Annual Report (Form 10-K), fiscal year 1993

Item 1. Business
Peoples First Corporation (the "Company") is a bank holding company registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended. The Company conducts a complete range of commercial and personal banking activities through five wholly owned subsidiaries located in Kentucky - The Peoples First National Bank & Trust Company of Paducah in McCracken County, First Liberty Bank of Calvert City in Marshall County, First National Bank of LaCenter in Ballard County, Salem Bank in Livingston County and Bank of Murray in Calloway County (together, the "Banks"). Peoples First Corporation's principal executive offices are located at 100 South Fourth Street, Paducah, Kentucky 42002-2200.
The Company is a Kentucky Corporation incorporated on March 1, 1983. The Company became a bank holding company when it acquired Peoples First National Bank & Trust Company ("Peoples Bank") in 1983. The Company acquired First Liberty Bank ("Liberty Bank") in 1985, First National Bank of LaCenter ("LaCenter Bank") in 1987 Salem Bank, Inc. ("Salem Bank") in 1989 and Bank of Murray in 1992. Management considers employee relations to be good with all of the bank employees, none of which are covered by a collective bargining agreement.
Dividends from the banks are the principal source of cash income for the Company. Legal limitations are imposed on the amount of dividends that may be paid by the individual banks. Although the Company may engage in other activities, subject to rules and regulations of the Federal Reserve Board and Kentucky Department of Financial Institutions, it is currently expected that the banks will remain the principal source of operating revenues.
Peoples Bank, organized in 1926, provides a full range of banking services to the region through five full service branch offices, three limited service branch offices and one business operations office all located in McCracken County, Kentucky. Commercial lending services provided to medium-size and small businesses, real estate mortgage lending and individual consumer lending services are the primary sources of operating revenues. Peoples Bank had total deposits of $398.2 million at December 31, 1993 and is the second largest commercial bank in McCracken County. At December 31, 1993, Peoples Bank had 208 full-time and 34 part-time employees.
Liberty Bank, organized in 1965, provides a wide variety of banking services to its local area through two full service branches, both located in Marshall County, Kentucky. Commercial, real estate and consumer lending are the primary sources of operating revenues. Liberty Bank is the third largest commercial bank in Marshall County and had total deposits of $31.3 million at December 31, 1993. At December 31, 1993, Liberty Bank had 10 full-time and 2 part-time employees.
First National Bank of LaCenter Bank, organized in 1953, serves its local area with a variety of banking services from its banking office in Ballard County, Kentucky. Agriculture related, real estate and consumer lending are the primary
sources of operating revenues. LaCenter Bank had total deposits of $30.8 million at December 31, 1993, and is the second largest commercial bank in Ballard County. At December 31, 1993, LaCenter Bank had 11 full-time and 3 part-time employees.
Salem Bank, organized in 1902, serves the Livingston County and western Crittenden County, area through full service branches located in Salem and Smithland, Kentucky. Agricultural related, real estate and consumer lending are the primary sources of operating income. Salem Bank had total deposits of $37.5 million at December 31, 1993, and was the largest commercial bank in Livingston County. At December 31, 1993, Salem Bank had 13 full-time employees.
Bank of Murray, organized in 1889, serves the Calloway County, area through three full service branches in Murray, Kentucky. Community-based commercial and consumer loans, including agricultural, automobile, real estate and student loans are the primary sources of operating income. Bank of Murray is the largest financial institution headquartered in Calloway County, Kentucky with total deposits of $215.8 million at December 31, 1993. At December 31, 1993, Bank of Murray had 90 full-time and 14 part-time employees.
Pending Acquisitions
The acquisition of First Kentucky Federal Savings Bank (First Kentucky FSB) as more fully described in Footnote 2. to the consolidated financial statements, was consumated on March 10, 1994. First Kentucky FSB, organized in 1934, con- verted to a federally chartered savings bank in 1990. In June 1991, the organ- ization converted from a mutual to a stock form. First Kentucky FSB conducts its operations through its main office in Central City, Kentucky and five branch offices in Muhlenberg, Ohio, McLean and Butler Counties. Residential real estate mortgage lending is the primary source of operating revenues. First Kentucky FSB is the largest financial institution in their immediate market area with total deposits of $160.8 million at December 31, 1993.
On February 24, 1994, the Company entered into a Definitive Merger Agreement with Libsab Bancorp, Inc. and its wholly-owned subsidiary, Liberty Bank & Trust Company (Liberty). The merger is subject to the approval of Libery shareholders and applicable regulatory agencies and is expected to be finalized in the third quarter of 1994. The Company will issue 1,118,000 shares of the Copmpany's stock for all the outstanding stock of Liberty. Liberty has offices in Mayfield and Symsonia and is the largest financial institution in Graves County, Kentucky, with assets of approximately $141.7 million at December 31, 1993.
Competition
The Banks actively compete on local and regional levels with other commercial banks and financial institutions for all types of deposits, loans, trust accounts and the provision of financial and other services. With respect to certain banking services, the Banks compete with insurance companies, savings and loan associations, credit unions and other financial institutions. Many of the Banks' competitors are not commercial banks. For example, the Banks compete for funds with savings and loan associations, money market mutual funds,
brokerage houses, and governmental and private issuers of money market instruments. The Banks also compete for loans with other financial institutions and private concerns providing financial services. These include savings and loan associations, finance companies, credit unions, certain governmental agencies and merchants who extend their own credit selling to consumers and other customers. Many of the banks, financial institutions and other interests with which the Banks compete have capital resources substantially in excess of the capital and resources of the Banks.
Supervision and Regulation
The Registrant is a bank holding company within the meaning of the Bank Holding Company Act. As such, it is registered with the Federal Reserve Board and files reports with and is subject to examination by that body.
Peoples Bank and LaCenter Bank, both chartered under the National Bank Act, are subject to the supervision of and are regularly examined by the Comptroller of the Currency of the United States. By law, they are members of the Federal Reserve System and insured members of the Federal Deposit Insurance Corporation. As such, they are subject to regulation by these federal agencies.
Liberty Bank, Salem Bank and Bank of Murray, all chartered under the Common- wealth of Kentucky, are subject to the supervision of and are regularly examined by the Kentucky Department of Financial Institutions. They are insured members of the Federal Deposit Insurance Corporation, and, as such, are subject to regu- lation and examined by that federal agency.
Governmental Monetary Policies and Economic Growth
The continuing volatile conditions in the national economy and in the money markets, together with the effects of actions by monetary and fiscal authorities in recent years, make it exceedingly difficult to predict with any reasonable accuracy the possible future changes in interest rates and their effect on deposit levels, loan demand and the business and earnings of the Registrant and its subsidiaries.
Statistical Disclosures
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
A. AVERAGE BALANCE SHEETS For the Year Ended December 31, (in thousands) 1993 1992 1991 _______________________________________________________________________________
INTEREST-EARNING ASSETS Federal funds sold $3,368 $6,996 $3,663 Taxable securities 181,114 170,752 101,299 Non-taxable securities 62,470 54,322 44,649 Loans (1) 514,381 423,972 324,841 ------- ------- ------- 761,333 656,042 474,452 NONINTEREST-EARNING ASSETS Cash and due from banks 25,325 22,526 15,655 Allowance for loan losses (8,329) (6,523) (5,603) Other assets 34,131 29,888 16,721 ------- ------- ------- $812,460 $701,933 $501,225 ======= ======= =======
INTEREST-BEARING LIABILITIES Transaction accounts $172,018 $143,394 $112,511 Saving deposits 64,960 49,571 26,764 Time deposits 385,381 353,310 273,707 Repurchase agreements 20,633 23,286 3,422 Notes payable 11,962 8,359 453 Other liabilities 11,893 1,073 2,233 ------- ------- ------- 666,847 578,993 419,090
NONINTEREST-BEARING LIABILITIES Demand deposits 65,276 54,024 35,615 Other liabilities 6,955 8,705 4,365
STOCKHOLDERS' EQUITY 73,382 60,211 42,155 ------- ------- ------- $812,460 $701,933 $501,225 ======= ======= =======
(1) Nonperforming loans are included in average loans
B. ANALYSIS OF NET INTEREST EARNINGS For the Year Ended December 31, (in thousands) 1993 1992 1991 _______________________________________________________________________________
INTEREST INCOME Federal funds sold $104 $255 $202 Taxable securities 11,041 11,681 8,550 Non-taxable securities (TE) (2) 5,777 5,087 4,293 Loans 44,251 40,329 36,074 ------ ------ ------ 61,173 57,352 49,119
INTEREST EXPENSE Transaction accounts 4,875 4,700 5,892 Saving deposits 1,870 1,745 1,371 Time deposits 18,269 20,497 20,006 Repurchase agreements 667 906 187 Notes payable 774 579 26 Other liabilities 414 33 149 ------ ------ ------ 26,869 28,460 27,631 ------ ------ ------ NET INTEREST INCOME (TE) (2) 34,304 28,892 21,488 TE Basis Adjustment (2,011) (1,679) (1,355) ------ ------ ------ NET INTEREST EARNINGS $32,293 $27,213 $20,133 ====== ====== ======
(2) Tax equivalent (TE) interest income is based upon a Federal income tax rate of 35%.
