2
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, 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 July 31, 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
June 30 December 31
(In thousands except share amounts) 1996 1995
Assets:
Cash and due from banks $ 65,012 $ 63,017
Interest bearing deposits in
other financial institutions 1,497 4,440
Federal funds sold 0 39,555
Securities available-for-sale 264,404 279,717
Securities held-to-maturity (fair value of $144,593
and $150,315, respectively) 146,384 150,721
Loans 1,216,210 1,115,068
Allowance for loan losses (17,699) (16,082)
Net loans 1,198,511 1,098,986
Premises and equipment, net 46,389 47,553
Excess of cost over net assets acquired (net of
accumulated amortization of
$5,802 and $5,469, respectively) 19,462 20,110
Other assets 28,125 26,071
Total Assets $ 1,769,784 $ 1,730,170
Liabilities and Shareholders' Equity:
Deposits:
Non-interest bearing $ 183,109 $ 186,829
Interest bearing 1,278,651 1,280,614
Total deposits 1,461,760 1,467,443
Federal funds purchased and other
short-term borrowings 20,781 20,383
Other liabilities 17,700 17,047
Advances from Federal Home Loan Bank 110,390 63,629
Long-term debt 21,954 27,873
Total Liabilities 1,632,585 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 65,589 59,934
Net unrealized appreciation (depreciation)
on securities available-for-sale, net of tax (1,895) 356
Total Shareholders' Equity 137,199 133,795
Total Liabilities and Shareholders' Equity $ 1,769,784 $ 1,730,170
The accompanying notes are an integral part of these statements.
Consolidated Statements of Income
Three months ended Six months ended
June 30 June 30
(In thousands except per share data) 1996 1995 1996 1995
Interest Income:
Interest and fees on loans $28,397 $24,158 $56,129 $46,670
Interest and dividends on securities
Taxable 6,248 6,180 12,209 12,106
Tax exempt 756 747 1,518 1,514
Interest on federal funds sold 0 878 450 1,637
Interest on deposits in other financial
institutions 11 33 23 82
Total Interest Income 35,412 31,996 70,329 62,009
Interest Expense:
Interest on deposits 14,898 13,797 30,346 26,155
Interest on federal funds purchased and
other short-term borrowings 288 349 558 769
Interest on advances from Federal Home
Loan Bank 1,196 1,204 2,092 2,360
Interest on long-term debt 493 512 1,046 1,022
Total Interest Expense 16,875 15,862 34,042 30,306
Net interest income 18,537 16,134 36,287 31,703
Provision for loan losses 1,686 1,322 3,174 2,393
Net interest income after provision
for loan losses 16,851 14,812 33,113 29,310
Noninterest Income:
Service charges on deposit accounts 1,556 1,228 2,883 2,389
Gains on sale of loans, net 588 101 751 140
Trust income 406 376 798 683
Securities gains, net 18 0 60 5
Other 1,094 991 2,429 2,145
Total Noninterest Income 3,662 2,696 6,921 5,362
Noninterest Expense:
Salaries and employee benefits 7,194 5,912 14,277 12,077
Occupancy, net 990 1,096 1,950 2,052
Equipment 945 861 1,884 1,730
Data processing 569 577 1,208 1,162
Stationery, printing and office supplies 379 239 881 664
Taxes other than payroll, property
and income 508 479 1,011 882
FDIC insurance 6 669 13 1,328
Other 3,048 3,237 5,892 6,352
Total Noninterest Expense 13,639 13,070 27,116 26,247
Income before income taxes 6,874 4,438 12,918 8,425
Income tax expense 2,137 1,598 3,978 2,612
Net income $ 4,737 $ 2,840 $ 8,940 $ 5,813
Net income per share $ .52 $ .32 $ .98 $ .65
Average shares outstanding 9,139 8,962 9,139 8,898
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
Six months ended
June 30
(In thousands) 1996 1995
Cash flows from operating activities:
Net income $ 8,940 $ 5,813
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,546 1,724
Provision for loan and other real estate losses 3,221 2,412
Securities gains, net (8) (5)
Gain on sale of loans, net (751) (140)
Gain on sale of assets (31) (33)
Net amortization of securities premiums 229 360
Loans originated for sale (16,523) (5,316)
Proceeds from sale of loans 21,799 5,998
Changes in:
Other assets (21) (1,823)
Other liabilities 653 4,249
Net cash provided by operating activities 20,054 13,239
Cash flows from investing activities:
Payments to acquire net assets of subsidiaries 0 (14,918)
Proceeds from:
Sale/call of securities available-for-sale 2,527 383
Maturity of securities available-for-sale 26,305 35,160
Maturity of securities held-to-maturity 6,638 122,015
Principal payments on mortgage-backed securities 24,933 11,740
Purchase of:
Securities available-for-sale (39,639) (15,871)
Securities held-to-maturity (3,441) (23,892)
Mortgage-backed securities (1,228) (98,216)
Net change in loans (108,385) (36,019)
Net change in premises and equipment (1,519) (2,588)
Other 980 1,868
Net cash used in investing activities (92,829) (20,338)
Cash flows from financing activities:
Net change in deposits (5,683) 35,331
Net change in federal funds purchased and
other short-term borrowings 398 (9,086)
Advances from Federal Home Loan Bank 57,000 1,336
Repayments of advances from Federal Home Loan Bank (10,239) (3,189)
Proceeds from long-term debt 1,000 13,500
Payments on long-term debt (6,919) (2,680)
