SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period
from_________to_________
Commission file number 0-11129
PIKEVILLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-0979818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
208 North Mayo Trail
P.O. Box 2947
Pikeville, Kentucky 41501
(address of principal executive offices) (Zip Code)
Registrant's telephone number (606) 432-1414
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90
days. Yes X No___
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practical date.
Common stock - 8,952,125 shares outstanding at
September 30, 1995
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by
independent public accountants; however, in the opinion of
management such information reflects all adjustments
necessary for a fair presentation of the results for the
interim period. All such adjustments are of a normal and
recurring nature.
The accompanying financial statements are presented in
accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally
required by generally accepted accounting principles or
those normally made in the registrant's annual report on
Form 10-K. Accordingly, the reader of the Form 10-Q should
refer to the registrant's Form 10-K for the year ended
December 31, 1994 for further information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
PIKEVILLE NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS September December 31
(in thousands) 1995 1994
Assets:
Cash and Cash Equivalents
Cash and due from banks $ 53,616 $ 64,267
Interest bearing deposits in other fin inst 1,250 1,906
Federal funds sold 27,665 13,925
Total cash and cash equivalents 82,531 80,098
Securities available for sale 86,980 87,415
Securities held to maturity (fair value of
$347,203 and $345,110, respectively) 347,381 363,546
Loans and lease financing, net of unearned 1,064,865 902,323
Less: Allowance for losses (16,463) (12,978)
Net Loans and lease financing 1,048,402 889,345
Loans held for sale 8,423 4,131
Premises and equipment, net 46,329 38,765
Interest receivable 13,447 11,242
Excess of cost over net assets acquired (net of
amortization of $5,037 and $4,315, respect 20,300 10,367
Other real estate (net of allowance for losses of
$445 and $1,852, respectively) 4,343 4,320
Other assets 12,124 10,205
Total Assets $1,670,260$1,499,434
Liabilities and Shareholders' Equity:
Deposits
Non-Interest bearing $179,896 $159,633
Interest bearing 1,226,018 1,086,754
Total Deposits 1,405,914 1,246,387
Federal funds purchased and securities
sold under repurchase agreements 22,413 25,735
Other short-term borrowings 73 5,419
Dividends payable 1,432 1,220
Interest payable 6,841 4,634
Other liabilities 7,834 4,699
Advances from Federal Home Loan Bank 65,830 69,760
Long-term debt 28,759 24,944
Total Liabilities 1,539,096 1,382,798
Shareholders' Equity:
Preferred stock, no par value, 300,000 shares
authorized and unissued
Common stock, $5 par value, 25,000,000 shares authorized;
shares issued and outstanding,
1995-8,952,125; 1994-8,592,287 44,761 42,961
Capital surplus 27,427 20,788
Retained earnings 59,295 54,928
Net unrealized depreciation on securities available
for sale, net of tax (319) (2,041)
Total Shareholders' Equity 131,164 116,636
Total Liabilities and Shareholders' Equity $1,670,260$1,499,434
See notes to consolidated financial statements.
<PAGE>
Pikeville National Corporation
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30 September 30
(in thousands) 1995 1994 1995 1994
Interest Income:
Interst and fees on loans
and lease finan $ 26,458 19,978 73,128 57,068
Interest and dividends on securities-
Taxable 6,128 5,745 18,234 17,389
Tax exempt 761 779 2,275 2,273
Interest on federal funds sold 877 594 2,514 1,415
Interest on deposits in other fin ins 25 38 107 105
34,249 27,134 96,258 78,250
Interest Expense:
Interest on deposits 15,116 10,007 41,271 28,884
Interest on federal funds purchased and securities
sold under repurchase agreements 458 363 1,159 863
Interest other short-term borrowings 4 23 72 69
Int on advances from FHLB 1,093 1,018 3,453 3,078
Interest on long-term debt 684 493 1,706 1,532
17,355 11,904 47,661 34,426
Net interest income 16,894 15,230 48,597 43,824
Provision for loan losses 1,615 1,097 4,008 4,344
Net interest income after provision for
loan losses 15,279 14,133 44,589 39,480
Non-interest income:
Service charges on deposit accounts 1,379 1,181 3,768 3,361
Gains on sale of loans, net 139 84 279 585
Insurance commissions 298 251 719 631
Trust income 371 423 1,054 1,194
Securities gains (losses), net 7 (61) 12 (45)
Other 218 525 1,942 1,475
2,412 2,403 7,774 7,201
Non-interest expenses:
Salaries and wages 5,148 4,390 14,459 13,138
Employee benefits 1,197 1,388 3,963 3,956
Occupancy, net 716 767 2,768 2,462
Equipment 977 827 2,707 2,456