For the Year Ended December 31, B. AVERAGE YIELDS AND RATES PAID 1993 1992 1991 _______________________________________________________________________________
AVERAGE YIELDS FOR INTEREST-EARNING ASSETS Federal funds sold 3.09% 3.64% 5.51% Taxable securities 6.10% 6.84% 8.44% Non-taxable securities (TE) (2) 9.25% 9.36% 9.61% Loans (1) 8.60% 9.51% 11.11% All interest-earning assets 8.03% 8.74% 10.35%
AVERAGE RATES FOR INTEREST-BEARING LIABILITIES Transaction accounts 2.83% 3.28% 5.24% Saving deposits 2.88% 3.52% 5.12% Time deposits 4.74% 5.80% 7.31% Repurchase agreements 3.23% 3.89% 5.46% Notes payable 6.47% 6.93% 5.74% Other liabilities 3.48% 3.08% 6.67% All interest-bearing liabilities 4.03% 4.92% 6.59% ---- ---- ---- NET INTEREST-RATE SPREAD (TE) (2) 4.00% 3.82% 3.76% ==== ==== ====
NET YIELD ON INTEREST-EARNING ASSETS 4.51% 4.40% 4.53% ==== ==== ====
(1) Nonperforming loans are included in average loans (2) Tax equivalent (TE) interest income is based upon a Federal income tax rate of 35%.
C. FOR THE LAST TWO FISCAL YEARS
CHANGES ATTRIBUTABLE TO VOLUME AND RATE Change Due to Due to (in thousands) 1993/1992 Volume Rate (3) _______________________________________________________________________________
INTEREST INCOME Federal funds sold ($151) ($132) ($19) Taxable securities (640) 709 (1,349) Non-taxable securities (TE) (2) 690 763 (73) Loans (1) 3,922 8,600 (4,678) ------ 3,821 9,205 (5,384) INTEREST EXPENSE Transaction accounts 175 938 (763) Saving deposits 125 542 (417) Time deposits (2,228) 1,861 (4,089) Repurchase agreements (239) (103) (136) Notes payable 195 250 (55) Other liabilities 381 333 48 ------ (1,591) 4,318 (5,909) ------ ------ ------ NET INTEREST INCOME (TE) (2) $5,412 $4,887 $525 ====== ====== ======
(1) Nonperforming loans are included in average loans. (2) Tax equivalent (TE) net interest income is based upon a Federal income tax rate of 35%. (3) Changes due to both rate and volume are included in due to rate.
CHANGES ATTRIBUTABLE TO VOLUME AND RATE Change Due to Due to (in thousands) 1992/1991 Volume Rate (3) _______________________________________________________________________________
INTEREST INCOME Federal funds sold $53 $184 ($131) Taxable securities 3,131 5,862 (2,731) Non-taxable securities (TE) (2) 794 930 (136) Loans (1) 4,255 11,009 (6,754) ------ 8,233 18,800 (10,567)
INTEREST EXPENSE Transaction accounts (1,192) 1,617 (2,809) Saving deposits 374 1,168 (794) Time deposits 491 5,818 (5,327) Repurchase agreements 719 1,085 (366) Notes payable 553 454 99 Other liabilities (116) (77) (39) ------ 829 10,543 (9,714) ------ ------ ------ NET INTEREST INCOME (TE) (2) $7,404 $8,257 ($853) ====== ====== ======
(1) Nonperforming loans are included in average loans. (2) Tax equivalent (TE) net interest income is based upon a Federal income tax rate of 35%. (3) Changes due to both rate and volume are included in due to rate.
II. Debt Security Portfolios
A. Footnote 4 to the Financial Statements included herein on page 39 presents the book value as of the end of 1993 and 1992 of debt securities by type of security.
B. Footnote 4 to the Financial Statements included herein on page 40 presents the amortized cost, estimated market value and the weighted average yield of debt securities at December 31, 1993, by contractual maturity range.
C. As of December 31, 1993, the Company owned no securities (other than U. S. Government and U. S. Government agencies and corporations) issued by one issuer for which the book value exceeded ten percent of stockholders' equity.
III. Loan Portfolio
A. The table of Types of Loans in Management's Discussion and Analysis of Financial Condition and Results of Operations (MDA) included herein on page 20 presents the amount of all loans in various categories as of the end of 1993 and 1992.
B. The following table presents the maturities in the loan portfolio, excluding commercial paper, real estate mortgage, installment, consumer revolving credit and other loans at December 31, 1993:
Loan Portfolio Maturities 1 year 1 to 5 Over December 31, 1993 or less years 5 years Total _______________________________________________________________________________ (in thousands)
Commercial, financial and agricultural $56,450 $34,215 $21,667 $112,312 Real estate construction 8,836 514 416 9,766 ------- ------- ------- ------- $65,286 $34,729 $22,083 $122,078 ======= ======= ======= =======
The amounts of these loans due after one year which have predetermined rates and adjustable rates are $4.7 million and $52.1 million, respectively.
C. Risk Elements
1. The table of Nonperforming Assets in MDA included herein on page 22 states the amount of nonaccrual, past due and restructured loans. The following table states the gross interest income that would have been recorded for the years ended December 31, 1989 through 1993, if the nonaccrual and renegotiated loans had been current in accordance with their original terms, and the amount of interest income that was included in net income for each year:
2. Potential Problem Loans
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 December 31, 1993, loans with a total principal balance of $13.9 million had been identified that may become nonperforming in the future, compared to $11.3 million at December 31, 1992. Potential problem loans are not included in nonperforming assets since the borrowers currently meet all applicable loan agreement terms. The identified potential problem loan totals consist of many different loans and are generally loans for which the collateral appears to be sufficient but that have potential financial weakness evidenced by internal credit review's analysis of historical financial information. At December 31, 1993, a total of $7.2 million of potential problem loans were to three borrowers.
3. Foreign Outstandings
There were no foreign outstandings at anytime during the last three years.
4. Loan Concentrations
As of December 31, 1993, there was no concentration of loans exceeding 10% of total loans which are not otherwise disclosed in the Types of Loans table pursuant to III. A. There were no amounts loaned in excess of 10% of total loans to a multiple of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Most loans are originated in the immediate market area of the Banks.
D. Other Interest Bearing Assets
The Company has no other interest earning assets that would be required to be disclosed under Item III. C.1. or 2. if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table presents an analysis of loss experience and the allow- ance for loan losses for the years ended December 31, 1993, 1992, 1991, 1990 and 1989:
B. The following tables present a breakdown of the allowance for loan losses at December 31, 1993, 1992, 1991, 1990 and 1989:
V. DEPOSITS
A.B. Average Balances and Rates Paid by Deposit
The Average Balance Sheets table and Average Yields and Rates Paid table in- cluded herein on pages 6 and 8 present the average amount of and the average rate paid for the years ended December 31, 1993, 1992 and 1991.
C. Foreign Deposits
The Company had no foreign deposits during the past three years.
D.E. Maturity Distribution of Time Deposits of $100,000 or More
The following table states the amount of time certificates of deposit at December 31, 1993, of $100,000 or more by maturity:
Maturity of $100,000 Time Deposits December 31, 1993 _______________________________________________________________________________ (in thousands)
Maturing 3 months or less $20,338 Maturing over 3 months through 6 months 5,140 Maturing over 6 months through 12 months 11,450 Maturing over 12 months 38,317 ------ $75,245 ======
For the Year Ended December 31, VI. RETURN ON EQUITY AND ASSETS 1993 1992 1991 _______________________________________________________________________________
1. Return on average assets 1.17% 1.08% 1.27% 2. Return on average equity 12.99% 12.57% 15.10% 3. Dividend payout ratio 26.85% 27.69% 23.85% 4. Equity to assets ratio 9.03% 8.58% 8.41%
VII. SHORT-TERM BORROWINGS
For 1993, the Company had no short-term borrowings for which the average balance outstanding during the year was more than 30 percent of stockholders' equity at the end of the period. For 1992, the amount of repurchase agreements outstand- ing at the end of the year was $19.5 million, the maximum amount outstanding during 1992 was $28.7 million, the average amount outstanding during 1992 was $23.3 million and the approximate weighted average interest rate thereon was 3.89%.
Item 2.



Item 2. PROPERTIES
The Company's investments in premises and equipment are comprised of properties owned and leased by the Banks. Peoples Bank owns the building housing its main offices, which contains 17,325 square feet of space and is located at 401 Kentucky Avenue. Peoples Bank also owns its Service Center, located at 100 South Fourth Street, which contains 50,000 square feet of space and houses the Company's executive offices. Of the twelve other banking offices of the Banks, ten are owned and two are leased by their respective Banks.
Item 3.

Item 3. LEGAL PROCEEDINGS - None
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market Information, Dividends The registrant's only class of common stock is traded on the National Associa- tion of Securities Dealers Automated Quotation System National Market System. Peoples First Corporation's common stock symbol is "PFKY". The high and low stock prices and the quarterly dividends declared on the Company's common stock for each quarter of 1993 and 1992 are as follows:
High and Low Stock Prices First Second Third Fourth Dividends Declared quarter quarter quarter quarter _______________________________________________________________________________
High 1993 $16.50 $16.88 $20.00 $25.50 Low 1993 16.00 16.00 16.63 19.25 Dividends declared 0.095 0.095 0.105 0.105
High 1992 $15.13 $17.38 $17.25 $16.50 Low 1992 11.88 15.38 15.75 15.63 Dividends declared 0.085 0.085 0.095 0.095
Holders The approximate number of holders of registrant's only class of common stock as of February 16, 1994, was 1,363.
Item 6.

