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 March 31, 1997
[ ] 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
March 31, 1997: Common stock, no par value - 10,005,059 shares outstanding.
INDEX Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997,
March 31, 1996 and December 31, 1996 3
Consolidated Statements of Income - Three Months
Ended March 31, 1997 and 1996 4
Consolidated Statement of Changes in Stockholders'
Equity - Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults on Senior Securities 25
Item 4. Submission of Matters to a Vote of Securities Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1997 1996 1996
_______________________________________________________________________________
(in thousands)
ASSETS
Cash and due from banks $33,135 $41,750 $43,285
Securities held for sale 196,572 158,749 182,352
Securities held for investment 111,236 151,794 121,959
Loans held for sale 1,784 1,235 1,886
Loans receivable, net 1,036,701 899,468 1,021,634
Excess of cost over net assets
of purchased subsidiaries 10,341 9,040 10,586
Premises and equipment 19,201 18,302 19,376
Other assets 17,516 16,099 16,686
--------- --------- ---------
$1,426,486 $1,296,437 $1,417,764
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $85,874 $79,096 $85,376
Interest-bearing transaction accounts 335,887 304,054 335,977
Savings deposits 85,509 85,558 85,145
Time deposits 615,016 577,918 608,755
--------- --------- ---------
1,122,286 1,046,626 1,115,253
Short-term borrowings 92,052 101,461 132,167
Long-term borrowings 54,207 7,575 14,013
Other liabilities 11,886 10,784 11,782
--------- --------- ---------
Total liabilities 1,280,431 1,166,446 1,273,215
Stockholders' Equity
Common stock 7,816 7,201 7,812
Surplus 69,820 53,707 69,691
Retained earnings 69,358 69,090 66,762
Unrealized net gain (loss) on
securities held for sale (939) 32 284
Debt on ESOP shares 0 (39) 0
--------- --------- ---------
146,055 129,991 144,549
--------- --------- ---------
$1,426,486 $1,296,437 $1,417,764
========= ========= =========
Fair value of securities held
for investment $113,131 $154,995 $125,061
Common shares issued and outstanding 10,005 9,679 9,999
See accompanying notes to consolidated financial statements. 3
Three Months Ended
March 31,
CONSOLIDATED STATEMENTS OF INCOME 1997 1996
_______________________________________________________________________________
(in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $23,360 $20,836
Taxable interest on securities 4,066 3,876
Nontaxable interest on securities 926 996
Interest on short-term investments 39 37
------ ------
28,391 25,745
INTEREST EXPENSE
Interest on deposits 12,164 11,343
Other interest expense 1,971 1,404
------ ------
14,135 12,747
------ ------
Net Interest Income 14,256 12,998
Provision for Loan Losses 839 577
------ ------
Net Interest Income after
Provision for Loan Losses 13,417 12,421
Noninterest Income 2,417 2,015
Noninterest Expense 9,145 8,326
------ ------
Income Before Income Tax Expense 6,689 6,110
Income Tax Expense 2,191 1,955
------ ------
NET INCOME $4,498 $4,155
====== ======
Net Income per Common Share $0.44 $0.42
Cash Dividend per Common Share 0.19 0.14
Average Common Shares Outstanding 10,252 9,961
See accompanying notes to consolidated financial statements. 4
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Unrealized
net gain
CONSOLIDATED STATEMENTS OF CHANGES Common Retained (loss) on
IN STOCKHOLDERS' EQUITY stock Surplus earnings securities Total
_________________________________________________________________________________________________________
(in thousands, except per share data)
BALANCE AT JANUARY 1, 1997 $7,812 $69,691 $66,762 $284 $144,549
Net income 4,498 4,498
Cash dividends declared
Common ($0.19 per share) (1,902) (1,902)
Stock issued pursuant to shareholder
and employee plans 14 415 429
Common stock repurchased (10) (286) (296)
Change in unrealized net gain
(loss) on securities held for sale (1,223) (1,223)
------ ------ ------ ------ -------
BALANCE AT MARCH 31, 1997 $7,816 $69,820 $69,358 ($939) $146,055
====== ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements. 5
March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1997 1996
_______________________________________________________________________________
(dollars in thousands)
OPERATING ACTIVITIES
Net income $4,498 $4,155
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 892 729
Net premium amortization 43 220
Provision for loan losses 839 577
Net (increase) decrease in loans held for sale 102 (527)
Provision for deferred income taxes (153) (272)
Other, net 64 (870)
------ ------
Net Cash Provided by Operating Activities 6,285 4,012
INVESTING ACTIVITIES
Proceeds from maturities, calls and prepay-
ments of securities held for sale 8,653 3,980
Proceeds from maturities, calls and prepay-
ments of securities held for investment 12,659 9,830
Purchase of securities held for sale (24,615) (17,792)
Purchase of securities held for investment (1,939) (1,362)
Net (increase) decrease in loans (16,111) 333
Purchases of premises and equipment (425) (596)
------ ------
Net Cash Used by Investing Activities (21,778) (5,607)
See accompanying notes to consolidated financial statements. 6
Three Months Ended
March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED 1997 1996
_______________________________________________________________________________
(dollars in thousands)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 7,032 (478)
Net increase (decrease) in short-term borrowings (40,114) 7,992
Proceeds from long-term borrowings 40,500 0
Repayments of long-term borrowings (306) (182)
Proceeds from issuance of common stock 113 228
Repurchase of common stock (296) (649)
Cash dividends paid (1,586) (1,090)
------ ------
Net Cash Provided by Financing Activities 5,343 5,821
------ ------
Cash and Cash Equivalents
Increase (Decrease) (10,150) 4,226
Beginning of Year 43,285 37,524
------ ------
End of Period $33,135 $41,750
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $14,148 $13,896
Cash paid for income tax 0 1,224
NONCASH INVESTING AND FINANCING TRANSACTIONS
Other real estate transferred to (from) loans, net (205) (40)
Dividends reinvested 317 228
See accompanying notes to consolidated financial statements. 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________________
NOTE A - BASIS OF PRESENTATION
Peoples First Corporation (Company) through its subsidiaries, Peoples First
National Bank and Trust Company, First Kentucky Federal Savings Bank and
Guaranty Federal Savings Bank, operates principally in a single business
segment offering a full range of banking services to individual and corporate
customers in the western Kentucky and contiguous interstate area. The Company
and the subsidiary banks are subject to the regulations of various federal and
state agencies and undergo periodic examination by regulators.
