_______________________________________________________________________________
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, 1998
[ ] 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, 1998: Common stock, no par value - 10,029,645 shares outstanding.
______________________________________________________________________________1
INDEX Page
_______________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998,
March 31, 1997 and December 31, 1997 3
Consolidated Statements of Income - Three Months
Ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders'
Equity - Three Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults on Senior Securities 26
Item 4. Submission of Matters to a Vote of Securities Holders 26
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 1998 1997 1997
_______________________________________________________________________________
(in thousands)
ASSETS
Cash and due from banks $40,136 $33,135 $46,820
Federal funds sold 9,700 0 0
Securities held for sale 209,382 196,572 217,871
Securities held for investment 90,843 111,236 98,622
Loans held for sale 2,517 1,784 2,140
Loans receivable, net 1,091,445 1,036,701 1,085,265
Goodwill and other intangibles 11,743 10,661 12,106
Premises and equipment 19,977 19,201 20,310
Other assets 17,348 17,196 17,863
--------- --------- ---------
$1,493,091 $1,426,486 $1,500,997
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $91,009 $85,874 $90,354
Interest-bearing transaction accounts 437,653 335,887 402,955
Savings deposits 73,384 85,509 73,438
Time deposits 607,814 615,016 610,094
--------- --------- ---------
1,209,860 1,122,286 1,176,841
Short-term borrowings 77,672 92,052 114,472
Long-term borrowings 35,890 54,207 43,104
Other liabilities 12,365 11,886 11,853
--------- --------- ---------
Total liabilities 1,335,787 1,280,431 1,346,270
Stockholders' Equity
Common stock 7,836 7,816 7,818
Surplus 70,969 69,820 70,627
Retained earnings 77,013 69,358 74,754
Unrealized net gain (loss) on
securities held for sale 1,486 (939) 1,528
--------- --------- ---------
157,304 146,055 154,727
--------- --------- ---------
$1,493,091 $1,426,486 $1,500,997
========= ========= =========
Fair value of securities held
for investment $94,042 $113,131 $102,190
Common shares issued and outstanding 10,030 10,005 10,007
See accompanying notes to consolidated financial statements. 3
Three Months Ended
March 31,
CONSOLIDATED STATEMENTS OF INCOME 1998 1997
_______________________________________________________________________________
(in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $24,718 $23,360
Taxable interest on securities 4,048 4,066
Nontaxable interest on securities 906 926
Interest on short-term investments 53 39
------ ------
29,725 28,391
INTEREST EXPENSE
Interest on deposits 13,405 12,164
Other interest expense 1,778 1,971
------ ------
15,183 14,135
------ ------
Net Interest Income 14,542 14,256
Provision for Loan Losses 939 839
------ ------
Net Interest Income after
Provision for Loan Losses 13,603 13,417
Noninterest Income 2,562 2,417
Noninterest Expense 9,229 9,145
------ ------
Income Before Income Tax Expense 6,936 6,689
Income Tax Expense 2,271 2,191
------ ------
NET INCOME $4,665 $4,498
====== ======
Earnings per Common Share
Basic $0.47 $0.45
Assuming dilution 0.46 0.44
Cash Dividend per Common Share 0.24 0.19
See accompanying notes to consolidated financial statements. 4
<TABLE>
<CAPTION>
<S> <S> <S> <S> <S> <S> <S>
Unrealized
CONSOLIDATED STATEMENTS OF CHANGES Compre- net gain
IN STOCKHOLDERS' EQUITY hensive Common Retained (loss) on
income stock Surplus earnings securities Total
______________________________________________________________________________________________________________________
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31, 1998
Balance at January 1, 1998 $7,818 $70,627 $74,754 $1,528 $154,727
Net income $4,665 4,665 4,665
Other comprehensive income,
net of tax
Change in unrealized net gain
(loss) on securities held for sale (42) (42) (42)
------
Comprehensive income $4,623
======
Cash dividends declared
Common ($0.24 per share) (2,406) (2,406)
Stock issued pursuant to shareholder
and employee plans 18 342 360
------ ------ ------ ------ -------
Balance at March 31, 1998 $7,836 $70,969 $77,013 $1,486 $157,304
====== ====== ====== ====== =======
THREE MONTHS ENDED MARCH 31, 1997
Balance at January 1, 1997 $7,812 $69,691 $66,762 $284 $144,549
Net income $4,498 4,498 4,498
Other comprehensive income,
net of tax
