5 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to_________ Commission file number 0-11129 PIKEVILLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Kentucky 61-0979818 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 208 North Mayo Trail Pikeville, Kentucky 41501 (address of principal executive offices) (Zip Code) Registrant's telephone number (606) 432-1414 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - 9,124,314 shares outstanding at October 31, 1996
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 September 30 December 31 (In thousands except share amounts) 1996 1995 Assets: Cash and due from banks $ 69,168 $ 63,017 Interest bearing deposits in other financial institutions 1,448 4,440 Federal funds sold 0 39,555 Securities available-for-sale 238,001 279,717 Securities held-to-maturity (fair value of $137,181 and $150,315, respectively) 141,530 150,721 Loans 1,266,147 1,115,068 Allowance for loan losses (18,764) (16,082) Net loans 1,247,383 1,098,986 Premises and equipment, net 46,181 47,553 Excess of cost over net assets acquired (net of accumulated amortization of $6,401 and $5,469, respectively) 20,086 20,110 Other assets 36,506 26,071 Total Assets $ 1,800,303 $ 1,730,170 Liabilities and Shareholders' Equity: Deposits: Noninterest bearing $ 191,651 $ 186,829 Interest bearing 1,270,327 1,280,614 Total deposits 1,461,978 1,467,443 Federal funds purchased and other short-term borrowings 48,421 20,383 Other liabilities 18,096 17,047 Advances from Federal Home Loan Bank 112,178 63,629 Long-term debt 19,169 27,873 Total Liabilities 1,659,842 1,596,375 Shareholders' Equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares issued and outstanding, 1996 - 9,124,314; 1995 - 9,124,314 45,622 45,622 Capital surplus 27,883 27,883 Retained earnings 68,851 59,934 Net unrealized appreciation (depreciation) on securities available-for-sale, net of tax (1,895) 356 Total Shareholders' Equity 140,461 133,795 Total Liabilities and Shareholders' Equity $ 1,800,303 $ 1,730,170 The accompanying notes are an integral part of these statements.
Consolidated Statements of Income Three months ended Nine months ended September 30 September 30 (In thousands except per share data) 1996 1995 1996 1995 Interest Income: Interest and fees on loans $ 30,843 $ 26,458 $ 86,972 $ 73,128 Interest and dividends on securities Taxable 5,030 6,128 17,239 18,234 Tax exempt 741 761 2,259 2,275 Interest on federal funds sold 0 877 450 2,514 Interest on deposits in other financial institutions 20 25 43 107 Total Interest Income 36,634 34,249 106,963 96,258 Interest Expense: Interest on deposits 15,029 15,116 45,375 41,271 Interest on federal funds purchased and other short-term borrowings 399 462 957 1,231 Interest on advances from Federal Home Loan Bank 1,636 1,093 3,728 3,453 Interest on long-term debt 447 684 1,493 1,706 Total Interest Expense 17,511 17,355 51,553 47,661 Net interest income 19,123 16,894 55,410 48,597 Provision for loan losses 2,003 1,615 5,177 4,008 Net interest income after provision for loan losses 17,120 15,279 50,233 44,589 Noninterest Income: Service charges on deposit accounts 1,634 1,379 4,517 3,768 Gains on sale of loans, net 698 139 1,449 279 Trust income 392 371 1,190 1,054 Securities gains, net 5 7 65 12 Other 967 516 3,396 2,661 Total Noninterest Income 3,696 2,412 10,617 7,774 Noninterest Expense: Salaries and employee benefits 6,989 6,345 21,266 18,422 Occupancy, net 