The accounting policies and reporting practices of the Company are based upon
generally accepted accounting principles and conform to predominant practices
within the banking industry. In preparing financial statements, management is
required to make assumptions and estimates which affect the Company's reported
amounts of assets and liabilities and the results of operations. Estimates and
assumptions involve future events and may change. The accompanying consolidated
financial statements are unaudited and should be read in conjunction with the
notes to consolidated financial statements contained in the 1996 annual report
on Form 10-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 period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NOTE B - SECURITIES HELD FOR SALE AND INVESTMENT
At acquisition, securities are classified into one of three categories: 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 currently has
no trading securities. Securities that are being held for indefinite periods of
time, including securities that management intends to use as a part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, to meet liquidity needs, the need to increase
regulatory capital or other similar factors, are classified as securities held
for sale and are stated at fair value. Fair value is based on market prices
quoted in financial publications or other independent sources. Net unrealized
gains or losses are excluded from earnings and reported, net of applicable
income taxes, as a separate component of stockholders' equity until realized.
Securities for which the Company has the ability and positive intent to hold
until maturity are classified as securities held for investment and 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.
Mortgage-backed securities represent a significant portion of the security
portfolios. Amortization of premiums and accretion of discounts on mortgage-
backed securities are analyzed in relation to the corresponding prepayment
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
rates, both historical and estimated, using a method which approximates the
level-yield method. Realized gains or losses on securities held for sale or
investment are accounted for using the specific security.
NOTE C - LOAN REVENUES
Loans receivable held for investment are carried at cost, as the Company has the
ability and it is management's intention to hold them to maturity. Interest on
commercial and real estate mortgage loans is accrued if deemed collectible and
credited to income based upon the principal amount outstanding. Mortgage loans
originated principally under programs with the Government National Mortgage
Association (GNMA) or the Federal National Mortgage Association (FNMA) and held
for sale are carried at the lower of cost or market value.
The Company evaluates the collectibility of both contractual interest and
contractual principal of all receivables when assessing the need for a loss
accrual. When in the opinion of management the collection of interest on a loan
is unlikely or when either principal or interest is past due over 90 days, that
loan is generally placed on nonaccrual status and interest is not recognized
unless received in cash. When a loan is placed in nonaccrual status, accrued
interest for the current period is reversed and charged against 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.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The allowance is increased by provisions for loan losses charged to operations
and is maintained at a level adequate to absorb estimated credit losses asso-
ciated with the loan portfolio, including binding commitments to lend and
off-balance sheet credit instruments. At the end of each quarter, or more
frequently if warranted, management uses a systematic, documented approach in
determining the appropriate level of the allowance for loan losses. Manage-
ment's approach provides for general and specific allowances and is based upon
current economic conditions, past losses, collection experience, risk charac-
teristics of the loan portfolio, assessment of collateral values and such other
factors which in management's judgement deserve current recognition in
estimating potential loan losses.
