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 June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For thetransition 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 - 8,947,809 shares outstanding at June 30,
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 June 30 December 31
(in thousands) 1995 1994
Assets:
Cash and Cash Equivalents
Cash and due from banks $ 58,495 $ 64,267
Interest bearing deposits in
other financial institutions 953 1,906
Federal funds sold 62,360 13,925
Total cash and cash equivalents 121,808 80,098
Securities available for sale 99,365 87,415
Securities held to maturity (fair value of
$345,125 and $345,110, respectively) 347,313 363,546
Loans and lease financing,
net of unearned income 1,052,842 902,323
Less: Allowance for losses (15,850) (12,978)
Net Loans and lease financing 1,036,992 889,345
Loans held for sale 3,589 4,131
Premises and equipment, net 45,803 38,765
Interest receivable 12,701 11,242
Excess of cost over net assets acquired (net of
amortization of $4,785 and $4,315,
respectively 20,612 10,367
Other real estate (net of allowance for losses of
$973 and $1,852, respectively) 3,744 4,320
Other assets 11,932 10,205
Total Assets $1,703,859$1,499,434
Liabilities and Shareholders' Equity:
Deposits
Non-Interest bearing $187,600 $159,633
Interest bearing 1,229,931 1,086,754
Total Deposits 1,417,531 1,246,387
Federal funds purchased and securities
sold under repurchase agreements 26,309 25,735
Other short-term borrowings 759 5,419
Dividends payable 1,435 1,220
Interest payable 6,195 4,634
Other liabilities 9,134 4,699
Advances from Federal Home Loan Bank 76,964 69,760
Long-term debt 35,764 24,944
Total Liabilities 1,574,091 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,
1995-8,947,809; 1994-8,592,287 44,739 42,961
Capital surplus 27,448 20,788
Retained earnings 57,992 54,928
Net unrealized depreciation on securities available
for sale, net of tax (411) (2,041)
Total Shareholders' Equity 129,768 116,636
Total Liabilities and
Shareholders'Equity $1,703,859$1,499,434
See notes to consolidated financial statements.
PIKEVILLE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Three Months Six Months
Ended Ended
June 30 June 30
(in thousands) 1995 1994 1995 1994
Interest Income:
Interest and fees on loans and
leasefinancing $24,158 $18,821 $ 46,670 $37,090
Interest and dividends on securities-
Taxable 6,180 5,925 12,106 11,644
Tax exempt 747 793 1,514 1,494
Interest on federal funds sold 878 418 1,637 821
Interest on deposits in other 33 33 82 67
31,996 25,990 62,009 51,116
Interest Expense:
Interest on deposits 13,797 9,488 26,155 18,877
Interest on federal funds purchased and securities
sold under repurchase agreements 327 268 701 500
Interest on other short-term borrow 22 22 68 46
Interest on advances from Federal H 1,204 1,038 2,360 2,060
Interest on long-term debt 512 514 1,022 1,039
15,862 11,330 30,306 22,522
Net interest income 16,134 14,660 31,703 28,594
Provision for loan and lease losses 1,322 2,482 2,393 3,247
Net interest income after provision 14,812 12,178 29,310 25,347
Non-interest income:
Service charges on deposit accounts 1,228 1,156 2,389 2,180
Gains on sale of loans, net 101 131 140 501
Insurance commissions 237 246 421 380
Trust income 376 345 683 771
Securities gains (losses), net 0 2 5 16
Other 754 481 1,724 950
2,696 2,361 5,362 4,798
Non-interest expenses:
Salaries and wages 4,576 4,225 9,311 8,748
Employee benefits 1,336 1,252 2,766 2,568
Occupancy, net 1,096 782 2,052 1,695
Equipment 861 824 1,730 1,629
Data processing 577 595 1,162 1,045
Stationery, printing and office sup 239 367 664 733
Taxes other than payroll, property 479 374 882 723
FDIC insurance 669 626 1,328 1,249
Other 3,237 2,733 6,352 4,947
13,070 11,778 26,247 23,337
Income before income taxes 4,438 2,761 8,425 6,808
Income taxes 1,598 628 2,612 1,630
Net Income 2,840 2,133 $ 5,813 5,178
Earnings per share:
Primary $0.32 $0.25 $0.65 $0.60
Fully diluted 0.32 0.25 0.65 0.60
Average shares outstanding
Primary 8,962 8,603 8,898 8,600
Fully diluted 8,962 8,603 8,898 8,600
See notes to consolidated financial statements.
