_______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, For the Quarter Ended June 30, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-16839
PEOPLES FIRST CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1023747
(State or other jurisdiction of (I R S Employer
incorporation or organization) Identification No.)
100 South Fourth Street
P. O. Box 2200
Paducah, Kentucky 42002-2200
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 441-1200
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 require-
ments for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's only class of stock as of
June 30, 1994: Common stock, no par value - 7,112,920 shares outstanding.
______________________________________________________________________________1
INDEX Page
_______________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1994,
June 30, 1993 and December 31, 1993 3
Consolidated Statements of Income - Three and Six
Months Ended June 30, 1994 and 1993 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults on Senior Securities 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
June 30, June 30, December 31,
CONSOLIDATED BALANCE SHEETS 1994 1993 1993
_______________________________________________________________________________
(in thousands)
ASSETS
Cash and due from banks $30,747 $32,309 $34,655
Federal funds sold 0 200 2,100
Securities held for sale 78,136 47,360 67,431
Investment securities 219,703 288,816 246,096
Loans 683,653 594,910 636,225
Allowance for loan losses (10,732) (9,341) (9,818)
--------- --------- ---------
Loans, net 672,921 585,569 626,407
Excess of cost over net assets
of purchased subsidiaries 10,492 11,322 10,908
Premises and equipment 13,706 13,918 13,999
Other assets 14,003 13,137 13,300
--------- --------- ---------
$1,039,708 $992,631 $1,014,896
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $73,589 $65,626 $73,029
Interest-bearing transaction accounts 213,332 200,660 209,707
Savings deposits 95,998 94,111 93,133
Time deposits 503,619 484,831 497,664
--------- --------- ---------
886,538 845,228 873,533
Repurchase agreements 20,904 21,625 19,705
Federal funds purchased 13,100 21,200 12,600
Notes payable 17,998 11,122 9,747
Other liabilities 6,925 6,837 6,843
--------- --------- ---------
Total liabilities 945,465 906,012 922,428
Stockholders' Equity
Common stock 5,557 5,521 5,539
Surplus 31,326 30,399 30,851
Retained earnings 58,969 50,902 54,990
Unrealized appreciation of securities
held for sale, net of deferred tax (1,451) 0 1,246
Debt on ESOP shares (158) (203) (158)
--------- --------- ---------
94,243 86,619 92,468
--------- --------- ---------
$1,039,708 $992,631 $1,014,896
========= ========= =========
Fair value of securities held for sale $78,136 $47,879 $67,431
Fair value of investment securities 229,234 300,305 255,606
Common shares issued and outstanding 7,113 7,066 7,090
See accompanying notes to consolidated financial statements. 3
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME 1994 1993 1994 1993
____________________________________________________________________________________________
(in thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on Federal funds sold $17 $24 $56 $93
Taxable interest on securities 3,595 4,387 7,286 8,883
Nontaxable interest on securities 947 979 1,930 1,919
Interest and fees on loans 13,725 12,518 26,624 24,765
------ ------ ------ ------
18,284 17,908 35,896 35,660
INTEREST EXPENSE
Interest on deposits 7,648 7,782 15,028 16,075
Interest on repurchase agreements 210 186 380 344
Other interest expense 345 289 642 523
------ ------ ------ ------
8,203 8,257 16,050 16,942
------ ------ ------ ------
Net Interest Income 10,081 9,651 19,846 18,718
Provision for Loan Losses 450 669 939 1,383
------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 9,631 8,982 18,907 17,335
Noninterest Income 1,553 1,423 3,024 2,758
Noninterest Expense 7,037 6,336 14,066 12,448
------ ------ ------ ------
Income Before Income Tax Expense 4,147 4,069 7,865 7,645
Income Tax Expense 1,212 1,180 2,363 2,164
------ ------ ------ ------
NET INCOME $2,935 $2,889 $5,502 $5,481
====== ====== ====== ======
Net Income per Common Share
and Common Share Equivalent $0.40 $0.41 $0.75 $0.77
Cash Dividend per Common Share 0.105 0.095 0.210 0.190
</TABLE>
See accompanying notes to consolidated financial statements. 4
Six Months Ended
June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1994 1993
_______________________________________________________________________________
(dollars in thousands)
OPERATING ACTIVITIES
Net income $5,502 $5,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,073 1,017
Net (discount accretion) premium
amortization 649 908
Provision for loan losses 939 1,383
Net decrease in loans held for sale 295 784
Provision for deferred income taxes (498) (721)
Other, net 1,566 1,583
------ ------
Net Cash Provided by Operating Activities 9,526 10,435
INVESTING ACTIVITIES
Net decrease in Federal funds sold 2,100 13,550
Proceeds from sales of securities
held for sale 3,019 2,536
Proceeds from maturities of securities
held for sale 11,400 13,246
Proceeds from maturities of investment
securities 17,255 19,869
Principal collected on mortgage-backed
securities held for sale 8,711 6,054
Principal collected on mortgage-backed
investment securities 21,329 12,108
Purchase of securities held for sale (36,259) (27,383)
Purchase of investment securities (14,417) (31,041)
Net increase in loans (47,747) (31,085)
Purchases of premises and equipment (409) (450)
------ ------
Net Cash Used by Investing Activities (35,018) (22,596)
See accompanying notes to consolidated financial statements. 5
Six Months Ended