Loans, except large groups of smaller-balance homogeneous loans, for which the
full collection of principal and interest is not probable, or a delay in
payments is expected, are evaluated for impairment. The Company measures and
reports impaired loans that are within the scope of FAS 114 at either the
present value of expected future cash flows discounted at the loan's effective
rate, the market price of the loan, or fair value of the underlying collateral
if the loan is collateral dependent. Information regarding impaired loans at
March 31, 1997 and 1996 and December 31, 1996 is as follows:
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
Impaired Loans March 31, December 31,
March 31, 1997 1996 1996
_______________________________________________________________________________
(in thousands)
Balance of impaired loans $4,571 $4,602 $4,454
Less portion for which no allowance
for loan losses is allocated 191 0 325
------ ------ ------
Portion of impaired loan balance for
which an allowance for loan losses
is allocated $4,380 $4,602 $4,129
====== ====== ======
Portion of allowance for loan losses
allocated to the impaired loan balance $1,338 $1,047 $1,142
====== ====== ======
Three Months Ended
March 31,
Impaired Loans 1997 1996
_______________________________________________________________________________
(in thousands)
Average investment in impaired loans $4,513 $4,525
Interest income recognized on
impaired loans 103 106
Interest income recognized on
impaired loans on cash basis 0 0
NOTE E - EXCESS OF COST OVER NET ASSETS OF PURCHASED SUBSIDIARIES
Net assets of subsidiaries acquired in purchase transactions are recorded at
fair value at the date of acquisition. The excess of cost over net assets
acquired is amortized by systematic charges in the consolidated statements of
income over the period benefited. Management evaluates the periods of
amortization continually to determine whether later events and circumstances
warrant revised estimates. Currently, amortization is provided on a
straight-line basis over fifteen years. Accumulated amortization was $4.0
million at March 31, 1997, $3.4 million at March 31, 1996 and $4.1 million
December 31, 1996. Amortization expense was $244,431 and $207,430,
respectively, for the three months ended March 31, 1997 and 1996.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
Management periodically evaluates whether events of circumstances have occurred
that would result in impairment in the value or life of goodwill or other
intangibles. Management considers an intangible to be potentially impaired if
internal management reports for respective business units show a net loss before
amortization of intangibles. The recoverability of the asset is then evaluated
using undiscounted cash flow projections.
NOTE F - STOCK OPTION PLAN
The Peoples First Corporation 1986 Stock Option Plan (Option Plan), as amended
in 1994, authorizes the granting to key employees of the Company incentive stock
options and nonqualified stock options to purchase common stock of the Company
at market value at the time the options are granted. Shares sold under the
Option Plan may be either unissued authorized shares or shares reacquired by the
Company. Options granted are exercisable, subject to vesting and other
requirements, at varying times from the first through the tenth year after the
grant date. Optionees may exercise their options with cash or with shares of
the Company's common stock. At March 31, 1997, a total of 151,581 shares are
reserved for grants of options. Outstanding stock options are considered common
stock equivalents in the computation of net income per common share.
NOTE G - PER COMMON SHARE DATA
Share and per share information have been adjusted to give effect to 5% stock
dividends declared in January 1997 and January 1996. Net income per common
share is determined by dividing net income by the weighted average number of
common shares outstanding and common stock equivalents pertaining to common
stock options. The average number of shares outstanding including common stock
equivalents for the three months ended March 31, 1997 and 1996 were 10,252,282
and 9,960,843, respectively. Common stock equivalents have no material dilutive
effect.
During February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS
128 establishes standards for computing and presenting earnings per share (EPS).
FAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS. Dual presentation of basic and diluted EPS is required on the face of the
statement of income for entities with complex capital structures. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. Management does not expect
the adoption of FAS 128 to have a material effect on the Company's results of
operations since common stock equivalents are not currently a significant factor
in the calculation of EPS.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
NOTE H - 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 I - BUSINESS COMBINATIONS
On August 30, 1996, the Company consummated the purchase acquisition of Guaranty
Federal Savings Bank (Guaranty) of Clarksville, Tennessee. The Company acquired
all of the outstanding shares of Guaranty in exchange for 315,002 shares of the
Company's common stock.
Guaranty's three locations in Clarksville, Tennessee, are immediately southeast
of the market area served by the Company's other subsidiary banks. Immediately
prior to the acquisition, Guaranty had total assets of approximately $55.9
million and stockholders' equity of $3.2 million.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
_______________________________________________________________________________
Management's discussion and analysis includes forward-looking statements. Many
factors affect Peoples First Corporation's (Company) financial position and
profitability, including changes in economic conditions, the volatility of
interest rates, political events and competition from other providers of
financial services. Because these factors are unpredictable and beyond the
Company's control, earnings may fluctuate from period to period. The purpose of
this discussion 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).
Headquartered in Paducah, Kentucky, the Company is a bank and savings and loan
holding company registered with the Federal Reserve Board. The Company's
market area is primarily western Kentucky and the surrounding interstate area.
The Company's one commercial bank subsidiary and two savings bank subsidiaries
operate principally in a single business segment offering general commercial,
consumer and savings bank services through 28 banking offices. Commercial
banking services, mortgage banking and consumer financing are all activities the
Company considers to be their one business segment.
EARNING ASSETS
Average earning assets of the Company for the first three months of 1997
increased 10.5%, or $128.8 million to $1,352.3 million from $1,223.5 million for
the first three months of 1996. Excluding the effect of the savings bank
acquisition in the third quarter of 1996, the increase was 5.9%, or $72.5
million. This compares to average earning asset growth of 6.8% for the first
quarter of 1996 over the first quarter of 1995. A consistently favorable ratio
of average earning assets to average total assets has been achieved. The ratio
was 95.5% and 95.2% for the first three months of 1997 and 1996, respectively.