PIKEVILLE NATIONAL CORPORATION Six Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS June 30
(in thousands) 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,813 $ 5,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,724 1,715
Provision for loan and other real estate losses 2,412 3,363
Securities gains, net (5) (16)
Gain on sale of loans, net (140) (501)
(Gains) losses on sale of assets, net (33) 90
Net amortization of securities premiums 360 849
Sales of securities available for sale 383
Loans originated for sale (5,316) (37,901)
Proceeds from sale of loans 5,998 34,856
Changes in:
Interest receivable (358) (155)
Interest payable 775 (255)
Other liabilities 3,474 (218)
Other assets (1,465) 492
Net cash provided by operating activities 13,622 7,497
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to acquire net assets of subsidiaries (14,918)
Proceeds from maturity of securities available-for 35,160 12,515
Proceeds from maturity of securities held-to-matur122,015 45,240
Proceeds from principal payments of mortgage backe 11,740 22,062
Purchases of securities available-for-sale (15,871) (4,283)
Purchase of securities held-to-maturity (23,892) (19,825)
Purchase of mortgage backed securities (98,216) (55,850)
Net change in loans (36,019) (18,425)
Purchase of premises, equipment and other real est (2,588) (2,998)
Proceeds from sale of premises and equipment 100 269
Proceeds from sale of other real estate 1,768 594
Net cash used in investing activities (20,721) (20,701)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 35,331 4,275
Net change in federal funds purchased and securities sold
under repurchase agreements (4,426) 5,966
Net change in short-term borrowings (4,660) (2,134)
Advances from Federal Home Loan Bank 1,336 10,545
Repayments of advances from Federal Home Loan Bank (3,189) (8,651)
Proceeds from long-term debt 13,500
Payments on long-term debt (2,680) (10,171)
Proceeds from issuance of common stock 270 7,507
Dividends paid (2,492) (2,245)
Net cash provided by financing activities 32,990 5,092
Net increase (decrease) in cash and cash equi 25,891 (8,112)
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 $121,808 $101,810
See notes to consolidated financial statements.
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.
Note 2 Securities
The amortized cost and fair value of securities available-for-
sale as of June 30, 1995 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $28,283 $28,380
Mortgage-backed pass through
certificates 11,602 11,729
Collateralized mortgage obligations 21,793 22,010
Other debt securities 5,331 5,343
Total debt securities 67,009 67,462
Equity securities 32,663 31,903
$99,672 $99,365
The amortized cost and fair value of securities held-to-maturity
as of June 30, 1995 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $101,054 $101,212
Obligations of states and political
subdivisions 53,523 53,337
Mortgage-backed pass through
certificates 130,756 128,944
Collateralized mortgage obligations 59,292 58,844
Other debt securities 2,688 2,788
$347,313 $345,125
Note 3 - Loans
Major classifications of loans are summarized as follows:
June 30 December 31
(in thousands) 1995 1994
Commercial, secured by real estate $ 243,566 $ 231,480
Commercial, other 198,973 183,533
Real Estate Construction 48,203 45,308
Real Estate Mortgage 378,767 290,998
Consumer 177,508 143,085
Equipment Lease Financing 5,825 7,919
$1,052,842 $ 902,323
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
June 30 June 30
1995 1994
(in thousands)
Balance January 1 $12,978 $13,346
Allowances of acquired banks 1,536
Additions to reserve charged
against operations 2,393 3,247
Recoveries 631 459
Loans charged off (1,688) (3,733)
Balance End of Period $15,850 $13,319
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 June
30.
(in thousands)
1995
Average investment in impaired loans 4,703
Interest income recognized on impaired loans
including interest income recognized on
cash basis
94
Interest income recognized on impaired loans
on a cash basis 94
Information regarding impaired loans at June 30, 1995 is as
follows.
