-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EYaRakCBKN2++zIiTXhzZ5wDlOpuuSK5F430xeTvkgvIi2Rwuun0mXqfnJlkGvHs 2nqolfj7cUrmOm12kDwm9Q== 0000350852-95-000013.txt : 19951109 0000350852-95-000013.hdr.sgml : 19951109 ACCESSION NUMBER: 0000350852-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951108 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIKEVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000350852 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 610979818 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11129 FILM NUMBER: 95588400 BUSINESS ADDRESS: STREET 1: 208 NORTH MAYO TRAIL STREET 2: P O BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41502-2947 BUSINESS PHONE: 6064321414 MAIL ADDRESS: STREET 1: 208 NORTH MAYO TRAIL STREET 2: PO BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41501 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to_________ Commission file number 0-11129 PIKEVILLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Kentucky 61-0979818 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 208 North Mayo Trail P.O. Box 2947 Pikeville, Kentucky 41501 (address of principal executive offices) (Zip Code) Registrant's telephone number (606) 432-1414 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - 8,952,125 shares outstanding at September 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 September December 31 (in thousands) 1995 1994 Assets: Cash and Cash Equivalents Cash and due from banks $ 53,616 $ 64,267 Interest bearing deposits in other fin inst 1,250 1,906 Federal funds sold 27,665 13,925 Total cash and cash equivalents 82,531 80,098 Securities available for sale 86,980 87,415 Securities held to maturity (fair value of $347,203 and $345,110, respectively) 347,381 363,546 Loans and lease financing, net of unearned 1,064,865 902,323 Less: Allowance for losses (16,463) (12,978) Net Loans and lease financing 1,048,402 889,345 Loans held for sale 8,423 4,131 Premises and equipment, net 46,329 38,765 Interest receivable 13,447 11,242 Excess of cost over net assets acquired (net of amortization of $5,037 and $4,315, respect 20,300 10,367 Other real estate (net of allowance for losses of $445 and $1,852, respectively) 4,343 4,320 Other assets 12,124 10,205 Total Assets $1,670,260$1,499,434 Liabilities and Shareholders' Equity: Deposits Non-Interest bearing $179,896 $159,633 Interest bearing 1,226,018 1,086,754 Total Deposits 1,405,914 1,246,387 Federal funds purchased and securities sold under repurchase agreements 22,413 25,735 Other short-term borrowings 73 5,419 Dividends payable 1,432 1,220 Interest payable 6,841 4,634 Other liabilities 7,834 4,699 Advances from Federal Home Loan Bank 65,830 69,760 Long-term debt 28,759 24,944 Total Liabilities 1,539,096 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, 1995-8,952,125; 1994-8,592,287 44,761 42,961 Capital surplus 27,427 20,788 Retained earnings 59,295 54,928 Net unrealized depreciation on securities available for sale, net of tax (319) (2,041) Total Shareholders' Equity 131,164 116,636 Total Liabilities and Shareholders' Equity $1,670,260$1,499,434 See notes to consolidated financial statements. Pikeville National Corporation CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended September 30 September 30 (in thousands) 1995 1994 1995 1994 Interest Income: Interst and fees on loans and lease finan $ 26,458 19,978 73,128 57,068 Interest and dividends on securities- Taxable 6,128 5,745 18,234 17,389 Tax exempt 761 779 2,275 2,273 Interest on federal funds sold 877 594 2,514 1,415 Interest on deposits in other fin ins 25 38 107 105 34,249 27,134 96,258 78,250 Interest Expense: Interest on deposits 15,116 10,007 41,271 28,884 Interest on federal funds purchased and securities sold under repurchase agreements 458 363 1,159 863 Interest other short-term borrowings 4 23 72 69 Int on advances from FHLB 1,093 1,018 3,453 3,078 Interest on long-term debt 684 493 1,706 1,532 17,355 11,904 47,661 34,426 Net interest income 16,894 15,230 48,597 43,824 Provision for loan losses 1,615 1,097 4,008 4,344 Net interest income after provision for loan losses 15,279 14,133 44,589 39,480 Non-interest income: Service charges on deposit accounts 1,379 1,181 3,768 3,361 Gains on sale of loans, net 139 84 279 585 Insurance commissions 298 251 719 631 Trust income 371 423 1,054 1,194 Securities gains (losses), net 7 (61) 12 (45) Other 218 525 1,942 1,475 2,412 2,403 7,774 7,201 Non-interest expenses: Salaries and wages 5,148 4,390 14,459 13,138 Employee benefits 1,197 1,388 3,963 3,956 Occupancy, net 716 767 2,768 2,462 Equipment 977 827 2,707 2,456 Data processing 888 464 2,050 1,509 Stationery and office supplies 442 339 1,106 1,072 Taxes other than payroll, property and income taxes 502 385 1,384 1,108 FDIC insurance 32 886 1,360 2,135 Losses associated with mortgage-backed