Three Months Ended
Table 1 March 31,
Average Earning Assets 1997 1996
_______________________________________________________________________________
(dollars in thousands)
Total average earning assets $1,352,268 $1,223,473
Percent of average earning assets
Loans 77.0% 74.8%
Securities 22.8 25.0
Other earning assets 0.2 0.2
The Company's primary business is making real estate, consumer and commercial
loans. Loans are the Company's primary earning asset and management believes
the Company should be a prominent lender. Average loans for the first three
months of 1997 were 77.0% of total average earning assets, up from 74.8% for the
13
first three months of 1996. Loan growth, while still strong, has slowed from
previous levels. Average loans for the first quarter of 1997 increased 13.8%,
or $126.0 million to $1,040.4 million from $914.4 million for the first quarter
of 1996. Excluding the effect of the savings bank acquisition in the third
quarter of 1996, the increase was 8.5%. Average loans for the first quarter of
1996 increased 11.5%, or $94.4 million from $820.0 million for the first quarter
of 1995. The Company primarily directs lending activities to its regional
market. Management has focused on retail lending and the growth of residential
real estate mortgage loans over the last three years.
Table 2 March 31, December 31,
Types of Loans 1997 1996 1996
_______________________________________________________________________________
(in thousands)
Real estate
Residential mortgage $420,987 $363,987 $421,129
Commercial mortgage 187,234 157,952 174,576
Construction 28,242 17,201 29,933
Consumer, net 289,806 261,991 289,653
Commercial, financial
and agricultural 124,844 110,510 120,283
Other 708 1,497 855
--------- --------- ---------
1,051,821 913,138 1,036,429
Allowance for loan losses (15,120) (13,670) (14,795)
--------- --------- ---------
$1,036,701 $899,468 $1,021,634
========= ========= =========
Average total securities for the first quarter of 1997 increased 0.8%, or $2.5
million to $308.6 million from $306.1 million for the first quarter of 1996.
Excluding the effect of the savings bank acquisition in the third quarter of
1996, average total securities decreased 1.6%. Average total securities for the
first quarter of 1996 decreased 5.6%, or $18.1 million from $324.2 million for
the first quarter of 1995. Management intends to continue the trend of further
leveraging stockholders' equity without creating excessive interest rate risk,
through reduction in the amount of loan funding derived from securities
activities.
FUNDING
The most important and stable source of funding is core deposits, considered by
management to include demand deposits, interest-bearing transaction accounts,
saving deposits and time deposits under $100,000. Average core deposits for the
first three months of 1997 increased 6.8%, or $64.2 million to $1,008.5 million
from $944.3 million for 1996. Excluding the savings bank acquisition, the
increase was 3.9%, or $33.7 million. Management plans to increase reliance on
non-core funding. The Company's subsidiaries have obtained various short-term
and long-term advances from the Federal Home Loan Bank (FHLB) under Blanket
Agreements for Advances and Security Agreements (Agreements). The Agreements
entitle the banks to borrow additional funds from the FHLB to fund mortgage loan
14
programs and satisfy other funding needs. Additional funding totaling approxi-
mately $154.5 million is available at March 31, 1997 from undrawn federal funds
purchased, lines of credit for U. S. treasury notes and FHLB advances.
Three Months Ended
Table 3 March 31,
Average Interest-bearing Liabilities 1997 1996
_______________________________________________________________________________
(dollars in thousands)
Total average interest-bearing
liabilities $1,172,403 $1,065,027
Percent of average total interest-
bearing liabilities
Interest-bearing core deposits 78.8% 81.1%
CDs of $100,000 or more 7.4 6.6
Brokered deposits 1.3 2.5
Short-term borrowings 10.4 9.0
Long-term borrowings 2.0 0.7
Other 0.1 0.1
NONPERFORMING ASSETS AND RISK ELEMENTS
The Company's loan underwriting guidelines, credit review procedures and
policies are designed to protect the Company from avoidable credit losses. Some
losses although inevitably occur. The Company's process for monitoring loan
quality includes detailed, monthly analyses of delinquencies, nonperforming
assets and potential problem loans from each subsidiary bank. Management
extensively monitors credit policies, including policies related to appraisals,
assessing the financial condition of borrowers, restrictions on out-of-area
lending and avoidance of loan concentrations.
The level of nonperforming assets at March 31, 1997 remains relatively low.
Diversification within the loan portfolio is an important means of reducing
inherent lending risks. At March 31, 1997, 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.
Nonperforming assets were $3.4 million higher at March 31, 1997 than at March
31, 1996. As a percentage of total loans and other real estate, nonperfroming
assets were down slightly during the last three months. There are generally
good economic conditions in the market area and management believes the
Company's comprehensive loan administration and workout procedures are adequate
to manage these credit risks. During the last five years, the allowance for
loan losses coverage of nonperforming assets has always been greater than 100%.