June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED 1994 1993
_______________________________________________________________________________
(dollars in thousands)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 13,005 (14,848)
Net increase in repurchase agreements 1,199 2,091
Net increase in Federal funds purchased 500 21,200
Proceeds from notes payable borrowings 16,286 6,200
Repayments of notes payable (8,036) (7,397)
Proceeds from issuance of common stock 257 506
Cash dividends paid (1,627) (1,234)
------ ------
Net Cash Provided by Financing Activities 21,584 6,518
------ ------
Cash and Cash Equivalents
Decrease (3,908) (5,643)
Beginning of Year 34,655 37,952
------ ------
End of Period $30,747 $32,309
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $15,581 $17,250
Cash paid for income tax 2,813 3,248
NONCASH INVESTING AND FINANCING TRANSACTIONS
Other real estate transferred to (from) loans, net 144 (75)
Dividends reinvested 241 207
See accompanying notes to consolidated financial statements. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________________
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and should be
read in conjunction with the notes to the supplemental consolidated financial
statements contained in the July 28, 1994 current report on Form 8-K. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the periods ended June 30, 1994 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1994.
NOTE B - SECURITIES HELD FOR SALE AND INVESTMENT SECURITIES
The Company adopted Financial Accounting Standard No. 115 "Accounting for Cer-
tain Investments in Debt and Equity Securities" (FAS 115) as of the end of 1993.
This new accounting policy expands the use of fair value accounting for secur-
ities for which there is not a positive intent and ability to hold to maturity.
At acquisition, FAS 115 requires that securities be classified into one of three
catergories: trading, held for sale or investment. Trading securities are
bought and held principally with the intention of selling them in the near term.
The Company has no trading securities. Investment securities are those securi-
ties for which the Company has the ability and intent to hold until maturity.
All other debt securities are classified as held for sale.
Securities held for sale are stated at fair value for June 30, 1994 and December
31, 1993, and are stated at the lower of amortized cost or market for June 30,
1993. Fair value is based on market prices quoted in financial publications or
other independent sources. Subsequent to adoption of FAS 115, net unrealized
gains or losses are excluded from earnings and reported, net of deferred income
taxes, as a separate component of stockholders' equity until realized. The
adjusted cost of the specific security held for sale that is sold is used to
compute any gain or loss upon sale.
Investment securities are carried at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized as adjustments to interest
income on the level-yield method. Gain or loss is recorded when realized on a
specific identity basis or when, in the opinion of management, an unrealized
loss is other than temporary in nature. Mortgage-backed securities represent a
significant portion of the investment security portfolio. Amortization of pre-
miums and accretion of discounts on mortgage-backed securities are analyzed in
relation to the corresponding prepayment rates, both historical and estimated,
using a method which approximates the level-yield method.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
NOTE C - LOAN REVENUES
Interest on commercial and real estate mortgage loans is accrued and credited
to income based upon the principal amount outstanding. Interest on certain
consumer installments loans is credited to income using a method which approxi-
mates the level-yield method.
When in the opinion of management the collection of interest on a loan is
unlikely or when either principal or interest is past due 90 days, the loan is
generally placed on nonaccrual status and interest income is not recognized
unless received in cash. When a loan is placed on nonaccrual status, accrued
interest for the current period is reversed and charged against current earnings
and accrued interest from prior periods is charged against the allowance for
loan losses. A loan remains on nonaccrual status until the loan is current as
to payment of both principal and interest and/or the borrower demonstrates the
ability to pay and remain current. Interest payments received on nonacccrual
loans are applied to principal if there is any doubt as to the collectibility of
total principal, otherwise these payments are recorded as interest income.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined by management
to be adequate to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current domestic economic conditions,
volume, growth and composition of the loan portfolio and other relevant factors.
The allowance is increased by provisions for loan losses charged to expense and
is reduced by loan chargeoffs, net of recoveries.
NOTE E - NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Net income per common share and common share equivalent is determined by divid-
ing net income by the weighted average number of common shares actually out-
standing and common stock equivalents pertaining to common stock options. The
average number of shares outstanding including common stock equivalents for the
six months ended June 30, 1994 and 1993 were 7,368,798 and 7,152,719,
respectively, and for the three months ended June 30, 1994 and 1993, were
7,374,137 and 7,130,983, respectively. Common stock equivalents have no
material dilutive effect.