987 716 2,937 2,768 Equipment 926 977 2,810 2,707 Data processing 648 888 1,856 2,050 Stationery, printing and office supplies 322 442 1,203 1,106 Taxes other than payroll, property and income 512 502 1,523 1,384 FDIC insurance 7 32 20 1,360 Other 3,309 3,853 9,201 10,205 Total Noninterest Expense 13,700 13,755 40,816 40,002 Income before income taxes 7,116 3,936 20,034 12,361 Income tax expense 2,210 1,202 6,188 3,814 Net income $ 4,906 $ 2,734 $ 13,846 $ 8,547 Net income per share $ 0.54 $ 0.30 $ 1.52 $ 0.96 Average shares outstanding 9,139 8,966 9,139 8,922 The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Nine months ended September 30 (In thousands) 1996 1995 Cash flows from operating activities: Net income $ 13,846 $ 8,547 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,631 2,934 Provision for loan and other real estate losses 5,240 4,381 Securities gains, net (65) (12) Gain on sale of loans, net (1,449) (279) Gain on sale of assets (18) 199 Net amortization of securities premiums 427 439 Loans originated for sale (24,356) (17,150) Proceeds from sale of loans 28,899 13,137 Changes in: Other assets (9,931) (2,865) Other liabilities 1,049 3,587 Net cash provided by operating activities 17,273 12,918 Cash flows from investing activities: Payments to acquire net assets of subsidiaries 0 (14,918) Proceeds from: Sale/call of securities available-for-sale 11,797 17,809 Maturity of securities available-for-sale 35,291 42,857 Maturity of securities held-to-maturity 10,239 26,584 Principal payments on mortgage-backed securities 34,824 132,961 Purchase of: Securities available-for-sale (40,339) (28,237) Securities held-to-maturity (3,441) (38,263) Mortgage-backed securities (1,228) (109,955) Net change in loans (157,853) (50,705) Net change in premises and equipment (2,018) (3,930) Other 1,570 2,275 Net cash used in investing activities (111,158) (23,522) Cash flows from financing activities: Net change in deposits (5,465) 23,714 Net change in federal funds purchased and other short-term borrowings 28,038 (13,668) Advances from Federal Home Loan Bank 61,145 1,595 Repayments of advances from Federal Home Loan Bank (12,596) (14,582) Proceeds from long-term debt 1,000 13,500 Payments on long-term debt (9,704) (9,685) Issuance of common stock - 311 Dividends paid (4,929) (3,967) Net cash provided by (used in) financing activities 57,489 (2,782) Net increase (decrease) in cash and cash equivalents (36,396) (13,386) Cash and cash equivalents at beginning of year 107,012 80,098 Cash and cash equivalents of acquired banks - 15,819 Cash and cash equivalents at end of period $ 70,616 $ 82,531 The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Pikeville National Corporation (the "Corporation"), and its subsidiaries on a consolidated basis conform to generally accepted accounting principles and general practices within the banking industry. Principles of Consolidation - The unaudited consolidated financial statements include the accounts of the Corporation, Pikeville National Bank & Trust Company and its subsidiary, First Security Bank & Trust Co., Commercial Bank (West Liberty), The Exchange Bank of Kentucky, Farmers National Bank, Farmers-Deposit Bank, First American Bank, Community Trust Bank, FSB, Trust Company of Kentucky, The Woodford Bank and Trust Company and Commercial Bank (Middlesboro). All significant intercompany transactions have been eliminated in consolidation.