15
Table 4 March 31, December 31,
Nonperforming Assets 1997 1996 1996
_______________________________________________________________________________
(dollars in thousands)
Nonaccrual loans $6,195 $2,435 $4,680
Loans past due ninety days 2,014 1,873 4,710
Renegotiated loans 2,669 2,837 2,707
Other real estate owned 310 673 90
------ ------ ------
$11,188 $7,818 $12,187
====== ====== ======
Ratios:
Nonperforming assets to total
loans and other real estate 1.06% 0.86% 1.18%
Allowance for loan losses to
nonperforming assets 135% 175% 121%
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. Since December 31, 1996, loans
that have been identified that may become nonperforming in the future have
increased $2.9 million. At March 31, 1997, loans with a total principal balance
of $29.3 million were considered potential problem loans, compared to $15.8
million at March 31, 1996. Potential problem loans are not included in
nonperforming assets since the borrowers currently meet all applicable loan
agreement terms.
The banking industry is currently experiencing an increase in consumer
delinquencies and chargeoffs. Management expects the Company's level of
chargeoffs and nonperforming assets to remain relatively high during 1997
compared to prior periods due to cyclical nature of consumer credit.
CAPITAL RESOURCES AND DIVIDENDS
The current economic and regulatory environment places increased emphasis on
capital strength. The board of directors develops and reviews the capital goals
and policies of the consolidated entity and subsidiary banks. The Company's
capital policies are designed to retain sufficient amounts for healthy financial
ratios and to maintain, at a minimum, a capital position that meets the federal
regulators' well capitalized classification. Stockholders' equity was 10.2% of
assets at March 31, 1997, up from 10.0% at March 31, 1996. Exclusive of the
$1.2 million decrease in the unrealized net gain on securities held for sale,
net of applicable income taxes, stockholders' equity increased $2.7 million, or
7.7% (annualized), during the first three months of 1997. This compares to an
increase, exclusive of the $0.9 million decrease in the unrealized net loss on
securities held for sale, net of applicable income taxes, of $2.7 million, or
8.6% (annualized), during the same 1996 period. Based upon the nature and
16
makeup of their current businesses, growth expectations, stock repurchase
program and dividend increases, management expects all of the reporting
entities' capital ratios to continue to exceed regulatory requirements.
The capital base has been strengthened through earnings retention and the
issuance of common stock. The earnings retention rate, which the board of
directors adjusts through declaration of cash dividends, was 56.8% for the first
quarter of 1997, compared to 66.7% for the first quarter of 1996. The quarterly
cash dividend was raised to $0.136 per share in the third quarter of 1995, to
$0.152 per share in the second quarter of 1996 and to $0.190 per share in the
fourth quarter of 1996. Subsidiary bank dividends are the principal source of
funds for the Company's payment of dividends to its stockholders. At March 31,
1997, approximately $25.2 million, compared to $20.8 million at March 31, 1996,
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.
The sale of common stock through shareholder and employee plans increased
capital $429,248 and $456,262, respectively, in the first quarter of 1997 and
1996. In the first quarter of 1996, the board of directors approved the
purchase of up to 400,000 shares of the Company's common stock in the open
market. During the first quarter of 1997, 12,202 shares were purchased for
$296,121, compared to 31,262 shares purchased for $648,907 during the first
quarter of 1996.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
8.0%. The minimum Tier I capital to risk-adjusted assets is 4.0%. The
Company's total capital and Tier I capital to risk-adjusted assets ratio was
14.36% and 13.19%, respectively, at March 31, 1997 compared with 14.84% and
13.63%, respectively at March 31, 1996. The Federal Reserve Board also requires
bank holding companies to comply with minimum leverage ratio guidelines. The
leverage ratio is the ratio of Tier I capital to its total consolidated
quarterly average assets, less goodwill and certain other intangible assets.
The guidelines require a minimum leverage ratio of 3.0% for companies that meet
certain specified criteria. The Company's leverage ratio was 9.68% at March 31,
1997, compared with 9.48% at March 31, 1996.
The Federal Deposit Insurance Act requires federal bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. As of March 31,
1997, all of the Company's insured depository institutions met the criteria to
be classified as "well capitalized".
17
RESULTS OF OPERATIONS
Net income for the first quarter increased 7.1% in 1997, reaching $4.5 million,
compared to $4.2 million in 1996. Net income per common share for the first
quarter increased 4.8% to $0.44 in 1997, compared to $0.42 for 1996. Results
for the first quarter were impacted by increased loan volume and improved
noninterest income offset by higher provision for loan losses and noninterest
expense.
Return on average stockholders' equity for the first three months of 1997 and
1996 was 12.57% and 12.95%, respectively. Return on average assets for the
first three months of 1997 and 1996 was 1.29% and 1.31%, respectively.
NET INTEREST INCOME
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities, consisting
primarily of deposits. Net interest income is determined by the difference
between yields earned on assets and rates paid on liabilities (interest-rate
spread) and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's interest-rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows.
For the three months ended March 31, 1997, net interest income, on a tax-
equivalent (TE) basis, increased 8.9%, or $1.2 million to $14.7 million compared
to $13.5 million for the three months ended March 31, 1996. The 1997 increase
was attributed to increased volume of earning assets, while volume and margin
improvement provided approximately equal amounts to the 1996 increased net
interest income.