NOTE F - CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all cash and due from banks to be cash equivalents.
NOTE G - BUSINESS COMBINATIONS
On March 10, 1994, the Company consummated the acquisition of First Kentucky
Bancorp, Inc. (First Kentucky) and First Kentucky Federal Savings Bank, a
wholly-owned subsidiary of First Kentucky. First Kentucky's six locations are
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
immediately east of the market area served by the Company's other subsidiary
banks, and at June 30, 1994, had total assets of approximately $172.9 million.
The acquisition has been accounted for as a pooling of interest, and accord-
ingly, the accompanying consolidated financial statements have been restated.
A total of 929,794 shares of the Company's common stock was issued in this
business combination. The following table shows the results of operations of
the previously separate enterprises for the period from January 1, 1994 through
March 10, 1994 and for the three and six month periods ended June 30, 1993, the
periods before the combination:
Peoples Pooled
Results of Operations First affiliate Combined
_______________________________________________________________________________
(in thousands)
1994 Total revenue $12,357 $2,273 $14,630
Net income 1,758 210 1,968
1993 Three-month period
Total revenue 16,098 3,233 19,331
Net income 2,401 488 2,889
Six-month period
Total revenue 31,851 6,567 38,418
Net income 4,550 931 5,481
On February 24, 1994, the Company entered into an affiliation agreement with
Libsab Bancorp, Inc. (Libsab), the bank holding company for Liberty Bank &
Trust Company of Mayfield, Kentucky. The agreement was subsequently amended on
April 15, 1994. The agreement, as amended, is subject to the approval of
Libsab shareholders and regulators. The Company will issue 1,078,000 shares
of the Company's stock for all the outstanding stock of Libsab. Liberty Bank
& Trust Company is a commercial bank with total assets of approximately $141.9
million at June 30, 1994 that is well established in western Kentucky with its
principal office in Mayfield, Kentucky. The business combination will be
accounted for as a pooling of interest. Consummation of the transaction is
expected to occur in the third quarter of 1994.
Merger expenses of approximately $300,000 related to pooling of interest acquis-
itions were charged to expense during 1994. The after-tax impact of these
expenses on earning per common share and common share equivalent was $0.04.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
_______________________________________________________________________________
Headquartered in Paducah, Kentucky, Peoples First Corporation (Company) is a
bank holding company. Through 23 banking offices, the Company serves primarily
the western Kentucky and contiguous interstate area. The purpose of this dis-
cussion and analysis is to provide financial statement readers with information
relevant to understanding and assessing the financial condition and results of
operations of Peoples First Corporation (Company).
EARNING ASSETS
Average earning assets of the Company for the first six months of 1994 increased
5.4%, or $49.1 million to $966.8 million from $917.7 million for the first six
months of 1993. This compares to internal average earning asset growth of 4.3%
for the first two quarters of 1993 over the first two quarters of 1992. Man-
agement attributes this increased earning asset growth to favorable economic
conditions and increased marketing efforts and promininence of the Company's
banking offices in area lending. A consistently favorable ratio of average
earning assets to average total assets has been achieved. The ratio was 94.5%
and 94.1% for the first six months of 1994 and 1993, respectively.
Loans are the Company's primary earning asset. Management has focused on
increasing lending activity and loan demand has been strong. Loans, net of
unearned income, increased $47.4 million during the six-month period since
December 31, 1993, compared to a $30.3 million increase for the first six-month
period in the prior year. Average loans for the first two quarters of 1994 were
14.8% greater than average loans for the first two quarters of 1993. Prior to
1993, loans had been a decreasing portion of earning assets. Average loans for
the first six months of 1994 were 67.9% of total average earning assets,
compared to 62.3% during the first six months of 1993. Management attributes
the current reversal of the declining loan composition trend to their focus on
improving the earning asset composition of all the banks, the Company's
promininence in area lending and a slowed growth of deposits.
The Company primarily directs lending activities to its regional market from
which deposits are drawn. Management has focused on retail lending and the
growth of residential real estate mortgage loans over the last two years.
A portion of the proceeds from the sale and maturity of debt securities and the
principal collected on mortgage-backed securities was used to fund loans. Debt
securities decreased $15.7 million during the first six months of 1994. The
Company maintains a portfolio of securities held for sale as a partial source of
available funding for loan growth.