(in thousands)
1995
Balance of impaired loans 4,703
Less portion for which no allowance for loan
losses is allocated 2,024
Portion of impaired loan balance for which an
allowance for credit losses is allocated
2,678
Portion of allowance for loan losses allocated
to the impaired loan balance 617
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
June30 December 31
1995 1994
(in thousands)
Senior Notes $17,230 $17,230
Bank Notes 15,500 4,000
Industrial Revenue Development Bonds 854 1,500
Kentucky Housing Corporation 467 467
Obligations under capital lease 1,593 1,614
Other 120 133
$35,764 $24,944
At June 30, 1995 the bank notes consist of $2.0 million of
existing debt to National City Bank, Louisville, Kentucky and
$13.5 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 June 30, 1995.
Refer to the 1994 Annual Report to Shareholders for
additional information concerning rates and assets securing long-
term debt.
Note 6 - Pending Acquisition
The Company has a definitive agreement in place to acquire United
Whitley Corporation, Williamsburg, Kentucky ("Williamsburg"), and
its subsidiary, Bank of Williamsburg. The transaction will be
effected by an exchange of the Company's stock for the stock of
Williamsburg. The acquisition is expected to be consummated
early in the fourth quarter of 1995 and will be accounted for as
a pooling-of-interests. Williamsburg has total assets of
approximately $42 million at June 30, 1995.
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 has total assets of approximately $103
million.
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 has total assets of approximately $106
million.
The Company also has a definitive agreement in place to
acquire United Whitley Corporation, Williamsburg, Kentucky
("Williamsburg"), and its subsidiary, Bank of Williamsburg. The
transaction will be effected by an exchange of the Company's
stock for stock of Williamsburg. The acquisition is expected to
be consummated early in the fourth quarter and will be accounted
for as a pooling without restatement, due to immateriality.
Williamsburg has assets of approximately $42 million.
Income Statement Review
Net income for the quarter ended June 30, 1995 increased 33%
to $2.8 million as compared to $2.1 million for the same period
in 1994. Earnings per share increased 28% from $0.25 per share
for the second quarter of 1994 to $0.32 per share for the second
quarter of 1995. Net income for the six months increased 12%
from $5.2 million in 1994 to $5.8 million for 1995. Earnings per
share for the six months increased 8% from $0.60 per share to
$0.65 per share for 1994 and 1995, respectively. Fully diluted
earnings per share was the same as primary earnings per share for
the three and six 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 six months ended June 30, 1995 and 1994:
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Return on average shareholders' equity 8.78% 7.21% 9.16% 8.91%
Return on average assets 0.72% 0.58% 0.74% 0.71%
The largest portions of the increases in net income for the
three and six month periods for 1995 as compared to 1994 are due
to increases in net interest income and decreases in provision
for loan losses. Net interest income increased $1.5 million for
the three months and $3.1 million for the six months ended June
30, 1995 as compared to the same periods in 1994. Provision for
loan losses expense decreased $1.2 million for the three months
and $0.9 million for the six months ended June 30, 1995, as
compared to the same periods ended June 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 six month periods in 1995 compared to 1994. These
increases in net income were offset by increases in non-interest
expenses for the same periods. All of the above items are
discussed in more detail later in this report. Income tax
expense was also higher for the three and six 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 three
completed acquisitions in 1995 and the one acquisition in
progress.
Net Interest Income
Net interest income increased $1.5 million or 10% for the
three months ended June 30, 1995 and increased $3.1 million or
11% for the six months ended June 30, 1995, as compared to the
same periods in 1994. The increase in net interest is driven by
increases in both the average earning assets and the net interest
margin. Average earning assets for the three months increased 7%
from $1.367 billion to $1.465 billion from 1994 to 1995 and 7%
for the six months also, rising from $1.359 billion in 1994 to
$1.454 billion in 1995. The largest part of the growth in
earning assets is attributable to growth in loans, our highest
yielding assets. Average loans increased from $856.5 million for
the quarter ended June 30, 1994 to $981.2 million for the second
quarter of 1995. For the six month period, average loans
increased from $853.1 million in 1994 to $962.7 million for the
first half of 1995. Average loans as a percentage of average
earning assets increased from 62.7% for the first quarter of 1994
to 67.0% for the first quarter of 1995. For the six months,
average loans as a percentage of average earning assets increased
from 62.8% in 1994 to 66.2% for the same period in 1995. Income
and fees from loans contributed 75.5% of the total interest
income for the three months ended June 30, 1995 compared to 72.4%
for the same period in 1994. For the six months, loans
contributed 75.3% of total interest income in 1995 and 72.6% in
1994.
