20
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, 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 April 30,
1996
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
Consolidated Balance Sheets
March 31 December 31
(In thousands except share amounts) 1996 1995
Assets:
Cash and due from banks $50,259 $63,017
Interest bearing deposits in
other financial institutions 856 4,440
Federal funds sold 5,910 39,555
Securities available-for-sale 281,671 279,717
Securities held-to-maturity (fair value
of $145,408 and $150,315, respectively) 146,367 150,721
Loans 1,157,698 1,115,068
Allowance for loan losses (16,426) (16,082)
Net loans 1,141,272 1,098,986
Premises and equipment, net 47,075 47,553
Interest receivable 13,434 13,731
Excess of cost over net assets acquired
(net of accumulated amortization of
$5,802 and $5,469, respectively) 19,600 20,110
Other assets 13,025 12,340
Total Assets $1,719,469 $ 1,730,170
Liabilities and Shareholders' Equity:
Deposits:
Non-interest bearing $179,912 $186,829
Interest bearing 1,280,947 1,280,614
Total deposits 1,460,859 1,467,443
Federal funds purchased and other
short-term borrowings 25,388 20,383
Interest payable 6,498 6,425
Other liabilities 11,175 10,622
Advances from Federal Home Loan Bank 54,554 63,629
Long-term debt 25,702 27,873
Total Liabilities 1,584,176 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 62,494 59,934
Net unrealized appreciation (depreciation)
on securities available-for-sale, net of tax (706) 356
Total Shareholders' Equity 135,293 133,795
Total Liabilities and
Shareholders' Equity $1,719,469 $1,730,170
The accompanying notes are an integral part of these statements.
Consolidated Statements of Income
Three months ended
March 31
(In thousands except per share data) 1996 1995
Interest Income:
Interest and fees on loans $27,732 $22,512
Interest and dividends on securities
Taxable 5,961 5,926
Tax exempt 762 767
Interest on federal funds sold 450 759
Interest on deposits in other financial institutions 12 49
Total Interest Income 34,917 30,013
Interest Expense:
Interest on deposits 15,448 12,358
Interest on federal funds purchased and other
short-term borrowings 270 420
Interest on advances from Federal Home Loan Bank 896 1,156
Interest on long-term debt 553 510
Total Interest Expense 17,167 14,444
Net interest income 17,750 15,569
Provision for loan losses 1,488 1,071
Net interest income after provision for loan losses 16,262 14,498
Noninterest Income:
Service charges on deposit accounts 1,327 1,161
Gains on sale of loans, net 163 39
Trust income 392 307
Securities gains, net 42 5
Other 1,335 1,154
Total Noninterest Income 3,259 2,666
Noninterest Expense:
Salaries and employee benefits 7,083 6,165
Occupancy, net 960 956
Equipment 939 869
Data processing 639 585
Stationery, printing and office supplies 502 425
Taxes other than payroll, property and income 503 403
FDIC insurance 7 659
Other 2,844 3,115
Total Noninterest Expense 13,477 13,177
Income before income tax 6,044 3,987
Income tax expense 1,841 1,014
Net income $4,203 $2,973
Net income per share $ .46 $ .34
Average shares outstanding 9,138 8,833
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
Three months ended
March 31
(In thousands) 1996 1995
Cash flows from operating activities:
Net income $ 4,203 $ 2,973
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,284 1,006
Provision for loan and other real estate losses 1,500 1,175
Securities gains, net (42) (5)
Gain on sale of loans, net (163) (39)
Gain on sale of assets (31) (169)
Net amortization of securities premiums 111 262
Loans originated for sale (14,128) (6,464)
Proceeds from sale of loans 12,704 3,788
Changes in:
Interest receivable 297 1,430
Interest payable 73 481
Other assets 194 399
Other liabilities 553 268
Net cash provided by operating activities 6,555 5,105
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 7,264 -
Maturity of securities available-for-sale 10,497 33,847
Maturity of securities held-to-maturity 4,649 3,880
Principal payments on mortgage-backed securities 8,774 85,705
Purchase of:
Securities available-for-sale (28,689) (5,365)
Securities held-to-maturity (633) (23,717)
Mortgage-backed securities (1,155) (98,216)
Net change in loans (42,886) (13,812)