Item 6. SELECTED FINANCIAL DATA
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion and analysis is to provide annual report 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 registered bank holding company serving primarily the western Kentucky and contiguous interstate area. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes.
The following table provides certain information regarding the Company's five banking subsidiaries as of December 31, 1993 (dollars in millions):
Year Subsidiary acquired Assets Loans Deposits ________________________________________________________________________________
Peoples First National Bank 1983 $475,367 $356,086 $398,232 Bank of Murray 1992 254,405 144,336 215,814 Salem Bank, Inc. 1989 41,686 16,602 37,512 First Nat'l Bank of LaCenter 1987 36,139 20,799 30,848 First Liberty Bank 1985 34,496 19,408 31,285
The above amounts do not total to consolidated amounts due to eliminating entries and parent company amounts.
EARNING ASSETS Earning assets were significantly impacted by the May 4, 1992 acquisition of Bank of Murray (Murray). Average earning assets of the Company for 1993, increased 16.1%, or $105.3 million to $761.3 million from $656.0 million for 1992. Internal growth of earning assets, hindered by slowed deposit generation in the low interest-rate environment, was 4.3% for 1993, compared to internal earning asset growth of 7.5% and 8.7% for 1992 and 1991, over respective previous years.
The Company maintains a consistently favorable ratio of average earning assets to average total assets. The ratio was 93.7% for 1993, compared to 93.5% and 94.7% for 1992 and 1991, respectively. The changes in the 1993 and 1992 ratios from prior levels is mostly attributable to the nonearning asset, goodwill, associated with the Murray acquisition.
Loans are the Company's primary earning asset. Loan demand was strong in 1993. Loans, net of unearned income, increased $75.1 million during 1993, compared to $22.8 million (excluding the initial effect of the Murray acquisition) and $22.0 million increases for 1992 and 1991 over respective prior years. Internal average loan growth for 1993 was 11.0%, up from a 7.4% increase in average loans for 1992 from 1991, and compared to a 8.4% increase in average loans for 1991 from 1990. Prior to 1993, loans had been a decreasing portion of earning assets. Average loans for 1993 were 67.6% of total average earning assets, compared to 64.6% and 68.5% during 1992 and 1991, respectively.
Management attributes the current reversal of the declining loan composition trend to their focus on improving the earning asset composition of Murray, strong loan demand and a slowed growth of total deposits. The potential mix of earning assets will be significantly impacted by the acquisition of additional subsidiary financial institutions and future loan demand.
The Company primarily directs lending activities to its regional market from which deposits are drawn. Management has focused on secured lending and the growth of residential and commercial real estate mortgage loans over the last three years.
A portion of the proceeds from the sale and maturity of debt securities and the principal collected on mortgage-backed securities was used to fund high loan demand. Debt securities decreased $28.3 million during 1993 and $3.6 million (excluding the initial effect of the Murray acquisition) during 1992. The Company maintains a portfolio of securities held for sale as a partial source of available funding for loan growth.
FUNDING The total of average deposits and repurchase agreements, which management relies on as a stable source of funding, of the Company for 1993 increased 13.6%, or $84.7 million to $708.3 million from $623.6 million for 1992. Internal growth was 1.0% for 1993 compared to average funding growth of 7.4% and 8.1% for 1992 and 1991, over respective previous year periods. Recently, the Company has been able to reflect greater relative increases in the total of deposits and repur- chase agreements than time deposits, which heretofore exhibited a greater relative increase. Management attributes this to a generally declining interest
rate environment and believes that sustained lower interest rates do not benefit funding growth rates. Highly competitive markets for deposits still exist. During periods of slow internal deposit growth, management partially relies on brokered deposits and Federal funds purchased to fund loan growth. Brokered deposits amounted to $19.2 million at December 31, 1993.
NONPERFORMING ASSETS AND RISK ELEMENTS The level of nonperforming assets at December 31, 1993 has improved since December 31, 1992. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At December 31, 1993, 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.
The Company discontinues the accrual of interest on loans which become ninety days past due as to principal or interest, unless the loans are adequately secured and in the process of collection. Other real estate owned is carried at the lower of cost or fair value. A loan is classified as a renegotiated loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the debt under the original terms.
Management continues to exert efforts to monitor and minimize nonperforming assets and to maintain aggressive charge-off practices, even though the nonperforming totals are significantly lower than peer bank holding company ratios. Significant focus on underwriting standards is maintained by management and the subsidiary bank boards.
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 December 31, 1993, loans with a total principal balance of $13.9 million have been identified that may become nonperforming in the future, compared to $11.3 million at December 31, 1992 and $16.8 million that had been identified at December 31, 1991. Performance of borrowers is aided by the current lower interest carrying costs. Potential problem loans are not included in nonperforming assets since the borrowers currently meet all applicable loan agreement terms.
Nonperforming assets at December 31, 1993 were 1.00% of total loans and other real estate, down from 1.40% at December 31, 1992. A small number of loans and one tract of undeveloped land in Nashville, Tennessee, represent most of the nonperforming balance for the last three years.
CAPITAL RESOURCES AND DIVIDENDS Stockholders' equity was 9.3% of assets at December 31, 1993, an increase of 0.6% from December 31, 1992. Stockholders' equity increased $8.0 million, or 11.5%, during 1993 due to a 73.2% earnings retention rate and sale of common stock through shareholder and employee plans ($797,034). This compares to an increase of $24.7 million during 1992 when the earnings retention rate was 73.2%, proceeds from the sale of common stock through shareholder and employee plans was $833,087 and common stock issued in the acquisition of Murray amounted to $18,257,866.
The quarterly dividend was raised to $0.095 per share in the third quarter of 1992 and to $0.105 per share in the third quarter of 1993. The board of direc- tors develops and reviews the capital goals of the consolidated entity and each of the subsidiary banks. The Company's dividend policy is designed to retain sufficient amounts for healthy financial ratios, considering future planned asset growth and other prudent financial management principles. Subsidiary bank dividends are the principal source of funds for the Company's payment of dividends to its stockholders. At December 31, 1993, approximately $13.8 million, compared to $13.6 million at December 31, 1992, 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.
Bank regulatory agencies' minimum capital guidelines assign relative measures of credit risk to balance sheet assets and off-balance sheet exposures. Based upon the nature and makeup of their current businesses and growth expectations, management expects all of the reporting entities' capital ratios to continue to exceed regulatory minimums. At December 31, 1993 and 1992, the Company and the subsidiary banks' capital ratios were as follows:
RESULTS OF OPERATIONS Earnings for 1993 met management's expectations. Increased earnings for 1993 over 1992 are attributable to an improved net interest income margin, reduced provision for loan losses and no change in the noninterest expense net of non- interest income (excluding securities gains) ratio. Net income per common share and common share equivalent for the year ended December 31, 1993 increased 14.6% to $1.49, from $1.30 for the year ended December 31, 1992, which was the same as the year ended December 31, 1991. Net income per common share and common share equivalent for the fourth quarter of 1993 increased 22.6% to $0.38 from $0.31 for the fourth quarter of 1992 (principally due to decreased provision for loan losses) and compared to $0.35 per share for the fourth quarter of 1991.
Return on average stockholders' equity for the year ended December 31, 1993, 1992 and 1991 was 12.99%, 12.57% and 15.10%, respectively. Return on average assets for the year ended 1993, 1992 and 1991 was 1.17%, 1.08% and 1.27%, respectively. Earnings performance was down in 1992 due to first-year dilution associated with the Murray acquisition.
NET INTEREST INCOME The amount by which interest earned on assets exceeds the interest paid on sup- porting funds, constitutes the primary source of income for the Company. For the year ended December 31, 1993, net interest income (TE) increased 18.7%, or $5.4 million to $34.3 million as compared to $28.9 million for 1992. The 1993 increase is mostly attributable to growth of average earning assets. Average earning asset growth accounted for all of the increased net interest income for the year ended December 31, 1992 over 1991. The earning assets of the newest bank acquisition significantly impacted 1993 and 1992 with increased volume of earning assets carrying lower margins. Net interest income on a tax- equivalent basis as a percent of average earning assets was 4.51%, 4.40% and 4.53% for the years ended December 31, 1993, 1992 and 1991, respectively. Margins in 1993 and 1992 were unfavorably affected by the purchase accounting recognition of interest income on certain investment securities at market yields. Net interest income margins continue to benefit from a favorable mix of earning assets and a favorable mix of funding sources.
Net interest income was favorably affected by repricing of savings deposit and certain transaction account liabilities heretofore considered not to be repriced during the one-year period. Generally, the subsidiary banks maintain a
relatively balanced position between volumes of rate-repricing assets and liabilities to guard against adverse effects to net interest income from possible fluctuations in interest rates. Low levels of nonperforming loans and a greater relative growth in deposits other than time deposits contributed to margins each period.
PROVISION FOR LOAN LOSSES A significant factor in the Company's past and future operating results is the level of the provision for loan losses. Management desires to provide assurance through sufficient provision for loan losses that future earnings will be less susceptible to changing economic cycles. The provision for loan losses amounted to $2.1 million for 1993, a decrease of $0.7 million or 25.0% when compared to $2.8 million in 1992. The decline in the 1993 provision for loan losses was influenced by a significant decline in net charge-offs and a modest decline in nonperforming assets. The provision for loan losses as a percentage of average loans was 0.41% for the year ended December 31, 1993, down from 0.65% and 0.64% for the years ended December 31, 1992 and 1991, respectively. Levels of pro- viding for loan losses reflect, among other things, management's evaluation of potential problem loans, which are currently at lower levels than in much of the past five years.
