5
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, 1996
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
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 - 9,124,314 shares outstanding at October 31, 1996
<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, 1995 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>
Consolidated Balance Sheets
September 30 December 31
(In thousands except share amounts) 1996 1995
Assets:
Cash and due from banks $ 69,168 $ 63,017
Interest bearing deposits in
other financial institutions 1,448 4,440
Federal funds sold 0 39,555
Securities available-for-sale 238,001 279,717
Securities held-to-maturity (fair value
of $137,181 and $150,315, respectively) 141,530 150,721
Loans 1,266,147 1,115,068
Allowance for loan losses (18,764) (16,082)
Net loans 1,247,383 1,098,986
Premises and equipment, net 46,181 47,553
Excess of cost over net assets acquired
(net of accumulated amortization of
$6,401 and $5,469, respectively) 20,086 20,110
Other assets 36,506 26,071
Total Assets $ 1,800,303 $ 1,730,170
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $ 191,651 $ 186,829
Interest bearing 1,270,327 1,280,614
Total deposits 1,461,978 1,467,443
Federal funds purchased and other
short-term borrowings 48,421 20,383
Other liabilities 18,096 17,047
Advances from Federal Home Loan Bank 112,178 63,629
Long-term debt 19,169 27,873
Total Liabilities 1,659,842 1,596,375
Shareholders' Equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued and outstanding,
1996 - 9,124,314; 1995 - 9,124,314 45,622 45,622
Capital surplus 27,883 27,883
Retained earnings 68,851 59,934
Net unrealized appreciation (depreciation)
on securities available-for-sale,
net of tax (1,895) 356
Total Shareholders' Equity 140,461 133,795
Total Liabilities and
Shareholders' Equity $ 1,800,303 $ 1,730,170
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Income
Three months ended Nine months ended
September 30 September 30
(In thousands except per share data) 1996 1995 1996 1995
Interest Income:
Interest and fees on loans $ 30,843 $ 26,458 $ 86,972 $ 73,128
Interest and dividends on securities
Taxable 5,030 6,128 17,239 18,234
Tax exempt 741 761 2,259 2,275
Interest on federal funds sold 0 877 450 2,514
Interest on deposits in other financial
institutions 20 25 43 107
Total Interest Income 36,634 34,249 106,963 96,258
Interest Expense:
Interest on deposits 15,029 15,116 45,375 41,271
Interest on federal funds purchased and
other short-term borrowings 399 462 957 1,231
Interest on advances from Federal
Home Loan Bank 1,636 1,093 3,728 3,453
Interest on long-term debt 447 684 1,493 1,706
Total Interest Expense 17,511 17,355 51,553 47,661
Net interest income 19,123 16,894 55,410 48,597
Provision for loan losses 2,003 1,615 5,177 4,008
Net interest income after provision
for loan losses 17,120 15,279 50,233 44,589
Noninterest Income:
Service charges on deposit accounts 1,634 1,379 4,517 3,768
Gains on sale of loans, net 698 139 1,449 279
Trust income 392 371 1,190 1,054
Securities gains, net 5 7 65 12
Other 967 516 3,396 2,661
Total Noninterest Income 3,696 2,412 10,617 7,774
Noninterest Expense:
Salaries and employee benefits 6,989 6,345 21,266 18,422
Occupancy, net 987 716 2,937 2,768
Equipment 926 977 2,810 2,707
Data processing 648 888 1,856 2,050
Stationery, printing and office supplies 322 442 1,203 1,106
Taxes other than payroll, property
and income 512 502 1,523 1,384
FDIC insurance 7 32 20 1,360
Other 3,309 3,853 9,201 10,205
Total Noninterest Expense 13,700 13,755 40,816 40,002
Income before income taxes 7,116 3,936 20,034 12,361
Income tax expense 2,210 1,202 6,188 3,814
Net income $ 4,906 $ 2,734 $ 13,846 $ 8,547
Net income per share $ 0.54 $ 0.30 $ 1.52 $ 0.96
Average shares outstanding 9,139 8,966 9,139 8,922
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Cash Flows
Nine months ended
September 30
(In thousands) 1996 1995
Cash flows from operating activities:
Net income $ 13,846 $ 8,547
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,631 2,934
Provision for loan and other real estate losses 5,240 4,381
Securities gains, net (65) (12)