10
Table 1 June 30, June 30, December 31,
Types of Loans 1994 1993 1993
_______________________________________________________________________________
(in thousands)
Commercial, financial
and agricultural $109,486 $119,420 $111,187
Real estate
Construction 9,557 7,201 10,887
Residential mortgage 267,034 226,701 244,558
Commercial mortgage 117,943 101,093 112,400
Installment loans to
individuals 180,528 142,862 159,611
Consumer revolving credit 4,879 3,326 3,922
Loans held for sale 209 458 504
Other 2,748 2,820 2,161
------- ------- -------
692,384 603,881 645,230
Unearned income (8,731) (8,971) (9,005)
------- ------- -------
$683,653 $594,910 $636,225
======= ======= =======
FUNDING
The total of average deposits and repurchase agreements, which management relies
on as a stable source of funding, of the Company for the first six months of
1994 increased 3.6%, or $31.5 million to $896.3 million from $864.8 million for
1993. Internal funding from local area deposits increased 1.4% during the first
six months of 1994 compared to the same prior year period. Highly competitive
local markets for deposits exist and sustained lower interest rates do not
benefit internal funding growth rates. During periods of slow internal deposit
growth, management partially relies on brokered deposits and Federal funds
purchased to fund loan growth. Brokered deposits amounted to $21.4 million,
$5.1 million and $19.2 million at June 30, 1994 and 1993 and December 31, 1993,
respectively.
Beginning in 1994, the Company's subsidiaries obtained various advances from the
Federal Home Loan Bank (FHLB) under Blanket Agreements for Advances and Security
Agreements (Agreements). The Agreements entitle the banks to borrow funds from
the FHLB to fund mortgage loan programs and satisfy other funding needs. Cer-
tain mortgage loans are pledge as collateral to secure the Agreements. Included
in the notes payable liability at June 30, 1994 was $11.5 million due the FHLB.
NONPERFORMING ASSETS AND RISK ELEMENTS
The level of nonperforming assets at June 30, 1994 remains relatively low,
improving slightly since December 31, 1993. Diversification within the loan
portfolio is an important means of reducing inherent lending risks. At June 30,
1994, the Company had no concentrations of ten percent or more of total loans in
any single industry nor any geographical area outside of the Paducah, Kentucky,
western Kentucky region, the immediate market area of the subsidiary banks.
11
The Company discontinues the accrual of interest on loans which become ninety
days past due as to principal or interest, or when in the opinion of management
the collection of interest is unlikely, unless the loans are adequately secured
and in the process of collection. Other real estate owned is carried at the
lower of cost or fair value less estimated disposal costs, if any. A loan is
classified as a renegotiated loan when the interest rate is materially reduced
or the term is extended beyond the original maturity date because of the
inability of the borrower to service the debt under the original terms.
Management continues to exert efforts to monitor and minimize nonperforming
assets even though the nonperforming totals are significantly lower than peer
bank holding company ratios. Significant focus on underwriting standards is
maintained by management and the subsidiary bank boards.
Table 2 June 30, June 30, December 31,
Nonperforming Assets 1994 1993 1993
_______________________________________________________________________________
(in thousands)
Nonaccrual loans $634 $3,405 $662
Other real estate owned 2,024 1,832 2,258
Renegotiated loans 2,936 1,233 2,995
----- ----- -----
$5,594 $6,470 $5,915
===== ===== =====
Loans past due ninety days and still
accruing interest $1,263 $777 $484
Ratios:
Nonperforming assets to total
loans and other real estate 0.82% 1.08% 0.93%
Allowance for loan losses to
nonperforming assets 192% 144% 166%
Internal credit review procedures are designed to alert management of possible
credit problems which would create serious doubts as to the future ability of
borrowers to comply with loan repayment terms. At June 30, 1994, loans with a
total principal balance of $17.3 million have been identified that may become
nonperforming in the future, compared to $16.5 million at December 31, 1993 and
$14.2 million that had been identified at June 30, 1993. Performance of
borrowers is aided by the current lower interest carrying costs. Potential
problem loans are not included in nonperforming assets since the borrowers
currently meet all applicable loan agreement terms.
Nonperforming assets at June 30, 1994 were 0.82% of total loans and other real
estate, down from 0.93% at December 31, 1993. A small number of loans and one
tract of undeveloped land in Nashville, Tennessee, represent most of the nonper-
forming balance for the last two years.
12
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity was 9.1% of assets at June 30, 1994, the same as at
December 31, 1993, and an increase of 0.4% from 8.7% at June 30, 1993.
Stockholders' equity increased $1.8 million, or 3.9% (annualized), during the
first six months of 1994 due to a 72.0% earnings retention rate, the sale of
common stock through shareholder and employee plans ($498,053) and offset by
$2,696,953 of unrealized loss on securities held for sale, net of deferred
income tax. This compares to an increase of $5.2 million during the same 1993
period when the earnings retention rate was 75.3%, proceeds from the sale of
common stock through shareholder and employee plans was $714,259 and there was
no adjustment on securities held for sale as they were not accounted for at fair
value through equity at that time.