Net change in premises and equipment (463) (1,623)
Other 568 1,516
Net cash used in investing activities (42,074) (17,785)
Cash flows from financing activities:
Net change in deposits (6,584) 8,980
Net change in federal funds purchased and
other short-term borrowings 5,005 (8,640)
Advances from Federal Home Loan Bank - 1,300
Repayments of advances from Federal
Home Loan Bank (9,075) (1,643)
Payments on long-term debt (2,171) (669)
Issuance of common stock - 257
Dividends paid (1,643) (1,246)
Net cash provided by (used in) financing
activities (14,468) (1,661)
Net increase(decrease) in cash and cash equivalents (49,987) (14,341)
Cash and cash equivalents at beginning of year 107,012 80,098
Cash and cash equivalents of acquired banks - 2,838
Cash and cash equivalents at end of period $ 57,025 $ 68,595
The accompanying notes are an integral part of these 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, 1995 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 "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 and its
subsidiary, Trust Company of Kentucky, The Woodford Bank and
Trust Company and Commercial Bank (Middlesboro). 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, 1996 summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 80,790 $ 81,171
Mortgage-backed pass through
certificates 140,882 140,863
Collateralized mortgage obligations 21,756 21,365
Other debt securities 5,320 5,212
Total debt securities 248,748 248,611
Equity securities 33,735 33,060
Total Securities $282,483 $281,671
The amortized cost and fair value of securities held-to-
maturity as of March 31, 1996 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 27,896 $ 27,779
States and political subdivisions 57,713 58,178
Mortgage-backed pass through
certificates 45,973 45,041
Collateralized mortgage obligations 12,789 12,414
Other debt securities 1,996 1,996
Total Securities $146,367 $145,408
Note 3 - Loans
Major classifications of loans are summarized as follows:
March 31 December 31
(in thousands) 1996 1995
Commercial, secured by real estate $ 266,077 $ 258,541
Commercial, other 212,712 192,127
Real Estate Construction 54,242 51,539
Real Estate Mortgage 403,274 398,288
Consumer 215,983 208,662
Equipment Lease Financing 5,410 5,911
$1,157,698 $1,115,068
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
March 31 March 31
1996 1995
(in thousands)
Balance January 1 $16,082 $12,978
Allowances of acquired banks - 376
Additions to reserve charged against operations 1,488 1,071
Recoveries 554 360
Loans charged off (1,698) (617)
Balance End of Period $16,426 $14,168
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) 1996
Average investment in impaired loans 10,381
Interest income recognized on impaired loans
Including interest income recognized on
cash basis 183
Interest income recognized on impaired loans
on a cash basis 183
Information regarding impaired loans at March 31, 1996 is as
follows.
(in thousands) 1996
Balance of impaired loans 10,344
Less portion for which no allowance for loan
losses is allocated 8,178
Portion of impaired loan balance for which an
allowance for credit losses is allocated 2,166
Portion of allowance for loan losses allocated
to the impaired loan balance 680
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
March 31 December 31
1996 1995
(in thousands)
Senior Notes $17,230 $17,230
Bank Note 2,000 2,000
Revolving Bank Note 4,200 5,700
Industrial Revenue Development Bonds 208 854
Obligations under capital lease 1,560 1,571
Other 504 518
$25,702 $27,873
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, 1996.
Refer to the 1995 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
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
sixty offices serving 85,000 households in nineteen Eastern and
Central Kentucky counties. The Corporation had total assets of
$1.72 billion and total shareholders' equity of $135 million as
of March 31, 1996. The Corporation's common stock is listed on
NASDAQ under the symbol PKVL. Market makers are Herzog, Heine,
Geduld, Inc., New York, New York; J. J. B. Hilliard, W. L. Lyons,
Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc.,
Memphis, Tennessee; and Robinson Humphrey Co., Inc., Atlanta,
Georgia.