Note 2 - Securities Securities are classified into held-to-maturity, available-for- sale, and trading categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those which the Company may decide to sell if needed for liquidity, asset-liability management, or other reasons. Available-for- sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. The amortized cost and fair value of securities available-for- sale are as of September 30, 1996 summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 57,798 $ 57,737 Mortgage-backed pass through certificates 122,936 121,659 Collateralized mortgage obligations 20,070 19,584 Other debt securities 4,028 3,917 Total debt securities 204,832 202,897 Equity securities 35,822 35,104 Total Securities $240,654 $238,001 The amortized cost and fair value of securities held-to-maturity as of September 30, 1996 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 27,346 $ 4,555 States and political subdivisions 56,842 56,966 Mortgage-backed pass through certificates 45,467 44,208 Collateralized mortgage obligations 11,875 11,452 Total Securities $141,530 $137,181
Note 3 - Loans Major classifications of loans are summarized as follows: September 30 December 31 (in thousands) 1996 1995 Commercial, secured by real estate $ 267,123 $ 258,541 Commercial, other 226,564 192,127 Real Estate Construction 70,370 51,539 Real Estate Mortgage 408,824 398,288 Consumer 289,002 208,662 Equipment Lease Financing 4,264 5,911 $1,266,147 $1,115,068 Note 4 - Allowance for Loan Losses Changes in the allowance for loan losses are as follows: September 30 September 30 1996 1995 (in thousands) Balance January 1 $16,082 $12,978 Allowances of acquired banks - 1,536 Additions to reserve charged against operations 5,177 4,008 Recoveries 1,784 923 Loans charged off (4,279) (2,982) Balance End of Period $18,764 $16,463 Effective January 1, 1995 the Company adopted FASB Statement No. 114. This Statement requires impaired loans to be measured to the present value of future cash flows or, as a practical expedient, at the fair value of collateral. Upon adoption, the Company recorded no additional loan loss provision. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as bad debt expense, if reductions, or otherwise as interest income. Information regarding impaired loans is as follows for the period ended September 30. (in thousands) 1996 Average investment in impaired loans 10,613 Interest income recognized on impaired loans Including interest income recognized on cash basis 375 Interest income recognized on impaired loans on a cash basis 375
Information regarding impaired loans at September 30, 1996 is as follows. (in thousands) 1996 Balance of impaired loans 10,587 Less portion for which no allowance for loan losses is allocated 8,516 Portion of impaired loan balance for which an allowance for credit losses is allocated 2,071 Portion of allowance for loan losses allocated to the impaired loan balance 900 Note 5 - Long-Term Debt Long-Term Debt consists of the following: September 30 December 31 1996 1995 (in thousands) Senior Notes $17,230 $17,230 Bank Note 0 2,000 Revolving Bank Note 0 5,700 Industrial Revenue Development Bonds 0 854 Obligations under capital lease 1,535 1,571 Other 404 518 $19,169 $27,873 Refer to the 1995 Annual Report to Shareholders for information concerning rates and assets securing long-term debt.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Pikeville National Corporation (the "Corporation") is a multi- bank holding company headquartered in Pikeville, Kentucky. The Corporation owns nine commercial banks, one savings bank and one trust company. Through its affiliates, the Corporation has over sixty banking locations serving 85,000 households in nineteen Eastern and Central Kentucky counties. The Corporation had total assets of $1.80 billion and total shareholders' equity of $140 million as of September 30, 1996. The Corporation's common stock is listed on NASDAQ under the symbol PKVL. Market makers are Robinson Humphrey Co.,Inc., Atlanta, Georgia; Morgan, Keegan and Company, Inc., Memphis, Tennessee; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Bear, Stearns & Co. Inc., New York, New York and Herzog, Heine, Geduld, Inc., New York, New York. On August 15, 1996, the Corporation's shareholders overwhelmingly approved changing the Corporation's name to Community Trust Bancorp, Inc., in order to better identify the Corporation with the communities served throughout Eastern and Central Kentucky, as opposed to just the Pikeville area. The name change will be effective as of January 1, 1997. At the time of the name change on January 1, 1997, the Corporation will merge its nine commercial banks into one commercial bank, which will be named Community Trust Bank, NA. The former commercial banks will operate their branch locations under the name of Community Trust Bank, NA, Pikeville National Bank and Trust Company or the name formerly used by the affiliate commercial bank (e.g. Commercial Bank). The Corporation's savings bank, Community Trust Bank, FSB and its trust company, Trust Company of Kentucky, will continue to operate as separate entities. Acquisitions After making no acquisitions during the years 1992 through 1994, the Corporation resumed its strategic policy of diversification through acquisition and acquired all of the outstanding stock of four Kentucky banks during 1995. This gives the Corporation additional economies of scale and new markets in which to deliver its existing products. On February 2, 1995, the Corporation acquired Community