derivatives 0 2,750 0 2,750 Restructuring and reengineering costs 0 945 0 945 Other 3,853 3,037 10,205 7,984 13,755 16,178 40,002 39,515 Income before income taxes 3,936 358 12,361 7,166 Applicable income taxes (benefits) 1,202 (96) 3,814 1,534 Net Income $ 2,734 454 8,547 5,632 Net income per share: Primary $ 0.30 0.05 0.96 0.65 Fully diluted 0.30 0.05 0.96 0.65 Average shares outstanding Primary 8,966 8,604 8,922 8,601 Fully diluted 8,966 8,604 8,922 8,601 PIKEVILLE NATIONAL CORPORATION Nine Months Ended CONSOLIDATED STATEMENT OF CASH FLOWS September 30 (in thousands) 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 8,547 $ 5,632 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,934 2,598 Provision for loan and other real estate losses 4,381 5,095 Securities (gains) losses, net (12) 45 Gain on sale of loans, net (279) (585) Losses on sale of assets, net 199 134 Net amortization of securities premiums 439 491 Loans originated for sale (17,150) (44,559) Proceeds from sale of loans 13,137 51,679 Changes in: Interest receivable (1,104) (569) Interest payable 1,421 (238) Other liabilities 2,166 2,821 Other assets (1,761) (581) Net cash provided by operating activities 12,918 21,963 CASH FLOWS FROM INVESTING ACTIVITIES: Payments to acquire net assets of subsidiaries (14,918) 0 Sales of securities available for sale 17,809 718 Proceeds from sale of securities held to maturity 0 14,370 Proceeds from maturity of securities available-for 42,857 15,422 Proceeds from maturity of securities held-to-matur 26,584 52,445 Proceeds from principal payments of mortgage backe132,961 28,620 Purchases of securities available-for-sale (28,237) (9,271) Purchase of securities held-to-maturity (38,263) (36,936) Purchase of mortgage backed securities (109,955) (62,230) Net change in loans (50,705) (62,114) Purchase of premises, equipment and other real est (4,158) (3,907) Proceeds from sale of premises and equipment 228 530 Proceeds from sale of other real estate 2,275 1,791 Net cash used in investing activities (23,522) (60,562) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 23,714 3,588 Net change in federal funds purchased and securities sold under repurchase agreements (8,322) 12,628 Net change in short-term borrowings (5,346) (3,715) Advances from Federal Home Loan Bank 1,595 10,990 Repayments of advances from Federal Home Loan Bank(14,582) (10,075) Proceeds from long-term debt 13,500 0 Payments on long-term debt (9,685) (10,193) Proceeds from issuance of common stock 311 7,594 Dividends paid (3,967) (3,438) Net cash provided by financing activities (2,782) 7,379 Net increase (decrease) in cash and cash equi(13,386) (31,220) 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 $ 82,531 $ 78,702 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 September 30, 1995 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $15,618 $15,739 Mortgage-backed pass through certificates 9,136 9,262 Collateralized mortgage obligations 24,677 24,937 Other debt securities 3,455 3,469 Total debt securities 52,886 53,407 Equity securities 34,279 33,573 $87,165 $86,980 The amortized cost and fair value of securities held-to- maturity as of September 30, 1995 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $93,727 $ 94,124 Obligations of states and political subdivisions 55,998 56,766 Mortgage-backed pass through certificates 53,838 53,826 Collateralized mortgage obligations 138,460 137,246 Other debt securities 5,358 5,241 $347,381 $347,203 Note 3 - Loans Major classifications of loans are summarized as follows: September 30 December 31 (in thousands) 1995 1994 Commercial, secured by real estate $ 254,533 $ 231,480 Commercial, other 190,265 183,533 Real Estate Construction 47,807 45,308 Real Estate Mortgage 373,363 290,998 Consumer 192,479 143,085 Equipment Lease Financing 6,418 7,919 $1,064,865 $ 902,323 Note 4 - Allowance for Loan Losses Changes in the allowance for loan losses are as follows: September 30 September 30 1995 1994 (in thousands) Balance January 1 $12,978 $13,346 Allowances of acquired banks 1,536 Additions to reserve charged against operations 4,008 4,344 Recoveries 923 628 Loans charged off (2,982) (4,784) Balance End of Period $16,463 $13,534 Effective January 1, 1995 the Company adopted FASB Statement No. 114. This Statement requires impaired loans to be measured to the present value of future cash flows or, as a practical expedient, at the fair value of collateral. Upon adoption, the Company recorded no additional loan loss provision. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as bad debt expense, if reductions, or otherwise as interest income. Information regarding impaired loans is as follows for the period ended September 30. (in thousands) 1995 Average investment in impaired loans 7,759 Interest income recognized on impaired loans including interest income recognized on cash basis 395 Interest income recognized on impaired loans on a cash basis 391 Information regarding impaired loans at September 30, 1995 is as follows. (in thousands) 1995 Balance of impaired loans 9,142 Less portion for which no allowance for loan losses is allocated 6,369 Portion of impaired loan balance for which an allowance for credit losses is allocated 2,773 Portion of allowance for loan losses allocated to the impaired loan balance 900 Note 5 - Long-Term Debt Long-Term Debt consists of the following: September 30 December 31 1995 1994 (in thousands) Senior Notes $17,230 $17,230 Bank Notes 8,600 4,000 Industrial Revenue Development Bonds 854 1,500 Kentucky Housing Corporation 386 467 Obligations under capital lease 1,582 1,614 Other 107 133 $28,759 $24,944 At September 30, 1995 the bank notes consist of $2.0 million of existing debt to National City Bank, Louisville, Kentucky and $ 6.6 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 September 30, 1995. Refer to the 1994 Annual Report to Shareholders for additional information concerning rates and assets securing long-term debt. Note 6 - Acquisition The Company acquired United Whitley Corporation, Williamsburg, Kentucky ("Williamsburg"), and its subsidiary, Bank of Williamsburg. The transaction was effected by an exchange of 172,000 shares of the Company's stock for the stock of Williamsburg. The acquisition was consummated on November 3, 1995, and was accounted for as a pooling-of- interests. Williamsburg had total assets of approximately $41 million at September 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 had total assets of approximately $103 million at the time of acquisition. 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 had total assets of approximately $106 million at the time of acquisition. On November 3, 1995 the acquired all of the outstanding stock of United Whitley Corporation, Williamsburg, Kentucky ("Williamsburg"), and its subsidiary, Bank of Williamsburg for approximately 172 thousand shares of its common stock. The transaction was accounted for as a pooling, but without restatement of prior period financial information, due to immateriality. Williamsburg had assets of approximately $41 million at September 30, 1995. Income Statement Review Net income for the quarter ended September 30, 1995 increased 502.2% to $2.7 million as compared to $454 thousand for the same period in 1994. Earnings per share increased 500.0% from $0.05 per share for the third quarter of 1994 to $0.30 per share for the third quarter of 1995. Net income for the nine months increased 51.8% from $5.6 million in 1994 to $8.5 million for 1995. Earnings per share for the nine months increased 47.7% from $0.65 per share to $0.96 per share for 1994 and 1995, respectively. Fully diluted earnings per share was the same as primary earnings per share for the three and nine 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 nine months ended June 30, 1995 and 1994: Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 Return on average shareholders' equity 8.39% 1.52% 8.78% 6.40% Return on average assets 0.65% 0.12% 0.71% 0.51% The largest portions of the increases in net income for the three and nine month periods for 1995 as compared to 1994 are due to losses associated with mortgage-backed derivative securities and restructuring and reengineering costs that were incurred in the third quarter of 1994. The impact of these items decreased income for the three and nine month periods ended September 30, 1994 by $2.4 million. Net interest income increased $1.7 million for the three months and $4.8 million for the nine months ended September 30, 1995 as compared to the same periods in 1994. Provision for loan losses expense increased $0.5 million for the three months and decreased $0.3 million for the nine months ended September 30, 1995, as compared to the same periods ended September 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 nine month periods in 1995 compared to 1994. These increases in net income were offset by increases in non- interest expenses for the same periods. Non-interest expense for the three months ended September 30, 1995 is lower than the same period in 1994, but is higher after adjusting for the derivative and restructuring costs. All of the above items are discussed in more detail later in this report. Income tax expense was also higher for the three and nine 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 acquisitions in 1995. Net Interest Income Net interest income increased $1.7 million or 10.9% for the three months ended September 30, 1995 and increased $4.8 million or 10.9% for the nine months ended September 30, 1995, as compared to the same periods in 1994. The increase in net interest income for 1995 as compared to 1994 is driven by increases in both the average earning assets and the net