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 it 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 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,
Williamsburg, Kentucky, already owned by the Corporation on the
date of acquisition. Through the acquisition, the Corporation
substantially increased the deposit base of Farmers National
Bank, an existing affiliate, 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 merged 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
March 31, 1996 was $4.2 million or $0.46 per share as compared to
$3.0 million or $0.34 per share for the three months ended March
31, 1995. 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, 1996 and 1995:
Three months ended
March 31
1996 1995
Return on average shareholders' equity 12.42% 9.56%
Return on average assets 0.98% 0.77%
The Corporation's net income for the first quarter of 1996
increased $1.2 million or 41% as compared to the same period in
1995. Earnings per share increased $0.11 per share or 35% for
the three months ended March 31, 1996, as compared to the first
quarter of 1995. Net interest income increased $2.2 million or
14% for the first three months of 1996 as compared to 1995. The
increase in net interest income was caused by increases in the
net interest margin from 4.52% for the first quarter of 1995 to
4.62% for the first quarter of 1996 and by increases in average
earning assets.
Provision for loan losses increased by $0.4 million from
$1.1 million for the three months ended March 31,1995 to $1.5
million for the quarter ended March 31, 1996 as net charge-offs
increased for the quarter as compared to the first quarter of
1995. Net noninterest expense for the quarter improved by $0.3
million as noninterest income increased by $0.6 million and
noninterest expense increased by $0.3 million.
All the results of operations are impacted by the four
acquisitions that occurred in 1995. 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 it 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 14% from $15.6
million for the first quarter of 1995 to $17.8 million for the
first quarter of 1996. Interest income and interest expense both
increased for the quarter ending March 31, 1996 as compared to
the same period in 1995, with interest income increasing $4.9
million and interest expense increasing by $2.7 million.
The increase in both interest income and interest expense
was impacted by increases in yields on interest earning assets
and costs of interest bearing funds while average balances of
interest earning assets and interest bearing funds also
increased. Average earning assets increased 11% from $1.44
billion for the three months ended March 31, 1995 to $1.60
billion for the same period in 1996. Average interest bearing
funds also increased 11% for the period, from $1.26 billion in
the first quarter of 1995 to $1.40 billion for the first quarter
of 1996. The increases in both average earning assets and
interest bearing funds were impacted by the acquisitions of
Community Bank, Middlesboro, and Williamsburg discussed earlier.
The yield on interest earning assets increased 35 basis
points from 8.59% for the first quarter of 1995 to 8.94% for the
first quarter of 1996. The cost of interest bearing funds
increased 31 basis points from 4.64% for the first three months
of 1995 to 4.95% for the same period in 1996. As a result the
net interest margin increased from 4.52% for the first quarter of
1996 to 4.62% for the current quarter.
The increases in yield and interest margin are due in large
part from growth in the Corporation's loan portfolio, the highest
yielding asset. Loan portfolio growth was caused by the
aforementioned acquisitions and by internally generated growth.
The Corporation's average loans increased 20% from $0.94 billion
for the first quarter of 1995 to $1.13 billion for the first
quarter of 1996. Loans accounted for 79.4% of total interest
income for the first quarter of 1996 compared to 75.0% for the
first quarter of 1995. The following table summarizes the
annualized net interest spread and net interest margin for the
three months ended March 31, 1996 and 1995.
Three Months Ended
March 31
1996 1995
Yield on interest earning assets 8.94% 8.59%
Cost of interest bearing funds 4.95% 4.64%
Net interest spread 3.99% 3.95%
Net interest margin 4.62% 4.52%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses
and selected ratios is set forth below.
Three Months Ended
March 31
(in thousands) 1996 1995
Allowance balance January 1 $16,082 $12,978
Balances of acquired banks - 376
Additions to allowance charged against operations 1,488 1,071
Recoveries credited to allowance 554 360
Losses charged against allowance (1,698) (617)
Allowance balance at March 31 $16,426 $14,168
Allowance for loan losses to period-end loans 1.42% 1.46%
Average loans, net of unearned income $1,130,576 $943,865
Provision for loan losses to
average loans, annualized .53% .45%
Loan charge-offs, net of net of recoveries to
average loans, annualized .40% .11%
The Corporation increased its provision for loan losses due
to its increase in net charge-offs. 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 increased 29 basis points for the first
quarter of 1996 as compared to the same period in 1995. The
Corporation's non-performing loans (90 days past due and non-
accrual) increased slightly from 1.20% of total outstanding loans
as of December 31, 1995 to 1.24% as of March 31, 1996.