Gain on sale of loans, net (1,449) (279)
Gain on sale of assets (18) 199
Net amortization of securities premiums 427 439
Loans originated for sale (24,356) (17,150)
Proceeds from sale of loans 28,899 13,137
Changes in:
Other assets (9,931) (2,865)
Other liabilities 1,049 3,587
Net cash provided by operating activities 17,273 12,918
Cash flows from investing activities:
Payments to acquire net assets of subsidiaries 0 (14,918)
Proceeds from:
Sale/call of securities available-for-sale 11,797 17,809
Maturity of securities available-for-sale 35,291 42,857
Maturity of securities held-to-maturity 10,239 26,584
Principal payments on mortgage-backed
securities 34,824 132,961
Purchase of:
Securities available-for-sale (40,339) (28,237)
Securities held-to-maturity (3,441) (38,263)
Mortgage-backed securities (1,228) (109,955)
Net change in loans (157,853) (50,705)
Net change in premises and equipment (2,018) (3,930)
Other 1,570 2,275
Net cash used in investing activities (111,158) (23,522)
Cash flows from financing activities:
Net change in deposits (5,465) 23,714
Net change in federal funds purchased and
other short-term borrowings 28,038 (13,668)
Advances from Federal Home Loan Bank 61,145 1,595
Repayments of advances from Federal
Home Loan Bank (12,596) (14,582)
Proceeds from long-term debt 1,000 13,500
Payments on long-term debt (9,704) (9,685)
Issuance of common stock - 311
Dividends paid (4,929) (3,967)
Net cash provided by (used in)
financing activities 57,489 (2,782)
Net increase (decrease) in cash and
cash equivalents (36,396) (13,386)
Cash and cash equivalents at beginning of year 107,012 80,098
Cash and cash equivalents of acquired banks - 15,819
Cash and cash equivalents at end of period $ 70,616 $ 82,531
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Pikeville National
Corporation (the "Corporation"), 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 Corporation,
Pikeville National Bank & Trust Company and its subsidiary, First
Security Bank & Trust Co., Commercial Bank (West Liberty), The
Exchange Bank of Kentucky, Farmers National Bank, Farmers-Deposit
Bank, First American Bank, Community Trust Bank, FSB, Trust Company of
Kentucky, The Woodford Bank and Trust Company and Commercial Bank
(Middlesboro). All significant intercompany transactions have been
eliminated in consolidation.
<PAGE>
Note 2 - Securities
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 September 30, 1996 summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 57,798 $ 57,737
Mortgage-backed pass through
certificates 122,936 121,659
Collateralized mortgage obligations 20,070 19,584
Other debt securities 4,028 3,917
Total debt securities 204,832 202,897
Equity securities 35,822 35,104
Total Securities $240,654 $238,001
The amortized cost and fair value of securities held-to-maturity
as of September 30, 1996 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 27,346 $ 4,555
States and political subdivisions 56,842 56,966
Mortgage-backed pass through
certificates 45,467 44,208
Collateralized mortgage obligations 11,875 11,452
Total Securities $141,530 $137,181
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
September 30 December 31
(in thousands) 1996 1995
Commercial, secured by real estate $ 267,123 $ 258,541
Commercial, other 226,564 192,127
Real Estate Construction 70,370 51,539
Real Estate Mortgage 408,824 398,288
Consumer 289,002 208,662
Equipment Lease Financing 4,264 5,911
$1,266,147 $1,115,068
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
September 30 September 30
1996 1995
(in thousands)
Balance January 1 $16,082 $12,978
Allowances of acquired banks - 1,536
Additions to reserve charged against operations 5,177 4,008
Recoveries 1,784 923
Loans charged off (4,279) (2,982)
Balance End of Period $18,764 $16,463
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) 1996
Average investment in impaired loans 10,613
Interest income recognized on impaired loans
Including interest income recognized on
cash basis 375
Interest income recognized on impaired loans
on a cash basis 375
<PAGE>
Information regarding impaired loans at September 30, 1996 is as
follows.