Data processing 888 464 2,050 1,509
Stationery and office supplies 442 339 1,106 1,072
Taxes other than payroll, property
and income taxes 502 385 1,384 1,108
FDIC insurance 32 886 1,360 2,135
Losses associated with
mortgage-backed derivatives 0 2,750 0 2,750
Restructuring and reengineering costs 0 945 0 945
Other 3,853 3,037 10,205 7,984
13,755 16,178 40,002 39,515
Income before income taxes 3,936 358 12,361 7,166
Applicable income taxes (benefits) 1,202 (96) 3,814 1,534
Net Income $ 2,734 454 8,547 5,632
Net income per share:
Primary $ 0.30 0.05 0.96 0.65
Fully diluted 0.30 0.05 0.96 0.65
Average shares outstanding
Primary 8,966 8,604 8,922 8,601
Fully diluted 8,966 8,604 8,922 8,601
<PAGE>
PIKEVILLE NATIONAL CORPORATION Nine Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS September 30
(in thousands) 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,547 $ 5,632
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,934 2,598
Provision for loan and other real estate losses 4,381 5,095
Securities (gains) losses, net (12) 45
Gain on sale of loans, net (279) (585)
Losses on sale of assets, net 199 134
Net amortization of securities premiums 439 491
Loans originated for sale (17,150) (44,559)
Proceeds from sale of loans 13,137 51,679
Changes in:
Interest receivable (1,104) (569)
Interest payable 1,421 (238)
Other liabilities 2,166 2,821
Other assets (1,761) (581)
Net cash provided by operating activities 12,918 21,963
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to acquire net assets of subsidiaries (14,918) 0
Sales of securities available for sale 17,809 718
Proceeds from sale of securities held to maturity 0 14,370
Proceeds from maturity of securities available-for 42,857 15,422
Proceeds from maturity of securities held-to-matur 26,584 52,445
Proceeds from principal payments of mortgage backe132,961 28,620
Purchases of securities available-for-sale (28,237) (9,271)
Purchase of securities held-to-maturity (38,263) (36,936)
Purchase of mortgage backed securities (109,955) (62,230)
Net change in loans (50,705) (62,114)
Purchase of premises, equipment and other real est (4,158) (3,907)
Proceeds from sale of premises and equipment 228 530
Proceeds from sale of other real estate 2,275 1,791
Net cash used in investing activities (23,522) (60,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 23,714 3,588
Net change in federal funds purchased and securities sold
under repurchase agreements (8,322) 12,628
Net change in short-term borrowings (5,346) (3,715)
Advances from Federal Home Loan Bank 1,595 10,990
Repayments of advances from Federal Home Loan Bank(14,582) (10,075)
Proceeds from long-term debt 13,500 0
Payments on long-term debt (9,685) (10,193)
Proceeds from issuance of common stock 311 7,594
Dividends paid (3,967) (3,438)
Net cash provided by financing activities (2,782) 7,379
Net increase (decrease) in cash and cash equi(13,386) (31,220)
Cash and cash equivalents at beginning of year 80,098 109,922
Cash and cash equivalents of acquired banks 15,819 0
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,531 $ 78,702
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation - The accompanying information
has not been audited by independent public accountants;
however, in the opinion of management such information
reflects all adjustments necessary for a fair presentation
of the results for the interim period. All such adjustments
are of a normal and recurring nature.
The accompanying financial statements are presented in
accordance with the requirements of Form 10-Q and
consequently do not include all the disclosures normally
required by generally accepted accounting principles or
those normally made in the Corporation's Annual Report on
Form 10-K. Accordingly, the reader may wish to refer to the
Corporation's Form 10-K for the year ended December 31, 1994
for other information in this regard. The financial
statements and footnotes are included in the Corporation's
Annual Report to Shareholders, to which the reader is hereby
referred.
The accounting and reporting policies of Pikeville
National Corporation (the "Company"), and its subsidiaries
on a consolidated basis conform to generally accepted
accounting principles and general practices within the
banking industry.
Principles of Consolidation - The unaudited
consolidated financial statements include the accounts of
the Company, Pikeville National Bank & Trust Company and its
subsidiary, First Security Bank and Trust Company,
Commercial Bank, Exchange Bank of Kentucky, Farmers National
Bank, Farmers-Deposit Bank, First American Bank, Community
Trust Bank, FSB and its subsidiary, The Trust Company of
Kentucky, Woodford Bancorp, Inc., and its subsidiary, and
Commercial Bank of Middlesboro. All significant
intercompany transactions have been eliminated in
consolidation.