Net chargeoffs as a percentage of average loans were 0.06% for 1993, a period of unusally low net chargeoffs, down from 0.57% and 0.55% for 1992 and 1991. Net chargeoffs as a percent of average loans were 0.43% for the five-year period ended December 31, 1993. The allowance for loan losses was 1.63% of outstanding loans at December 31, 1993, which approximates the average during the last five years. The December 31, 1993 allowance is 162% compared to 107% at December 31, 1992, of nonperforming assets and is maintained at a level which management considers adequate to absorb estimated potential losses in the loan portfolio, after reviewing the individual loans and in relation to risk elements in the portfolios and giving consideration to the prevailing economy and anticipated changes.
NONINTEREST INCOME Noninterest income amounted to $5.3 million in 1993, a 3.9% increase from $5.1 million in 1992. Excluding securities gains of $40,577 in 1993 and $580,145 in 1992, the increase was 16.8% in 1993. The additional bank accounted for 7.9%, or $353,573 of this increase. A variety of issues contributed to the remaining increase. Excluding the newest bank, service charges on deposit accounts, the largest component of noninterest income, increased 6.4% in 1993 over 1992. During the recent year, some of the subsidiary banks adjusted fee schedules to recapture higher operating costs and to provide more uniform pricing among the affiliated banks.
Gains totaling $40,577 were recognized on $2.5 million of mortgage-backed securities held for sale which were sold during the first quarter of 1993 and $0.4 million of municipal bonds which were called during the year. Gains were recognized on $14.1 million of debt securities sold during 1992 to reduce, to the extent possible, the Company's interest rate sensitivity on assets.
Trust fees for 1993 increased 13.9% from 1992 without the effects of the addi- tional bank. Fee arrangements were altered during the last two years and total assets under management by the trust department have increased to generate better levels of fee income. Trust fees, which are recognized on a cash basis, are usually greater in the fourth quarter than other quarters of the year because of billing cycles. The increase in insurance commissions for 1993 over 1992 is all attributable to the additional bank, as the penetration of this product to consumer loan customers has lessened during the last three years. During 1993, the amount of home refinancing was unusually high and fee income from secondary-market mortgage loan services accounted for most of the remaining other noninterest income increase. The relative improvement in fee income is slightly less than the growth in net interest income. Noninterest income ex- cluding securities gains was 14.0% of total net interest income plus noninterest income for 1993, compared to 14.2% and 14.4%, respectively, for 1992 and 1991.
NONINTEREST EXPENSE The ratio of noninterest expense as a percent of average assets was 2.77% for 1993 and 1992, compared to 2.62% for 1991. Excluding the effects of the addi- tional bank acquisition, noninterest expense for 1993 only increased approxi- mately $689,000, or 4.5%, from 1992. Since internal asset growth has slowed, management continues to focus on controlling the rate of increase of noninterest expense by reconfiguring certain functions to gain more employee productivity and consolidating some operational tasks of the various banks. Based upon the analysis of the operations of the three smaller banking subsidiaries, the Company has consolidated some of their operations to provide consistency in services, to assure quality in service delivery and to gain some employee efficiency.
The ratio of personnel expense has been relatively constant as a percentage of average total assets and was 1.29% for 1993, compared to 1.28% and 1.31%, re- spectively for 1992 and 1991. The increase in occupancy expense for 1993 is totally related to the additional bank, while 1992 increased only 3.1%, exclud- ing the effects of the additional bank. Equipment expense increased 11.3% in 1993 from 1992, following a 7.9% increase in 1992 from 1991 without the effects of Murray. The Company has made investments in equipment as technolgy has advanced and the need to control personnel costs has intensified.
Increased data processing expense is attributable to some greater volume of activity and the outsourcing of a portion of some functions in 1993. Excluding the effects of the Murray acquisition, data processing expense increased 10.7% and 2.4% during the past two years, respectively. The Company's bank subsid- iaries are required to pay deposit insurance assessments to the FDIC, to maintain significant noninterest-bearing balances with the Federal Reserve, and to pay fees to regulatory agencies for periodic examinations by the agencies. Assessments for deposit insurance were $1.5 million, $1.3 million and $0.9 million, respectively, in 1993, 1992 and 1991. Beginning in 1993, the assess- ments were based not only on deposits but also on the risk characteristics of the individual financial institutions. All of the Company's subsidiaries received the lowest deposit assessment rate from the FDIC.
Bankshare taxes imposed by the State of Kentucky have been increasing and are expected to continue to increase in future years. Kentucky has raised the assessment level and is attempting to significantly increase this taxation, which is based upon net income of the subsidiaries. Without the effects of the additional bank, bankshare taxes increased 12.6% in 1993, following a 15.0% increase in 1992 and a 17.4% increase in 1991. Included in other noninterest expense for 1993 was approximately $145,000 of professional fees to date related to a pending merger expected to be completed in the second quarter of 1994 and to be accounted for as a pooling-of-interests.
INCOME TAXES The increase in income tax expense for the year ended December 31, 1993, is pri- marily attributable to higher operating earnings. The effective tax rate is increasing, and was 26.5% for the year ended December 31, 1993, compared to 25.0% for 1992 and 23.5% for 1991. Compared to 1992, a lesser portion of 1993 pretax income was derived from nontaxable sources and nondeductible goodwill amortization was greater in 1993 than in 1992 and 1991. The Company manages the effective tax rate based upon changing tax laws, particularly new alternative minimum tax provisions, the availability and price of nontaxable investment securities and other portfolio considerations.
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, changing the method of accounting for income taxes on a prospective basis. This method of accounting for income taxes accounts for income taxes using a balance sheet approach known as the "liability method" compared to the previous income statement approach known as the "deferred method". The liability method accounts for deferred income taxes by applying statutory rates in effect at the date of the balance sheet to differences between book and tax bases of assets and liabilities.
LIQUIDITY AND INTEREST-RATE SENSITIVITY The Company's objective of liquidity management is to ensure the ability to access funding which enables each bank to efficiently satisfy the cash flow requirements of depositors and borrowers. Asset/Liability management (ALM) involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. The Company's ALM committee monitors funds available from a number of sources to meet its objectives. The primary source of liquidity for the banks, in addition to loan repayments, is their debt securities portfolios. Debt securities classified as held for sale are those that the Company intends to use as part of its asset/liability management and that may be sold prior to maturity in response to changes in interest rates, resultant prepayment risks and other factors. The Company's access to the retail deposit market through individual banks located in five different counties has been a reliable source of funds. Additional funds for liquidity are available by borrowing of Federal funds from correspondent banks, Federal Home Loan Bank borrowings and brokered deposits. Various types of analyses are performed to ensure adequate liquidity, and to evaluate the desirability of the relative interest rate sensitivity of assets and liabilities. In the past, as was typical for most financial institutions, the Company's cash flows provided
by financing activities (primarily through deposit and repurchase agreement generation) generally greatly exceeded cash flows from operations and were used to fund investing activities. During 1993, due to the current strong loan de- mand coupled with the low interest-rate environment, which hinders area deposit growth, financing activities funding was partially derived from increased levels of Federal funds purchased and brokered deposits. Cash flows from operations for 1993 have increased due to greater net income and to increased amortization expense primarily related to the 1992 bank acquisition. Securities held for sale totaling $2.5 million and $14.1 million in 1993 and 1992, respectively, were sold to adjust repricing characteristics as determined to be desirable by the ALM Committee. During 1992, the Company established debt securities with a carrying value of $42.0 million and an aggregate market value of $42.9 million as securities held for sale as part of ongoing asset/liability management stra- tegies. 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. The primary objective of the ALM Committee is to optimize earnings results, while controlling interest rate risks within internal policy constraints. The subsidiary banks and the Company collectively measure their level of earnings exposure to future interest rate movements. Currently, the Company does not employ interest rate swaps, financial futures or options to affect interest rate risks. The Company expects a greater amount of assets will reprice than liabilities in the first six months of 1994. This position is subject to change in response to the dynamics of the Company's balance sheet and general market conditions. Rising interest rates are likely to increase net interest income in a positive gap position (greater amount of repricing assets than liabilities) and falling rates would likely decrease net interest income.
INDUSTRY DEVELOPMENTS In December of 1991, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) was enacted. Extremely broad in scope, it included many significant provisions that affect the Company's operations. The Act established new and expanded reporting and auditing standards, expanded regulatory supervision and established new consumer provisions. Management currently anticipates that while the cost of compliance with FDICIA will add to regulatory costs, it should not have a material impact on the financial condition of the Company.
Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report _______________________________________________________________________________
The Board of Directors and Stockholders Peoples First Corporation
We have audited the accompanying consolidated balance sheets of Peoples First Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples First Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investment securities to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, at December 31, 1993.
