21
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 March 31, 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 - 7,977,247 shares outstanding at
March 31, 1995.
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
PIKEVILLE NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
(in thousands) 1995 1994
Assets:
Cash and Cash Equivalents
Cash and due from banks $ 45,993 $ 60,473
Interest bearing deposits in other financial
institutions 2,729 1,906
Federal funds sold 15,599 11,925
Total cash and cash equivalents 64,321 74,304
Securities available for sale 63,584 82,439
Securities held to maturity (approximate
market value of
$345,706 and $307,837, respectively) 356,723 325,945
Loans and lease financing, net of unearned
income 913,676 850,647
Allowance for losses (12,192) (11,015)
Net Loans and lease financing 901,484 839,632
Loans held for sale 6,846 4,131
Premises and equipment 39,814 37,149
Interest receivable 10,173 9,962
Excess of cost over net assets acquired (net of
amortization of $4,532 and $4,315,
respectively) 16,469 10,367
Other real estate (net of allowance for losses of
$2,115 and $1,852, respectively) 2,919 4,320
Other assets 8,428 9,528
Total Assets $ 1,470,761 $ 1,397,777
Liabilities and Shareholders' Equity:
Deposits
Non-Interest bearing $ 135,514 $ 145,288
Interest bearing 1,077,863 1,011,474
Total Deposits 1,213,377 1,156,762
Federal funds purchased and securities sold
under repurchase agreements 25,606 25,735
Other short-term borrowings 1,908 5,419
Dividends payable 1,272 1,220
Interest payable 5,399 4,363
Other liabilities 4,907 4,606
Advances from Federal Home Loan Bank 78,474 69,760
Long-term debt 24,275 24,944
Total Liabilities 1,355,218 1,292,809
Shareholders' Equity:
Preferred stock, no par value, 300,000 shares
authorized and unissued
Common stock, 25,000,000 shares authorized;
shares issued and outstanding,
1995-7,977,247; 1994-7,625,299 39,886 38,126
Capital surplus 27,399 20,788
Retained earnings 49,251 48,085
Net unrealized depreciation on securities
available-for-sale, net of tax $159
and $433, respectively (993) (2,031)
Total Shareholders' Equity 115,543 104,968
Total Liabilities and Shareholders' Equity $1,470,761 $ 1,397,777
PIKEVILLE NATIONAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Three Months Ended
March 31
(in thousands ) 1995 1994
Interest Income:
Interest and fees on loans and lease
financing $21,383 $17,258
Interest and dividends on securities-
Taxable 5,330 4,987
Tax exempt 660 597
Interest on federal funds sold 735 390
Interest on deposits in other
financial institutions 49 34
28,157 23,266
Interest Expense:
Interest on deposits 11,573 8,677
Interest on federal funds purchased
and securities sold under
repurchase agreements 374 232
Interest on other short-term
borrowings 46 24
Interest on advances from Federal
Home Loan Bank 1,156 1,022
Interest on long-term debt 510 525
13,659 10,480
Net interest income 14,498 12,786
Provision for loan losses 1,046 665
Net interest income after provision
for loan losses 13,452 12,121
Non-interest income:
Service charges on deposit accounts 1,073 937
Gains on sale of loans, net 39 370
Insurance commissions 184 134
Trust income 276 398
Securities gains (losses), net 2 14
Other 913 432
2,487 2,285
Non-interest expenses:
Salaries and wages 4,442 4,224
Employee benefits 1,348 1,247
Occupancy, net 817 773
Equipment 827 728
Data processing 585 450
Stationery, printing and office
supplies 408 348
Taxes other than payroll, property
and income 403 344
FDIC insurance 659 623
Other 3,010 2,106
12,499 10,843
Income before income taxes 3,440 3,563
Applicable income taxes 1,014 993
Net Income $ 2,426 $ 2,570
Net income per share:
Primary $ 0.31 $ 0.34
Fully diluted 0.31 0.34
Average shares outstanding
Primary 7,873 7,629
Fully diluted 7,873 7,629
PIKEVILLE NATIONAL CORPORATION Three Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS March 31
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 2,426 2,570
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 973 829
Provision for loan and other real estate
losses 1,150 665
Securities gains, net (2) (14)
Gain on sale of loans, net (39) (370)
Gain on sale of assets (169) (24)