Issuance of common stock - 270
Dividends paid (3,285) (2,492)
Net cash provided by (used in) financing activities 32,272 32,990
Net increase (decrease) in cash and cash equivalents (40,503) 25,891
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 $ 66,509 $121,808
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,
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
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 June 30, 1996 summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 64,783 $ 64,632
Mortgage-backed pass through
certificates 141,244 140,191
Collateralized mortgage obligations 20,689 20,264
Other debt securities 4,642 4,495
Total debt securities 231,358 229,582
Equity securities 35,633 34,822
Total Securities $266,991 $264,404
The amortized cost and fair value of securities held-to-maturity
as of June 30, 1996 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 27,848 $ 27,781
States and political subdivisions 58,546 58,256
Mortgage-backed pass through
certificates 45,715 44,663
Collateralized mortgage obligations 12,275 11,893
Other debt securities 2,000 2,000
Total Securities $146,384 $144,593
Note 3 - Loans
Major classifications of loans are summarized as follows:
June 30 December 31
(in thousands) 1996 1995
Commercial, secured by real estate $ 275,837 $ 258,541
Commercial, other 207,823 192,127
Real Estate Construction 64,975 51,539
Real Estate Mortgage 406,111 398,288
Consumer 256,826 208,662
Equipment Lease Financing 4,638 5,911
$1,216,210 $1,115,068
Note 4 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
June 30 June 30
1996 1995
(in thousands)
Balance January 1 $16,082 $12,978
Allowances of acquired banks - 1,536
Additions to reserve charged
against operations 3,174 2,393
Recoveries 1,218 631
Loans charged off (2,775) (1,688)
Balance End of Period $17,699 $15,850
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) 1996
Average investment in impaired loans 9,887
Interest income recognized on impaired loans
Including interest income recognized on
cash basis 252
Interest income recognized on impaired loans
on a cash basis 252
Information regarding impaired loans at June 30, 1996 is as
follows.
(in thousands) 1996
Balance of impaired loans 9,026
Less portion for which no allowance for loan
losses is allocated 7,309
Portion of impaired loan balance for which an
allowance for credit losses is allocated 1,717
Portion of allowance for loan losses allocated
to the impaired loan balance 741
Note 5 - Long-Term Debt
Long-Term Debt consists of the following:
June 30 December 31
1996 1995
(in thousands)
Senior Notes $17,230 $17,230
Bank Note 0 2,000
Revolving Bank Note 2,700 5,700
Industrial Revenue Development Bonds 0 854
Obligations under capital lease 1,547 1,571
Other 477 518
$21,954 $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 June 30, 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 $1.77 billion and total
shareholders' equity of $137 million as of June 30, 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.
On June 28, 1996, the Corporation announced plans to change its
name from Pikeville National Corporation 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 is subject to approval of the
shareholders at a special meeting on August 15, 1996 and, if approved,
will be effective 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. Farmers
National Bank, The Woodford Bank & Trust Co.). 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 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 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 June 30,
1996 was $4.7 million or $0.52 per share as compared to $2.8 million
or $0.32 per share for the three months ended June 30, 1995. Net
income for the six months ended June 30, 1996 was $8.9 million or
$0.98 per share as compared to $5.8 million or $0.65 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 six months ended June 30, 1996 and 1995:
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
Return on average shareholders' equity 13.98% 8.78% 13.24% 9.16%
Return on average assets 1.09% 0.72% 1.04% 0.74%
The Corporation's net income for the second quarter of 1996
increased $1.9 million or 67% as compared to the same period in 1995.
Net income for the six months ended June 30, 1996 increased $3.1
million or 54% as compared to the six months ended June 30, 1995.
Earnings per share increased $0.20 per share or 63% for the three
months ended June 30, 1996, as compared to the second quarter of 1995.
Earnings per share for the six months increased 51% to $0.98 per share
for the period ended June 30, 1996 as compared to the same period in
1995. Net interest income increased $2.4 million or 15% for second
quarter of 1996 as compared to 1995 and increased $4.6 million or 14%
for the first six months of 1996 as compared to 1995. The increase in
net interest income was caused by increases in the net interest margin
from 4.57% for the second quarter of 1995 to 4.78% for the second
quarter of 1996 and by increases in average earning assets. The
increases in average earning assets were caused by both internally
generated growth and the acquired banks.