/s/ KPMG Peat Marwick
St. Louis, Missouri January 26, 1994
December 31, December 31, CONSOLIDATED BALANCE SHEETS 1993 1992 _______________________________________________________________________________
ASSETS Cash and due from banks $27,272,307 $24,712,567 Federal funds sold 2,100,000 13,750,000 Securities held for sale 42,934,154 41,858,786 Investment securities 182,279,326 211,623,602 Loans 557,231,497 482,132,051 Allowance for loan losses (9,058,060) (7,259,336) ----------- ----------- Loans, net 548,173,437 474,872,715 Excess of cost over net assets 10,907,401 11,737,239 of purchased subsidiaries 12,123,653 12,051,880 Premises and equipment 11,791,236 11,543,490 Other assets ----------- ----------- $837,581,514 $802,150,279 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand deposits $70,719,943 $67,137,457 Interest-bearing transaction accounts 182,225,399 176,238,461 Savings deposits 64,995,943 62,152,111 Time deposits 394,217,169 389,124,956 ----------- ----------- 712,158,454 694,652,985 Repurchase agreements 19,704,809 19,534,280 Federal funds purchased 12,600,000 0 Notes payable 9,589,292 12,116,993 Other liabilities 5,727,543 6,090,931 ----------- ----------- Total liabilities 759,780,098 732,395,189
Stockholders' Equity Common stock 4,812,751 4,774,835 Surplus 27,903,418 27,144,300 Retained earnings 44,917,658 37,835,955 Unrealized appreciation of securities held for sale, net of deferred income tax 167,589 -- ----------- ----------- 77,801,416 69,755,090 ----------- ----------- $837,581,514 $802,150,279 =========== ===========
Fair value of securities held for sale $42,934,000 $41,957,000 Fair value of investment securities 190,214,000 217,747,000 Common shares issued and outstanding 6,160,322 6,111,790
See accompanying notes to consolidated financial statements. 29
Year Ended December 31, CONSOLIDATED STATEMENTS OF INCOME 1993 1992 1991 _______________________________________________________________________________
INTEREST INCOME Interest on Federal funds sold $103,800 $255,259 $201,927 Taxable interest on securities 10,968,716 11,725,047 8,635,296 Nontaxable interest on securities 3,925,215 3,463,436 2,956,988 Interest and fees on loans 44,163,930 40,229,586 35,969,827 ---------- ---------- ---------- 59,161,661 55,673,328 47,764,038 INTEREST EXPENSE Interest on deposits 25,012,386 26,941,881 27,268,339 Interest on repurchase agreements 666,551 906,179 187,509 Other interest expense 1,189,751 612,125 174,743 ---------- ---------- ---------- 26,868,688 28,460,185 27,630,591 ---------- ---------- ---------- Net Interest Income 32,292,973 27,213,143 20,133,447 Provision for Loan Losses 2,107,000 2,772,800 2,074,150 ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 30,185,973 24,440,343 18,059,297
Noninterest Income 5,293,074 5,077,550 3,400,272 Noninterest Expense 22,509,005 19,425,099 13,136,851 ---------- ---------- ---------- Income Before Income Tax Expense 12,970,042 10,092,794 8,322,718 Income Tax Expense 3,436,371 2,523,864 1,956,003 ---------- ---------- ---------- NET INCOME $9,533,671 $7,568,930 $6,366,715 ========== ========== ==========
Net Income per Common Share and Common Share Equivalent $1.49 $1.30 $1.30
Cash Dividend per Common Share 0.40 0.36 0.31
See accompanying notes to consolidated financial statements. 30
See accompanying notes to consolidated financial statements. 31
Year Ended December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS 1993 1992 1991 _______________________________________________________________________________
OPERATING ACTIVITIES Net income $9,533,671 $7,568,930 $6,366,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,955,155 1,516,857 750,143 Net (discount accretion) premium amortization 2,535,996 1,668,379 (122,536) Provision for loan losses 2,107,000 2,772,800 2,074,150 Net (increase) decrease in loans held for sale 737,377 (1,241,477) -- Provision for deferred income taxes (1,219,013) (932,153) (142,103) Other, net 907,270 52,059 (490,013) ---------- ---------- ---------- Net Cash Provided by Operating Activities 16,557,456 11,405,395 8,436,356
INVESTING ACTIVITIES Net decrease in Federal funds sold 11,650,000 10,050,000 3,700,000 Proceeds from sales of securities held for sale 2,536,445 14,129,438 3,174,840 Proceeds from maturities of securities held for sale 2,500,000 1,950,000 -- Proceeds from maturities of investment securities 45,955,797 58,512,934 20,093,769 Principal collected on mortgage-backed securities held for sale 4,619,450 571,630 -- Principal collected on mortgage-backed investment securities 12,697,797 12,221,578 3,296,975 Purchase of securities held for sale (10,928,126) (3,526,726) -- Purchase of investment securities (31,350,251) (81,389,988) (46,473,282) Net increase in loans (76,562,466) (35,927,383) (23,655,718) Purchases of premises and equipment (1,151,481) (858,307) (756,216) Net cash paid for acquisition of subsidiary -- (7,453,592) -- ---------- ---------- ---------- Net Cash Used by Investing Activities (40,032,835) (31,720,416) (40,619,632)
See accompanying notes to consolidated financial statements. 32
CONSOLIDATED STATEMENTS OF CASH FLOWS - Year Ended December 31, CONTINUED 1993 1992 1991 _______________________________________________________________________________
FINANCING ACTIVITIES Net increase in deposits 17,505,469 29,997,777 12,541,639 Net increase (decrease) in repurchase agreements 170,529 (5,355,499) 23,889,779 Net increase in Federal funds purchased 12,600,000 0 0 Proceeds from notes payable borrowings 6,200,000 2,700,000 53,496 Repayments of notes payable (8,727,701) (691,780) (13,646) Proceeds from issuance of common stock 299,352 386,116 142,419 Cash dividends paid (2,012,530) (1,632,551) (1,208,305) ---------- ---------- ---------- Net Cash Provided by Financing Activities 26,035,119 25,404,063 35,405,382 ---------- ---------- ---------- Net Increase in Cash and Cash Equivalents 2,559,740 5,089,042 3,222,106
Cash and Cash Equivalents at Beginning of Year 24,712,567 19,623,525 16,401,419 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $27,272,307 $24,712,567 $19,623,525 ========== ========== ==========
SUPPLEMENTAL DISCLOSURES Cash paid for interest expense $27,195,633 $29,194,190 $27,929,356 Cash paid for income tax 4,826,520 3,131,812 2,383,326
NONCASH INVESTING AND FINANCING TRANSACTIONS Other real estate transferred from loans, net 249,267 13,000 3,280 Dividends reinvested 439,438 347,415 270,660 Notes payable issued in acquisition of subsidiary -- 10,025,000 -- Common stock issued in acquisition of subsidiary -- 18,257,866 --
See accompanying notes to consolidated financial statements. 33
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Peoples First Corporation (Company) through its subsidiaries, Peoples First National Bank and Trust Company, First Liberty Bank, First National Bank of LaCenter, Salem Bank, Inc. and Bank of Murray, provides 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. The more significant policies are summarized below.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
SECURITIES HELD FOR SALE AND INVESTMENT SECURITIES The Company adopted Financial Accounting Standard No. 115 "Accounting for Cer- tain Investments in Debt and Equity Securities" (FAS 115) as of the end of 1993. This new accounting policy expands the use of fair value accounting for secur- ities for which there is not a positive intent and ability to hold to maturity. At acquisition, FAS 115 requires that securities be classified into one of three catergories: trading, held for sale or investment. Trading securities are bought and held principally with the intention of selling them in the near term. The Company has no trading securities. Investment securities are those securi- ties for which the Company has the ability and intent to hold until maturity. All other debt securities are classified as held for sale. There was no effect of this change on 1993 net income.
Securities held for sale are stated at fair value for December 31, 1993 and at the lower of amortized cost or market for December 31, 1992. Fair value is based on market prices quoted in financial publications or other independent sources. Subsequent to adoption of FAS 115, net unrealized gains or losses are excluded from earnings and reported, net of deferred income taxes, as a separate component of shareholders' equity until realized. The adjusted cost of the specific security held for sale that is sold is used to compute any gain or loss upon sale.
Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income on the level-yield method. Gain or loss is recorded when realized on a specific identity basis or when, in the opinion of management, an unrealized loss is other than temporary in nature. Mortgage-backed securities represent a significant portion of the investment security portfolio. Amortization of pre- miums and accretion of discounts on mortgage-backed securities are analyzed in relation to the corresponding prepayment rates, both historical and estimated, using a method which approximates the level-yield method.
Transfers of debt securities between categories are recorded at fair value at the date of transfer. Unrealized gains or losses associated with transfers of debt securities from the investment to the held for sale category are recorded and maintained as a separate component of stockholders' equity. The unrealized gains or losses included as a separate component of stockholders' equity for debt securities transferred to the investment from the held for sale category are maintained and amortized into earnings over the remaining life of the debt securities as an adjustment to yield in a manner consistent with the amortiza- tion or accretion of premiums or discounts on the associated securities.
At the end of the third quarter of 1992, the Company evaluated the conditions under which it might sell any of its debt securities. As a result, management decided that certain types of debt securities might be sold in the future as part of the Company's efforts to manage interest rate risk or in response to changes in interest rates or other economic factors. Based upon this decision, the Company classified these selected securities as held for sale. At December 31, 1992 (prior to adoption of FAS 115), debt securities classified as held for sale were stated at the lower of amortized cost or market.
LOANS RECEIVABLE 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. Consumer installment loans are generally made on a discount basis. The unearned discount attributable to these loans is credited to income using a method which approxi- mates the level yield method. 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. Interest payments received on nonaccrual loans are applied to principal if there is any doubt as to the collectibility of total principal, otherwise these payments are recorded as interest income.
ALLOWANCE FOR LOAN LOSSES The allowance is increased by provisions for loan losses charged to operations and is maintained at an adequate level to absorb estimated credit losses associated 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.