Bank of Lexington, Inc., Lexington, Kentucky ("Community Bank"), which had assets of $61 million. The Corporation issued 366,000 shares of its common stock with a market value of $24 per share to acquire Community Bank. The transaction was accounted for under the purchase method of accounting, with $6.3 million of goodwill recognized. The assets and results of operations of Community Bank are included in the Corporation's financial statements from the date of acquisition forward. The offices of Community Bank became branches of Pikeville National Bank and Trust Company, the Corporation's lead bank, on March 31, 1995. While the Corporation had already been active in lending in the Lexington-Fayette County market through its loan production office, the Community Bank acquisition gives the Corporation branch offices in which to provide deposit products and other financial services in one of Kentucky's fastest growing markets. On May 31, 1995, the Corporation acquired Woodford Bancorp, Inc., Versailles, Kentucky ("Woodford"), which had assets of $103 million for 967,000 shares of its common stock. The transaction was accounted for under the pooling-of-interests method of accounting, and all prior period financial information was restated to give effect to the
transaction. This acquisition gives the Corporation another presence in the Central Kentucky area, which has one of the highest per capita incomes and lowest unemployment rates in Kentucky. On June 30, 1995, the Corporation acquired Commercial Bank, Middlesboro, Kentucky ("Middlesboro"), which had assets of $99 million for $14.4 million in cash. The transaction was accounted for under the purchase method of accounting and goodwill of $4.2 million was recognized. Funds of $13.5 million were borrowed in connection with the acquisition. The assets and results of operations of Middlesboro are included in the Corporation's financial statements from the date of acquisition forward. The City of Middlesboro is located on the Kentucky-Virginia-Tennessee border and is a growing market with a thriving tourism industry. On November 3, 1995 the Corporation acquired United Whitley Corporation, Williamsburg, Kentucky ("Williamsburg") and its subsidiary, Bank of Williamsburg, which had assets of $37 million for 172,000 shares of its common stock. The transaction was accounted for under the pooling-of-interests method of accounting, but without restatement of prior period financial information due to lack of materiality. The assets and results of operations of Williamsburg are included in the Corporation's financial statements from the date of acquisition forward. Bank of Williamsburg was merged into Farmers National Bank on the date of acquisition. Through the acquisition, the Corporation substantially increased the deposit base of Farmers National Bank while increasing its operating costs only marginally. Through the merger of Farmers National Bank and Bank of Williamsburg, the Corporation was able to move the bank charter of the acquired institution to adjacent Laurel County and now has a branch in London, Kentucky which is among the fastest growing areas in Kentucky. Income Statement Review The Corporation's net income for the three months ended September 30, 1996 was $4.9 million or $0.54 per share as compared to $2.7 million or $0.30 per share for the three months ended September 30, 1995. Net income for the nine months ended September 30, 1996 was $13.8 million or $1.52 per share as compared to $8.5 million or $0.96 per share for the same period in 1995. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three and nine months ended September 30, 1996 and 1995: Three months ended Nine months ended September 30 September 30 1996 1995 1996 1995 Return on average shareholders' equity 13.92% 8.39% 13.47% 8.78% Return on average assets 1.09% 0.65% 1.06% 0.71% The Corporation's net income for the third quarter of 1996 increased $2.2 million or 80% as compared to the same period in 1995. Net income for the nine months ended September 30, 1996 increased $5.3 million or 62% as compared to the nine months ended September 30, 1995. Earnings per share increased $0.24 per share or 80% for the three months ended September 30, 1996, as compared to the third quarter of 1995. Earnings per share increased 58% to $1.52 per share for the nine month period ended September 30, 1996 as compared to the same period in 1995. Net interest income increased $2.2 million or 13% for the third quarter of 1996 as compared to 1995 and increased $6.8 million or 14% for the first nine months of 1996 as compared to 1995. The increase in net interest income was caused by increases in the net interest margin from 4.47% for the third quarter of 1995 to 4.73% for the third quarter of 1996 and by increases in average earning assets. The increases in average earning assets were caused by internally generated growth for the third quarter and by internally