On January 1, 1995 the Corporation adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan". Loans are categorized as impaired
when it is probable that full collection of principal and
interest will not be realized, except for groups of smaller
homogeneous loans such as consumer and residential mortgage
loans. The statement also requires specific reserves for loans
considered to be impaired. The adoption of the statement was not
material to the Corporation's provision for loans losses or
financial condition and results of operations. The Corporation
has an internal loan review department which is responsible for
reviewing the loan portfolios of all subsidiary banks.
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.
Noninterest Income
The Corporation's noninterest income increased 22% from $2.7
million for the three months ended March 31, 1995 to $3.3 million
for the first quarter of 1996. All categories of noninterest
income increased during the period. Service charges on deposit
accounts increased from $1.2 million to $1.3 million, gains on
sales of loans increased from $39 thousand to $163 thousand,
trust income increased from $307 thousand to $392 thousand and
other noninterest income increased from $1.2 million to $1.3
million for the first quarter of 1996 as compared to the first
quarter of 1995. The largest component of other noninterest
income is insurance commissions, which increased from $184
thousand to $256 thousand. Net securities gains for the period
increased to $42 thousand for the first quarter of 1996 as
compared to $5 thousand for the first quarter of 1995. The
increases in all noninterest income categories were impacted by
the acquisitions of Community Bank, Middlesboro and Williamsburg.
Noninterest Expense
The Corporation's noninterest expense increased by 2% from
$13.2 million for the three months ended March 31, 1995 to $13.5
million for the first quarter of 1996. Salaries and employee
benefits increased from $6.2 million to $7.1 million, occupancy
expense increased from $956 thousand to $960 thousand, equipment
expense increased from $869 thousand to $939 thousand, data
processing expense increased from $585 thousand to $639 thousand,
stationery & printing costs increased from $425 thousand to $502
thousand and other taxes increased from $403 thousand to $503
thousand for the three months ended March 31, 1996 as compared to
the same period in 1995. Two categories of noninterest expense
declined for the quarter as compared to the same period in 1995.
FDIC insurance declined from $659 thousand to $7 thousand and
other noninterest expense declined from $3.1 million to $2.8
million. 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.
Balance Sheet Review
Total assets decreased from $1.73 billion at December 31,
1995 to $1.72 billion at March 31, 1996, or an annualized rate of
2%. During this time, loans increased from $1.12 billion to
$1.16 billion or an annualized rate of 14%. The asset category
which declined most was federal funds sold which declined from
$39.6 million at December 31, 1995 to $5.9 million at March 31,
1996 as the Corporation was able to invest more in its loan
portfolio.
The Corporation's largest liability, deposits, remained
essentially flat for the period, declining from $1.47 billion as
of December 31, 1995 to $1.46 billion as of March 31, 1996. All
of the decline in deposits was caused by a decline in noninterest
bearing deposits as interest bearing deposits increased by $333
thousand during the period. The Corporation reduced its long-
term debt during the period from $27.9 million as of December 31,
1995 to $25.7 million as of March 31, 1996. The Corporation also
reduced its advances from Federal Home Bank during the period, as
these advances declined from $63.6 million to $54.6 million.
Among the liability categories, federal funds purchased and other-
short term borrowings increased the most, as the category
increased from $20.4 million as of December 31, 1995 to $25.4
million as of March 31, 1996.
Loans
Loans increased from $1.12 billion as of December 31, 1995
to $1.16 billion as of March 31, 1996. The loan category which
increased most was commercial loans, which increased from $192.1
million as of December 31, 1995 to $212.7 million as of March 31,
1996. Consumer loans also increased substantially, rising from
$208.7 million as of December 31, 1995 to $216.0 million as of
March 31, 1996. Other than lease financing, which declined from
$5.9 million to $5.4 million, all other loan categories increased
during the period from December 31, 1995 to March 31, 1996.