(in thousands) 1996
Balance of impaired loans 10,587
Less portion for which no allowance for loan
losses is allocated 8,516
Portion of impaired loan balance for which an
allowance for credit losses is allocated 2,071
Portion of allowance for loan losses allocated
to the impaired loan balance 900
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
September 30 December 31
1996 1995
(in thousands)
Senior Notes $17,230 $17,230
Bank Note 0 2,000
Revolving Bank Note 0 5,700
Industrial Revenue Development Bonds 0 854
Obligations under capital lease 1,535 1,571
Other 404 518
$19,169 $27,873
Refer to the 1995 Annual Report to Shareholders for information
concerning rates and assets securing long-term debt.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Pikeville National Corporation (the "Corporation") is a multi-
bank holding company headquartered in Pikeville, Kentucky. The
Corporation owns nine commercial banks, one savings bank and one trust
company. Through its affiliates, the Corporation has over sixty
banking locations serving 85,000 households in nineteen Eastern and
Central Kentucky counties. The Corporation had total assets of $1.80
billion and total shareholders' equity of $140 million as of September
30, 1996. The Corporation's common stock is listed on NASDAQ under
the symbol PKVL. Market makers are Robinson Humphrey Co.,Inc.,
Atlanta, Georgia; Morgan, Keegan and Company, Inc., Memphis,
Tennessee; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky;
Bear, Stearns & Co. Inc., New York, New York and Herzog, Heine,
Geduld, Inc., New York, New York.
On August 15, 1996, the Corporation's shareholders overwhelmingly
approved changing the Corporation's name to Community Trust Bancorp,
Inc., in order to better identify the Corporation with the communities
served throughout Eastern and Central Kentucky, as opposed to just the
Pikeville area. The name change will be effective as of January 1,
1997.
At the time of the name change on January 1, 1997, the
Corporation will merge its nine commercial banks into one commercial
bank, which will be named Community Trust Bank, NA. The former
commercial banks will operate their branch locations under the name of
Community Trust Bank, NA, Pikeville National Bank and Trust Company or
the name formerly used by the affiliate commercial bank (e.g.
Commercial Bank). The Corporation's savings bank, Community Trust
Bank, FSB and its trust company, Trust Company of Kentucky, will
continue to operate as separate entities.
Acquisitions
After making no acquisitions during the years 1992 through 1994,
the Corporation resumed its strategic policy of diversification
through acquisition and acquired all of the outstanding stock of four
Kentucky banks during 1995. This gives the Corporation additional
economies of scale and new markets in which to deliver its existing
products.
On February 2, 1995, the Corporation acquired Community Bank of
Lexington, Inc., Lexington, Kentucky ("Community Bank"), which had
assets of $61 million. The Corporation issued 366,000 shares of its
common stock with a market value of $24 per share to acquire Community
Bank. The transaction was accounted for under the purchase method of
accounting, with $6.3 million of goodwill recognized. The assets and
results of operations of Community Bank are included in the
Corporation's financial statements from the date of acquisition
forward. The offices of Community Bank became branches of Pikeville
National Bank and Trust Company, the Corporation's lead bank, on March
31, 1995. While the Corporation had already been active in lending in
the Lexington-Fayette County market through its loan production
office, the Community Bank acquisition gives the Corporation branch
offices in which to provide deposit products and other financial
services in one of Kentucky's fastest growing markets.
On May 31, 1995, the Corporation acquired Woodford Bancorp, Inc.,
Versailles, Kentucky ("Woodford"), which had assets of $103 million
for 967,000 shares of its common stock. The transaction was accounted
for under the pooling-of-interests method of accounting, and all prior
period financial information was restated to give effect to the
<PAGE>
transaction. This acquisition gives the Corporation another presence
in the Central Kentucky area, which has one of the highest per capita
incomes and lowest unemployment rates in Kentucky.
