Kentucky's largest bank holding company is spinning off one of its 10 bank subsidiaries.

Pikeville National Corp. last week entered a definitive agreement to sell Commercial Bank, West Liberty, for $10.2 million to a group of local investors that includes the subsidiary's management.

The transaction represents a meeting of two desires: that of a restructuring middle-tier holding company to leave a slow-growth market and that of some local investors to re-create a locally based bank.

The move demonstrates that as community banks grow they face some of the same decisions that regionals do about market penetration, and that those decisions can create opportunities for new community banks.

"We want to be more community oriented," said Paul Kidd, a vice president of $73 million-asset Commercial Bank. "They're operating on a larger scale than what we want to be." Mr. Kidd was with Commercial when $1.8 billion-asset Pikeville acquired it in 1987

The bank is being purchased by an investor group calling itself Commercial Bancshares whose members include the bank's management and some employees. Other local investors are involved, but Mr. Kidd declined to identify them.

Usually acquisitive Pikeville National is agreeable to pulling out of West Liberty because it sees little prospect for expansion in the Morgan County market, said Burlin Coleman, chairman and interim chief executive of the holding company.

"It's just a market we don't see as having much growth," Mr. Coleman said.

Indeed, according to state figures, the county's population will stand at 14,200 in 2000, up just 8% from 1994.

"We're not the fastest-growing market in the country - we realize that," Mr. Kidd said.

Mr. Coleman said the banking company can deploy the proceeds of the sale toward moving into new markets.

Although Pikeville National evidently sees little merit in staying in West Liberty, Mr. Kidd expressed confidence that a locally based institution without the bottom-line concerns of a big holding company could thrive there.

Indeed, Commercial's performance during the first six months of 1996 compared favorably to performance by the holding company.

According to figures from Sheshunoff Information Services, Commercial racked up a 1.44% return on assets and a 17.9% return on equity in the six months June. Pikeville, meanwhile, posted 1.0% and 13.8% returns respectively.

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