Change in unrealized net gain
(loss) on securities held for sale (1,223) (1,223) (1,223)
------
Comprehensive income $3,275
======
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)
------ ------ ------ ------ -------
Balance at March 31, 1997 $7,816 $69,820 $69,358 ($939) $146,055
====== ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements. 5
Three Months Ended
March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997
_______________________________________________________________________________
(dollars in thousands)
OPERATING ACTIVITIES
Net income $4,665 $4,498
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,035 892
Net premium amortization (5) 43
Provision for loan losses 939 839
Net (increase) decrease in loans held for sale (377) 102
Provision for deferred income taxes (530) (153)
Increase (decrease) in accrued items 921 479
Other, net 896 (415)
------ ------
Net Cash Provided by Operating Activities 7,544 6,285
INVESTING ACTIVITIES
Net increase in Federal funds sold (9,700) 0
Proceeds from maturities, calls and prepay-
ments of securities held for sale 13,654 8,653
Proceeds from maturities, calls and prepay-
ments of securities held for investment 8,351 12,659
Purchase of securities held for sale (5,103) (24,615)
Purchase of securities held for investment (560) (1,939)
Net increase in loans (7,229) (16,111)
Purchases of premises and equipment (322) (425)
------ ------
Net Cash Used by Investing Activities (909) (21,778)
See accompanying notes to consolidated financial statements. 6
Three Months Ended
March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED 1998 1997
_______________________________________________________________________________
(dollars in thousands)
FINANCING ACTIVITIES
Net increase in deposits 33,019 7,032
Net increase (decrease) in short-term borrowings (36,800) (40,114)
Proceeds from long-term borrowings 0 40,500
Repayments of long-term borrowings (7,214) (306)
Proceeds from issuance of common stock 82 113
Repurchase of common stock 0 (296)
Cash dividends paid (2,406) (1,586)
------ ------
Net Cash Provided by Financing Activities (13,319) 5,343
------ ------
Cash and Cash Equivalents
Increase (Decrease) (6,684) (10,150)
Beginning of Year 46,820 43,285
------ ------
End of Period $40,136 $33,135
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $15,660 $14,148
Cash paid for income tax 153 0
NONCASH INVESTING AND FINANCING TRANSACTIONS
Other real estate transferred from loans, net (110) (205)
Dividends reinvested 0 317
See accompanying notes to consolidated financial statements. 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________________
NOTE A - BASIS OF PRESENTATION
Peoples First Corporation (Company) through its subsidiary, Peoples First
National Bank and Trust Company, 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 bank 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 1997 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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
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), the Federal National Mortgage Association (FNMA) or the
Federal Home Loan Mortgage Corporation (FHLMC) 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 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, 1998 and 1997 and December 31,
1997 is as follows:
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
March 31, December 31,
Impaired Loans 1998 1997 1997
________________________________________________________________________________
(in thousands)
Balance of impaired loans $8,966 $4,571 $6,300
Less portion for which no allowance
for loan losses is allocated 0 191 0
------ ------ ------
Portion of impaired loan balance for
which an allowance for loan losses
is allocated $8,966 $4,380 $6,300
====== ====== ======
Portion of allowance for loan losses
allocated to the impaired loan balance $2,974 $1,338 $1,638
====== ====== ======
Three Months Ended
March 31,
Impaired Loans 1998 1997
_______________________________________________________________________________
(in thousands)
Average investment in impaired loans $7,633 $4,513
Interest income recognized on
impaired loans 161 103
Interest income recognized on
impaired loans on cash basis 0 0
NOTE E - GOODWILL AND OTHER INTANGIBLES
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 amorti-
zation 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 $5.3 million at March 31,
1998, $4.0 million at March 31, 1997 and $5.1 million December 31, 1997.