On June 30, 1995, the Corporation acquired Commercial Bank,
Middlesboro, Kentucky ("Middlesboro"), which had assets of $99 million
for $14.4 million in cash. The transaction was accounted for under
the purchase method of accounting and goodwill of $4.2 million was
recognized. Funds of $13.5 million were borrowed in connection with
the acquisition. The assets and results of operations of Middlesboro
are included in the Corporation's financial statements from the date
of acquisition forward. The City of Middlesboro is located on the
Kentucky-Virginia-Tennessee border and is a growing market with a
thriving tourism industry.
On November 3, 1995 the Corporation acquired United Whitley
Corporation, Williamsburg, Kentucky ("Williamsburg") and its
subsidiary, Bank of Williamsburg, which had assets of $37 million for
172,000 shares of its common stock. The transaction was accounted for
under the pooling-of-interests method of accounting, but without
restatement of prior period financial information due to lack of
materiality. The assets and results of operations of Williamsburg are
included in the Corporation's financial statements from the date of
acquisition forward. Bank of Williamsburg was merged into Farmers
National Bank on the date of acquisition. Through the acquisition,
the Corporation substantially increased the deposit base of Farmers
National Bank while increasing its operating costs only marginally.
Through the merger of Farmers National Bank and Bank of Williamsburg,
the Corporation was able to move the bank charter of the acquired
institution to adjacent Laurel County and now has a branch in London,
Kentucky which is among the fastest growing areas in Kentucky.
Income Statement Review
The Corporation's net income for the three months ended September
30, 1996 was $4.9 million or $0.54 per share as compared to $2.7
million or $0.30 per share for the three months ended September 30,
1995. Net income for the nine months ended September 30, 1996 was
$13.8 million or $1.52 per share as compared to $8.5 million or $0.96
per share for the same period in 1995. 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
September 30, 1996 and 1995:
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
Return on average shareholders' equity 13.92% 8.39% 13.47% 8.78%
Return on average assets 1.09% 0.65% 1.06% 0.71%
The Corporation's net income for the third quarter of 1996
increased $2.2 million or 80% as compared to the same period in 1995.
Net income for the nine months ended September 30, 1996 increased $5.3
million or 62% as compared to the nine months ended September 30,
1995. Earnings per share increased $0.24 per share or 80% for the
three months ended September 30, 1996, as compared to the third
quarter of 1995. Earnings per share increased 58% to $1.52 per share
for the nine month period ended September 30, 1996 as compared to the
same period in 1995. Net interest income increased $2.2 million or
13% for the third quarter of 1996 as compared to 1995 and increased
$6.8 million or 14% for the first nine months of 1996 as compared to
1995. The increase in net interest income was caused by increases in
the net interest margin from 4.47% for the third quarter of 1995 to
4.73% for the third quarter of 1996 and by increases in average
earning assets. The increases in average earning assets were caused
by internally generated growth for the third quarter and by internally
<PAGE>
generated growth plus the assets of acquired banks for the nine month
period as compared to 1995.
Provision for loan losses increased by $0.4 million from $1.6
million for the three months ended September 30, 1995 to $2.0 million
for the quarter ended September 30, 1996, and by $1.2 million from
$4.0 million for the nine months ended September 30,1995 to $5.2
million for the same period in 1996 as net charge-offs increased for
the three and nine month periods as compared to the same periods in
1995. The increases in net charge-offs were due to increases in the
loan portfolio from internally generated growth and acquisitions. Net
noninterest expense for the quarter decreased by $1.3 million as
compared to the same period in 1995 and decreased by $2.0 million for
the first nine months as compared to 1995.
All the results of operations are impacted by the four
acquisitions that occurred in 1995. As a result of the acquisitions,
net interest income, noninterest income and noninterest expense have
all experienced increases. The results of operations of Community
Bank are included from February 2, 1995, Middlesboro from June 30,
1995 and Williamsburg from November 3, 1995. Woodford is included for
all periods due to being accounted for as a pooling-of-interests with
restatement of all prior period financial information.
Net Interest Income
Net interest income increased $2.2 million or 13% from $16.9
million for the third quarter of 1995 to $19.1 million for the third
quarter of 1996. Interest income and interest expense both increased
for the quarter ending September 30, 1996 as compared to the same
period in 1995, with interest income increasing $2.4 million and
interest expense increasing $0.2 million. For the nine months ended
September 30, 1996 as compared to the same period in 1995, net
interest income increased $6.8 million as interest income increased
$10.7 million and interest expense increased $3.9 million.