<PAGE>
Note 2 Securities
The amortized cost and fair value of securities available-
for-sale as of September 30, 1995 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $15,618 $15,739
Mortgage-backed pass through
certificates 9,136 9,262
Collateralized mortgage obligations 24,677 24,937
Other debt securities 3,455 3,469
Total debt securities 52,886 53,407
Equity securities 34,279 33,573
$87,165 $86,980
The amortized cost and fair value of securities held-to-
maturity as of September 30, 1995 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $93,727 $ 94,124
Obligations of states and political
subdivisions 55,998 56,766
Mortgage-backed pass through
certificates 53,838 53,826
Collateralized mortgage obligations 138,460 137,246
Other debt securities 5,358 5,241
$347,381 $347,203
Note 3 - Loans
Major classifications of loans are summarized as follows:
September 30 December 31
(in thousands) 1995 1994
Commercial, secured by real estate $ 254,533 $ 231,480
Commercial, other 190,265 183,533
Real Estate Construction 47,807 45,308
Real Estate Mortgage 373,363 290,998
Consumer 192,479 143,085
Equipment Lease Financing 6,418 7,919
$1,064,865 $ 902,323
<PAGE>
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
September 30 September 30
1995 1994
(in thousands)
Balance January 1 $12,978 $13,346
Allowances of acquired banks 1,536
Additions to reserve charged against operations 4,008 4,344
Recoveries 923 628
Loans charged off (2,982) (4,784)
Balance End of Period $16,463 $13,534
Effective January 1, 1995 the Company adopted FASB
Statement No. 114. This Statement requires impaired loans
to be measured to the present value of future cash flows or,
as a practical expedient, at the fair value of collateral.
Upon adoption, the Company recorded no additional loan loss
provision.
The carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time.
Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in
carrying value, while increases or decreases due to changes
in estimates of future payments and due to the passage of
time are reported as bad debt expense, if reductions, or
otherwise as interest income. Information regarding
impaired loans is as follows for the period ended September
30.
(in thousands) 1995
Average investment in impaired loans 7,759
Interest income recognized on impaired loans
including interest income recognized on
cash basis 395
Interest income recognized on impaired loans
on a cash basis 391
Information regarding impaired loans at September 30, 1995
is as follows.
(in thousands) 1995
Balance of impaired loans 9,142
Less portion for which no allowance for loan
losses is allocated 6,369
Portion of impaired loan balance for which an
allowance for credit losses is allocated 2,773
Portion of allowance for loan losses allocated
to the impaired loan balance 900
<PAGE>
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
September 30 December 31
1995 1994
(in thousands)
Senior Notes $17,230 $17,230
Bank Notes 8,600 4,000
Industrial Revenue Development Bonds 854 1,500
Kentucky Housing Corporation 386 467
Obligations under capital lease 1,582 1,614
Other 107 133
$28,759 $24,944
At September 30, 1995 the bank notes consist of $2.0
million of existing debt to National City Bank, Louisville,
Kentucky and $ 6.6 million of debt acquired on June 29, 1995
from Star Bank, Cincinnati, Ohio. The debt was extended
under a revolving credit line in the amount of $17.5
million. The credit line has a variable rate of interest of
Wall Street Journal prime minus eighty-eight basis points,
with interest payable quarterly. No principal payments are
required before the maturity of the note on June 29, 1997.
All of the outstanding capital stock of three affiliate
banks are pledged as security on the note. The bank notes
and related loan agreements require the maintenance of
certain capital and operational ratios, all of which have
been complied with on September 30, 1995.
Refer to the 1994 Annual Report to Shareholders for
additional information concerning rates and assets securing
long-term debt.
Note 6 - Acquisition
The Company acquired United Whitley Corporation,
Williamsburg, Kentucky ("Williamsburg"), and its subsidiary,
Bank of Williamsburg. The transaction was effected by an
exchange of 172,000 shares of the Company's stock for the
stock of Williamsburg. The acquisition was consummated on
November 3, 1995, and was accounted for as a pooling-of-
interests. Williamsburg had total assets of approximately
$41 million at September 30, 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Acquisitions
On February 2, 1995, the Company acquired all of the
outstanding stock of Community Bank of Lexington, Inc.,
Lexington, Kentucky ("Community Bank"). In connection with
the acquisition, the Company issued approximately 366
thousand shares of common stock with a market price of $24
per share. The transaction was accounted for as a purchase
with approximately $6.3 million of goodwill recognized in
the transaction. Community Bank had assets of approximately
$61 million at the time of acquisition. On March 31, 1995,
the offices of Community Bank became branches of Pikeville
National Bank and Trust Company, the lead bank of the
Company.
On May 31, 1995, the Company acquired all of the
outstanding stock of Woodford Bancorp, Inc., Versailles,
Kentucky ("Woodford")for approximately 967 thousand shares
of its common stock. The transaction was accounted for as a
pooling with all prior period financial information restated
to give effect to the transaction. Woodford had total
assets of approximately $103 million at the time of
acquisition.