Net amortization of securities premiums 266 463
Loans originated for sale (6,464) (18,806)
Proceeds from sale of loans 3,788 25,851
Changes in:
Interest receivable 150 255
Interest payable 752 (454)
Other liabilities 262 4,620
Other assets 1,451 (5,582)
Net cash provided by operating activities 4,544 10,003
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities
available-for-sale 33,847 2,461
Proceeds from maturity of securities held-
to-maturity 3,859 34,760
Proceeds from principal payments on
mortgage backed securities 85,705 12,685
Purchases of securities available-for-sale (5,365) (3,055)
Purchase of securities held-to-maturity (23,517) (18,324)
Purchase of mortgage backed securities (98,216) (52,283)
Net change in loans (13,253) (11,286)
Purchase of premises, equipment and other
real estate (1,653) (1,078)
Proceeds from sale of premises and
equipment 31 142
Proceeds from sale of other real estate 1,516 260
Net cash used in investing activities (17,046) (35,718)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 10,296 (1,986)
Net change in federal funds purchased and
securities sold under
repurchase agreements (5,129) 7,516
Net change in short-term borrowings (3,511) (2,189)
Advances from Federal Home Loan Bank 1,300 9,511
Repayments of advances from Federal Home
Loan Bank (1,643) (1,352)
Payments on long-term debt (669) (7,953)
Proceeds from issuance of common stock 257 7,550
Dividends paid (1,220) (1,053)
Net cash provided by (used in)
financing activities (319) 10,044
Net increase (decrease in cash and cash
equivalents (12,821) (15,671)
Cash and cash equivalents at beginning of
year 74,304 103,573
Cash and cash equivalents of acquired banks 2,838 0
CASH AND CASH EQUIVALENTS AT END OF PERIOD 64,321 87,902
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 and Community Trust Bank, FSB and its subsidiary.
All significant intercompany transactions have been eliminated in
consolidation.
Note 2 - Securities
As of January 1, 1994, the Company changed its accounting for
debt and equity securities to adopt Statement of Financial
Accounting Standards No. 115, ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly,
securities are classified into held-to-maturity, available-for-
sale, and trading categories. Held-to-maturity securities are
those which the Company has the positive intent and ability to
hold to maturity, and are reported at amortized cost. Available-
for-sale securities are those which the Company may decide to
sell if needed for liquidity, asset-liability management, or
other reasons. Available-for sale securities are reported at
fair value, with unrealized gains or losses included as a
separate component of equity, net of tax.
The amortized cost and fair value of securities available-for-
sale are as of March 31, 1995 summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $7,635 $7,910
Mortgage-backed pass through certificates 9,917 9,907
Collateralized mortgage obligations 9,795 9,597
Other debt securities 4,590 4,548
Total debt securities 31,937 31,962
Equity securities 32,515 31,622
$64,452 $63,584
The amortized cost and fair value of securities held-to-maturity
as of March 31, 1995 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $112,027 $110,683
States and political subdivisions 50,571 46,358
Mortgage-backed pass through
certificates 54,965 53,460
Collateralized mortgage obligations 133,084 129,405
Other debt securities 6,076 5,800
Total Securities $356,723 $345,706
Note 3 - Loans
Major classifications of loans are summarized as follows:
March 31 December 31
(in thousands) 1995 1994
Commercial, secured by real estate $221,519 $220,066
Commercial, other 182,659 172,199
Real Estate Construction 43,442 43,161
Real Estate Mortgage 306,947 271,478
Consumer 152,282 135,824
Equipment Lease Financing 6,827 7,919
$913,676 $850,647
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
March 31 March 31
1995 1994
(in thousands)
Balance January 1 $11,015 $11,960
Allowances of acquired banks 376
Additions to reserve charged against
Operations 1,046 665
Recoveries 351 211
Loans charged off (596) (951)
Balance End of Period $12,192 $11,885
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 March
31.