The increase in net interest income for both the three and nine
month periods was driven by increases in net interest margin and
increases in average earning assets due to the acquisitions. Average
earning assets increased 7% from $1.55 billion for the three months
ended September 30, 1995 to $1.66 billion for the same period in 1996.
For the nine month period average earning assets also increased 9%,
from $1.48 billion in 1995 to $1.62 billion in 1996. The increases in
both average earning assets and interest bearing funds for the nine
month period were due in substantial part to the acquisitions of
Community Bank, Middlesboro, and Williamsburg discussed earlier. For
the third quarter as compared to 1995, the only acquisition that had
an impact was Williamsburg, which was the smallest of the
acquisitions.
The yield on interest earning assets remained the same for the
third quarter of 1996 and increased 15 basis points to 8.96% for the
first nine months of 1996 as compared to the same periods in 1995.
The cost of interest bearing funds decreased 25 basis points to 4.82%
for the third quarter of 1996 and decreased 4 basis points to 4.86%
for the first nine months of 1996 as compared to the same periods in
1995. As a result the net interest margin increased from 4.47% for
the third quarter of 1995 to 4.73% for the third quarter of 1996 and
increased from 4.53% for the nine months ended September 30, 1995 to
4.71% for the nine months ended September 30, 1996.
The increases in yield and interest margin are due in large part
from growth in the Corporation's loan portfolio, its highest yielding
asset. Loan portfolio growth was caused by the aforementioned
acquisitions and by internally generated growth. The Corporation's
average loans increased 18% from $1.06 billion for the third quarter
of 1995 to $1.25 billion for the third quarter of 1996. Loans
<PAGE>
accounted for 84% of total interest income for the third quarter of
1996 compared to 77% for the third quarter of 1995. The following
table summarizes the annualized net interest spread and net interest
margin for the three and nine month periods ended September 30, 1996
and 1995.
Three Months Ended Nine months ended
September 30 September 30
1996 1995 1996 1995
Yield on interest earning assets 8.94% 8.94% 8.96% 8.81%
Cost of interest bearing funds 4.82% 5.07% 4.86% 4.90%
Net interest spread 4.12% 3.87% 4.10% 3.91%
Net interest margin 4.73% 4.47% 4.71% 4.53%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Nine Months Ended
September 30
(in thousands) 1996 1995
Allowance balance January 1 $16,082 $12,978
Balances of acquired banks - 1,536
Additions to allowance charged
against operations 5,177 4,008
Recoveries credited to allowance 1,784 923
Losses charged against allowance (4,279) (2,982)
Allowance balance at September 30 $18,764 $16,463
Allowance for loan losses to
period-end loans 1.48% 1.53%
Average loans, net of unearned income $1,190,903 $996,365
Provision for loan losses to
average loans, annualized .58% .54%
Loan charge-offs, net of recoveries to
average loans, annualized .28% .28%
The Corporation increased its provision for loan losses as a
result of the growth in its loan portfolio. Net charge-offs represent
the amount of loans charged off less amounts recovered on loans
previously charged off. Net charge-offs as a percentage of average
loans outstanding was the same during the first nine months of 1996 as
compared to the same period in 1995. The Corporation's non-performing
loans (90 days past due and non-accrual) was 1.20% of outstanding
loans at both December 31, 1995 and September 30, 1996.
Any loans classified 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 has knowledge of any information which would cause
management to have serious doubts as to the ability of the borrowers
to comply with the loan repayment terms. The Corporation does not
believe there are currently any trends, events or uncertainties that
are reasonably likely to have a material effect on the volume of its
non-performing loans.