On June 30, 1995, the Company acquired all of the
outstanding stock of Commercial Bank of Middlesboro,
Middlesboro, Kentucky ("Middlesboro") for approximately
$14.4 million in cash. The transaction was accounted for as
a purchase and goodwill of approximately $4.4 million was
recognized in the transaction and funds of $13.5 million
were borrowed in connection with the acquisition.
Middlesboro had total assets of approximately $106 million
at the time of acquisition.
On November 3, 1995 the acquired all of the outstanding
stock of United Whitley Corporation, Williamsburg, Kentucky
("Williamsburg"), and its subsidiary, Bank of Williamsburg
for approximately 172 thousand shares of its common stock.
The transaction was accounted for as a pooling, but without
restatement of prior period financial information, due to
immateriality. Williamsburg had assets of approximately $41
million at September 30, 1995.
<PAGE>
Income Statement Review
Net income for the quarter ended September 30, 1995
increased 502.2% to $2.7 million as compared to $454
thousand for the same period in 1994. Earnings per share
increased 500.0% from $0.05 per share for the third quarter
of 1994 to $0.30 per share for the third quarter of 1995.
Net income for the nine months increased 51.8% from $5.6
million in 1994 to $8.5 million for 1995. Earnings per
share for the nine months increased 47.7% from $0.65 per
share to $0.96 per share for 1994 and 1995, respectively.
Fully diluted earnings per share was the same as primary
earnings per share for the three and nine month periods in
both 1995 and 1994. The following table sets forth on an
annualized basis the return on average assets and return on
average shareholders' equity for the three and nine months
ended June 30, 1995 and 1994:
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
Return on average shareholders' equity 8.39% 1.52% 8.78% 6.40%
Return on average assets 0.65% 0.12% 0.71% 0.51%
The largest portions of the increases in net income for
the three and nine month periods for 1995 as compared to
1994 are due to losses associated with mortgage-backed
derivative securities and restructuring and reengineering
costs that were incurred in the third quarter of 1994. The
impact of these items decreased income for the three and
nine month periods ended September 30, 1994 by $2.4 million.
Net interest income increased $1.7 million for the
three months and $4.8 million for the nine months ended
September 30, 1995 as compared to the same periods in 1994.
Provision for loan losses expense increased $0.5 million for
the three months and decreased $0.3 million for the nine
months ended September 30, 1995, as compared to the same
periods ended September 30, 1994. Also contributing to
increased net income by lesser amounts for the same periods
was non-interest income, which increased for both the three
and nine month periods in 1995 compared to 1994. These
increases in net income were offset by increases in non-
interest expenses for the same periods. Non-interest
expense for the three months ended September 30, 1995 is
lower than the same period in 1994, but is higher after
adjusting for the derivative and restructuring costs. All
of the above items are discussed in more detail later in
this report. Income tax expense was also higher for the
three and nine month periods, due to increased net income,
increased nondeductible goodwill amortization from the
Community Bank acquisition, and an increase in nondeductible
legal and professional fees related to the acquisitions in
1995.
<PAGE>
Net Interest Income
Net interest income increased $1.7 million or 10.9% for
the three months ended September 30, 1995 and increased $4.8
million or 10.9% for the nine months ended September 30,
1995, as compared to the same periods in 1994. The increase
in net interest income for 1995 as compared to 1994 is
driven by increases in both the average earning assets and
the net interest margin for the nine month period and by
increases in average earning assets offset by a slight
decline in net interest margin for the three month period.
Average earning assets for the three months increased 13.8%
from $1.364 billion to $1.553 billion from 1994 to 1995 and
9.4% for the nine months, rising from $1.361 billion in 1994
to $1.489 billion in 1995. The acquisition of Commercial
Bank, Middlesboro was responsible for a large portion of the
growth in earning assets for the three months as compared to
1994. The largest part of the growth in earning assets is
attributable to growth in loans, our highest yielding
assets. Average loans increased from $879.3 million for the
quarter ended September 30, 1994 to $1.063 billion for the
third quarter of 1995. For the nine month period, average
loans increased from $862.0 million in 1994 to $996.3
million for the same period in 1995. Average loans as a
percentage of average earning assets increased from 64.5%
for the third quarter of 1994 to 68.4% for the third quarter
of 1995. For the nine months, average loans as a percentage
of average earning assets increased from 63.3% in 1994 to
66.9% for the same period in 1995. Income and fees from
loans contributed 77.3% of the total interest income for the
three months ended September 30, 1995 compared to 73.6% for
the same period in 1994. For the nine months, loans
contributed 76.0% of total interest income in 1995 and 72.9%
in 1994.