The quarterly dividend was raised to $0.105 per share in the third quarter of
1993 and to $0.120 per share in the third quarter of 1994 in an attempt to
reach a dividend payout ratio equal to 30% of earnings. The board of direc-
tors develops and reviews the capital goals of the consolidated entity and each
of the subsidiary banks. The Company's dividend policy is designed to retain
sufficient amounts for healthy financial ratios, considering future planned
asset growth and other prudent financial management principles.
Subsidiary bank dividends are the principal source of funds for the Company's
payment of dividends to its stockholders. At June 30, 1994, approximately $11.6
million, compared to $12.7 million at June 30, 1993, in retained earnings of
subsidiary banks were available for dividend payments to the Company without
regulatory approval or without reducing capital of the respective banks below
minimum standards. At June 30, 1994 and December 31, 1993, the Company, the
two largest subsidiary banks' and the subsidiary savings bank's capital ratios
were as follows:
<TABLE>
<CAPTION>
Total Tier I Leverage Ratio
Table 3 Jun 30, Dec 31, Jun 30, Dec 31, Jun 30, Dec 31,
Risk-Based Capital 1994 1993 1994 1993 1994 1993
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Company 14.05% 13.94% 12.80% 12.69% 8.37% 8.18%
Peoples First National Bank 12.65 13.13 11.40 11.88 8.91 9.24
Bank of Murray 16.27 16.54 15.02 15.29 9.41 9.17
First Kentucky FSB 20.88 19.99 19.70 18.86 7.68 7.35
</TABLE>
Bank regulatory agencies' minimum capital guidelines assign relative measures of
credit risk to balance sheet assets and off-balance sheet exposures. Based upon
the nature and makeup of their current businesses and growth expectations,
management expects all of the reporting entities' capital ratios to continue to
exceed regulatory minimums.
13
RESULTS OF OPERATIONS
Although net interest income and the provision for loan losses improved,
earnings per share decreased for the first six months of 1994 over the same 1993
period. The decrease is attributable to costs involved with two acquisitions in
progress and costs associated with expanding customer volumes during the first
two quarters of 1994. Net income per common share and common share equivalent
for the first six months of 1994 was $0.75, down from $0.77 for the first six
months of 1993. Net income per common share and common share equivalent for the
second quarter of 1994 was $0.40, down from $0.41 for the second quarter of
1993.
Return on average stockholders' equity for the first six months of 1994 and 1993
was 11.91% and 13.20%, respectively; and, return on average stockholders' equity
for the second quarter of 1994 and 1993 was 12.57% and 13.64%, respectively.
Return on average assets for the first six months of 1994 and 1993 was 1.08% and
1.13%, respectively; and, return on average assets for the second quarter of
1994 and 1993 was 1.14% and 1.18%, respectively.
NET INTEREST INCOME
The amount by which interest earned on assets exceeds the interest paid on sup-
porting funds, constitutes the primary source of income for the Company. For
the six months ended June 30, 1994, net interest income (TE) increased 5.7%, or
$1.1 million to $20.8 million as compared to $19.7 million for the six months
ended June 30, 1993. All of 1994's increase is attributable to growth of
average earning assets. A small amount of 1993's increase was attributable to
improved margins. Compared to 1994, net interest spreads on loans in 1993 were
more favorably affected by falling interest rates which reduced liability costs
to a greater extent than earning assets due to rate-reduction limits on
repricable loans.
Net interest income on a tax-equivalent basis as a percent of average earning
assets was 4.34% and 4.33% for the six months ended June 30, 1994 and 1993,
respectively. Net interest income on a tax-equivalent basis as a percent of
average earning assets was 4.35% and 4.40% for the three months ended June 30,
1994 and 1993, respectively. For the six months ended June 30, 1994, interest
earned on securities was 2.90% greater than the average funding cost, up from
2.86% for the six months ended June 30, 1993. For the six months ended June 30,
1994, interest earned on loans was 4.39% greater than the average funding cost,
down from 4.57% for the six months ended June 30, 1993. Aggressive pricing of
loans during the past year has stimulated demand and retarded margins. Margins
in 1993, and in 1994 to a lesser extent, were unfavorably affected by the pur-
chase accounting recognition of interest income on certain investment securities
at market yields. Net interest income margins continue to benefit from a favor-
able mix of earning assets and a favorable mix of funding sources.
Generally, the subsidiary banks maintain a relatively balanced position between
volumes of rate-repricing assets and liabilities to guard against adverse
effects to net interest income from possible fluctuations in interest rates.
Low levels of nonperforming loans contributed to good margins each period.