generated growth plus the assets of acquired banks for the nine month period as compared to 1995. Provision for loan losses increased by $0.4 million from $1.6 million for the three months ended September 30, 1995 to $2.0 million for the quarter ended September 30, 1996, and by $1.2 million from $4.0 million for the nine months ended September 30,1995 to $5.2 million for the same period in 1996 as net charge-offs increased for the three and nine month periods as compared to the same periods in 1995. The increases in net charge-offs were due to increases in the loan portfolio from internally generated growth and acquisitions. Net noninterest expense for the quarter decreased by $1.3 million as compared to the same period in 1995 and decreased by $2.0 million for the first nine months as compared to 1995. All the results of operations are impacted by the four acquisitions that occurred in 1995. As a result of the acquisitions, net interest income, noninterest income and noninterest expense have all experienced increases. The results of operations of Community Bank are included from February 2, 1995, Middlesboro from June 30, 1995 and Williamsburg from November 3, 1995. Woodford is included for all periods due to being accounted for as a pooling-of-interests with restatement of all prior period financial information. Net Interest Income Net interest income increased $2.2 million or 13% from $16.9 million for the third quarter of 1995 to $19.1 million for the third quarter of 1996. Interest income and interest expense both increased for the quarter ending September 30, 1996 as compared to the same period in 1995, with interest income increasing $2.4 million and interest expense increasing $0.2 million. For the nine months ended September 30, 1996 as compared to the same period in 1995, net interest income increased $6.8 million as interest income increased $10.7 million and interest expense increased $3.9 million. The increase in net interest income for both the three and nine month periods was driven by increases in net interest margin and increases in average earning assets due to the acquisitions. Average earning assets increased 7% from $1.55 billion for the three months ended September 30, 1995 to $1.66 billion for the same period in 1996. For the nine month period average earning assets also increased 9%, from $1.48 billion in 1995 to $1.62 billion in 1996. The increases in both average earning assets and interest bearing funds for the nine month period were due in substantial part to the acquisitions of Community Bank, Middlesboro, and Williamsburg discussed earlier. For the third quarter as compared to 1995, the only acquisition that had an impact was Williamsburg, which was the smallest of the acquisitions. The yield on interest earning assets remained the same for the third quarter of 1996 and increased 15 basis points to 8.96% for the first nine months of 1996 as compared to the same periods in 1995. The cost of interest bearing funds decreased 25 basis points to 4.82% for the third quarter of 1996 and decreased 4 basis points to 4.86% for the first nine months of 1996 as compared to the same periods in 1995. As a result the net interest margin increased from 4.47% for the third quarter of 1995 to 4.73% for the third quarter of 1996 and increased from 4.53% for the nine months ended September 30, 1995 to 4.71% for the nine months ended September 30, 1996. The increases in yield and interest margin are due in large part from growth in the Corporation's loan portfolio, its highest yielding asset. Loan portfolio growth was caused by the aforementioned acquisitions and by internally generated growth. The Corporation's average loans increased 18% from $1.06 billion for the third quarter of 1995 to $1.25 billion for the third quarter of 1996. Loans
accounted for 84% of total interest income for the third quarter of 1996 compared to 77% for the third quarter of 1995. The following table summarizes the annualized net interest spread and net interest margin for the three and nine month periods ended September 30, 1996 and 1995. Three Months Ended Nine months ended September 30 September 30 1996 1995 1996 1995 Yield on interest earning assets 8.94% 8.94% 8.96% 8.81% Cost of interest bearing funds 4.82% 5.07% 4.86% 4.90% Net interest spread 4.12% 3.87% 4.10% 3.91% Net interest margin 4.73% 4.47% 4.71% 4.53% Provision for Loan Losses The analysis of the changes in the allowance for loan losses and selected ratios is set forth below. Nine Months Ended September 30 (in thousands) 1996 1995 Allowance balance January 1 $16,082 $12,978 Balances of acquired banks - 1,536 Additions to allowance charged against operations 5,177 4,008 Recoveries credited to allowance 1,784 923 Losses charged against allowance (4,279) (2,982) Allowance balance at September 30 $18,764 $16,463 Allowance for loan losses to period-end loans 1.48% 1.53% Average loans, net of unearned income $1,190,903 $996,365 Provision for loan losses to average loans, annualized .58% .54% Loan charge-offs, net of recoveries to average loans, annualized .28% .28% The Corporation increased its provision for loan losses as a result of the growth in its loan portfolio. Net charge-offs represent the amount of loans charged off less amounts recovered on loans previously charged off. Net charge-offs as a percentage of average loans outstanding was the same during the first nine months of 1996 as compared to the same period in 1995. The Corporation's non-performing loans (90 days past due and non-accrual) was 1.20% of outstanding loans at both December 31, 1995 and September 30, 1996. Any loans classified as loss, doubtful, substandard or special mention that are not included in non-performing loans do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources or (2) represent material credits about which management has knowledge of any information which would cause management to have serious doubts as to the ability of the borrowers to comply with the loan repayment terms. The Corporation does not believe there are currently any trends, events or uncertainties that are reasonably likely to have a material effect on the volume of its non-performing loans.