Non-accrual and 90 days past due loans increased slightly
from 1.20% of total loans outstanding as of December 31, 1995 to
1.24% as of March 31, 1996. Non-accrual loans increased 8 basis
points from 0.85% of total loans outstanding as of December 31,
1995 to 0.93% as of March 31, 1996. During the same period,
loans 90 days or more past due declined by 4 basis points from
0.35% of total loans outstanding to 0.31%. The allowance for
loan losses decreased from 1.44% of total loans outstanding as of
December 31, 1995 to 1.42% as of March 31, 1996. The allowance
for loan losses as a percentage of non-accrual loans and loans 90
days or past due declined from 119.99% as of December 31, 1995 to
114.58% as of March 31, 1996.
The following table summarizes the Corporation's loans that
are non-accrual or past due 90 days or more as of March 31, 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)
March 31, 1996
Commercial loans,
secured by real estate $ 4,914 1.58% $ 396 0.12%
Commercial loans, other 3,377 1.55 779 0.36
Consumer loans,
secured by real estate 2,305 0.56 1,660 0.40
Consumer loans, other 107 0.05 798 0.37
Total $10,703 0.93% $3,633 0.31%
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 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 and lodging. In
order to manage the risks inherent in concentrations of credit,
management has taken the following actions: (i) developed
expertise, lending policies and guidelines for making loans
within specific industries; (ii) changed the composition of loans
to the coal industry by making loans to larger and better
capitalized operations which are in a better position to react to
changes in the 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 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
increased from $279.7 million as of December 31, 1995 to $281.7
million as of March 31, 1995. Securities held-to-maturity
declined from $150.7 million to $146.3 million during the same
period. Total securities as a percentage of total assets was
24.9% as of both December 31, 1995 and March 31, 1996.
Liquidity and Capital Resources
The Corporation's 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
mainly on core deposits, certificates of $100,000 or more,
repayment of principal and interest on loans and securities, and
federal funds sold and purchased to create long-term liquidity.
The subsidiary banks also rely on the sale of securities under
repurchase agreements, securities available-for-sale and Federal
Home Loan Bank borrowings.
Deposits decreased marginally from $1.47 billion to $1.46
billion from December 31, 1995 to March 31, 1996. All of the
decline was in noninterest bearing deposits as interest bearing
deposits increased by $333 thousand during the period. 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 $54 million, if necessary,
to meet the Corporation's liquidity needs.
The Corporation owns $282 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.
These advances have often been matched against pools of
residential mortgage loans which are not sold in the secondary
market, some of which have original maturities of ten to fifteen
years. Federal Home Loan Bank Advances decreased from $63.6
million as of December 31, 1995 to $54.6 million as of March 31,
1996.
The Corporation generally relies upon net inflows of cash
from financing activities, supplemented by net inflows of cash
from 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 $4.2
million outstanding, of $13.5 million originally borrowed, on a
$17.5 million revolving line of credit (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. No options were outstanding as of March 31, 1996.
The impact on operations of interest rate swaps and options was
not material during the first three 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 $0.18
per share for the first quarter of 1996 and $0.16 for the first
quarter of 1995. Earnings per share for the same periods were
$0.46 and $0.34, respectively. The Corporation retained 61% of
earnings for the first quarter 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 March
31, 1996. The Corporation's Tier 1 leverage, Tier 1 risk-based
and total risk-based ratios were 6.85%, 10.25% and 11.52%,
respectively as of March 31, 1996.
As of March 31, 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 resources, or operations. Congress is
currently considering legislation which would impose an
additional one-time insurance assessment on SAIF deposits, or
deposits of savings institutions, which constitute 12% of the
Corporation's total deposits. If this were to be implemented, it
would not have a material impact on the Corporation's financial
condition 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.
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
a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Corporation incorporates by reference Form 8-K
filed with the Commission on January 30, 1996.
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 14, 1996 Richard M. Levy
Richard M. Levy
Executive Vice President
Principal Financial Officer