14
Table 4
Net Interest Income Analysis Average Average
Six months ended June 30, 1994 volume Interest rate
_______________________________________________________________________________
(in thousands)
Loans $656,882 $26,665 8.19%
Securities 303,569 10,085 6.70
Other interest earning assets 6,309 120 3.84
------- ------
966,760 36,870 7.69
Time deposits 499,498 10,726 4.33
All other interest bearing deposits 301,425 4,303 2.88
Other interest bearing liabilities 49,828 1,022 4.14
------- ------
$850,751 16,051 3.80
------ ----
Net interest income (TE) spread $20,819 3.89%
====== ====
Net interest income (TE) as a percent 4.34%
of average interest-earning assets ====
Table 5
Net Interest Income Analysis Average Average
Six months ended June 30, 1993 volume Interest rate
_______________________________________________________________________________
(in thousands)
Loans $571,959 $24,803 8.74%
Securities 334,481 11,654 7.03
Other interest earning assets 11,299 180 3.21
------- ------
917,739 36,637 8.05
Time deposits 487,792 11,665 4.82
All other interest bearing deposits 291,370 4,410 3.05
Other interest bearing liabilities 39,596 868 4.42
------- ------
$818,758 16,943 4.17
------ ----
Net interest income (TE) spread $19,694 3.88%
====== ====
Net interest income (TE) as a percent 4.33%
of average interest-earning assets ====
15
Table 6
Net Interest Income Analysis Average Average
Three months ended June 30, 1994 volume Interest rate
_______________________________________________________________________________
(in thousands)
Loans $672,932 $13,746 8.19%
Securities 299,451 4,980 6.67
Other interest earning assets 2,017 35 6.96
------- ------
974,400 18,761 7.72
Time deposits 501,074 5,445 4.36
All other interest bearing deposits 302,091 2,204 2.93
Other interest bearing liabilities 52,149 555 4.27
------- ------
$855,314 8,204 3.85
------ ----
Net interest income (TE) spread $10,557 3.88%
====== ====
Net interest income (TE) as a percent 4.35%
of average interest-earning assets ====
Table 7
Net Interest Income Analysis Average Average
Three months ended June 30, 1993 volume Interest rate
_______________________________________________________________________________
(in thousands)
Loans $580,055 $12,530 8.66%
Securities 336,279 5,806 6.93
Other interest earning assets 7,744 64 3.31
------- ------
924,078 18,400 7.99
Time deposits 482,442 5,681 4.72
All other interest bearing deposits 293,970 2,095 2.86
Other interest bearing liabilities 44,859 481 4.30
------- ------
$821,271 8,257 4.03
------ ----
Net interest income (TE) spread $10,143 3.95%
====== ====
Net interest income (TE) as a percent 4.40%
of average interest-earning assets ====
16
PROVISION FOR LOAN LOSSES
A significant factor in the Company's past and future operating results is the
level of the provision for loan losses. Management desires to provide assurance
through sufficient provision for loan losses that future earnings will be less
susceptible to changing economic cycles. The provision for loan losses amounted
to $938,600 for the six months ended June 30, 1994, a decrease of $444,000 or
32.1% when compared to $1,382,600 for the six months ended June 30, 1993. The
decline in the 1994 provision for loan losses was influenced by a significant
decline in net charge-offs from previous years and a modest decline in nonper-
forming assets. The annualized provision for loan losses as a percentage of
average loans was 0.29% for the six months ended June 30, 1994, down from 0.38%
and 0.59% for the years ended December 31, 1993 and 1992, respectively. Levels
of providing for loan losses reflect, among other things, management's evalua-
tion of potential problem loans.
Net chargeoffs as a percentage of average loans were 0.01% and 0.02% for the
six months ended June 30, 1994 and 1993, respectively, periods of unusally low
net chargeoffs. Net chargeoffs as a percent of average loans were 0.34% for the
five-year period ended December 31, 1993. The allowance for loan losses was
1.57% of outstanding loans at June 30, 1994, which approximates the average
during the last five years. The June 30, 1994 allowance is 192% compared to
166% at December 31, 1993, of nonperforming assets and is maintained at a level
which management considers adequate to absorb estimated potential losses in the
loan portfolio, after reviewing the individual loans and in relation to risk
elements in the portfolios and giving consideration to the prevailing economy
and anticipated changes.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Table 8 June 30, June 30,
Allowance for Loan Losses 1994 1993 1994 1993
____________________________________________________________________________________________
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $10,290 $8,675 $9,818 $8,016
Provision charged to expense 450 669 939 1,383
Loans charged off (98) (200) (227) (399)
Recoveries of chargeoffs 90 197 202 341
----- ----- ----- -----
Net loans charged off (8) (3) (25) (58)
----- ----- ----- -----
Balance at end of period $10,732 $9,341 $10,732 $9,341
====== ====== ====== ======
Annualized Ratios:
Provision for loan losses
to average loans 0.27% 0.46% 0.29% 0.49%
Net chargeoffs to
average loans 0.00 0.00 0.01 0.02
Allowance for loan losses
to period end loans 1.57 1.57 1.57 1.57
</TABLE>
17
NONINTEREST INCOME
Noninterest income amounted to $3,023,875 for the six months ended June 30,
1994, a 9.7% increase from $2,757,749 for the six months ended June 30, 1993.