The following table summarizes the net interest spread and
net interest margin for the three and six months ended June 30,
1995 and 1994.
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Yield on interest earning assets 8.92% 7.77% 8.75% 7.74%
Cost of interest bearing funds 4.98% 3.82% 4.81% 3.79%
Net interest spread 3.94% 3.95% 3.94% 3.95%
Net interest margin 4.57% 4.43% 4.55% 4.40%
Provision for loan losses
An analysis of the changes in the allowance for loan losses
and selected ratios is set forth below.
Six Months Ended
June 30
1995 1994
(in thousands)
Allowance Balance at January 1 $12,978 $13,346
Balances of acquired Banks 1,536 -
Provision for loan losses 2,393 3,247
Recoveries 631 459
Losses charged against allowance (1,688) (3,733)
Allowance Balance at June 30 $15,850 $13,319
Allowance for loan losses to period-end loans 1.51% 1.56%
Average loans, net of unearned income 962,637 853,141
Provision for loan losses to average loans, annualized 0.50% 0.76%
Loan charge-offs, net of recoveries to average loans,
annualized 0.22% 0.77%
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 0.33% of average
loans for the three months ended June 30, 1995 compared to 1.12%
for the same period in 1994. For the six months net annualized
credit losses were 0.22% of average loans for 1995 compared to
0.77% 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 1.27% at June
30, 1995.
The following table compares certain ratios of the Company
at June 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 March 31, 1995, the most
recent information available.
Company Peer Group
Allowance for loan losses to period-end loans 1.51% 1.73%
90 days past due and non-accrual loans
to total loans 1.27% 1.07%
Non-accrual loans to total loans 0.78% 0.85%
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
Non-interest income increased 14% from $2.36 million for the
three months ended June 30, 1995 to $2.70 million for the same
period in 1995. For the six months, non-interest income
increased 12% from $4.80 million in 1994 to $5.36 million in
1995. For the three month periods, service charges on deposit
accounts increased $72 thousand and other non-interest income
increased $273 thousand. Trust income increased by a lesser
amount while securities gains, gains on sale of loans, and
insurance commissions all declined marginally. For the six month
periods in 1995 as compared to 1994, service charges on deposit
accounts increased by $209 thousand, insurance commissions
increased by $41 thousand, and other non-interest income
increased by $774 thousand. The largest single component of the
increase in other non-interest income for the six 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 $361 thousand,
trust income declined $88 thousand, and net securities gains &
losses declined marginally.
Non-interest Expenses
Non-interest expenses increased 11% from $11.8 million for
the three months ended June 30, 1995 to $13.1 million for the
same period in 1995. For the six month period, non-interest
expenses increased 12% from $23.3 million in 1994 to $26.2
million in 1995. For the three month period, salaries and
employee benefits increased $435 thousand, occupancy expense
increased $314 thousand, other taxes increased $105 thousand,
other non-interest expenses increased by $504 thousand, and FDIC
insurance and equipment expenses increased slightly while the
other categories of non-interest expense declined, with
stationery and printing costs having the largest decrease at $128
thousand. For the six month period, salaries and benefits
increased $761 thousand, occupancy expense increased $357
thousand and other non-interest expense increased by $1.4
million, while equipment, data processing, other taxes, and FDIC
insurance increased by smaller amounts for 1995 as compared to
1994. Stationery and printing costs declined $69 thousand for
the six months ended June 30, 1995, as compared to 1994, the only
category which declined. The largest components of the increases
in other non-interest expenses for the three and six 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 $1.704 billion at June 30, 1995, or an annualized rate of
27%. Of the approximately $205 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 $1.053 billion at June 30, 1995, an
annualized rate of 33%. Of the $151 million increase,
approximately $116 million came from the acquisitions of
Community Bank and Middlesboro. Loans accounted for 62% of total
assets at June 30, 1995 compared to 60% at December 31, 1994.
Federal funds sold also increased significantly during the
period, from $13.9 million at December 31, 1994 to $62.4 million
at June 30, 1995.
The majority of the asset growth was funded by deposit
growth as total deposits increased from $1.246 billion to $1.418
billion at December 31, 1994 and June 30, 1995, respectively, an
annualized increase of 27%. 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 $35.8
million at June 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.