Management's approach provides for general and specific allowances and is based upon current economic conditions, past losses, collection experience, risk characteristics 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.
During May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS 114), which is effective for fiscal years beginning after December 15, 1994. FAS 114 requires that impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company is currently evaluating when and how it will adopt FAS 114, as well as the possible financial impact to the Company.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Esti- mated useful lives on buildings range from ten to thirty years and two to ten years on equipment. Leasehold improvements are amortized over the term of the related leases. Expenditures for major renewals and betterments of premises and equipment are capitalized and those for maintenance and repairs are expensed as incurred.
OTHER REAL ESTATE Real estate acquired through foreclosure or deed in lieu of foreclosure is in- cluded in other assets, and is recorded at the lower of cost or the property's fair value at the time of foreclosure less estimated disposal costs, if any. The excess of cost over fair value of other real estate at the date of acquisition is charged to the allowance for loan losses. Subsequent reductions in carrying value to reflect current fair value and any other period costs are charged to expense as incurred. In-substance foreclosed assets are accounted for the same as foreclosed assets.
INCOME TAXES Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), was issued by the Financial Accounting Standards Board in February 1992, to be effective January 1, 1993 with earlier adoption encouraged. The Company elected to adopt the new standard effective January 1, 1992 on a prospective basis. FAS 109 provides for the recognition of a current tax liability or asset for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carry- forwards. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based upon management's judgement of available evidence, are not expected to be realized.
The deferred method of accounting for income taxes under APB Opinion 11, which applied in 1991 and prior years, requires the recognition of deferred income taxes for income and expense items that are reported in different years for financial reporting purposes and for income tax purposes using the tax rate applicable for the year of the calculation. Under this method, deferred taxes are not adjusted for subsequent changes in tax rates.
The significant components of deferred tax assets and liabilities are principally related to provisions for loan losses, amortization of premiums on debt securities, depreciation and deferred compensation.
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT Net income per common share and common share equivalent is determined by divid- ing net income by the weighted average number of common shares actually out- standing and common stock equivalents pertaining to common stock options. The average number of shares outstanding including common stock equivalents for 1993, 1992 and 1991 were 6,407,528, 5,842,484 and 4,888,060, respectively. The computations of average shares outstanding is based upon the new number of shares outstanding as a result of a two-for-one stock split effected on January 4, 1994. Common stock equivalents have no material dilutive effect.
CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all cash and due from banks to be cash equivalents.
PURCHASE ACCOUNTING In accordance with the purchase method of accounting, the assets and liabilities of purchased institutions are stated at estimated fair values at the date of acquisition less accumulated amortization and depreciation. Intangible assets related to purchased banks are amortized primarily on the straight-line method over a fifteen year period.
RECLASSIFICATIONS Certain amounts in the 1992 and 1991 consolidated financial statements have been reclassified to conform with the 1993 presentation.
2. BUSINESS COMBINATIONS On May 4, 1992, the Company consummated the acquisition of an additional banking organization, Bank of Murray. At acquisition, the bank had total assets of approximately $235.3 million. The purchase price of approximately $42.4 million consisted of 1,217,246 shares of the Company's common stock, $10.0 million of subordinated two-year notes with an interest rate of 7.25% and $14.1 million in cash. The transaction was accounted for using the purchase method of accounting. The results of operations of the acquired entity are included in the consolidated financial statements subsequent to its acquisition date and the excess of the cost over fair value of the net assets acquired, $11.9 million, is being amortized over fifteen years on a straight-line basis. The following table presents unaudited pro forma results of operations for the years ended December 31, 1992 and 1991, assuming the purchase of Bank of Murray had taken place on January 1, 1991:
Pro Forma Statements of Income (unaudited) Year Ended December 31, 1992 1991 _______________________________________________________________________________ (in thousands, except per share data)
Interest income $60,939 $65,198 Interest expense 31,939 40,057 ------ ------ Net interest income 29,000 25,141 Provision for loan losses 3,246 2,534 ------ ------ Net interest income after provision for loan losses 25,754 22,607 Noninterest income 5,501 4,543 Noninterest expense 21,715 19,031 ------ ------ Income before income tax expense 9,540 8,119 Income tax expense 2,412 1,866 ------ ------ Net income $7,128 $6,253 ====== ======
Net income per common share and common share equivalent $1.14 $1.03 _______________________________________________________________________________
This pro forma information is not necessarily indicative of the actual results of operations which would have occurred had the acquisition of Bank of Murray been consummated as of January 1, 1991, nor is it necessarily indicative of future operating results.
On October 16, 1993, the Company entered into a Merger Agreement providing for the acquisition, which is expected to be consummated in the first quarter of 1994, of a significant subsidiary. The Merger Agreement with First Kentucky Bancorp, Inc. and its wholly-owned subsidiary, First Kentucky Federal Savings Bank (First Kentucky), is subject to the approval of First Kentucky Bancorp, Inc.'s shareholders and regulators. The Company will issue 930,000 shares of the Company's stock for all the outstanding stock of First Kentucky Bancorp, Inc.
First Kentucky is a federally chartered savings bank with total assets of approximately $178 million at December 31, 1993 that is well established in western Kentucky with its principal office in Central City, Kentucky. The business combination will be accounted for as a pooling-of-interests. Peoples First Corporation will report the results of operations for 1994 as though First Kentucky had been combined as of the beginning of 1994 and financial statements for prior years will then be restated on a combined basis to furnish comparative information.
3. CASH AND DUE FROM BANKS The Company's bank subsidiaries are required to maintain certain reserve balances in accordance with Federal Reserve Board requirements. The reserve balances maintained in accordance with such requirements as of December 31, 1993 and 1992 were $6,747,000 and $6,321,000, respectively.
4. SECURITIES HELD FOR SALE AND INVESTMENT SECURITIES The amortized cost and fair value of securities held for sale as of December 31, 1993 and 1992 are summarized as follows:
Gross Gross Securities Held For Sale Amortized unrealized unrealized Fair December 31, 1993 cost gains losses value _______________________________________________________________________________
U.S. treasury and agencies $16,885,564 $243,436 $0 $17,129,000 Mortgage-backed securities 25,794,667 94,136 (83,803) 25,805,000 ----------- ---------- ---------- ----------- $42,680,231 $337,572 ($83,803) $42,934,000 =========== ========== ========== ===========
Gross Gross Securities Held For Sale Amortized unrealized unrealized Fair December 31, 1992 cost gains losses value _______________________________________________________________________________
U.S. treasury and agencies $16,318,426 $422,457 ($24,883) $16,716,000 Mortgage-backed securities 25,540,360 73,921 (373,281) 25,241,000 ----------- ---------- ---------- ----------- $41,858,786 $496,378 ($398,164) $41,957,000 =========== ========== ========== ===========
The amortized cost and fair value of investment securities as of December 31, 1993 and 1992 are summarized as follows:
Gross Gross Investment Securities Amortized unrealized unrealized Fair December 31, 1993 cost gains losses value _______________________________________________________________________________
U.S. treasury and agencies $74,929,337 $1,907,534 ($871) $76,836,000 Mortgage-backed securities 35,383,427 592,592 (63,019) 35,913,000 State and political subdivisions 63,329,472 5,297,432 (17,904) 68,609,000 Other 8,637,090 311,910 (93,000) 8,856,000 ----------- ---------- ---------- ----------- $182,279,326 $8,109,468 ($174,794)$190,214,000 =========== ========== ========== ===========
Gross Gross Investment Securities Amortized unrealized unrealized Fair December 31, 1992 cost gains losses value _______________________________________________________________________________
U.S. treasury and agencies $114,695,982 $2,258,817 ($67,799)$116,887,000 Mortgage-backed securities 31,488,814 621,171 (58,985) 32,051,000 State and political subdivisions 58,162,656 3,221,233 (30,889) 61,353,000 Other 7,276,150 180,340 (490) 7,456,000 ----------- ---------- ---------- ----------- $211,623,602 $6,281,561 ($158,163)$217,747,000 =========== ========== ========== ===========
Proceeds from sales of debt securities during 1993, 1992 and 1991 were $2,536,445, $14,129,438 and $3,174,840, respectively. Gross gains of $40,577, $580,145 and 28,356 were realized on those sales during 1993, 1992 and 1991, respectively, and gross losses of $3,158 were realized on those sales during 1991.
The amortized cost, estimated fair value and the weighted average yield of securities held for sale and investment securities at December 31, 1993, by contractual maturity, are shown below. Actual maturities will differ from the depicted maturities because of the borrowers' right to call or prepay obliga- tions with or without prepayment penalties. Contractual maturities are not meaningful for mortgage-backed securities, which are particularly exposed to prepayments in the current interest rate environment. Management evaluates, on an on-going basis, the potential maturities for asset/liability purposes. Yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
Securities Held for Sale Portfolio Weighted Maturity Distribution Amortized Fair average December 31, 1993 cost value yield _______________________________________________________________________________ (in thousands)
U.S. treasury and agencies 1 year or less $9,020 $9,096 6.58% Over 1 through 5 years 7,865 8,033 5.50 Over 5 through 10 years -- -- -- Over 10 years -- -- --
Mortgage-backed securities 25,795 25,805 5.40 ------- ------- $42,680 $42,934 5.67% ======= =======
Investment Securities Portfolio Weighted Maturity Distribution Amortized Fair average December 31, 1993 cost value yield _______________________________________________________________________________ (in thousands)
U.S. treasury and agencies 1 year or less $30,472 $30,858 5.95% Over 1 through 5 years 44,457 45,977 6.20 Over 5 through 10 years -- -- -- Over 10 years -- -- --
Mortgage-backed securities 35,383 35,913 6.02
State and political sudivisions 1 year or less 5,529 5,592 5.43 Over 1 through 5 years 17,985 19,335 6.44 Over 5 through 10 years 19,825 22,158 6.63 Over 10 years 19,991 21,525 6.64
Other 1 year or less 1,000 1,030 8.87 Over 1 through 5 years 6,003 6,285 6.92 Over 5 through 10 years 38 35 7.50 Over 10 years 1,596 1,506 4.74 ------- ------- $182,279 $190,214 6.32% ======= =======
At December 31, 1993 and 1992, securities with carrying values of approximately $105,315,000 and $94,794,000, respectively, were pledged to secure repurchase agreements, public and trust deposits and for other purposes as required by law.