Most areas reflected good increases. Service charges on deposit accounts, the
largest component of noninterest income, increased 13.2% during the first six
months of 1994 over the first six months of 1993. During the recent year, some
of the subsidiary banks adjusted fee schedules to recapture higher operating
costs and to provide more uniform pricing among the affiliated banks.
Total assets under management by the trust department have increased, generating
more fee income. The 31.9% increase in insurance commissions for the first two
quarters of 1994 over 1993 is attributable to greater opportunities resulting
from the significant increase in consumer loans as well as better penetration of
this product to consumer loan customers. Fee income from secondary-market
mortgage loan services during 1994 is anticipated to be lower than 1993 due to
the unusually large amount of home refinancing in 1993. The relative
improvement in fee income slightly exceeds the growth in net interest income.
Noninterest income excluding securities gains was 13.2% of total net interest
income plus noninterest income for the six months ended June 30, 1994, compared
to 12.8% for the six months ended June 30, 1993.
Three Months Ended Six Months Ended
Table 9 June 30, June 30,
Noninterest Income 1994 1993 1994 1993
_______________________________________________________________________________
(in thousands)
Services charges on deposits $889 $779 $1,693 $1,496
Net securities gains 9 15 9 22
Trust fees 299 313 592 584
Insurance commissions 102 81 182 138
Other income 254 235 548 518
----- ----- ----- -----
$1,553 $1,423 $3,024 $2,758
===== ===== ===== =====
Annualized Ratio:
Noninterest income
to average assets 0.61% 0.59% 0.60% 0.57%
NONINTEREST EXPENSE
During 1994, it required more noninterest expense (overhead) to produce total
net interest income plus noninterest income (revenue). The ratio of overhead
to revenue was 58.99% for the six months ended June 30, 1994, compared to 55.44%
for the six months ended June 30, 1993. During the first quarter of 1994,
management changed its strategic plans regarding the approach to productivity
gains. Management shifted its focus from controlling the rate of increase of
noninterest expense to gain more employee productivity, to increasing revenue
volumes to gain operational ratio efficiencies.
18
Accordingly, the ratio of personnel expense has increased as a percentage of
average total assets and was 1.27% for the six months ended June 30, 1994,
compared to 1.20% for the six months ended June 30, 1993. The double-digit
percentage increase in equipment expense was the result of management's current
focus on increasing revenue volumes. The Company has made investments in
facilities and equipment as technology has advanced and the need to leverage
personnel costs has intensified. Two new branch locations are scheduled to be
opened during the next three quarters. Management is currently considering
combining several of the operating subsidiaries into one bank to allow the
personnel at the remote locations to better focus on quality customer service
and increasing the volume of business as well as reducing a small amount of
redundant costs.
The Company's bank subsidiaries are required to pay deposit insurance assess-
ments to the FDIC, to maintain significant noninterest-bearing balances with the
Federal Reserve, and to pay fees to regulatory agencies for periodic examina-
tions by the agencies. The 2.4% increase in assessments for deposit insurance
for the six months ended June 30, 1994 from the same 1993 period, is attri-
butable to increased deposit levels. Beginning in 1993, the assessments were
based not only on deposits but also on the risk characteristics of the indivi-
dual financial institutions. All of the Company's subsidiaries received the
lowest deposit assessment rate from the FDIC.
Three Months Ended Six Months Ended
Table 10 June 30, June 30,
Noninterest Expense 1994 1993 1994 1993
_______________________________________________________________________________
(in thousands)
Salaries $2,678 $2,479 $5,257 $4,838
Employee benefits 598 491 1,196 988
Occupancy expense 348 343 693 661
Equipment expense 330 299 667 595
FDIC insurance expense 490 477 977 954
Data processing expense 443 398 873 846
Bank share taxes 305 265 604 543
Goodwill amortization 207 207 415 415
Other expense 1,638 1,377 3,384 2,608
------ ------ ------ ------
$7,037 $6,336 $14,066 $12,448
====== ====== ====== ======
Annualized Ratios:
Overhead ratio 60.17% 54.78% 58.99% 55.44%
Noninterest expense
to average assets 2.77 2.62 2.77 2.57
Additional data processing expense was incurred in 1993 related to processing
changes. Bankshare taxes imposed by the State of Kentucky have been increasing
and are expected to continue to increase in future years. Kentucky has raised
the assessment level and is attempting to significantly increase this taxation,
which is based upon net income of the subsidiaries. During 1994, the Company
19
was involved in two pooling-of-interests acquisitions. Included in other
noninterest expense for the six months ended June 30, 1994 was approximately
$300,000 (equal to more than $0.04 per common share and common share equivalent)
of professional fees relating to the merger completed in the first quarter and
one merger expected to be completed in the third quarter of 1994. Several
components of other noninterest expense have increased primarily as a result of
costs associated with expanding customer volumes and marketing.