<PAGE>
Noninterest Income
The Corporation's noninterest income increased 54% from $2.4
million for the three months ended September 30, 1995 to $3.7 million
for the third quarter of 1996. Noninterest income for the nine months
ended September 30, 1996 increased 36% from $7.8 million in 1995 to
$10.6 million in 1996. All categories of noninterest income increased
during the three and nine month periods for 1996, as compared to the
same periods in 1995, except for net securities gains, which declined
from $7 thousand to $5 thousand for the third quarter. Included in
gains on sale of loans for the nine months ended September 30, 1996 is
$400 thousand applicable to the sale of the Corporation's credit card
portfolio. The adoption of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights,"
increased gain on sale of loans by $480 thousand. The largest
component of other noninterest income is insurance commissions, which
increased from $298 thousand to $496 thousand for the three months and
from $719 thousand to $1.2 million for the nine months ended September
30, 1996 as compared to the same period in 1995. New incentive
programs for sales of credit life insurance are primarily responsible
for the increase. The increases in all noninterest income categories
were substantially impacted by the acquisitions of Community Bank,
Middlesboro and Williamsburg for the nine month period. However,
increases in noninterest income categories were not impacted for the
three month period by the acquisitions.
Noninterest Expense
The Corporation's noninterest expense decreased by 1% from $13.8
million for the three months ended September 30, 1995 to $13.7 million
for the same period in 1996. For the nine months ended September 30,
1996, noninterest expense increased 2% to $40.8 million compared to
$40.0 million for the nine months ended September 30, 1995. Salaries
and employee benefits increased the most of any category, rising from
$6.3 million for the third quarter of 1995 to $7.0 million for the
same period in 1996, and from $18.4 million for the nine months ended
September 30, 1995 to $21.3 million for the first nine months of 1996.
FDIC insurance declined substantially, from $1.4 million to $20
thousand for the nine months ended September 30, 1996 as compared to
the same period in 1995. The reduction in FDIC insurance is due to
the change in premium structure. Currently the FDIC charges "well-
capitalized" banks, as defined for regulatory purposes, only minimal
amounts for deposit insurance premiums. All of the Corporation's
affiliate banks are currently classified as "well-capitalized" for
regulatory purposes. The increases in all noninterest expense
categories were impacted by the acquisitions of Community Bank,
Middlesboro and Williamsburg for the nine month period.
Balance Sheet Review
Total assets increased from $1.73 billion at December 31, 1995 to
$1.80 billion at September 30, 1996, or an annualized rate of 5%.
During this time, loans increased from $1.12 billion to $1.27 billion
or an annualized rate of 18%. The asset category which declined most
was federal funds sold which declined from $39.6 million at December
31, 1995 to $0 at September 30, 1996 as the Corporation was able to
invest more in its higher yielding loan portfolio.
The Corporation's largest liability, deposits, declined from
$1.47 billion as of December 31, 1995 to $1.46 billion as of September
30, 1996. The decline in deposits was all in interest bearing
deposits as noninterest bearing deposits increased from $187.8 million
at December 31, 1995 to $191.7 million at September 30, 1996.
Interest bearing deposits declined from $1.280 billion to $1.270
billion during the same period. The Corporation reduced its long-term
<PAGE>
debt during the period from $27.9 million as of December 31, 1995 to
$19.2 million as of September 30, 1996. The Corporation's advances
from Federal Home Loan Bank increased from $63.6 million at December
31, 1995 to $112.2 million at September 30, 1996.
Loans
Loans increased from $1.12 billion as of December 31, 1995 to
$1.22 billion as of September 30, 1996. The loan category which
increased most was consumer loans, which increased from $208.9 million
as of December 31, 1995 to $289.0 million as of September 30, 1996.
Consumer loans increased due to the Corporation's aggressive expansion
into the indirect consumer loan market in Kentucky. Other than lease
financing, which declined from $5.9 million to $4.3 million, all other
loan categories increased during the period from December 31, 1995 to
September 30, 1996.
Non-accrual and 90 days past due loans amounted to 1.20% of total
loans outstanding as of both December 31, 1995 and September 30, 1996.
Non-accrual loans decreased 5 basis points from 0.85% of total loans
outstanding as of December 31, 1995 to 0.80% as of September 30, 1996.
During the same period, loans 90 days or more past due increased 5
basis points from 0.35% of total loans outstanding to 0.40%. The
allowance for loan losses increased from 1.44% of total loans
outstanding as of December 31, 1995 to 1.48% as of September 30, 1996.
The allowance for loan losses as a percentage of non-accrual loans and
loans 90 days or more past due was 120% at December 31, 1995 and 123%
at September 30, 1996.