Provision for loan losses increased by $0.4 million from $1.3
million for the three months ended June 30, 1995 to $1.7 million for
the quarter ended June 30, 1996, and by $0.8 million from $2.4 million
for the six months ended June 30,1995 to $3.2 million for the first
half of 1996 as net charge-offs increased for the three and six 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 improved by $0.4 million as compared to the same
period in 1995 and improved by $0.7 million for the first six months
as compared to 1995.
All the results of operations are impacted by the four
acquisitions that occurred in 1995. As of 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 $2.4 million or 15% from $16.1
million for the second quarter of 1995 to $18.5 million for the second
quarter of 1996. Interest income and interest expense both increased
for the quarter ending June 30, 1996 as compared to the same period in
1995, with interest income increasing $3.4 million and interest
expense increasing $1.0 million. For the six months ended June 30,
1996 as compared to the same period in 1995, net interest income
increased $4.6 million as interest income increased $8.3 million and
interest expense increased $3.7 million.
The increase in net interest income for both the three and six
month period was driven by increases in net interest margin and
increases in average earning assets due to the acquisitions. Average
earning assets increased 9% from $1.47 billion for the three months
ended June 30, 1995 to $1.61 billion for the same period in 1996. For
the six month period average earning assets also increased 9%, from
$1.45 billion in 1995 to $1.60 billion in 1996. The increases in both
average earning assets and interest bearing funds were due in
substantial part to the acquisitions of Community Bank, Middlesboro,
and Williamsburg discussed earlier.
The yield on interest earning assets increased 7 basis points for
the second quarter of 1996 and 22 basis points for the first six
months of 1996 as compared to the same periods in 1995. The cost of
interest bearing funds decreased 16 basis points for the second
quarter of 1996 and increased 7 basis points for the first six months
of 1996 as compared to the same periods in 1995. As a result the net
interest margin increased from 4.57% for the second quarter of 1995 to
4.78% for the current quarter and increased from 4.55% for the six
months ended June 30, 1995 to 4.70% for the first half of 1996.
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 18% from $0.98 billion for the second quarter
of 1995 to $1.16 billion for the second quarter of 1996. Loans
accounted for 80% of total interest income for the second quarter of
1996 compared to 76% for the second quarter of 1995. The following
table summarizes the annualized net interest spread and net interest
margin for the three and six months ended June 30, 1996 and 1995.
Three Months Ended Six months ended
June 30 June 30
1996 1995 1996 1995
Yield on interest earning assets 8.99% 8.92% 8.97% 8.75%
Cost of interest bearing funds 4.82% 4.98% 4.88% 4.81%
Net interest spread 4.17% 3.94% 4.09% 3.94%
Net interest margin 4.78% 4.57% 4.70% 4.55%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Six Months Ended
June 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 3,174 2,393
Recoveries credited to allowance 1,218 631
Losses charged against allowance (2,775) (1,688)
Allowance balance at June 30 $17,699 $14,168
Allowance for loan losses to period-end loans 1.46% 1.51%
Average loans, net of unearned income $1,159,339 $962,637
Provision for loan losses to
average loans, annualized .55% .50%
Loan charge-offs, net of recoveries to
average loans, annualized .27% .22%
The Corporation increased its provision for loan losses as a
result of the growth in its loan portfolio, and to a lesser degree,
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 5 basis points for the first six months 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 1.21%
as of June 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.
Noninterest Income
The Corporation's noninterest income increased 37% from $2.7
million for the three months ended June 30, 1995 to $3.7 million for
the second quarter of 1996. Noninterest income for the six months
ended June 30, 1996 increased 28% from $5.4 million in 1995 to $6.9
million in 1996. All categories of noninterest income increased
during the period. Included in gains on sale of loans for the three
and six months is $400 thousand applicable to the sale of the
Corporation's credit card portfolio in June 1996. The largest
component of other noninterest income is insurance commissions, which
increased from $237 thousand to $477 thousand for the three months and
from $421 thousand to $733 thousand for the six months ended June 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 caused by the acquisitions of Community Bank,
Middlesboro and Williamsburg.
Noninterest Expense
The Corporation's noninterest expense increased by 4% from $13.1
million for the three months ended June 30, 1995 to $13.6 million for
the same period in 1996. For the six months ended June 30, 1996,
noninterest expense increased 3% to $27.1 million compared to $26.2
million for the six months ended June 30, 1995. Salaries and employee
benefits increased the most of any category, rising from $5.9 million
for the second quarter of 1995 to $7.2 million for the same period in
1996, and from $12.1 million for the six months ended June 30, 1995 to
$14.3 million for the first half of 1996. FDIC insurance declined
substantially, from $669 thousand to $6 thousand for the second
quarter of 1996 as compared to 1995 and from $1.3 million to $13
thousand for the six months ended June 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.