Table 5
Net Interest Income Analysis Average Average
Three months ended March 31, 1997 volume Interest rate
_______________________________________________________________________________
(dollars in thousands)
Loans $1,040,410 $23,378 9.11%
Securities 308,567 5,438 7.15
Other interest earning assets 3,291 39 4.81
--------- ------
1,352,268 28,855 8.65
Time deposits 609,745 8,483 5.64
All other interest bearing deposits 416,247 3,681 3.59
Other interest bearing liabilities 146,411 1,971 5.46
--------- ------
$1,172,403 14,135 4.89
------ ----
Net interest income (TE) spread $14,720 3.76%
====== ====
Net interest income (TE) as a percent 4.41%
of average interest-earning assets ====
18
Table 6
Net Interest Income Analysis Average Average
Three months ended March 31, 1996 volume Interest rate
_______________________________________________________________________________
(dollars in thousands)
Loans $914,362 $20,852 9.17%
Securities 306,058 5,358 7.04
Other interest earning assets 3,053 37 4.87
--------- ------
1,223,473 26,247 8.63
Time deposits 579,409 8,038 5.58
All other interest bearing deposits 380,600 3,305 3.49
Other interest bearing liabilities 105,018 1,404 5.38
--------- ------
$1,065,027 12,747 4.81
------ ----
Net interest income (TE) spread $13,500 3.82%
====== ====
Net interest income (TE) as a percent 4.44%
of average interest-earning assets ====
For 1997, management is attempting to balance volume increases and pricing to a
greater degree. Low levels of nonperforming loans favorably contributed to
margins each period.
Net interest income (TE) as a percent of average earning assets was 4.41% and
4.44% for the three months ended March 31, 1997 and 1996, respectively.
Interest earned on loans for the three months ended March 31, 1997 was 4.22%
greater than the average funding cost, down from 4.36% for the three months
ended March 31, 1996. Management attributes this to their concentration on
secured residential real estate lending and a competitive consumer market. Net
interest income margins continue to benefit from a favorable change in the mix
of earning assets and funding sources.
PROVISION FOR LOAN LOSSES
The Company's primary business of making real estate, consumer and commercial
loans entails potential loan losses, the magnitude of which depend on a
variety of economic factors affecting borrowers which are beyond the control of
the Company. Accordingly, a significant factor in the Company's past and future
operating results is the level of the provision for loan losses. The provision
for loan losses amounted to $839,000 for the three months ended March 31, 1997,
an increase of $262,000 or 45.4% when compared to $577,000 for the three months
ended March 31, 1996. The increase in the 1997 provision for loan losses was
influenced by the growth in outstanding loans and net loan chargeoffs,
particularly consumer chargeoffs. The annualized provision for loan losses as a
percentage of average loans was 0.33% for the three months ended March 31, 1997,
up from 0.28% and 0.25%, for the years ended December 31, 1996 and 1995,
19
respectively. Levels of providing for loan losses reflect, among other things,
management's evaluation of potential problem loans.
Net loan chargeoffs over the last three years are at levels below previous
trends. Net chargeoffs as a percentage of average loans were 0.20% and 0.12%
for the three months ended March 31, 1997 and 1996, respectively. Net
chargeoffs as a percent of average loans were 0.17% for the five-year period
ended December 31, 1996. The allowance for loan losses is 1.44% and 1.50%,
respectively, of outstanding loans at March 31, 1997 and 1996. The allowance 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.
Three Months Ended
Table 7 March 31,
Allowance for Loan Losses 1997 1996
__________________________________________________________________
(dollars in thousands)
Balance at beginning of period $14,795 $13,371
Provision charged to expense 839 577
Loans charged off (652) (381)
Recoveries of chargeoffs 138 103
------ ------
Net loans charged off (514) (278)
------ ------
Balance at end of period $15,120 $13,670
====== ======
Annualized Ratios:
Provision for loan losses
to average loans 0.33% 0.25%
Net chargeoffs to
average loans 0.20 0.12
Allowance for loan losses
to period end loans 1.44 1.50
NONINTEREST INCOME
Noninterest income is an important but not yet significant source of revenue for
the Company, representing 14.1% of tax-equivalent revenues, excluding securities
gains, for the first quarter of 1997, up from 13.0% for the first quarter of
1996. Fees from traditional deposit services as well as revenues from
insurance, brokerage activities and other commission business have been
increased by management's focus on improving all areas of noninterest income
during the last two years. Noninterest income amounted to $2,416,589 for the
three months ended March 31, 1997, a 19.9% increase compared to $2,014,855 for
the three months ended March 31, 1996. Service charges on deposit accounts, the
largest component of noninterest income, increased 31.9% primarily due to
management's decrease in waived revenue. This level of increase is not expected
to continue. The decrease in trust fees is attributable to timing of certain
fees for estates and other services. Insurance commissions for the year of
20
1997 are expected to equal comparative prior periods due to renewed management
focus. Management plans to continue to seek ways to increase fee income from
services.