interest margin for the nine month period and by increases in average earning assets offset by a slight decline in net interest margin for the three month period. Average earning assets for the three months increased 13.8% from $1.364 billion to $1.553 billion from 1994 to 1995 and 9.4% for the nine months, rising from $1.361 billion in 1994 to $1.489 billion in 1995. The acquisition of Commercial Bank, Middlesboro was responsible for a large portion of the growth in earning assets for the three months as compared to 1994. The largest part of the growth in earning assets is attributable to growth in loans, our highest yielding assets. Average loans increased from $879.3 million for the quarter ended September 30, 1994 to $1.063 billion for the third quarter of 1995. For the nine month period, average loans increased from $862.0 million in 1994 to $996.3 million for the same period in 1995. Average loans as a percentage of average earning assets increased from 64.5% for the third quarter of 1994 to 68.4% for the third quarter of 1995. For the nine months, average loans as a percentage of average earning assets increased from 63.3% in 1994 to 66.9% for the same period in 1995. Income and fees from loans contributed 77.3% of the total interest income for the three months ended September 30, 1995 compared to 73.6% for the same period in 1994. For the nine months, loans contributed 76.0% of total interest income in 1995 and 72.9% in 1994. The following table summarizes the net interest spread and net interest margin for the three and nine months ended September 30, 1995 and 1994. Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 Yield on interest earning assets 8.94% 8.01% 8.81% 7.85% Cost of interest bearing funds 5.07% 3.97% 4.90% 3.87% Net interest spread 3.87% 4.04% 3.91% 3.98% Net interest margin 4.47% 4.55% 4.53% 4.47% Provision for loan losses An analysis of the changes in the allowance for loan losses and selected ratios is set forth below. Nine Months Ended September 30 1995 1994 (in thousands) Allowance Balance at January 1 $12,978 $13,346 Balances of acquired Banks 1,536 - Additions to reserve charged against operations 4,008 4,344 Recoveries 923 628 Losses charged against allowance (2,982) (4,784) Allowance Balance at June 30 $16,463 $13,534 Allowance for loan losses to period-end loans 1.55% 1.51% Average loans, net of unearned income 996,321 861,953 Provision for loan losses to average loans, annualized 0.54% 0.67% Loan charge-offs, net of recoveries to average loans, annualized 0.28% 0.64% 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 0.28% of average loans for the nine months ended September 30, 1995 compared to 0.64% 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 1.12% at September 30, 1995. The following table compares certain ratios of the Company at September 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 June 30, 1995, the most recent information available. Company Peer Group Allowance for loan losses to period-end loans 1.55% 1.68% 90 days past due and non-accrual loans to total loans 1.12% 1.27% Non-accrual loans to total loans 0.89% 0.78% Problem loans are reviewed on a monthly basis and specific allocations are made based on review of collateral and payment ability of the borrower. Loans are fully reserved when review determines that there is an inability to pay and the liquidation value of collateral is insufficient. Loans 90 days or more past due are placed on non-accrual. The Company has an internal loan review department which is responsible for reviewing the loan portfolios of all subsidiary banks. Any loans classified by regulatory examiners as loss, doubtful, substandard or special mention that are not included in non-performing loans do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources or (2) represent material credits about which management is aware of any information which would cause management to have serious doubt as to the ability of the borrowers to comply with the loan repayment terms. The Company is unaware of any trends, events or uncertainties that will have, or that are reasonably likely to have, a material effect on the status of its non-performing loans. In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, Accounting By Creditors For Impairment of a Loan. SFAS No. 114 requires that allowances for loan losses on impaired loans be determined using the present value of the estimated future cash flows of the loans, discounted at the loan's effective interest rate. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. The Company adopted SFAS No. 114, as required, on January 1, 1995. The effect of adopting the new guidance was not material to the Corporation's consolidated financial statements. Non-interest Income Non-interest income increased $9 thousand for the three months ended September 30, 1995 as compared to the same period in 1994. For the nine months, non-interest income increased 8.0% from $7.2 million in 1994 to $7.8 million in 1995. For the three month periods, service charges on deposit accounts increased $198 thousand while all other non- interest income categories except for trust income and other non-interest income increased by lesser amounts while those two categories experienced declines for the three months as compared to the same period in 1994. For the nine month periods in 1995 as compared to 1994, service charges on deposit accounts increased by $407 thousand, insurance commissions increased by $88 thousand, and other non- interest income increased by $467 thousand. The largest single component of the increase in other non-interest income for the nine 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 $306 thousand, trust income declined $140 thousand, and net securities gains & losses increased from a loss of $45 thousand to a gain of $12 thousand. Non-interest Expenses Non-interest expenses decreased 15.0% from $16.1 million for the three months ended September 30, 1994 to $13.8 million for the same period in 1995. For the nine month period, non-interest expenses increased 1.2% from $39.5 million in 1994 to $40.0 million in 1995. Two contributing factors were present in the three and nine month periods in 1994 that were not present in 1995: Losses incurred on certain mortgage derivative securities and costs associated with restructuring and reengineering the company's operations. Mortgage-backed derivatives were purchased for certain trust accounts administered by the Company's affiliates. While all of these securities are guaranteed by either the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association and therefore, pose very little, if any, credit, they exhibited an excessive volatility which led to a significant decline in their market value. The Company recognized a $2.75 million pre- tax loss in these securities which represented the difference between the book value carried in the customer accounts and the actual market value. The Company purchased the securities from the trust accounts and because management believes there is no credit loss, expects to collect the full face value over time. The securities are carried at market value as available for sale and currently no additional market value declines have been suffered. During the latter part of 1993 and continuing through 1994, the Company intensively examined ways to improve its performance through restructuring its operations and reengineering its work flow processes. As a result of this examination, the Company adopted a plan which downsized its workforce by approximately 9% of total employment. Severance and other related costs of downsizing in the amount of $945 thousand were recognized in the third quarter of 1994. For the three month period, salaries and employee benefits increased $567 thousand, equipment expenses increased $150 thousand, data processing increased $424 and other non-interest expenses increased by $816 thousand, while FDIC insurance declined $854 thousand and the other categories of non-interest expense increased by lesser amounts. The decrease in FDIC insurance is due to the drop in rates from $0.23 per $100 of insured deposits to $0.04 per $100 of insured deposits during the third quarter, effective to May 31, 1995. This was effective for all banks, but not for savings institutions. The largest component of other non-interest expense is write-downs on repossessed real estate, accounting for $545 thousand during the third quarter of 1995. For the nine month period, salaries and benefits increased $1.3 million, occupancy expense increased $306 thousand, equipment expenses increased $251 thousand, data processing increased $541 thousand, other taxes increased $276 thousand and other non-interest expense increased by $2.2 million, while stationery & printing increased marginally and FDIC insurance decreased $775 thousand, all due to the third quarter decline. In addition to the write downs on repossessed real estate, the largest components of the increases in other non-interest expenses for the three and nine 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 $1.670 billion at September 30, 1995, or an annualized rate of 15.2%. Of the approximately $171 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 $1.065 billion at September 30, 1995, an annualized rate of 24.1%. Of the $163 million increase, approximately $116 million came from the acquisitions of Community Bank and Middlesboro. Loans accounted for 63.8% of total assets at September 30, 1995 compared to 60.2% at December 31, 1994. Federal funds sold also increased significantly during the period, from $13.9 million at December 31, 1994 to $27.7 million at September 30, 1995. The majority of the asset growth was funded by deposit growth as total deposits increased from $1.246 billion to $1.406 billion at December 31, 1994 and September 30, 1995, respectively, an annualized increase of 17.1%. 