The following table summarizes the net interest spread
and net interest margin for the three and nine months ended
September 30, 1995 and 1994.
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
Yield on interest earning assets 8.94% 8.01% 8.81% 7.85%
Cost of interest bearing funds 5.07% 3.97% 4.90% 3.87%
Net interest spread 3.87% 4.04% 3.91% 3.98%
Net interest margin 4.47% 4.55% 4.53% 4.47%
<PAGE>
Provision for loan losses
An analysis of the changes in the allowance for loan
losses and selected ratios is set forth below.
Nine Months Ended
September 30
1995 1994
(in thousands)
Allowance Balance at January 1 $12,978 $13,346
Balances of acquired Banks 1,536 -
Additions to reserve charged against operations 4,008 4,344
Recoveries 923 628
Losses charged against allowance (2,982) (4,784)
Allowance Balance at June 30 $16,463 $13,534
Allowance for loan losses to period-end loans 1.55% 1.51%
Average loans, net of unearned income 996,321 861,953
Provision for loan losses to average loans,
annualized 0.54% 0.67%
Loan charge-offs, net of recoveries to average loans,
annualized 0.28% 0.64%
The Company has been able to decrease its loan loss
provision for 1995 compared to 1994 due to a decline in
credit losses suffered during the period as compared to the
prior year. Annualized credit losses net of recoveries were
0.28% of average loans for the nine months ended September
30, 1995 compared to 0.64% for 1994. The Company's
nonperforming loans (nonaccrual loans and 90 days or more
past due) as a percentage of total loans decreased from
1.35% at December 31, 1994 to 1.12% at September 30, 1995.
The following table compares certain ratios of the
Company at September 30, 1995 to its peer group, which
consists of bank holding companies with total assets of
between $1 billion and $3
billion. Peer group ratios are as of June 30, 1995, the
most recent information available.
Company Peer Group
Allowance for loan losses to period-end loans 1.55% 1.68%
90 days past due and non-accrual loans
to total loans 1.12% 1.27%
Non-accrual loans to total loans 0.89% 0.78%
Problem loans are reviewed on a monthly basis and
specific allocations are made based on review of collateral
and payment ability of the borrower. Loans are fully
reserved when review determines that there is an inability
to pay and the liquidation value of collateral is
insufficient. Loans 90 days or more past due are placed on
non-accrual. The Company has an internal loan review
department which is responsible for reviewing the loan
portfolios of all subsidiary banks.
<PAGE>
Any loans classified by regulatory examiners as loss,
doubtful, substandard or special mention that are not
included in non-performing loans do not (1) represent or
result from trends or uncertainties which management
reasonably expects will materially impact future operating
results, liquidity or capital resources or (2) represent
material credits about which management is aware of any
information which would cause management to have serious
doubt as to the ability of the borrowers to comply with the
loan repayment terms. The Company is unaware of any trends,
events or uncertainties that will have, or that are
reasonably likely to have, a material effect on the status
of its non-performing loans.
In May 1993, the Financial Accounting Standards Board
issued SFAS No. 114, Accounting By Creditors For Impairment
of a Loan. SFAS No. 114 requires that allowances for loan
losses on impaired loans be determined using the present
value of the estimated future cash flows of the loans,
discounted at the loan's effective interest rate. A loan is
considered impaired when it is probable that all principal
and interest amounts will not be collected according to the
loan contract. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994. The Company adopted SFAS
No. 114, as required, on January 1, 1995. The effect of
adopting the new guidance was not material to the
Corporation's consolidated financial statements.
Non-interest Income
Non-interest income increased $9 thousand for the three
months ended September 30, 1995 as compared to the same
period in 1994. For the nine months, non-interest income
increased 8.0% from $7.2 million in 1994 to $7.8 million in
1995. For the three month periods, service charges on
deposit accounts increased $198 thousand while all other non-
interest income categories except for trust income and other
non-interest income increased by lesser amounts while those
two categories experienced declines for the three months as
compared to the same period in 1994. For the nine month
periods in 1995 as compared to 1994, service charges on
deposit accounts increased by $407 thousand, insurance
commissions increased by $88 thousand, and other non-
interest income increased by $467 thousand. The largest
single component of the increase in other non-interest
income for the nine months was $345 thousand of gain on the
sale of deposits in connection with the sale of a branch of
the Company's savings bank affiliate. During the same
period, gains on sale of loans declined $306 thousand, trust
income declined $140 thousand, and net securities gains &
losses increased from a loss of $45 thousand to a gain of
$12 thousand.