(in thousands) 1995
Average investment in impaired loans 5,738
Interest income recognized on impaired loans
Including interest income recognized on
cash basis 18
Interest income recognized on impaired loans
on a cash basis 18
Information regarding impaired loans at March 31, 1995 is as
follows.
(in thousands) 1995
Balance of impaired loans 5,697
Less portion for which no allowance for loan
losses is allocated 3,010
Portion of impaired loan balance for which an
allowance for credit losses is allocated 2,687
Portion of allowance for loan losses allocated
to the impaired loan balance 592
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
March 31 December 31
1995 1994
(in thousands)
Senior Notes $17,230 $17,230
Bank Note 4,000 4,000
Industrial Revenue Development Bonds 854 1,500
Kentucky Housing Corporation 467 467
Obligations under capital lease 1,604 1,614
Other 120 133
$24,275 $24,944
The bank note and related loan agreement require the
maintenance of certain capital and operational ratios, all of
which have been complied with on March 31, 1995.
Refer to the 1994 Annual Report to Shareholders for
information concerning rates and assets securing long-term debt.
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.
The Company also has definitive agreements in place for the
acquisition of Woodford Bancorp, Inc., Versailles, Kentucky
("Woodford") and Commercial Bank of Middlesboro, Middlesboro,
Kentucky ("Middlesboro").
The acquisition of Woodford is expected to be consummated on
May 31, 1995 and will be accounted for as a pooling-of-interests.
Each of Woodford's 43 thousand outstanding shares of common stock
will be exchanged for 20 shares of the Company's common stock,
subject to an increase in certain circumstances based on the
market price of the Company's common stock. Woodford has total
assets of approximately $102 million.
The acquisition of Middlesboro is expected to be consummated
on June 30, 1995 and will be accounted for as a purchase. The
Company will acquire Middlesboro's 150 thousand shares of
outstanding common stock for $14.4 million in cash. Goodwill of
approximately $6 million is expected to be recognized in the
transaction. Middlesboro has total assets of approximately $93
million. The Company expects to use a combination of internally
generated funds and long-term debt to finance the acquisition.
Income Statement Review
Net income for the three months ended March 31, 1995 was
$2.4 million or $0.31 per share compared to $2.6 million or $0.34
per share for the same period in 1994. Fully diluted earnings per
share was the same as primary earnings per share for the three
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 months
ended March 31, 1995 and 1994:
Three Months Ended
March 31
1995 1994
Return on average shareholders' equity 8.63% 10.07%
Return on average Assets 0.67% 0.76%
Net income for the three months ended March 31, 1995
decreased 5.6%, as compared to the same period in 1994. Net
interest income for the three months ended March 31 increased
$1.7 million or 13.4% for 1995 as compared to the same period in
1994. Provision for loan losses increased $0.4 million or 57.3%
for the first quarter of 1995 as compared to 1994. Gains on
securities and from the sale of loans both declined for the three
months ended March 31, 1995 as compared to 1994. Gains on sale
of loans declined $0.3 million or 89.5% for the three month
period and securities gains declined $12 thousand for 1995 as
compared to 1994. Non-interest expenses increased by $1.7
million or 15.3% for the three months and non-interest income,
exclusive of gains from sales of loans and securities, increased
by $0.5 million or 28.7% for 1995 as compared to 1994.
Net Interest Income
Net interest income for the three months ended March 31,
1995 increased 13.4% or $1.7 million from the same period in
1994. For the three month period, yield on interest earning
assets was ninety basis points higher and cost of interest
bearing funds was eighty-one basis points higher for 1995 as
compared to 1994. This contributed to the rise in net interest
margin as it increased twenty basis points in 1995 over the same
period in 1994, rising from 4.32% to 4.52%. Much of this is due
to the growth in loans, our highest yielding asset. Average
loans as a percentage of average earning assets increased from
64.11% in the first quarter of 1994 to 66.22% in the first
quarter of 1995.
The following table summarizes the net interest spread and
net interest margin for the three months ended March 31, 1995 and
1994.