Noninterest Income The Corporation's noninterest income increased 54% from $2.4 million for the three months ended September 30, 1995 to $3.7 million for the third quarter of 1996. Noninterest income for the nine months ended September 30, 1996 increased 36% from $7.8 million in 1995 to $10.6 million in 1996. All categories of noninterest income increased during the three and nine month periods for 1996, as compared to the same periods in 1995, except for net securities gains, which declined from $7 thousand to $5 thousand for the third quarter. Included in gains on sale of loans for the nine months ended September 30, 1996 is $400 thousand applicable to the sale of the Corporation's credit card portfolio. The adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," increased gain on sale of loans by $480 thousand. The largest component of other noninterest income is insurance commissions, which increased from $298 thousand to $496 thousand for the three months and from $719 thousand to $1.2 million for the nine months ended September 30, 1996 as compared to the same period in 1995. New incentive programs for sales of credit life insurance are primarily responsible for the increase. The increases in all noninterest income categories were substantially impacted by the acquisitions of Community Bank, Middlesboro and Williamsburg for the nine month period. However, increases in noninterest income categories were not impacted for the three month period by the acquisitions. Noninterest Expense The Corporation's noninterest expense decreased by 1% from $13.8 million for the three months ended September 30, 1995 to $13.7 million for the same period in 1996. For the nine months ended September 30, 1996, noninterest expense increased 2% to $40.8 million compared to $40.0 million for the nine months ended September 30, 1995. Salaries and employee benefits increased the most of any category, rising from $6.3 million for the third quarter of 1995 to $7.0 million for the same period in 1996, and from $18.4 million for the nine months ended September 30, 1995 to $21.3 million for the first nine months of 1996. FDIC insurance declined substantially, from $1.4 million to $20 thousand for the nine months ended September 30, 1996 as compared to the same period in 1995. The reduction in FDIC insurance is due to the change in premium structure. Currently the FDIC charges "well- capitalized" banks, as defined for regulatory purposes, only minimal amounts for deposit insurance premiums. All of the Corporation's affiliate banks are currently classified as "well-capitalized" for regulatory purposes. The increases in all noninterest expense categories were impacted by the acquisitions of Community Bank, Middlesboro and Williamsburg for the nine month period. Balance Sheet Review Total assets increased from $1.73 billion at December 31, 1995 to $1.80 billion at September 30, 1996, or an annualized rate of 5%. During this time, loans increased from $1.12 billion to $1.27 billion or an annualized rate of 18%. The asset category which declined most was federal funds sold which declined from $39.6 million at December 31, 1995 to $0 at September 30, 1996 as the Corporation was able to invest more in its higher yielding loan portfolio. The Corporation's largest liability, deposits, declined from $1.47 billion as of December 31, 1995 to $1.46 billion as of September 30, 1996. The decline in deposits was all in interest bearing deposits as noninterest bearing deposits increased from $187.8 million at December 31, 1995 to $191.7 million at September 30, 1996. Interest bearing deposits declined from $1.280 billion to $1.270 billion during the same period. The Corporation reduced its long-term
debt during the period from $27.9 million as of December 31, 1995 to $19.2 million as of September 30, 1996. The Corporation's advances from Federal Home Loan Bank increased from $63.6 million at December 31, 1995 to $112.2 million at September 30, 1996. Loans Loans increased from $1.12 billion as of December 31, 1995 to $1.22 billion as of September 30, 1996. The loan category which increased most was consumer loans, which increased from $208.9 million as of December 31, 1995 to $289.0 million as of September 30, 1996. Consumer loans increased due to the Corporation's aggressive expansion into the indirect consumer loan market in Kentucky. Other than lease financing, which declined from $5.9 million to $4.3 million, all other loan categories increased during the period from December 31, 1995 to September 30, 1996. Non-accrual and 90 days past due loans amounted to 1.20% of total loans outstanding as of both December 31, 1995 