<PAGE>
Non-interest Expenses
Non-interest expenses decreased 15.0% from $16.1
million for the three months ended September 30, 1994 to
$13.8 million for the same period in 1995. For the nine
month period, non-interest expenses increased 1.2% from
$39.5 million in 1994 to $40.0 million in 1995. Two
contributing factors were present in the three and nine
month periods in 1994 that were not present in 1995: Losses
incurred on certain mortgage derivative securities and costs
associated with restructuring and reengineering the
company's operations.
Mortgage-backed derivatives were purchased for certain
trust accounts administered by the Company's affiliates.
While all of these securities are guaranteed by either the
Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association and therefore, pose very
little, if any, credit, they exhibited an excessive
volatility which led to a significant decline in their
market value. The Company recognized a $2.75 million pre-
tax loss in these securities which represented the
difference between the book value carried in the customer
accounts and the actual market value. The Company purchased
the securities from the trust accounts and because
management believes there is no credit loss, expects to
collect the full face value over time. The securities are
carried at market value as available for sale and currently
no additional market value declines have been suffered.
During the latter part of 1993 and continuing through
1994, the Company intensively examined ways to improve its
performance through restructuring its operations and
reengineering its work flow processes. As a result of this
examination, the Company adopted a plan which downsized its
workforce by approximately 9% of total employment.
Severance and other related costs of downsizing in the
amount of $945 thousand were recognized in the third quarter
of 1994.
For the three month period, salaries and employee
benefits increased $567 thousand, equipment expenses
increased $150 thousand, data processing increased $424 and
other non-interest expenses increased by $816 thousand,
while FDIC insurance declined $854 thousand and the other
categories of non-interest expense increased by lesser
amounts. The decrease in FDIC insurance is due to the drop
in rates from $0.23 per $100 of insured deposits to $0.04
per $100 of insured deposits during the third quarter,
effective to May 31, 1995. This was effective for all
banks, but not for savings institutions. The largest
component of other non-interest expense is write-downs on
repossessed real estate, accounting for $545 thousand during
the third quarter of 1995. For the nine month period,
salaries and
<PAGE>
benefits increased $1.3 million, occupancy expense increased
$306 thousand, equipment expenses increased $251 thousand,
data processing increased $541 thousand, other taxes
increased $276 thousand and other non-interest expense
increased by $2.2 million, while stationery & printing
increased marginally and FDIC insurance decreased $775
thousand, all due to the third quarter decline. In addition
to the write downs on repossessed real estate, the largest
components of the increases in other non-interest expenses
for the three and nine month periods are increased legal and
professional fees in connection with the completed and
upcoming acquisitions and the costs of implementing the
company's profit improvement plan.
Balance Sheet Review
Total assets increased from $1.499 billion at December
31, 1994 to $1.670 billion at September 30, 1995, or an
annualized rate of 15.2%. Of the approximately $171 million
increase, $61 million came from the acquired assets of
Community Bank and $106 million came from the acquired
assets of Middlesboro. Loans increased by more than any
other asset category, rising from $0.902 billion at December
31, 1994 to $1.065 billion at September 30, 1995, an
annualized rate of 24.1%. Of the $163 million increase,
approximately $116 million came from the acquisitions of
Community Bank and Middlesboro. Loans accounted for 63.8%
of total assets at September 30, 1995 compared to 60.2% at
December 31, 1994. Federal funds sold also increased
significantly during the period, from $13.9 million at
December 31, 1994 to $27.7 million at September 30, 1995.
The majority of the asset growth was funded by deposit
growth as total deposits increased from $1.246 billion to
$1.406 billion at December 31, 1994 and September 30, 1995,
respectively, an annualized increase of 17.1%.
Approximately $133 million of this increase was due to the
acquisitions of Community Bank and Middlesboro. New long-
term debt of $13.5 million was incurred in connection with
the acquisition of Middlesboro as long-term debt increased
from $24.9 million at December 31, 1994 to $28.8 million at
September 30, 1995. Further information concerning the new
debt is contained in footnote 5 to the consolidated
financial statements. The Company also paid a $2 million
scheduled principal payment on existing debt during the
first half of 1995 and has paid 6.9 million in principal on
the $13.5 million of new debt. Advances from Federal Home
Loan Bank declined somewhat during the period, decreasing
from $69.8 million at December 31, 1994 to $65.8 million at
September 30, 1995.
<PAGE>
Loans
Loans increased from $0.902 billion at December 31,
1994 to $1.065 billion at September 30, 1995, or an
annualized rate of 24.1%. Approximately $50 million of the
growth came from the acquired loans of Community Bank and
approximately $66 million came from the acquired loans of
Middlesboro. All loan categories increased from December
31, 1994 to September 30, 1995 except for lease financing,
which decreased by $1.5 million. The largest increase of
any loan category was in real estate mortgage loans, which
increased from $291.0 million to $373.4 million. The
acquisitions of Community Bank and Middlesboro were the
biggest factors in this increase as approximately 90% of
Community Bank's loans and over 50% of Middlesboro's loans
were in the real estate mortgage category. Consumer loans
increased by the next largest amount, as it grew from $143.1
million at December 31, 1994 to $192.5 million at September
30, 1995. No other loan category grew by over 10%.