Three Months Ended
Table 8 March 31,
Noninterest Income 1997 1996
__________________________________________________________________
(in thousands)
Service charges on deposits $1,229 $932
Net securities gains (losses) 0 (9)
Trust fees 316 339
Insurance commissions 124 144
Bankcard fees 175 161
Other income 573 448
----- -----
$2,417 $2,015
===== =====
Annualized Ratio:
Noninterest income
to average assets 0.69% 0.63%
NONINTEREST EXPENSE
The Company's efficiency ratios are approximately the same for the first
quarters of 1997 and 1996. The ratio of overhead to revenue was 53.36% for the
three months ended March 31, 1997, compared to 53.66% for the three months ended
March 31, 1996. Noninterest expense to average assets was approximately the
same for both periods. There is a constant process of evaluation to reach the
optimum balance between revenue and overhead.
The ratio of personnel expense decreased slightly as a percentage of average
total assets to 1.25% for the three months ended March 31, 1997, compared to
1.31% for the three months ended March 31, 1996. Comparable staffing levels at
March 31, 1997 are up 1.6% from March 31, 1996 as approximately 8 full-time
equivalent employees, excluding the savings bank acquisition, were added. An
additional one-time expense amounting to approximately $116,000 was incurred in
the first quarter of 1996 to terminate a defined benefit plan of an acquired
bank.
For the last three years, equipment expense has increased by an average of
approximately 14.9%. For 1997, management expects a double-digit percentage
increase due to implementation of new systems. The Company has made purchases
amounting to approximately $3.3 million for equipment during the last two years
as technology has advanced and the need to leverage personnel costs has
intensified. Management is attempting to increase customers volumes and
leverage personnel expense through the use of additional technology and plans to
continue to purchase technology for new product delivery systems.
Due to management's focus on reducing staff coupled with outsourcing some func-
tions, particularly related to credit card operations, data processing expense
21
for the first quarter of 1997 was 15.4% higher than the first quarter of 1996,
which was significantly higher than the previous year. 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. Increased goodwill
amortization resulted from the acquisition of a savings bank in the third
quarter of 1996.
Three Months Ended
Table 9 March 31,
Noninterest Expense 1997 1996
__________________________________________________________________
(in thousands)
Salaries $3,677 $3,476
Employee benefits 686 722
Occupancy expense 476 444
Equipment expense 640 504
Deposit insurance expense 52 90
Data processing expense 726 629
Bank share taxes 411 383
Goodwill amortization 245 207
Other expense 2,232 1,871
------ ------
$9,145 $8,326
====== ======
Annualized Ratios:
Overhead ratio 53.36% 53.66%
Noninterest expense
to average assets 2.62 2.61
INCOME TAXES
The Company's income tax planning is based on the goal of maximizing long-term,
after-tax profitability. Income tax expense is impacted by the mix of taxable
versus tax-exempt revenues from loans and securities as well as certain
nondeductible expenses. The Company manages the effective tax rate to some
degree, based upon changing tax laws, particularly alternative minimum tax
provisions, the availability and price of nontaxable investment securities and
other portfolio considerations.
The increase in income tax expense for the three months ended March 31, 1997
from the comparable 1996 period, is attributable to higher operating earnings
and a higher effective tax rate. The Company's effective tax rate was 32.8% and
32.0% for the quarters ended March 31, 1997 and 1996, respectively. Operating
earnings are now at a level that the 1% federal income tax rate increase
mandated by the Omnibus Budget Reconciliation Act of 1993 is applicable. The
effective tax rate also increased due to the continued decline in tax-exempt
income, an increase in nondeductible acquisition expenses and interstate
taxation.
22
LIQUIDITY AND INTEREST-RATE SENSITIVITY
The 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. The goal of the asset/liability management (ALM)
process is to manage the structure of the balance sheet to provide the maximum
level of net interest income while maintaining acceptable levels of interest-
sensitivity risk. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Table 10
Interest Rate Sensitivity
Analysis 1-91 92-183 184 days Total at Over
March 31, 1997 Days Days to 1 year 1 year 1 year Total
_________________________________________________________________________________________________________
(in thousands)
Rate Sensitive Assets
Securities, at cost
U.S. treasury
and agencies $3,004 $200 $193 $3,397 $66,759 $70,156
Mortgage-backed 15,374 7,805 18,407 41,586 120,890 162,476
Municipal bonds 735 685 2,761 4,181 57,319 61,500
Other 13,589 0 0 13,589 1,526 15,115
------- ------- ------- ------- ------- ---------
32,702 8,690 21,361 62,753 246,494 309,247
Loans 350,360 147,404 230,032 727,796 325,810 1,053,606
------- ------- ------- ------- ------- ---------
383,062 156,094 251,393 790,549 572,304 1,362,853
Rate Sensitive Liabilities
Deposits
Transaction and savings 175,821 0 0 175,821 245,575 421,396
Time 149,383 100,808 167,465 417,656 197,360 615,016
Short-term borrowings 63,484 7,064 21,504 92,052 0 92,052
Long-term borrowings 43,562 329 2,502 46,393 7,814 54,207
------- ------- ------- ------- ------- ---------
432,250 108,201 191,471 731,922 450,749 1,182,671
------- ------- ------- ------- ------- ---------
Period Gap ($49,188) $47,893 $59,922 $58,627 $121,555 $180,182
======= ======= ======= ======= ======= =========
Cumulative Gap at 03/31/97 ($49,188) ($1,295) $58,627 $58,627 $180,182 $180,182
Cumulative Gap at 12/31/96 ($63,615) $17,200 $63,764 $63,764 $166,128 $166,128
</TABLE>
Management 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. 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
23
changes in interest rates, resultant prepayment risks and other factors. The
Company's access to the retail 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. Management considers current liquidity positions of the subsidiary
banks to be adequate to meet depositor and borrower needs.