Balance Sheet Review
Total assets increased from $1.73 billion at December 31, 1995 to
$1.77 billion at June 30, 1996, or an annualized rate of 5%. During
this time, loans increased from $1.12 billion to $1.22 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 June 30, 1996 as the Corporation was able to invest more
in its loan portfolio.
The Corporation's largest liability, deposits, declined from
$1.47 billion as of December 31, 1995 to $1.46 billion as of June 30,
1996. The decline in deposits was marginal in both interest bearing
and noninterest bearing as noninterest bearing deposits declined from
$187.8 million at December 31, 1995 to $183.1 million at June 30,
1996. Interest bearing deposits declined from $1.280 billion to
$1.279 billion during the same period. The Corporation reduced its
long-term debt during the period from $27.9 million as of December 31,
1995 to $22.0 million as of June 30, 1996. The Corporation's advances
from Federal Home Loan Bank increased from $63.6 million at December
31, 1995 to $110.4 million at June 30, 1996 as the Corporation used
this as a source of funding for the additional loan demand.
Loans
Loans increased from $1.12 billion as of December 31, 1995 to
$1.22 billion as of June 30, 1996. The loan category which increased
most was consumer loans, which increased from $208.9 million as of
December 31, 1995 to $256.8 million as of June 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 $4.6 million, all other
loan categories increased during the period from December 31, 1995 to
June 30, 1996.
Non-accrual and 90 days past due loans increased slightly from
1.20% of total loans outstanding as of December 31, 1995 to 1.21% as
of June 30, 1996. Non-accrual loans increased 12 basis points from
0.85% of total loans outstanding as of December 31, 1995 to 0.97% as
of June 30, 1996. During the same period, loans 90 days or more past
due declined by 11 basis points from 0.35% of total loans outstanding
to 0.24%. The allowance for loan losses increased from 1.44% of total
loans outstanding as of December 31, 1995 to 1.46% as of June 30,
1996. The allowance for loan losses as a percentage of non-accrual
loans and loans 90 days or past due was 120% at both December 31, 1995
and June 30, 1996.
The following table summarizes the Corporation's loans that are
non-accrual or past due 90 days or more as of June 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)
June 30, 1996
Commercial loans,
secured by real estate $ 6,024 2.18% $ 466 0.17%
Commercial loans, other 3,675 1.73 560 0.26
Consumer loans,
secured by real estate 2,016 0.43 1,192 0.25
Consumer loans, other 110 0.04 657 0.26
Total $11,825 0.97% $2,875 0.24%
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.
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 $246.4 million as of June 30, 1996. Securities
held-to-maturity declined from $150.7 million to $146.8 million during
the same period. Total securities as a percentage of total assets was
24.9% as of December 31, 1995 and 23.2% as of June 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 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 June 30, 1996. Both interest bearing and
noninterest bearing deposits experienced slight declines. 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 $264 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 sometimes 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 increased from
$63.6 million as of December 31, 1995 to $110.4 million as of June 30,
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 $2.7 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. The Corporation had $6 million in options
outstanding at June 30, 1996, which expired without being exercised in
July 1996. The impact on operations of interest rate swaps and
options was not material during the first six 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 $0.36 per share for
the first half of 1996 and $0.32 for the first half of 1995. Earnings
per share for the same periods were $0.98 and $0.65, respectively.
The Corporation retained 63% of earnings for the first half 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 June 30, 1996. The Corporation's Tier 1 leverage, Tier 1
risk-based and total risk-based ratios were 6.84%, 9.84% and 11.10%,
respectively as of June 30, 1996.
As of June 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
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
The Company's Annual Meeting of Shareholders was held on April 23,
1996. 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 6,957,542 69,614
Burlin Coleman 6,962,405 64,751
Terry N. Coleman 6,960,346 66,810
Nick A. Cooley 6,967,217 59,939
William A. Graham, Jr. 6,967,942 59,214
Jean R. Hale 6,966,283 60,873
Brandt T. Mullins 6,966,435 60,721
M. Lynn Parrish 6,967,219 59,937
Ernst M. Rodgers 6,967,219 59,937
Porter P. Welch 6,967,160 59,996
2) Ratification of Ernst & Young, L.L.P. as the Company's
independent certified public accountants for 1996.
The votes of the shareholders on this item was as follows:
In Favor Opposed Abstained
6,945,233 6,337 53,085
3) Amendment of the Company's 1989 Stock Option Plan.
The votes of the shareholders on this item was as follows:
In Favor Opposed Abstained
6,567,588 144,246 300,697
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
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, 1996 Richard M. Levy
Richard M. Levy
Executive Vice President
Principal Financial Officer