Non-accruing and 90 days past due loans decreased from
1.35% of net loans at December 31, 1994 to 1.12% at
September 30, 1995. Non accrual loans decreased 9 basis
points from 0.98% of net loans at December 31, 1994 to 0.89%
of net loans at September 30, 1995. 90 days past due loans
as a percent of net loans decreased 15 basis points from
0.38% to 0.23% for the same period. The reserve for loan
losses increased from 1.44% of net loans at December 31,
1994 to 1.55% of net loans at September 30, 1995. The
reserve for loan losses as a percentage of loans 90 days
past due and non-accrual loans increased from 106.1% at
December 31, 1994 to 138.4% at June 30, 1995.
<PAGE>
The following table summarizes the Company's loans that
are non-accrual or past due 90 days or more at September 30,
1995 and December 31, 1994:
As a % of Accruing Loans As a % of
Non-accrual Loan Balances Past Due 90 Loan Balances
Loans by category Days or More by category
( in thousands)
September 30, 1995
Commercial loans, secured by
real estate $3,778 1.48% $ 494 0.19%
Commercial loans, other 3,293 1.67% 140 0.07%
Consumer loans, secured by
real estate 2,272 0.54% 1,491 0.35%
Consumer loans, other 106 0.06% 406 0.21%
TOTAL $9,449 0.88% $2,531 0.24%
December 31, 1994
Commercial loans, secured by
real estate $5,584 2.41% $1,322 0.57%
Commercial loans, other 2,005 1.09% 520 0.28%
Consumer loans, secured by
real estate 1,199 0.36% 1,145 0.34%
Consumer loans, other 41 0.03% 414 0.27%
TOTAL $8,829 0.98% $3,401 0.38%
Allowance for loan losses
Management analyzes the adequacy of its allowance for
loan losses on a quarterly basis. The loan portfolio of
each subsidiary bank is analyzed by each major loan
category, with a review of the following areas: (i)
specific allocations based upon a review of selected loans
for loss potential; (ii) an allocation which estimates
reserves based upon the remaining pool of loans in each
category derived from historical net charge-off data,
delinquency trends and other relevant factors; and (iii) an
unallocated portion of the allowance which provides for a
margin of error in estimating the allocations described
above and provides for risks inherent in the portfolio which
may not be specifically addressed elsewhere.
Concentrations of credit are monitored through the use
of a subclassification coding system. A concentration of
credit is defined as a direct, indirect, or contingent
obligation exceeding 25% of a subsidiary bank's primary
capital. Management has currently identified concentrations
of credit in the coal industry, apartment complexes,
shopping centers, lodging and medical services. In order to
manage the risks associated with concentrations of credit,
management has taken the following actions: (i) developed
expertise, lending policies and guidelines, in making loans
within specific industries; (ii)
<PAGE>
changed the composition of loans to the coal industry by
making loans to larger, better capitalized companies which
are in a better position to react to changes in the coal
industry; and
(iii) established procedures for monitoring all credits,
including the establishment of a company-wide internal loan
review department.
Off-balance sheet risk is addressed by including
letters of credit in the Company's reserve adequacy analysis
and through a monthly review of all letters of credit
outstanding, including deteriorating letters of credit in
completing the Company's loan review and problem loan
analysis. Volume and trends in delinquencies are monitored
monthly by management and the boards of directors of the
respective subsidiary banks.
Securities
The Company uses its securities held to maturity for
production of income and to manage cash flow needs through
expected maturities. The company uses its securities
available for sale for income and for balance sheet
liquidity management. The book value of securities held to
maturity decreased $16.1 million from $363.5 million at
December 31, 1994 to $347.4 million at September 30, 1995.
Securities available for sale decreased $0.4 million from
$87.4 million at December 31, 1994 to $87.0 million at
September 30, 1995. Total securities as a percentage of the
Company's assets decreased during the six month period, as
securities accounted for 30.1% of total assets at December
31, 1994 and 26.0% of total assets at September 30, 1995.
Liquidity and Capital Resources
The Company's objective is to ensure that funds are
available at the subsidiary banks to meet deposit
withdrawals and credit demands without unduly penalizing
profitability. The Company continues to identify ways to
provide for liquidity on both a current and long-term basis.