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. Management seeks to closely match the duration of repricing
assets and liabilities over time to avoid unnecessary interest rate risk.
Currently, the Company does not employ interest rate swaps, financial futures or
options to affect interest rate risks.
The subsidiary banks and the Company collectively measure their level of
earnings exposure to future interest rate movements. Simulation and interest
rate gap analyses are used to scrutinize the sensitivity of net interest income
over a relatively short (1-2 years) time horizon. The analyses are used to
examine the impact on earnings of an immediate interest rate shock as well as
other forecasted rate scenarios. Each scenario incorporates what management
believes to be the most reasonable assumptions about such variables as volumes,
prepayment rates for mortgage assets and repricing characteristics. A valuation
analysis is also performed to measure the sensitivity of the Company's net
interest income. This analysis involves discounting projected future cash flows
of assets, liabilities and off-balance sheet positions to arrive at an estimated
net present economic value. The March 31, 1997 cumulative gap at one year
between rate sensitive assets and liabilities has changed little from December
31 or March 31, 1996.
24
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
(a) The regular annual meeting of the shareholders of Peoples First
Corporation was held May 1, 1997, at the Executive Inn in
Paducah, Kentucky.
(b) The Corporation's Board of Directors consists of 18 members in
three classes. Directors are usually elected to three-year
terms, and ordinarily one class of directors is elected at each
annual meeting. Cumulative voting applies in the election of
directors. The following six nominees were elected to the board
of directors for the terms and by the votes indicated below:
Term For Against
Nominee Expires Votes Votes
Walter L. Apperson 2000 8,080,094 3,483
William R. Dibert 2000 8,094,042 3,483
R. E. Fairhurst, Jr. 2000 8,094,042 3,483
Dennis W. Kirtley 2000 8,067,111 3,483
Aubrey W. Lippert 2000 8,091,023 3,483
Allan Rhodes, Jr. 2000 8,088,026 3,483
Twelve other directors continued their terms of office after the
meeting. Six directors, Glen Berryman, Joe Dick, William Rowland
Hancock, Joe Harry metzger, Jerry L. Page and C. Steve Story
continue in office until 1998. Six additional directors, James T.
Holloway, Allan B. Kleet, Rufus E. Pugh, Neal H. Ramage, Mary
Warren Sanders and Victor F. Speck, Jr. continue in office
until 1999.
(c) Shareholders ratified the Board of Director's appointments to
the Audit Committee. The Audit Committee, which is composed
entirely of nonmanagement directors, reviews the audit plans and
the results of audits of the Corporation and subsidiary banks
performed by the Corporation's internal audit department and
independent certified public accountants, reviews the adequacy
of internal controls and reviews the accounting principles em-
ployed in financial reporting.
25
The appointments of R. E. Fairhurst, Jr., William Rowland Hancock,
Allan Rhodes, Jr., Victor F. Speck, Jr. and Mary Warren Sanders
were ratified by the following vote:
For: 8,089,206 Against: 2,006 Abstain: 51,984
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27.1) Financial Data Schedules (SEC use only)
(b) Reports on Form 8-K
Peoples First Corporation filed a current report on Form
8-K on January 21, 1997, reporting the January 21, 1997
press release announcement of the declaration of a 5%
stock dividend payable March 20, 1997.
26
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, thereunto duly authorized.
PEOPLES FIRST CORPORATION
05/05/97 /s/ Aubrey W. Lippert
Aubrey W. Lippert
President and Chairman
of the Board
05/05/97 /s/ Allan B. Kleet
Allan B. Kleet
Principal Accounting Officer
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 33,135
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 196,572
<INVESTMENTS-CARRYING> 111,236
<INVESTMENTS-MARKET> 113,131
<LOANS> 1,051,821
<ALLOWANCE> 15,120
<TOTAL-ASSETS> 1,426,486
<DEPOSITS> 1,122,286
<SHORT-TERM> 92,052
<LIABILITIES-OTHER> 11,886
<LONG-TERM> 54,207
<COMMON> 7,816
0
0
<OTHER-SE> 138,239
<TOTAL-LIABILITIES-AND-EQUITY> 1,426,486
<INTEREST-LOAN> 23,360
<INTEREST-INVEST> 4,992
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 28,391
<INTEREST-DEPOSIT> 12,164
<INTEREST-EXPENSE> 14,135
<INTEREST-INCOME-NET> 14,256
<LOAN-LOSSES> 839
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,145
<INCOME-PRETAX> 6,689
<INCOME-PRE-EXTRAORDINARY> 6,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,498
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 4.41
<LOANS-NON> 6,195
<LOANS-PAST> 2,014
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 29,300
<ALLOWANCE-OPEN> 14,795
<CHARGE-OFFS> 652
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 15,120
<ALLOWANCE-DOMESTIC> 15,120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