Goodwill amortization expense was $244,440 for both the three months ended March
31, 1998 and 1997.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
Core deposit intangibles, which represent the net present value of the future
economic benefit related to deposits purchased, are amortized on an accelerated
basis over 10 years. Accumulated amortization was $308,856 at March 31, 1998,
$38,017 at March 31, 1997 and $190,056 at December 31, 1997. Core deposit
intangibles amortization expense was $118,800 and $16,293, respectively, for the
three months ended March 31, 1998 and 1997.
The Company reviews intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Asset
values and the related amortization expense are based on estimated lives and
significant changes in these lives could significantly affect future
amortization expense.
NOTE F - STOCK OPTION PLAN
The Company recognizes no compensation cost for stock option grants in the
financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
NOTE G - PER COMMON SHARE DATA
Share and per share information have been adjusted to give effect to a 5% stock
dividend declared in January 1997.
EPS Reconciliation Per share
Three Months Ended March 31, 1998 Income Shares amount
_______________________________________________________________________________
(in thousands)
Basic EPS
Income available to
common stockholders $4,665 10,024 $0.47
====
Effect of dilutive securities
Stock options -- 226
------ ------
Diluted EPS $4,665 10,250 $0.46
====
EPS Reconciliation Per share
Three Months Ended March 31, 1997 Income Shares amount
_______________________________________________________________________________
(in thousands)
Basic EPS
Income available to
common stockholders $4,498 10,002 $0.45
====
Effect of dilutive securities
Stock options -- 250
------ ------
Diluted EPS $4,498 10,252 $0.44
====
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.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
_______________________________________________________________________________
NOTE I - ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
Company adopted the provisions of this statement effective the first quarter of
1998. The statement establishes standards for reporting and display of
comprehensive income and its components. Since this statement requires only
additional disclosure, there was no effect on the Company's results of
operations or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information". The Company will adopt the provisions of
this statement effective the fourth quarter of 1998. The statement requires
disclosure of selected information about operating segments including segment
income, revenues and asset data. Since this statement requires only additional
disclosure, there will be no effect on the Company's results of operations or
financial position.
13
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 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 operates principally in a single business
segment offering general commercial, consumer and savings bank services through
29 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 1998
increased 4.8%, or $64.5 million to $1,416.8 million from $1,352.3 million for
the first three months of 1997. This compares to average earning asset growth
of 5.9% for the first three months of 1997 over the first three months of
1996, excluding the effect of the savings bank acquisition in the third quarter
of 1996. A consistently favorable ratio of average earning assets to average
total assets has been achieved. The ratio was 95.6% and 95.5% for the first
three months of 1998 and 1997, respectively.
Three Months Ended
Table 1 March 31,
Average Earning Assets 1998 1997
_______________________________________________________________________________
(dollars in thousands)
Total average earning assets $1,416,821 $1,352,268
Percent of average earning assets
Loans 77.9% 77.0%
Securities 21.8 22.8
Other earning assets 0.3 0.2
14
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. Loan growth, while still strong, has
slowed from previous levels. For the first quarter of 1998, average loans
increased 6.0%, or $62.7 million to $1,103.1 million from $1,040.4 million for
the first quarter of 1997. For the first quarter of 1997, average loans
increased 8.5%, compared to the first quarter of 1996, excluding the effect of
the savings bank acquisition. 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 1998 1997 1997
_______________________________________________________________________________
(in thousands)
Real estate
Residential mortgage $470,562 $420,987 $468,330
Commercial mortgage 199,695 187,234 188,502
Construction 26,106 28,242 24,157
Consumer, net 286,904 289,806 298,724
Commercial, financial
and agricultural 124,621 124,844 119,924
Other 340 708 2,070
--------- --------- ---------
1,108,228 1,051,821 1,101,707
Allowance for loan losses (16,783) (15,120) (16,442)
--------- --------- ---------
$1,091,445 $1,036,701 $1,085,265
========= ========= =========
For the first quarter of 1998, average total securities increased 0.3%, or $0.9
million to $309.5 million from $308.6 million for the first quarter of 1997.