On a long-term basis, the subsidiary banks rely mainly on
core deposits, certificates of deposits of $100,000 or more,
repayment of principal and interest on loans and federal
funds sold and purchased. The subsidiary banks also rely on
the sale of securities under repurchase agreements,
securities available for sale and Federal Home Loan Bank
borrowings.
Deposits increased $160 million or an annualized rate
of 17.1% from December 31, 1994 to September 30, 1995, of
which
<PAGE>
approximately $44 million was from the acquisition of
Community Bank and $89 million was from the acquisition of
Middlesboro. This growth has allowed the Company to remain
liquid in a time of increasing loan demand requiring more
funding than has been needed in recent years.
Due to the nature of the markets served by the
subsidiary banks, management believes that the majority of
deposits of $100,000 or more are no more volatile than its
core deposits. During the recent period of low interest
rates, these deposit balances remained stable as a
percentage of total deposits. In addition, arrangements
have been made with two correspondent banks for the purchase
of federal funds on an unsecured basis up to an aggregate of
$20,000,000, if necessary, to meet the Company's liquidity
needs.
The Company owns $87.0 million of securities designated
as available for sale and valued at market which are
available to meet liquidity needs on a continuing basis.
The Company also relies on Federal Home Loan Bank advances
for both liquidity and management of its asset/liability
position. On an increasing basis, the Company matches the
maturity of these advances primarily with pools of
residential mortgage loans which are not sold in the
secondary market, some of which have maturities of ten to
fifteen years. Federal Home Loan Bank advances decreased
from $69.8 million at December 31, 1994 to $65.8 million at
September 30, 1995. This amount is in compliance with the
Company's borrowing limits under applicable Federal Home
Loan Bank guidelines.
The Company generally relies upon net inflows of cash
from financing activities, supplemented by net inflows of
cash from operating activities, to provide cash used in its
investing activities. As is typical of many financial
institutions, significant financing activities include
deposit gathering, use of short-term borrowing facilities
such as federal funds purchased and securities sold under
repurchase agreements and the issuance of long-term debt.
The company borrowed new funds in the amount of $13.5
million in June to finance the acquisition of Middlesboro,
of which $6.9 million was repaid during the third quarter of
1995. This is under a $17.5 million credit line expiring
June 29, 1997, which is in the form of a revolving line of
credit (see footnote 5 to the consolidated financial
statements).The Company's primary investing activities
include purchases of investment securities and loan
originations.
<PAGE>
In conjunction with maintaining a satisfactory level of
liquidity, management monitors the degree of interest rate
risk assumed on the balance sheet. The Company monitors
its interest rate risk by the use of static and dynamic gap
models at the one year interval. The static gap monitors
the difference in interest rate sensitive assets and
interest rate sensitive liabilities as a percentage of total
assets that mature within the specified time frame. The
dynamic gap goes further in that
it assumes that interest rate sensitive assets and
liabilities will be reinvested. The Company uses the
Sendero system to monitor its interest rate risk.
The Company's principal source of funds is dividends
received from the subsidiary banks. Various federal and
state statutory provisions, as well as regulatory policies
and directives, limit the amount the subsidiary banks can
pay to the Company without regulatory approval. Under these
regulations, the amount of dividends that may be paid by any
subsidiary bank in any calendar year is generally limited to
the current year's net profits combined with its retained
net profits for the preceding two years. For the year 1995,
the subsidiary banks could declare dividends of
approximately $9.3 million plus any 1995 net profits
retained to the date of declaration without prior regulatory
approval.
The primary source of capital of the Company is
retained earnings. The Company declared dividends of $0.48
per share for the first nine months of 1995 and $0.45 for
the first nine months of 1994 while earnings per share for
the periods were $0.96 and $0.65 per share, respectively.
The Company retained 50 percent of earnings for the first
nine months of 1995. The Company's leverage, Tier 1
capital, and Total risk based capital ratios at June 30,
1995 were 6.77%, 10.40%, and 11.68%, compared to regulatory
minimums of 4.0%, 4.0%, and 8.0%, respectively.
The Company's subsidiaries meet the applicable minimum
regulatory capital requirements at September 30, 1995. The
Company remains comfortably above the minimum regulatory
capital requirements. The Banking regulators may alter
minimum capital requirements as a result of revising their
internal policies and their ratings of the Company's
subsidiary banks.
As of September 30, 1995, management is not aware of
any current recommendation by banking regulatory authorities
which if they were to be implemented would have, or are
reasonably likely to have, a material adverse effect on the
Company's liquidity, capital resources or operations.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a vote
of Security Holders None
Item 5. Other Information None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27. Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Corporation has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
PIKEVILLE NATIONAL CORPORATION
by
Date: November 8,1995 Signature
Richard M. Levy
Senior Vice President
Principal Financial Officer
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<PERIOD-START> JAN-01-1995
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