5. LOANS The Company's lending activities are concentrated primarily in the contiguous interstate area of western Kentucky, southern Illinois, northwestern Tennessee and southeastern Missouri. The loan portfolio is well diversified and consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 1993 and 1992, total loans to any group of customers engaged in similar activities and having similar economic character- istics, as defined by standard industrial classifications, did not exceed 10% of total loans.
Major classification of loans are as follows:
December 31, 1993 1992 _______________________________________________________________________________
Commercial: Manufacturing $8,294,696 $8,671,362 Retail 43,981,307 40,511,088 Wholesale 21,547,164 17,305,261 Health services 14,733,778 16,835,592 Financial institutions 1,220,000 2,079,297 Agricultural 21,169,484 20,723,583 Transportation, moving and warehousing 12,939,037 8,106,645 Contractors 7,566,031 9,045,523 Hotels and motels 17,979,158 12,452,018 Shopping centers and apartments 31,667,926 26,015,439 Recreational 2,480,143 4,633,586 Real estate development 1,216,100 1,192,960 Other 41,994,568 37,041,494 ----------- ----------- 226,789,392 204,613,848
One-to-four family residential mortgage 183,665,699 154,803,505 Manufactured housing loans 34,963,466 28,249,158 Installment loans 110,417,163 96,174,010 Consumer revolving credit 3,921,514 3,321,765 Other 5,684,815 3,074,836 ----------- ----------- 565,442,049 490,237,122 Unearned income (8,210,552) (8,105,071) ----------- ----------- $557,231,497 $482,132,051 =========== ===========
The Company evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, income producing commercial properties, real estate mortgages and other property owned by the borrowers.
Nonaccrual and renegotiated loans totaled $3,615,512 and $4,650,673 at December 31, 1993 and 1992, respectively.
Certain officers and directors of Peoples First Corporation and its subsidiaries and certain corporations and individuals related to them incurred indebtedness in the form of loans as customers. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectibility. The activity of these loans is summarized below:
6. PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
Premises and Equipment December 31, 1993 1992 _______________________________________________________________________________
Land $1,387,667 $1,387,667 Buildings 12,562,745 12,543,912 Equipment 7,663,100 6,907,432 Leasehold improvements 217,538 217,538 Construction in progress 181,675 -- ---------- ---------- 22,012,725 21,056,549 Accumulated depreciation (9,889,072) (9,004,669) ---------- ---------- $12,123,653 $12,051,880 ========== ==========
The amount of depreciation and amortization related to premises and equipment that was charged to operating expenses in 1993, 1992 and 1991 was $1,051,628, $870,768 and $656,796 respectively.
The Company leases certain premises and equipment under agreements which expire at various dates. Additionally, the Company leases certain properties it owns. The following is a schedule of future minimum payments required under operating leases and future minimum rental income from leased properties that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1993.
Future Operating Leases Year Ending December 31, Payments Income _______________________________________________________________________________
1994 $51,500 $3,750 1995 36,900 -- 1996 24,000 -- 1997 24,000 -- 1998 22,500 -- Later years 55,000 --
In addition to the amounts set forth above, certain of the operating leases require payments by the Company for taxes, insurance, and maintenance. Rental expenses for operating leases (including equipment rentals based upon usage) amounted to $51,051 in 1993, $71,769 in 1992 and $79,534 in 1991. Rental income for all operating leases amounted to $27,839 in 1993, $26,956 in 1992 and $31,840 in 1991.
7. NOTES PAYABLE The Company issued unsecured, subordinated, short-term notes on May 4, 1992 in connection with an acquisition of a subsidiary bank. The balance outstanding at December 31, 1993 and 1992 was $5,012,500 and $10,025,000, respectively. Interest is payable quarterly at the annual rate of 7.25%. The remaining prin- cipal amount is due and payable on May 4, 1994.
In May 1993, the Company obtained a $10,200,000 loan commitment from a regional bank, which was used to retire short-term notes and other bank debt. The balance outstanding of bank debt at December 31, 1993 and 1992 was $4,576,792 and $2,076,792, respectively, and is secured by the pledge of the outstanding stock of a subsidiary bank (Bank of Murray). The note agreement contains various financial covenants pertaining to levels of net worth and indebtedness. The Company was in compliance with all such covenants at December 31, 1993. Interest is payable quarterly at the lender's prime rate which can be adjusted daily (6.00% at December 31, 1993 and December 31, 1992). The note provides for quarterly principal payments of $261,604 and a final maturity in May 2004.
At December 31, 1993, the Company's lead bank had available up to $10.5 million from the Federal Home Loan Bank (FHLB) of Cincinnati which could be used for short-term funding and other requirements. Certain single-family mortgage loans totaling approximately $86.4 million were pledged to secure the line of credit. The arrangement is subject to periodic review and cancellation by either party. There was no outstanding indebtedness to the FHLB at December 31, 1993 and 1992.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These off-balance-sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and standby letters of credit are subject to the same underwriting and collateralizing standards as on-balance-sheet items.
Contractual commitments to extend credit and standby letters of credit at December 31, 1993 and 1992 are summarized as follows:
Financial Instruments with Off-Balance-Sheet Risk December 31, 1993 1992 _______________________________________________________________________________ (in thousands)
Contractual commitments to extend credit $76,326 $74,263 Standby letters of credit 3,231 2,847
9. EMPLOYEE BENEFITS The Company maintains a noncontributory Employee Stock Ownership Plan (ESOP) and an employer matching 401(k) Plan which was made available to employees in 1991. Both plans cover substantially all of the Company's employees.
Employer contributions to the ESOP are determined annually by the Company's board of directors and were $170,000, $145,000 and $117,800 for the years ended 1993, 1992 and 1991, respectively. The ESOP's investments include 210,470 and 205,238 shares of the Company's common stock at December 31, 1993 and 1992, respectively.
During November 1993, the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" (SOP 93-6), which is effective for for fiscal years beginning after December 15, 1993. SOP 93-6 replaces existing accounting guidance and will significantly change the accounting for companies that maintain a leveraged employee stock ownership plan (ESOP). The current ESOP is not leveraged. Management has not yet evaluated the potential impact of SOP 93-6 on the Company's financial condition or results of operations should a leveraged ESOP be implemented or otherwise acquired.
Under the 401(k) Plan, participants may voluntarily contribute a percentage of their salary through payroll deductions. The Company is currently committed to make contributions to the 401(k) Plan annually in an amount equal to 100% of the first 3% contribution of each participant's base salary. For the years ended December 31, 1993, 1992 and 1991, the Company's required matching contribution amounted to $184,472, $148,665 and $113,249, respectively. Employees have four investment options in which their contributions may be invested.
In accordance with the terms of the acquisition, as described in Note 2., Bank of Murray's defined benefit plan was terminated and their employees became eli- gible to participate in the Company's ESOP and 401(k) plans during 1992. The fair value of Bank of Murray's defined benefit plan assets, which were distri- buted to plan participants in 1993, exceeded the actuarial present value of all accrued benefits. The plan termination had no financial effect on the Company.
Post retirement benefits other than pensions are not provided for the Company's employees. Eligible retired employees may for a period of time maintain certain health care benefits through policies of the Company at the employee's expense. There was no cost for employee benefits for retired employees in 1993, 1992 and 1991.
10. CAPITAL STOCK On December 15, 1993, the Company's Board of Directors announced a common stock split to be effected on January 4, 1994 by the issuance of shares equal to 100% of the previously outstanding shares. All shares outstanding and per share amounts have been adjusted to reflect the two-for-one stock split.
The Company has ten million authorized shares of no par, $0.7812 stated value common stock. At December 31, 1993 and 1992, 820,322 shares and 854,234 shares, respectively, of an original authorization of of 1,040,000 shares were reserved for issuance under the Peoples First Corporation Share Owner Dividend Reinvest- vestment and Stock Purchase Plan. In addition, at December 31, 1993 and 1992, 31,820 shares and 114,420 shares, respectively, of an original authorization of 600,000 shares were reserved for issuance under the Peoples First Corporation 1986 Stock Option Plan.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Plan provides for sale from shares reserved of unissued authorized shares of the Company's common stock, at market value, to existing shareholders. All shareholders may purchase stock with optional payments up to $500 but not less than $100 per dividend payment cycle. Participating shareholders owning a minimum of 500 common shares may reinvest all or part of cash dividends. At December 31, 1993, a total of 219,678 shares have been issued pursuant to the plan, of which 33,912 shares were issued during 1993.