Three Months Ended
March 31
1995 1994
Yield on average interest earning assets 8.64% 7.74%
Cost of average interest bearing funds 4.66% 3.85%
Net interest spread 3.98% 3.89%
Net interest margin 4.52% 4.32%
Provision for loan losses
An analysis of the changes in the allowance for loan losses
and selected ratios is set forth below.
Three Months Ended
March 31
1995 1994
(in thousands)
Allowance Balance at January 1 $11,015 $11,960
Balances of acquired Banks 376 0
Provision for loan losses 1,046 665
Recoveries 351 211
Losses charged against allowance (596) (951)
Allowance Balance at March 31 $12,192 $11,885
Allowance for loan losses to period-end loans 1.33% 1.48%
Average loans, net of unearned income 891,904 798,131
Provision for loan losses to average loans,
annualized 0.47% 0.34%
Loan charge-offs, net of recoveries to average loans,
annualized 0.11% 0.38%
The increase in the provision for loan losses was not due to
losses in the portfolio, as evidenced by the low ratio of charge-
offs to average loans, but was a general build-up due to growth
in the loan portfolio. Total net charge-offs for the three
months declined from $0.7 million or 0.38% of average loans to
$0.2 million or 0.11% of average loans for 1995 as compared to
1994. The Company's nonperforming assets (nonaccrual loans and
repossessed properties) as a percentage of total loans and
foreclosed properties decreased from 1.78% at December 31, 1994
to 1.57% at March 31, 1995.
The following table compares certain ratios of the Company
at March 31, 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 December 31, 1994, the most
recent information available.
Company Peer Group
Allowance for loan losses to period-end loans 1.33% 1.73%
90 days past due and non-accrual loans
to total loans 1.27% 0.99%
Non-accrual loans to total loans 0.97% 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.
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
Total non-interest income, including securities gains and
losses and gains from sale of loans, increased $0.2 million or
8.8% for the three months ended March 31, 1995 as compared to the
same period in 1994. Exclusive of securities gains and losses
and gains from sale of loans, non-interest income increased from
$1.9 million to $2.4 million for the three months ended March
31, 1995, as compared to 1994. Gains from sale of loans declined
from $0.4 million to $39 thousand for the three months ended
March 31, 1995, as compared to the same periods in 1994. Non-
interest income was up 28.7% for the three months, exclusive of
gains from loan sales and securities transactions, as compared to
the same periods in 1994. The largest portion of the increase in
the three months was an increase in other non-interest income,
which increased from $0.4 million to $0.9 million or 111.3% for
the first three months of 1995, as compared to 1994. The largest
portion of the increase, $0.3 million, was due to the sale of the
deposits in connection with the sale of a branch of the Company's
savings bank affiliate. Service charges on deposit accounts and
insurance commissions also increased for the first quarter of
1995 as compared to 1994, while trust income declined for 1995 as
compared to the same period in 1994.
Non-interest Expenses
Non-interest expenses increased by $1.7 million or 15.3% for
the three months ended March 31, 1995, as compared to the same
period in 1994. Of the increase, the largest portion was due to
an increase in other non-interest expense, which rose 43.0% from
$2.1 million to $3.0 million from the first quarter of 1994 to
the first quarter of 1995. Increases in legal and professional
fees accounted for $0.4 million of the $0.9 million increase,
with a large portion due to the Company's ongoing acquisitions.
The implementation of the Company's profit improvement plans has
also contributed to the increase in other non-interest expense,
and is expected to also negatively impact earnings during the
second quarter of 1995.
Salaries and employee benefits increased $0.3 million or
5.8% for the first quarter of 1995 as compared to 1994, the
largest dollar increase of any other category. All other
categories of non-interest expense also increased.
Balance Sheet Review
Total assets increased by $73.0 million or an annualized
rate of 20.9% from December 31, 1994 to March 31, 1995. Of this
increase, approximately $61 million was due to the acquired
assets of Community Bank. Loans net of unearned interest
experienced the greatest growth as it increased by $63.0 million
or an annualized rate of 29.6% while cash and cash equivalents
decreased by $10.0 million as the Company was able to place more
of its resources in higher earning assets. Of the loan growth,
approximately $50 million was due to the acquisition of Community
Bank.