The following table summarizes the Corporation's loans that are
non-accrual or past due 90 days or more as of September 30, 1996 and
December 31, 1995.
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, 1996
Commercial loans,
secured by real estate $ 4,884 1.83% $ 989 0.37%
Commercial loans, other 3,309 1.43 721 0.31
Consumer loans,
secured by real estate 1,783 0.37 2,277 0.48
Consumer loans, other 189 0.07 1,035 0.36
Total $10,165 0.80% $5,022 0.40%
December 31, 1995
Commercial loans,
secured by real estate $ 3,264 1.26% $1,428 0.55%
Commercial loans, other 3,048 1.54 237 0.12
Consumer loans,
secured by real estate 2,873 0.64 1,335 0.30
Consumer loans, other 248 0.12 947 0.45
Total $ 9,433 0.85% $3,947 0.35%
Allowance for loan losses
Management analyzes the adequacy of its allowance for loan losses
on a quarterly basis. The loan portfolio of each affiliate 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
<PAGE>
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.
Off-balance sheet risk is addressed by including letters of
credit in the Corporation's allowance adequacy analysis and through a
monthly review of all letters of credit outstanding. The
Corporation's loan review and problem loan analysis includes
evaluation of deteriorating letters of credit. Volume and trends in
delinquencies are monitored monthly by management and the boards of
directors of the respective banks.
Securities
The Corporation uses its securities held-to-maturity for
production of income and to manage cash flow needs through expected
maturities. The Corporation uses its securities available-for-sale
for income and balance sheet liquidity management. The book value of
securities available-for-sale decreased from $279.7 million as of
December 31, 1995 to $238.0 million as of September 30, 1996.
Securities held-to-maturity declined from $150.7 million to $141.5
million during the same period. Total securities as a percentage of
total assets was 24.9% as of December 31, 1995 and 21.1% as of
September 30, 1996.
Liquidity and Capital Resources
The Corporation's liquidity objectives are to ensure that funds
are available for the affiliate banks to meet deposit withdrawals and
credit demands without unduly penalizing profitability, and to ensure
that funding is available for the Corporation to meet ongoing cash
needs while maximizing profitability. The Corporation continues to
identify ways to provide for liquidity on both a current and long-term
basis. The subsidiary banks rely on core deposits, certificates of
deposit of $100,000 or more, repayment of principal and interest on
loans and securities, federal funds sold and purchased, the sale of
securities under repurchase agreements, securities available-for-sale
and Federal Home Loan Bank borrowings to provide for liquidity.
Deposits decreased marginally from $1.47 billion to $1.46 billion
from December 31, 1995 to September 30, 1996. Noninterest bearing
deposits increased by $5 million while interest bearing deposits
decreased by $10 million. This decline has not materially impacted
the Corporation's profitability or its ability to provide loan funding
as loans continue to grow.
Due to the nature of the markets served by the subsidiary banks,
management believes that the majority of its certificates of deposits
of $100,000 or more are no more volatile than its core deposits.
During the periods of low interest rates, these deposit balances
remained stable as a percentage of total deposits. In addition,
arrangements have been made with correspondent banks for the purchase
of federal funds on an unsecured basis, up to an aggregate of $97
million, if necessary, to meet the Corporation's liquidity needs.
The Corporation owns $238 million of securities valued at market
price that are designated as available-for-sale and available to meet
liquidity needs on a continuing basis. The Corporation also relies on
Federal Home Loan Bank advances for both liquidity and management of
its asset/liability position. Federal Home Loan Bank Advances
increased from $63.6 million as of December 31, 1995 to $112.2 million
as of September 30, 1996.
The Corporation generally relies upon net inflows of cash from
financing activities, supplemented by net inflows of cash from
<PAGE>
operating activities, to provide cash for 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 issuance of long-term debt. The
Corporation currently has a $17.5 million revolving line of credit
available to meet any future cash needs (see long-term debt footnote
to the consolidated financial statements). The Corporation's primary
investing activities include purchases of 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 Corporation monitors its interest
rate risk by use of the static and dynamic gap models at the one year
interval. The static gap model 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 model goes further in that it assumes that
interest rate sensitive assets and liabilities will be reinvested.