Advances from Federal Home Loan Bank was the only other liability
category to grow significantly, increasing from $69.8 million at
December 31, 1994 to $77.0 million at June 30, 1995.
Loans
Loans increased from $0.902 billion at December 31, 1994 to
$1.053 billion at June 30, 1995, or an annualized rate of 33%.
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 June 30, 1995 except for lease
financing, which decreased by $2.1 million. The largest increase
of any loan category was in real estate mortgage loans, which
increased from $291.0 million to $378.8 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
$177.5 million at June 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 1.27% at June 30, 1995. Non
accrual loans decreased 20 basis points from 0.98% of net loans
at December 31, 1994 to 0.78% of net loans at June 30, 1995. 90
days past due loans as a percent of net loans increased 11 basis
points from 0.38% to 0.49% for the same period. The reserve for
loan losses increased from 1.44% of net loans at December 31,
1994 to 1.51% of net loans at June 30, 1995. The reserve for
loan losses as a percentage of loans 90 days past due and non-
accrual loans increased from 106.12% at December 31, 1994 to
118.35% at June 30, 1995.
The following table summarizes the Company's loans that are
non-accrual or past due 90 days or more at June 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)
June 30, 1995
Commercial loans, secured by
real estate $3,684 1.51% $1,188 0.49%
Commercial loans, other 2,386 1.20% 2,269 1.14%
Consumer loans, secured by
real estate 2,078 0.49% 1,425 0.33%
Consumer loans, other 56 0.03% 307 0.17%
TOTAL $8,204 0.78% $5,189 0.49%
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)
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 $16.2
million from $363.5 million at December 31, 1994 to $347.3
million at June 30, 1995. Securities available for sale
increased $12.0 million from $87.4 million at December 31, 1994
to $99.4 million at June 30, 1995. Total securities as a
percentage of the Company's assets decreased during the six month
period, as securities accounted for 30% of total assets at
December 31, 1994 and 26% of total assets at June 30, 1995. All
$17.6 million of securities acquired in the Middlesboro
acquisition were classified as available for sale at the time of
purchase.
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 $171.1 million or an annualized rate of
27% from December 31, 1994 to June 30, 1995, of which
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 $99.4 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 $77.0 million at June
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. 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.
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 $0.32 per share for
the first six months of 1995 and $0.30 for the first six months
of 1994 while earnings per share for the periods were $0.65 and
$0.60 per share, respectively. The Company retained 51 percent
of earnings for the first six months of 1995. The Company's
leverage, Tier 1 capital, and Total risk based capital ratios at
June 30, 1995 were 6.45%, 10.30%, and 11.55%, 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 June 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 June 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.
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
The Company's Annual Meeting of Shareholders was held on April
18, 1995. The following two items were approved:
1) Election of the following members to the Company's Board
of Directors for the ensuing year.
Nominee In Favor Withheld
Charles J. Baird 4,934,273 35,410
Burlin Coleman 4,957,556 12,127
Terry N. Coleman 4,958,681 11,002
Nick A. Cooley 4,957,556 12,127
John B. DuPuy 4,956,234 13,449
William A. Graham, Jr. 4,957,840 11,843
Jean R. Hale 4,958,681 11,002
Bryan M. Johnson 4,955,072 14,611
Earl Gene Johnson 4,958,681 11,002
George F. Johnson 4,956,234 13,449
John H. Mays 4,958,681 11,002
Leonard McCoy 4,958,681 11,002
Lucian I. Meade 4,958,681 11,002
Brandt Mullins 4,958,681 11,002
M. Lynn Parrish 4,958,681 11,002
Ernest M. Rogers 4,956,234 13,449
E. Bruce Walters 4,956,194 13,489
2) Ratification of Crowe Chizek & Company as the Company's
independent certified public accountants for 1995.
The votes of the shareholders on this item was as follows:
In Favor Opposed Abstained
4,898,635 9,396 61,651
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibts
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Corporation incorporates by reference Form 8-K filed
with the Commission on April 10,1995 and a second Form 8-K
filed on June 14, 1995.
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: August 14,1995 Signature
Richard M. Levy
Senior Vice President
Principal Financial Officer