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 $28.8 million at September 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 and has paid 6.9 million in principal on the $13.5 million of new debt. Advances from Federal Home Loan Bank declined somewhat during the period, decreasing from $69.8 million at December 31, 1994 to $65.8 million at September 30, 1995. Loans Loans increased from $0.902 billion at December 31, 1994 to $1.065 billion at September 30, 1995, or an annualized rate of 24.1%. 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 September 30, 1995 except for lease financing, which decreased by $1.5 million. The largest increase of any loan category was in real estate mortgage loans, which increased from $291.0 million to $373.4 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 $192.5 million at September 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 1.12% at September 30, 1995. Non accrual loans decreased 9 basis points from 0.98% of net loans at December 31, 1994 to 0.89% of net loans at September 30, 1995. 90 days past due loans as a percent of net loans decreased 15 basis points from 0.38% to 0.23% for the same period. The reserve for loan losses increased from 1.44% of net loans at December 31, 1994 to 1.55% of net loans at September 30, 1995. The reserve for loan losses as a percentage of loans 90 days past due and non-accrual loans increased from 106.1% at December 31, 1994 to 138.4% at June 30, 1995. The following table summarizes the Company's loans that are non-accrual or past due 90 days or more at September 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) September 30, 1995 Commercial loans, secured by real estate $3,778 1.48% $ 494 0.19% Commercial loans, other 3,293 1.67% 140 0.07% Consumer loans, secured by real estate 2,272 0.54% 1,491 0.35% Consumer loans, other 106 0.06% 406 0.21% TOTAL $9,449 0.88% $2,531 0.24% 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 $16.1 million from $363.5 million at December 31, 1994 to $347.4 million at September 30, 1995. Securities available for sale decreased $0.4 million from $87.4 million at December 31, 1994 to $87.0 million at September 30, 1995. Total securities as a percentage of the Company's assets decreased during the six month period, as securities accounted for 30.1% of total assets at December 31, 1994 and 26.0% of total assets at September 30, 1995. Liquidity and Capital Resources The Company's objective is to ensure that funds are available at the subsidiary banks to meet deposit withdrawals and credit demands without unduly penalizing profitability. The Company continues to identify ways to provide for liquidity on both a current and long-term basis. On a long-term basis, the subsidiary banks rely mainly on core deposits, certificates of deposits of $100,000 or more, repayment of principal and interest on loans and federal funds sold and purchased. The subsidiary banks also rely on the sale of securities under repurchase agreements, securities available for sale and Federal Home Loan Bank borrowings. Deposits increased $160 million or an annualized rate of 17.1% from December 31, 1994 to September 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 $87.0 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 decreased from $69.8 million at December 31, 1994 to $65.8 million at September 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, of which $6.9 million was repaid during the third quarter of 1995. 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 $0.48 per share for the first nine months of 1995 and $0.45 for the first nine months of 1994 while earnings per share for the periods were $0.96 and $0.65 per share, respectively. The Company retained 50 percent of earnings for the first nine months of 1995. The Company's leverage, Tier 1 capital, and Total risk based capital ratios at June 30, 1995 were 6.77%, 10.40%, and 11.68%, 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 September 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 September 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 None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PIKEVILLE NATIONAL CORPORATION by Date: November 8,1995 Signature Richard M. Levy Senior Vice President Principal Financial Officer EX-27 2
9 1000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 53,616 1,250 27,665 0 86,980 347,381 347,203 1,073,288 16,463 1,670,260 1,405914 22,486 16,107 94,589 44,761 0 0 86,403 1,670,260 73,128 20,509 2,621 96,258 41,271 47,661 48,597 4,008 12 40,002 12,361 8,547 0 0 8,547 0.96 0.96 4.53 9,449 2,531 0 11,980 12,978 2,982 923 16,463 16,463 0 0
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