The Corporation uses the Sendero system to monitor its interest rate
risk. The Corporation desires an interest sensitivity gap of not more
than fifteen percent of total assets at the one year interval.
On a limited basis, the Corporation now uses interest rate swaps
and sales of options on securities as additional tools in managing
interest rate risk. Interest rate swaps involve an exchange of cash
flows based on the notional principal amount and agreed upon fixed and
variable interest rates. In this transaction, the Corporation has
agreed to pay a floating interest rate based on London Inter-Bank
Offering Rate (LIBOR) and receive a fixed interest rate in return. On
options, the Corporation has sold the right to a third party to
purchase securities the Corporation currently owns at a fixed price on
a future date. The Corporation had no options outstanding at
September 30, 1996. The impact on operations of interest rate swaps
and options was not material during the first nine months of 1995 or
1996.
The Corporation's principal source of funds used to pay dividends
to shareholders and service long-term debt is the dividends it
receives from subsidiary banks. Various federal and state statutory
provisions, in addition to regulatory policies and directives, limit
the amount of dividends that subsidiary banks can pay without prior
regulatory approval. These restrictions have had no major impact on
the Corporation's dividend policy or its ability to service long-term
debt, nor is it anticipated that they will have any major impact in
the foreseeable future. In addition to the subsidiary banks' 1996
profits, approximately $4.5 million can be paid to the Corporation as
dividends without prior regulatory approval.
The primary source of capital for the Corporation is retained
earnings. The Corporation declared dividends of $0.54 per share for
the first nine months of 1996 and $0.48 for the first nine months of
1995. Earnings per share for the same periods were $1.52 and $0.96,
respectively. The Corporation retained 64% of earnings for the first
nine months of 1996.
Under guidelines issued by banking regulators, the Corporation
and its subsidiary banks are required to maintain a minimum Tier 1
risk-based capital ratio of 4% and a minimum total risk-based ratio of
8%. Risk-based capital ratios weight the relative risk factors of all
assets and consider the risk associated with off-balance sheet items.
The Corporation must also maintain a minimum Tier 1 leverage ratio of
4% as of September 30, 1996. The Corporation's Tier 1 leverage, Tier
1 risk-based and total risk-based ratios were 6.82%, 9.60% and 10.85%,
respectively as of September 30, 1996.
As of September 30, 1996, management is not aware of any current
recommendations by banking regulatory authorities which, if they were
to be implemented, would have, or would be reasonably likely to have,
a material adverse impact on the Corporation's liquidity, capital
<PAGE>
resources, or operations. A one-time assessment of 65.7 cents per
$100 of savings deposits, which constitute 12% of the Corporation's
deposits, was passed by congress to recapitalize the Savings
Association Insurance Fund (SAIF). This did not have a material
impact on the Corporation's financial position or results of
operations.
Impact of Inflation and Changing Prices
The majority of the Corporation's assets and liabilities are
monetary in nature. Therefore, the Corporation differs greatly from
most commercial and industrial companies that have significant
investment in nonmonetary assets, such as fixed assets and
inventories. However, inflation does have an important impact on the
growth of assets in the banking industry and on the resulting need to
increase equity capital at higher than normal rates in order to
maintain an appropriate equity to assets ratio. Inflation also
affects other expenses, which tend to rise during periods of general
inflation.
Management believes the most significant impact on financial and
operating results is the Corporation's ability to react to changes in
interest rates. Management seeks to maintain an essentially balanced
position between interest rate sensitive assets and liabilities in
order to protect against the effects of wide interest rate
fluctuations.
<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
A special called Meeting of Shareholders was held on August 15, 1996.
The following item was approved:
1) Proposal to amend Pikeville National Corporation's Articles
of Incorporation to change Pikeville National Corporation's name to
"Community Trust Bancorp, Inc.", effective January 1, 1997.
The votes of the shareholders on this item was as follows:
In Favor Opposed Abstained
6,802,539 593,256 53,639
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K None
<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 14, 1996 Richard M. Levy
Richard M. Levy
Executive Vice President
Principal Financial Officer
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