and September 30, 1996. Non-accrual loans decreased 5 basis points from 0.85% of total loans outstanding as of December 31, 1995 to 0.80% as of September 30, 1996. During the same period, loans 90 days or more past due increased 5 basis points from 0.35% of total loans outstanding to 0.40%. The allowance for loan losses increased from 1.44% of total loans outstanding as of December 31, 1995 to 1.48% as of September 30, 1996. The allowance for loan losses as a percentage of non-accrual loans and loans 90 days or more past due was 120% at December 31, 1995 and 123% at September 30, 1996. The following table summarizes the Corporation's loans that are non-accrual or past due 90 days or more as of September 30, 1996 and December 31, 1995. As a % of Accruing loans As a % of Non-accrual loan balances past due 90 loan balances loans by category days or more by category (in thousands) September 30, 1996 Commercial loans, secured by real estate $ 4,884 1.83% $ 989 0.37% Commercial loans, other 3,309 1.43 721 0.31 Consumer loans, secured by real estate 1,783 0.37 2,277 0.48 Consumer loans, other 189 0.07 1,035 0.36 Total $10,165 0.80% $5,022 0.40% December 31, 1995 Commercial loans, secured by real estate $ 3,264 1.26% $1,428 0.55% Commercial loans, other 3,048 1.54 237 0.12 Consumer loans, secured by real estate 2,873 0.64 1,335 0.30 Consumer loans, other 248 0.12 947 0.45 Total $ 9,433 0.85% $3,947 0.35% Allowance for loan losses Management analyzes the adequacy of its allowance for loan losses on a quarterly basis. The loan portfolio of each affiliate bank is analyzed by each major loan category, with a review of the following areas: (i) specific allocations based upon a review of selected loans for loss potential; (ii) an allocation which estimates reserves based upon the remaining pool of loans in each category derived from historical net charge-off data, delinquency trends and other relevant
factors; and (iii) an unallocated portion of the allowance which provides for a margin of error in estimating the allocations described above and provides for risks inherent in the portfolio which may not be specifically addressed elsewhere. Off-balance sheet risk is addressed by including letters of credit in the Corporation's allowance adequacy analysis and through a monthly review of all letters of credit outstanding. The Corporation's loan review and problem loan analysis includes evaluation of deteriorating letters of credit. Volume and trends in delinquencies are monitored monthly by management and the boards of directors of the respective banks. Securities The Corporation uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Corporation uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale decreased from $279.7 million as of December 31, 1995 to $238.0 million as of September 30, 1996. Securities held-to-maturity declined from $150.7 million to $141.5 million during the same period. Total securities as a percentage of total assets was 24.9% as of December 31, 1995 and 21.1% as of September 30, 1996. Liquidity and Capital Resources The Corporation's liquidity objectives are to ensure that funds are available for the affiliate banks to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Corporation to meet ongoing cash needs while maximizing profitability. The Corporation continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary banks rely on core deposits, certificates of deposit of $100,000 or more, repayment of principal and interest on loans and securities, federal funds sold and purchased, the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings to provide for liquidity. Deposits decreased marginally from $1.47 billion to $1.46 billion from December 31, 1995 to September 30, 1996. Noninterest bearing deposits increased by $5 million while interest bearing deposits decreased by $10 million. This decline has not materially impacted the Corporation's profitability or its ability to provide loan funding as loans continue to grow. Due to the nature of the markets served by the subsidiary banks, management believes that the majority of its certificates of deposits of $100,000 or more are no more volatile than its core deposits. During the periods of low interest rates, these deposit balances remained stable as a percentage of total deposits. In addition, arrangements have been made with correspondent banks for the purchase of federal funds on an unsecured basis, up to an aggregate of $97 million, if necessary, to meet the Corporation's liquidity needs. The Corporation owns $238 million of securities valued at market price that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Corporation also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank Advances increased from $63.6 million as of December 31, 1995 to $112.2 million as of September 30, 1996. The Corporation generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from