For the first quarter of 1997, average total securities decreased 2.0%, compared
to the first quarter of 1996, excluding the effect of the savings bank
acquisition. Management intends to concentrate on borrowings to fund loan
growth and allow the level of securities to remain at levels to better leverage
stockholders' equity.
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 interest-bearing core
deposits for the first three months of 1998 increased 7.7%, or $71.1 million to
$995.0 million from $923.9 million for 1997. Excluding a 1997 branch purchase,
the increase was $39.6 million. Average interest-bearing core deposits for the
first three months of 1997 increased 3.9% compared to the first three months of
1996, excluding the savings bank acquisition. Management plans to continue to
rely on non-core funding. The Company's subsidiaries have obtained various
short-term and long-term advances from the Federal Home Loan Bank (FHLB)
15
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 programs and satisfy other funding needs. Additional funding
totaling approximately $255.8 million is available at March 31, 1998 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 1998 1997
_______________________________________________________________________________
(dollars in thousands)
Total average interest-bearing
liabilities $1,228,797 $1,172,403
Percent of average total interest-
bearing liabilities
Interest-bearing core deposits 80.9% 78.8%
CDs of $100,000 or more 7.6 7.4
Brokered deposits 1.1 1.3
Short-term borrowings 7.0 10.4
Long-term borrowings 3.3 2.0
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 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, 1998 remains at manageable
levels. Diversification within the loan portfolio is an important means of
reducing inherent lending risks. At March 31, 1998, 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 $1.1 million higher at March 31, 1998 than at December
31, 1997. As a percentage of total loans and other real estate, nonperforming
assets were up 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%.
16
Table 4 March 31, December 31,
Nonperforming Assets 1998 1997 1997
_______________________________________________________________________________
(dollars in thousands)
Nonaccrual loans $6,911 $6,195 $5,848
Loans past due ninety days 4,627 2,014 4,451
Renegotiated loans 2,487 2,669 2,532
Other real estate owned 180 310 236
------ ------ ------
$14,205 $11,188 $13,067
====== ====== ======
Ratios:
Nonperforming assets to total
loans and other real estate 1.28% 1.06% 1.18%
Allowance for loan losses to
nonperforming assets 118% 135% 126%
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 March 31, 1998, loans with a
total principal balance of $25.7 million were considered potential problem
loans, compared to $29.3 million at March 31, 1997. Potential problem loans are
not included in nonperforming assets since the borrowers currently meet all
applicable loan agreement terms.
The banking industry is experiencing an increase in consumer delinquencies and
chargeoffs. Management expects the Company's level of chargeoffs and
nonperforming assets to remain relatively high during 1998 compared to prior
periods due to the cyclical nature of consumer credit and the Company's increase
in consumer lending.
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 10.5% of
assets at March 31, 1998, up from 10.2% at March 31, 1997. Exclusive of the
$41,833 decrease in the unrealized net gain on securities held for sale, net of
applicable income taxes, stockholders' equity increased $2.6 million, or 6.9%
(annualized), during the first three months of 1998. This compares to an
increase, exclusive of the $1.2 million decrease in the unrealized net loss on
securities held for sale, net of applicable income taxes, of $2.7 million, or
7.7% (annualized), during the same 1997 period. Based upon the nature and
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.
17
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 47.8% for the first
quarter of 1998, compared to 56.8% for the first quarter of 1997. The quarterly
cash dividend was raised to $0.19 per share in the fourth quarter of 1996, to
$0.22 per share in the third quarter of 1997 and to $0.24 per share in the
first quarter of 1998. Subsidiary bank dividends are the principal source of
funds for the Company's payment of dividends to its stockholders. At March 31,
1998, approximately $15.3 million, compared to $25.2 million at March 31, 1997,
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. Consolidation of subsidiary banks
into the lead bank had the effect of lowering the total available subsidiary
dividends.