INCOME TAXES
The increase in income tax expense for the six months ended June 30, 1994, is
primarily attributable to nondeductible organizational costs associated with two
acquisitions, and to a lesser extent, to higher operating earnings. The
effective tax rate is increasing, and was 30.0% for the six months ended June
30, 1994, compared to 28.8% for the six months ended June 30, 1993. The Company
manages the effective tax rate to some degree, based upon changing tax laws,
particularly new alternative minimum tax provisions, the availability and price
of nontaxable investment securities and other portfolio considerations.
LIQUIDITY AND INTEREST-RATE SENSITIVITY
The Company's objective of liquidity management is to ensure the ability to
access funding which enables each bank to efficiently satisfy the cash flow
requirements of depositors and borrowers. Asset/Liability management (ALM)
involves the funding and investment strategies necessary to maintain an
appropriate balance between interest sensitive assets and liabilities as well as
to assure adequate liquidity. The Company's ALM committee monitors funds
available from a number of sources to meet its objectives. The primary source
of liquidity for the banks, in addition to loan repayments, is their debt
securities portfolios. Debt securities classified as held for sale are those
that the Company intends to use as part of its asset/liability management and
that may be sold prior to maturity in response to changes in interest rates,
resultant prepayment risks and other factors. The Company's access to the re-
tail deposit market through individual banks located in nine different counties
has been a stable source of funds. Additional funds for liquidity are available
by borrowing of Federal funds from correspondent banks, Federal Home Loan Bank
borrowings and brokered deposits. Various types of analyses are performed to
ensure adequate liquidity, and to evaluate the desirability of the relative
interest rate sensitivity of assets and liabilities. In the past, as was
typical for most financial institutions, the Company's cash flows provided by
financing activities (primarily through deposit and repurchase agreement
generation) generally greatly exceeded cash flows from operations and were used
to fund investing activities. During the past two years, due to strong loan
demand coupled with the low interest-rate environment, which hinders area
deposit growth, financing activities funding was partially derived from
increased levels of Federal funds purchased and brokered deposits. Management
considers current liquidity positions of the subsidiary banks to be adequate to
meet depositor and borrower needs.
20
Because banks must assume interest rate risks as part of their normal opera-
tions, the Company actively manages its interest rate sensitivity as well as
liquidity positions. Both interest rate sensitivity and liquidity are affected
by maturing assets and sources of funds; however, management must also consider
those assets and liabilities with interest rates which are subject to change
prior to maturity. The primary objective of the ALM Committee is to optimize
earnings results, while controlling interest rate risks within internal policy
constraints. The subsidiary banks and the Company collectively measure their
level of earnings exposure to future interest rate movements. Currently, the
Company does not employ interest rate swaps, financial futures or options to
affect interest rate risks. Management expects that a slightly greater amount
of assets will reprice than liabilities during the third and fourth quarter
period of 1994. This position is subject to change in response to the dynamics
of the Company's balance sheet and general market conditions. Rising interest
rates are likely to increase net interest income in a positive gap position
(greater amount of repricing assets than liabilities) and falling rates would
likely decrease net interest income.
21
PART II
_______________________________________________________________________________
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) No exhibits are included.
(b) Peoples First Corporation filed a current report on Form
8-K dated July 28, 1994 on August 2, 1994. The report
contained audited supplemental consolidated financial
statements which restated the Company's most recent fiscal
year comparative consolidated financial statements to
reflect the pooling of interest acquisition of a significant
subsidiary subsequent to those financial statements. These
supplemental consolidated financial statements became the
historical consolidated financial statements of the Company
after financial statements covering the date of consummation
of the business combination were issued.
22
SIGNATURES
_______________________________________________________________________________
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, therunto duly authorized.
PEOPLES FIRST CORPORATION
08/11/94 /s/ Aubrey W. Lippert
Aubrey W. Lippert
President and Chairman
of the Board
08/11/94 /s/ Allan B. Kleet
Allan B. Kleet
Principal Financial Officer
23