Most of the asset growth was funded by growth in deposits as
deposits increased $56.6 million or an annualized rate of 19.6%.
Approximately $44 million of the growth in deposits came from the
acquisition of Community Bank. No other asset liability category
experienced significant growth except advances from the Federal
Home Loan Bank, which increased from $69.8 million at December
31, 1994 to $78.5 million at March 31, 1995. The majority of the
increase was due to the Community Bank acquisition.
Loans
Loans increased $63.0 million or an annualized rate of 29.6%
from December 31, 1994 to March 31, 1995, with $50 million of the
growth coming from the acquisition of Community Bank. Most loan
categories experienced healthy growth as residential mortgage
loans grew $35.5 million, other commercial loans grew $10.5
million and consumer loans grew $16.5 million while real estate
construction and commercial real estate loans grew by lesser
amounts and equipment lease financing declined slightly.
Non-accruing and 90 days past due loans decreased from
1.28% of net loans at December 31, 1994 to 1.26% at March 31,
1995. Non accrual loans increased 2 basis points from 0.95% of
net loans at December 31, 1994 to March 31, 1995. 90 days past
due loans as a percent of net loans decreased 4 basis points from
0.33% to 0.29%. The reserve for loan losses increased from 1.29%
of net loans at December 31, 1994 to 1.33% of net loans at March
31, 1995. The reserve for loan losses as a percentage of loans
90 days past due and non-accrual loans increased from 100.77% at
December 31, 1994 to 105.52% at March 31, 1995. Pikeville National
Corporation has no restructured loans at March 31, 1995.
The following table summarizes the Company's loans that are
non-performing or past due 90 days or more at March 31, 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)
March 31, 1995
Commercial loans,
secured by
real estate $3,795 1.71% $ 481 0.22%
Commercial loans,
other 3,597 1.90% 737 0.39%
Consumer loans,
secured by
real estate 1,428 0.41% 1,252 0.36%
Consumer loans,
other 42 0.03% 267 0.18%
TOTAL $8,862 0.97% $2,737 0.30%
December 31, 1994
Commercial loans,
secured by
real estate $5,193 2.36% $ 762 0.35%
Commercial loans,
other 1,678 0.93% 520 0.29%
Consumer loans,
secured by
real estate 1,199 0.38% 1,145 0.36%
Consumer loans,
other 23 0.02% 411 0.30%
TOTAL $8,093 0.95% $2,838 0.33%
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)
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 increased $30.8
million from $325.9 million at December 31, 1994 to $356.78
million at March 31, 1995. Securities available for sale
decreased $18.8 million from $82.4 million at December 31, 1994
to $63.6 million at March 31, 1995. Total securities as a
percentage of the Company's assets decreased during the three
month period, as securities accounted for 29.2% of total assets
at December 31, 1994 and 28.6% of total assets at March 31, 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 $56.6 million or an annualized rate of
19.6% from December 31, 1994 to March 31, 1995, of which
approximately $46 million was from the acquisition of Community
Bank. 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 $63.6 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 increased
from $69.8 million at December 31, 1994 to $78.5 million at March
31, 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 repurchase agreements and the issuance of long-term
debt. The Company's primary investing activities include
purchases of investment securities and loan originations.
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 an outside vendor utilizing
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 $7.7 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 $0.16 per share for
the first three months of 1995 and $0.15 for the first three
months of 1994 while earnings per share for the periods were
$0.31 and $0.34 per share, respectively. The Company retained 48
percent of earnings for the first three months of 1995. The
Company's leverage, Tier 1 capital, and Total risk based capital
ratios at March 31, 1995 were 6.90%, 10.50%, and 11.77%, 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 March 31, 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 March 31, 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.
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
Item 6. Exhibits and Reports on Form 8-K None
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: May 12, 1995 Richard M. LevySignature
Richard M. Levy
Senior Vice President
Principal Financial Officer