The sale of common stock through shareholder and employee plans increased
capital $359,517 and $429,248, respectively, in the first quarter of 1998 and
1997. Following the fourth quarter dividend in 1997, the Company terminated
the stockholders' dividend reinvestment plan and cancelled the authorization
of repurchase of shares pursuant to the merger agreement with Union Planters
Corporation dated November 17, 1997.
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
14.92% and 13.49%, respectively, at March 31, 1998 compared with 14.36% and
13.19%, respectively at March 31, 1997. 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 9.78% at March 31,
1998, compared with 9.76% at March 31, 1997.
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,
1998, the Company's insured depository institution met the criteria to be
classified as "well capitalized".
18
RESULTS OF OPERATIONS
Net income for the first three months increased 4.4% in 1998, reaching $4.7
million, compared to $4.5 million in 1997. Earnings per common share assuming
dilution for the first three months increased 4.5% to $0.46 in 1998, compared to
$0.44 for 1997. Results for 1998 were impacted by increased loan volume and
improved noninterest income offset by higher provision for loan losses and
slightly higher noninterest expense.
Return on average stockholders' equity for the first three months of 1998 and
1997 was 12.18% and 12.57%, respectively. Return on average assets the first
three months of 1998 and 1997 was 1.28% and 1.29%, 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.
Table 5
Net Interest Income Analysis Average Average
Three months ended March 31, 1998 volume Interest rate
_______________________________________________________________________________
(dollars in thousands)
Loans $1,103,067 $24,737 9.09%
Securities 309,531 5,369 7.03
Other interest earning assets 4,223 53 5.09
--------- ------
1,416,821 30,159 8.63
Time deposits 608,041 8,430 5.62
All other interest bearing deposits 493,125 4,975 4.09
Other interest bearing liabilities 127,631 1,778 5.65
--------- ------
$1,228,797 15,183 5.01
------ ----
Net interest income (TE) spread $14,976 3.62%
====== ====
Net interest income (TE) as a percent
of average interest-earning assets 4.29%
====
19
Table 6
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
of average interest-earning assets 4.41%
====
Net interest income (TE) as a percent of average earning assets was 4.29% and
4.41% for the three months ended March 31, 1998 and 1997, respectively.
Interest earned on loans for the three months ended March 31, 1998 was 4.08%
greater than the average funding cost, down from 4.22% for the three months
ended March 31, 1997. This downward trend is attributed to the concentration on
secured residential real estate lending and a continuing competitive market.
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 $939,000 for the three months ended March 31, 1998,
an increase of $100,000 or 11.9% when compared to $839,000 for the three months
ended March 31, 1997. The increase in the 1998 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 0.35% for the three months ended March 31, 1998,
up from 0.32% and 0.18%, for the years ended December 31, 1997 and 1996,
respectively. Levels of providing for loan losses reflect, among other things,
management's evaluation of potential problem loans.