operating activities, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. The Corporation currently has a $17.5 million revolving line of credit available to meet any future cash needs (see long-term debt footnote to the consolidated financial statements). The Corporation's primary investing activities include purchases of securities and loan originations. In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Corporation monitors its interest rate risk by use of the static and dynamic gap models at the one year interval. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Corporation uses the Sendero system to monitor its interest rate risk. The Corporation desires an interest sensitivity gap of not more than fifteen percent of total assets at the one year interval. On a limited basis, the Corporation now uses interest rate swaps and sales of options on securities as additional tools in managing interest rate risk. Interest rate swaps involve an exchange of cash flows based on the notional principal amount and agreed upon fixed and variable interest rates. In this transaction, the Corporation has agreed to pay a floating interest rate based on London Inter-Bank Offering Rate (LIBOR) and receive a fixed interest rate in return. On options, the Corporation has sold the right to a third party to purchase securities the Corporation currently owns at a fixed price on a future date. The Corporation had no options outstanding at September 30, 1996. The impact on operations of interest rate swaps and options was not material during the first nine months of 1995 or 1996. The Corporation's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from subsidiary banks. Various federal and state statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Corporation's dividend policy or its ability to service long-term debt, nor is it anticipated that they will have any major impact in the foreseeable future. In addition to the subsidiary banks' 1996 profits, approximately $4.5 million can be paid to the Corporation as dividends without prior regulatory approval. The primary source of capital for the Corporation is retained earnings. The Corporation declared dividends of $0.54 per share for the first nine months of 1996 and $0.48 for the first nine months of 1995. Earnings per share for the same periods were $1.52 and $0.96, respectively. The Corporation retained 64% of earnings for the first nine months of 1996. Under guidelines issued by banking regulators, the Corporation and its subsidiary banks are required to maintain a minimum Tier 1 risk-based capital ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios weight the relative risk factors of all assets and consider the risk associated with off-balance sheet items. The Corporation must also maintain a minimum Tier 1 leverage ratio of 4% as of September 30, 1996. The Corporation's Tier 1 leverage, Tier 1 risk-based and total risk-based ratios were 6.82%, 9.60% and 10.85%, respectively as of September 30, 1996. As of September 30, 1996, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or would be reasonably likely to have, a material adverse impact on the Corporation's liquidity, capital
resources, or operations. A one-time assessment of 65.7 cents per $100 of savings deposits, which constitute 12% of the Corporation's deposits, was passed by congress to recapitalize the Savings Association Insurance Fund (SAIF). This did not have a material impact on the Corporation's financial position or results of operations. Impact of Inflation and Changing Prices The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial and operating results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a vote of Security Holders A special called Meeting of Shareholders was held on August 15, 1996. The following item was approved: 1) Proposal to amend Pikeville National Corporation's Articles of Incorporation to change Pikeville National Corporation's name to "Community Trust Bancorp, Inc.", effective January 1, 1997. The votes of the shareholders on this item was as follows: In Favor Opposed Abstained 6,802,539 593,256 53,639 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule b. Reports on Form 8-K None
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PIKEVILLE NATIONAL CORPORATION by Date: November 14, 1996 Richard M. Levy Richard M. Levy Executive Vice President Principal Financial Officer