market value of the stock.[^10]

Judicial authority provides support for concluding that reverse stock
splits for legitimate corporate purposes are consistent with the
National Bank Act, where banks provide appropriate dissenters\' rights.
While the only Federal Court of Appeals case to address reverse stock
splits directly, *Bloomington Nat\'l Bank* v. *Telfer,* decided on the
facts that the transaction before it violated the National Bank Act, the
court declined to determine if reverse stock splits would be permissible
for valid business purposes if dissenting shareholders\' rights were
provided.[^11] The court also noted that the decision was limited to the
facts of the case.[^12]

In *NoDak Bancorporation* v. *Clarke,* the Eighth Circuit held that
national banks could effect freeze-out mergers to allow a holding
company to obtain 100 percent ownership so long as the national bank has
a valid corporate purpose and observes dissenters\' rights.[^13] The
*NoDak* court found that a national bank may engage in any merger not
inconsistent with 12 U.S.C. §§ 214a and 215-215a, and that freeze-out
mergers are consistent with those sections.[^14] More recently, a
district court in the Tenth Circuit relied on *NoDak* to hold that a
bank may effect a freeze-out merger to consolidate with another bank and
become a wholly-owned subsidiary of an existing bank holding
company.[^15]

In *Lewis v. Clark\[e\],* the Eleventh Circuit determined that a
national bank may not offer different consideration to shareholders when
the bank effects a freeze-out merger under 12 U.S.C.

§ 215a.[^16] The court held that the OCC lacked authority to approve
mergers where minority shareholders receive cash for their shares and
majority shareholders receive stock in the resulting bank, even in cases
where the minority shareholders have appraisal rights. That case did not
involve a decision, like the present case, where a regulation expressly
permits reverse stock splits. Since the OCC has adopted section 7.2023
following a notice and comment procedure, courts reviewing an OCC
decision approving a reverse stock split should give deference to the
OCC\'s reasonable interpretation of a statute that it administers.[^17]
Moreover, the OCC has permitted national banks to conduct reverse stock
splits in numerous situations since *Lewis* and *Bloomington* were
decided. In the period since *Lewis* and *Bloomington,* the OCC has
approved reverse stock splits for banks located in fourteen states in
cases where the banks had legitimate corporate purposes in conducting
the transactions.[^18] Thus, applicable statutory and regulatory
provisions and the weight of judicial precedent would permit reverse
stock splits for legitimate business purposes, provided dissenters\'
rights are available.

The Bank has articulated legitimate business purposes in effecting a
reverse stock split. The Bank indicates it wants to decrease the
administrative expenses incurred in servicing many stockholders who own
relatively small numbers of shares, including corporate expenses
associated with stockholder communications and meetings. Eliminating
burdens associated with a shareholder constituency is a proper business
purpose.[^19] It also is a valid business purpose to effect a merger in
order to reduce corporate expenses associated with shareholder
communications and meetings.[^20] The OCC expressly recognizes these
corporate purposes in its regulation permitting national banks to
conduct reverse stock splits.[^21]

To avoid undermining the shareholder protections of 12 U.S.C. §§ 214a
and 215-215a, however, a reverse stock split must provide shareholders
adequate dissenters\' rights to ensure that they receive a fair price
for their shares. Those dissenters\' rights need not be identical to
those located in sections 214a, 215, and 215a. Accordingly, the Bank may
effect a reverse stock split as long as it has a valid corporate purpose
for the transaction and observes appropriate dissenters\' rights.

AL 2002-6 does not specify all aspects of dissenters' rights that a bank
must offer to dissenting stockholders in connection with a reverse stock
split. For example, AL 2002-6 states that a bank must provide "\[a\]n
independent third-party appraisal of the shares if the bank and any
dissenting shareholders are unable to agree on the value of the
dissenting shares." However, AL 2002-6 does not state whether the
independent third-party appraisal is to be made by one appraiser or by a
committee of appraisers. As such, to the extent that specific aspects of
dissenters' rights are not covered by the guidelines set forth in AL
2002-6, the Bank proposes to follow the procedures set forth in 12
U.S.C. § 215a. In effect, the Bank will supplement the dissenters'
rights outlined in AL 2002-6 with certain aspects of the dissenters'
rights set forth in 12 U.S.C. § 215a, provided that any such additional
rights afforded by section 215a do not conflict with the rights set
forth in AL 2002-6.

Consequently, minority shareholders in the reverse stock split will
receive dissenters\' rights comparable to those under the National Bank
Consolidation and Merger Act (the "NBCMA").[^22] Specifically, the Bank
has represented that it will provide notice of dissenters\' rights to
the minority interest holders before the shareholder meeting acting on
the reverse stock split proposal; pay the cost of an independent third
party appraisal of the shares if the Bank and any dissenting
shareholders are unable to agree on the value of the dissenting shares;
and pay the cost of a binding arbitration by an independent third party,
if the court that would ordinarily hear an appraisal action under the
corporate governance procedures refuses jurisdiction to appraise the
shares of a national bank. The Bank will not pay the costs of attorneys'
fees incurred by and costs of experts retained by dissenting
shareholders for any such proceeding.

**III.** **[Conclusion]{.underline}**

For the above reasons, including the representations and commitments
made by the Bank, we find that the reverse stock split application is
legally authorized and meets the other statutory criteria for approval.
Accordingly, this application is hereby approved, subject to the
following conditions:

1 The Bank will elect the corporate governance provisions of Kentucky
law.

2\. The Bank will provide for dissenters\' rights comparable to those
found in 12 U.S.C.

> §§ 214a, 215, and 215a.