20
Net chargeoffs as a percentage of average loans were 0.22% and 0.20% for the
three months ended March 31, 1998 and 1997, respectively. The allowance for
loan losses is 1.51% and 1.44%, respectively, of outstanding loans at March 31,
1998 and 1997. 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 1998 1997
_______________________________________________________________________________
(dollars in thousands)
Balance at beginning of period $16,442 $14,795
Provision charged to expense 939 839
Loans charged off (702) (652)
Recoveries of chargeoffs 104 138
------ ------
Net loans charged off (598) (514)
------ ------
Balance at end of period $16,783 $15,120
====== ======
Annualized Ratios:
Provision for loan losses
to average loans 0.35% 0.33%
Net chargeoffs to
average loans 0.22 0.20
Allowance for loan losses
to period end loans 1.51 1.44
NONINTEREST INCOME
Noninterest income is an important but not yet significant source of revenue for
the Company, representing 14.6% of tax-equivalent revenues, excluding securities
gains, for the first quarter of 1998, up from 14.1% for the first quarter of
1997. During the last two years, the Company has continued to engage outside
consulting firms to review banking products and services. As a result, fees
from traditional deposit services as well as revenues from brokerage activities
and other commission business have been increased by management's focus on
improving all areas of noninterest income. Noninterest income amounted to
$2,562,248 for the three months ended March 31, 1998, a 6.0% increase compared
to $2,416,589 for the three months ended March 31, 1997. Service charges on
deposit accounts, the largest component of noninterest income, increased 2.4%
due to a change in the assessment of overdraft fees. Management continues to
seek ways to increase fee income from services.
21
Three Months Ended
Table 8 March 31,
Noninterest Income 1998 1997
_______________________________________________________________________________
(in thousands)
Service charges on deposits $1,259 $1,229
Net securities gains (losses) 0 0
Trust fees 387 316
Insurance commissions 109 124
Bankcard fees 172 175
Other income 635 573
----- -----
$2,562 $2,417
===== =====
Annualized Ratio:
Noninterest income
to average assets 0.70% 0.69%
NONINTEREST EXPENSE
The Company's efficiency ratios have improved, despite costs associated with
system changes. The ratio of overhead to revenue was 53.96% for the three
months ended March 31, 1998, compared to 54.85% for the three months ended March
31, 1997. Noninterest expense to average assets was down slightly in 1998.
There is a constant process of evaluation to reach the optimum balance between
revenue and overhead. Prior to the third quarter of 1997, subsidiary banks used
three different data processors for principal customer applications. The
systems have now been converted to the Company's primary data processor to allow
for more uniform applications and better employee utilization. Also during the
third quarter of 1996 and in the first quarter of 1998, the remaining savings
subsidiaries were merged into the lead bank. A total of seven separate
subsidiaries have now been merged in order to provide opportunity for future
efficiencies.
The ratio of personnel expense decreased slightly as a percentage of average
total assets to 1.22% for the three months ended March 31, 1998, compared to
1.25% for the three months ended March 31, 1997. Comparable staffing levels
were maintained at March 31, 1998 and 1997.
For the last three years, equipment expense has increased by an average of
approximately 17.4% per year. For the first quarter of 1998, the increase was
down to 3.8% from the first quarter of 1997. The Company made purchases
amounting to approximately $8.6 million for equipment during the last three
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.
Data processing expense for the first quarter of 1998 was 2.1% lower than the
first quarter of 1997, due to the previous merger of the various individual
banks and the conversion of their different systems. These efficiencies offset
additional business volume.
22
Bankshare taxes imposed by the State of Kentucky have been increasing and are
expected to continue to increase in future years. Increased amortization
resulted from the acquisition of a branch bank in the third quarter of 1997.
Three Months Ended
Table 9 March 31,
Noninterest Expense 1998 1997
_______________________________________________________________________________
(in thousands)
Salaries $3,722 $3,677
Employee benefits 724 686
Occupancy expense 467 476
Equipment expense 664 640
Deposit insurance expense 65 52
Data processing expense 711 726
Bank share taxes 476 411
Goodwill and other intangible
asset amortization 363 260
Legal and consulting fees 129 365
Other expense 1,908 1,852
------ ------
$9,229 $9,145
====== ======
Annualized Ratios:
Overhead ratio 53.96% 54.85%
Noninterest expense
to average assets 2.52 2.62
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 effective tax rate is influenced by the level of
tax-exempt income, nondeductible acquisition expenses and interstate taxation.
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, 1998
from the comparable 1997 period, is attributable to higher operating earnings.
The Company's effective tax rate was 32.7% and 32.8% for the three months ended
March 31, 1998 and 1997, respectively.
23
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.
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
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.
24
<TABLE>
<CAPTION>
<S> <S> <S> <S> <S> <S> <S> <S> <S>
Table 10
Interest Rate Sensitivity
Analysis 1-90 91-365 Total at >1 - <3 >3 - <5 >5 - <15 Over 15
March 31, 1998 Days Days 1 year years years years years Total
___________________________________________________________________________________________________________________________________
(in thousands)
Rate Sensitive Assets
Federal funds sold $9,700 $0 $9,700 $0 $0 $0 $0 $9,700
Securities, at cost
U.S. treasury
and agencies 1,000 20,701 21,701 11,721 37,062 1,975 1,471 73,930
Mortgage-backed 13,675 29,767 43,442 48,925 26,753 32,025 2,218 153,363
Municipal bonds 590 2,203 2,793 8,305 7,425 42,536 174 61,233
Other 7,771 1 7,772 35 1,601 0 0 9,408
------- ------- ------- ------- ------- --------- --------- ---------
23,036 52,672 75,708 68,986 72,841 76,536 3,863 297,934
Loans 317,197 417,314 734,511 180,178 111,431 80,702 3,923 1,110,745
------- ------- ------- ------- ------- --------- --------- ---------
349,933 469,986 819,919 249,164 184,272 157,238 7,786 1,418,379
Rate Sensitive Liabilities
Deposits
Transaction and savings 284,855 0 284,855 29,990 29,990 149,957 16,245 511,037
Time 138,023 266,843 404,866 176,367 19,982 6,599 0 607,814
Short-term borrowings 42,465 35,207 77,672 0 0 0 0 77,672
Long-term borrowings 26,742 2,324 29,066 718 718 3,592 1,796 35,890
------- ------- ------- ------- ------- --------- --------- ---------
492,085 304,374 796,459 207,075 50,690 160,148 18,041 1,232,413
------- ------- ------- ------- ------- --------- --------- ---------
Period Gap ($142,152) $165,612 $23,460 $42,089 $133,582 ($2,910) ($10,255) $185,966
======= ======= ======= ======= ======= ========= ========= =========
Cumulative Gap at 03/31/98 ($142,152) $23,460 $23,460 $65,549 $199,131 $196,221 $185,966 $185,966
Cumulative Gap at 12/31/97 ($130,412) $29,033 $29,033 $46,248 $185,976 $190,216 $173,922 $173,922
</TABLE>
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, 1998 cumulative gap at one year
between rate sensitive assets and liabilities has changed little from December
31, 1997.
25
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) Exhibits
(27.1) Financial Data Schedules (SEC use only)
(b) Reports on Form 8-K - None
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
05/13/98 /s/ Aubrey W. Lippert
Aubrey W. Lippert
President and Chairman
of the Board
05/13/98 /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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 40,136
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 209,382
<INVESTMENTS-CARRYING> 90,842
<INVESTMENTS-MARKET> 94,042
<LOANS> 1,108,228
<ALLOWANCE> 16,783
<TOTAL-ASSETS> 1,493,091
<DEPOSITS> 1,209,860
<SHORT-TERM> 77,672
<LIABILITIES-OTHER> 12,365
<LONG-TERM> 35,890
<COMMON> 7,836
0
0
<OTHER-SE> 149,468
<TOTAL-LIABILITIES-AND-EQUITY> 1,493,091
<INTEREST-LOAN> 24,718
<INTEREST-INVEST> 4,954
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 29,725
<INTEREST-DEPOSIT> 13,405
<INTEREST-EXPENSE> 15,183
<INTEREST-INCOME-NET> 14,542
<LOAN-LOSSES> 939
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,229
<INCOME-PRETAX> 6,936
<INCOME-PRE-EXTRAORDINARY> 6,936
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,665
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 4.29
<LOANS-NON> 6,911
<LOANS-PAST> 4,627
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 25,700
<ALLOWANCE-OPEN> 16,442
<CHARGE-OFFS> 702
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 16,783
<ALLOWANCE-DOMESTIC> 16,783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