3\. If any shareholders dissent from the reverse stock split, the Bank
will pay the cost of any appraisal that may occur, but not the costs of
attorneys' fees incurred by and costs of experts retained by dissenting
shareholders.

4\. If the appropriate court(s) decline to accept jurisdiction of an
appraisal action, the Bank will pay for binding arbitration by an
independent third party to appraise the stock but not the costs of
attorneys' fees incurred by and costs of experts retained by dissenting
shareholders.

Please be advised that the above conditions of this approval shall be
deemed to be conditions \"imposed in writing by the agency in connection
with the granting of any application or other request\" within the
meaning of 12 U.S.C. § 1818(b)(1).

Please notify the OCC when the change in capital has been completed in
accordance with this approval. The notification should state the date of
the change, and the dollar amount of the reduction in the common stock
and surplus account associated with the payment for fractional shares.
The notification should include a certification that shareholders
approved the change in capital structure according to law, regulations,
and the Bank\'s Articles of Association. A secretary\'s certificate of
shareholder approval and a certified copy of the amendment to the
Articles of Association should be included. The notification also should
include a statement that the change in the capital structure complies
with all applicable laws and regulations. Upon receipt of the
notification, the OCC will review the reduction in capital attributable
to the payment for fractional shares.

If the reverse stock split is not consummated within one year from the
approval date, the approval shall automatically terminate unless the OCC
grants an extension of the time period. Please advise Brenda E. McNeese,
Senior Licensing Analyst, within 10 days of the effective date of the
reverse stock split.

Please include CAIS Control Number 2005-SO-12-0020 on all correspondence
related to this application.

This approval, and the activities and communications by OCC employees in
connection with the filing, do not constitute a contract, express or
implied, or any other obligation binding upon the OCC, United States,
any agency or entity of the United States, or any officer or employee of
the United States, and do not affect the ability of the OCC to exercise
its supervisory, regulatory and examination authorities under applicable
laws and regulations. The foregoing may not be waived or modified by any
employee or agent of the OCC or the United States.

If you have any questions, please contact Brenda E. McNeese, Senior
Licensing Analyst, at 214-720-5711, ext 5711.

Sincerely,

**signed**

Stephen A. Lybarger

Director for Licensing Activities

[^1]: 12 C.F.R. § 7.2000(b).

[^2]: 12 C.F.R. § 7.2023(a).

[^3]: 12 C.F.R. § 7.2023(b)(2).

[^4]: *See* 12 C.F.R. § 7.2000(b).

[^5]: *See* OCC Advisory Letter No. 2002-6 (July 17, 2002)(Reverse Stock
    Split Procedures); Conditional Approval 434 (Dec. 15, 2000);
    Interpretive Letter No. 786 (June 9, 1997); and Interpretive Letter
    No. 275 (Oct. 21, 1983).

[^6]: *See* 12 C.F.R. § 7.2023.

[^7]: *See* 12 U.S.C. § 21a; *see also* 12 U.S.C. § 52 (par value may
    not exceed \$100 per share).

[^8]: *See* 12 U.S.C. § 59.

[^9]: *See* 12 C.F.R. § 5.67(c).

[^10]: \"The cash equivalent is based on the market value of the stock,
    if there is an established and active market in the national bank\'s
    stock.\" *Id.* In the absence of an established and active market in
    the Bank\'s stock, the Bank obtained an independent valuation as to
    the fair market value of its shares.

[^11]: *Bloomington Nat\'l Bank* v. *Telfer,* 916 F.2d 1305 (7th Cir.
    1990) *(\"Bloomington\").*

[^12]: *See* id., 916 F.2d at 1308 n.4,1309.

[^13]: *NoDak Bancorporation* v. *Clarke,* 998 F.2d 1416 (8th Cir. 1993)
    *(\"NoDak\").*

[^14]: See *id.,* 998 F.2d at 1419-20 and 1425.

[^15]: *See Moody* v. *First National Bank, Sallisaw,* CY-00-306-5
    (E.D.Ok. July 5, 2001).

[^16]: *Lewis* v. *Clark\[e\],* 911 F.2d 1558 (11th Cir. 1990), *reh*
    \'g *denied,* 972 F.2d 1351 (1991) *(\"Lewis").*

[^17]: *NationsBank v. Variable Annuity Life Ins. Co*., 513 U.S. 251
    (1995); *United States* v. *Mead Corp,* 533 U.S. 218, 231 n.13
    (2001).

[^18]: *See* Advisory Letter 2002-6, *supra;* Conditional Approval 541
    (July 30, 2002).

[^19]: *See Leader v. Hycor, Inc.,* 479 N.E.2d 173, 178 (Mass. 1985);
    *see also Nash v. Farmers New World Life,* 1976 U.S. Dist. 15,846,
    \*48 (S.D. Ohio, 1976).

[^20]: *See Teschner* v. *Chicago Title* & *Trust Co.,* 322 N.E.2d 54,
    58 (III. 1974).

[^21]: 12 C.F.R. § 7.2023(b).

[^22]: Under the NBCMA, a dissenting shareholder must either vote
    against the merger, or give written notice of dissent prior to or at
    the shareholder meeting at which the shareholders vote on the
    merger. The value of the dissenting shareholders\' shares is
    determined by an appraisal made by a committee of three persons: one
    chosen by the dissenting shareholders, one chosen by the directors
    of the bank (as it exists after the merger), and one chosen by the
    other two members of the committee. If the committee fails to
    determine a value of the shares, or a dissenting shareholder is not
    satisfied with the value determined, the OCC must make an appraisal
    of the shares. *See* 12 U.S.C. §§ 214a(b), 215(b)-(d), and
    215a(b)-(d).