STOCK OPTION PLAN The Plan 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 Plan may be either unissued authorized shares or shares reacquired by the Company. Options granted under the plan 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. Of the 446,960 shares under option outstanding at December 31, 1993, a total of 202,600 shares were currently exercisable, compared to a total of 156,152 shares exercisable at December 31, 1992.
11. DIVIDEND LIMITATIONS Subsidiary bank dividends are the principal source of funds for payment of dividends by the Company to its shareholders. By regulation, national banks and banks chartered by the State of Kentucky are prohibited from paying dividends in excess of the current year's retained income plus retained income from the two preceding years unless prior Federal or state regulatory approval is obtained. At December 31, 1993, approximately $13.8 million in retained earnings of Peoples First Corporation's subsidiary banks were available for the payment of dividends to the Company without regulatory approval or without reducing the capital of the respective subsidiary banks below present minimum regulatory standards.
12. INCOME TAXES The current and deferred portions of income tax expense were as follows:
Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Current taxes $4,655,384 $3,456,017 $2,098,106 Deferred taxes (1,219,013) (932,153) (142,103) --------- --------- --------- Income tax expense $3,436,371 $2,523,864 $1,956,003 ========= ========= =========
As discussed in Note 1, the Company adopted FAS 109 as of January 1, 1992, changing the method of computing deferred taxes on a prospective basis. No cumulative adjustment was required for the adoption of FAS 109.
The Company and its subsidiaries file a consolidated Federal income tax return. Deferred taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each were as follows:
Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Provision for loan losses ($892,921) ($240,264) ($148,469) Amortization of security premiums (398,985) (431,373) 0 Accretion of security discounts (8,144) (67,330) (3,415) Interest income on nonaccrual loans 98,210 0 0 Deferred compensation (53,538) (31,493) (38,528) Depreciation 3,082 (13,658) 4,288 Other real estate owned (3,282) (104,067) 0 Other, net 36,565 (43,968) 44,021 --------- ------- ------- Deferred income taxes ($1,219,013) ($932,153) ($142,103) ========= ======= =======
The following is a reconciliation between the amount of income tax expense and the amount of tax computed by applying the statutory Federal income tax rates:
Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Tax computed at statutory rates $4,439,515 $3,431,550 $2,829,724 Increase (decrease) in taxes resulting from: Tax-exempt income (1,369,680) (1,154,395) (898,693) Goodwill amortization 290,463 192,046 11,811 Other, net 76,073 54,663 13,161 --------- --------- --------- Income tax expense $3,436,371 $2,523,864 $1,956,003 ========= ========= =========
Enacted in September, 1993, the Revenue Reconciliation Act of 1993 was a change in the tax laws that raised the Company's top income tax rate. Adjustment to the deferred tax asset required by this rate change was insignificant. Not all temporary differences are accounted for through income tax expense on the state- ments of income. The tax effects of temporary differences, that give rise to significant elements of the deferred tax assets and deferred tax liabilities are as follows:
December 31, 1993 1992 _______________________________________________________________________________
Deferred tax assets: Allowance for loan losses ($2,773,512) ($1,880,591) Deferred compensation (318,161) (264,623) Other real estate owned (107,349) (104,067) Other (139,082) (158,374) --------- --------- (3,338,103) (2,407,655) Deferred tax liabilities: Premiums on securities 195,669 594,654 Discounts on securities 24,963 32,210 Unrealized security appreciation 88,873 0 Accrued interest income 98,210 0 Premises and equipment 855,968 852,886 Other 25,420 5,905 --------- --------- 1,289,103 1,485,655 --------- --------- Net deferred tax assets ($2,049,000) ($922,000) ========= =========
Deferred tax assets have not been reduced by a valuation allowance since based on the weight of available evidence, management believes it is more likely than not that all of the deferred tax assets will be realized.
13. SUPPLEMENTAL INCOME STATEMENT INFORMATION Details of noninterest income and noninterest expense are as follows:
Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Noninterest Income Service charges on deposits $2,810,026 $2,439,575 $1,917,332 Net securities gains 40,577 580,145 25,198 Trust department fees 1,185,786 1,078,008 762,375 Insurance commissions 256,443 232,121 322,205 Other income 1,000,242 747,701 373,162 --------- --------- --------- $5,293,074 $5,077,550 $3,400,272 ========= ========= =========
Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Noninterest Expense Salaries $8,816,589 $7,409,170 $5,504,178 Employee benefits 1,681,959 1,573,758 1,058,866 Occupancy expense 1,181,915 1,094,674 852,631 Equipment expense 1,152,254 935,011 697,187 FDIC insurance expense 1,541,230 1,346,837 926,772 Data processing expense 1,436,490 1,225,537 967,515 Bankshare taxes 916,751 727,183 493,772 Goodwill amortization 829,894 564,842 34,738 Other expense 4,951,923 4,548,087 2,601,192 ---------- ---------- ---------- $22,509,005 $19,425,099 $13,136,851 ========== ========== ==========
14. PARENT COMPANY FINANCIAL INFORMATION Following are condensed balance sheets of Peoples First Corporation (parent company only) as of December 31, 1993 and 1992, and the related condensed statements of income and cash flows for the years ended 1993, 1992 and 1991:
Condensed Balance Sheets December 31, 1993 1992 __________________________________________________________________
Assets Cash in subsidiary bank $956,366 $534,635 Investment in subsidiaries 85,991,518 80,954,475 Cost in excess of net assets acquired 201,934 224,863 Other assets 558,068 495,147 ---------- ---------- $87,707,886 $82,209,120 ========== ========== Liabilities and Stockholders' Equity Liabilities Notes payable $9,589,292 $12,101,792 Other liabilities 317,178 352,238 ---------- ---------- Total liabilities 9,906,470 12,454,030
Stockholders' equity Common stock 4,812,751 4,774,835 Surplus 27,903,418 27,144,300 Retained earnings 44,917,658 37,835,955 Unrealized appreciation of securities held for sale, net of deferred income tax 167,589 -- ---------- ---------- 77,801,416 69,755,090 ---------- ---------- $87,707,886 $82,209,120 ========== ==========
Common shares issued and outstanding 6,160,322 6,111,790
Condensed Statements of Income Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Income Dividends from subsidiaries $5,753,386 $3,520,000 $2,191,279 Other income 6,849 83,964 82,949 --------- --------- --------- 5,760,235 3,603,964 2,274,228 Expense Salaries and employee benefits 0 127,442 134,148 Interest expense 745,359 577,600 4,659 Legal and accounting fees 334,949 139,623 159,185 Other expense 449,847 595,913 218,810 --------- --------- --------- 1,530,155 1,440,578 516,802 --------- --------- --------- Income before income taxes and equity in undistributed income from subsidiaries 4,230,080 2,163,386 1,757,426 Income tax benefit 434,237 428,510 133,565 Income before equity in --------- --------- --------- undistributed income of subsidiaries 4,664,317 2,591,896 1,890,991 Equity in undistributed income of subsidiaries 4,869,354 4,977,034 4,475,724 --------- --------- --------- Net Income $9,533,671 $7,568,930 $6,366,715 ========= ========= =========
Condensed Statement of Cash Flows Year Ended December 31, 1993 1992 1991 _______________________________________________________________________________
Operating Activities Net income $9,533,671 $7,568,930 $6,366,715 Adjustments to reconcile income to net cash provided by operating activities Equity in undistributed income of subsidiaries (4,869,354) (4,977,034) (4,475,724) Amortization and other, net (16,908) (149,777) 228,905 Net cash provided by --------- --------- --------- operating activities 4,647,409 2,442,119 2,119,896
Investing Activities Cash paid for acquisition of subsidiary, net of dividend received -- (3,914,229) -- --------- --------- --------- Net cash used by investing activities -- (3,914,229) --
Financing Activities Proceeds from notes payable 6,200,000 2,700,000 -- Repayments of notes payable (8,712,500) (623,208) -- Issuance of common stock 299,352 386,116 142,419 Cash dividends paid (2,012,530) (1,632,551) (1,208,305) Net cash provided (used) --------- --------- --------- by financing activities (4,225,678) 830,357 (1,065,886)
Net Increase (Decrease) in Cash 421,731 (641,753) 1,054,010 and Cash Equivalents Cash and Cash Equivalents at Beginning of Year 534,635 1,176,388 122,378 --------- --------- --------- Cash and Cash Equivalents at End of Year $956,366 $534,635 $1,176,388 ========= ========= =========
Supplemental Disclosures Cash paid for interest expense $716,428 $550,643 $0 Cash received for income taxes (364,611) (338,418) (351,007)
Noncash Investing and Financing Activities Dividends reinvested 439,438 347,415 270,660 Notes payable issued in acquisition of subsidiary -- 10,025,000 -- Common stock issued in acquisition of subsidiary -- 18,257,866 --
15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In December, 1991, Financial Accounting Standard (FAS) No. 107, "Disclosures about Fair Value of Financial Instruments" was issued. This standard requires that the Company disclose the fair value of financial instruments for both on and off-balance sheet assets and liabilities for which it is practicable to estimate that value. Where readily available, quoted market prices were util- ized by the Company. If quoted market prices were not available, fair values were based on estimates using present value and other valuation techniques. These techniques were significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The calculated fair value estimates, therefore, cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair value for financial instruments.
CASH, DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, FEDERAL FUNDS SOLD, FEDERAL FUNDS PURCHASED AND ACCRUED INTEREST PAYABLE The carrying amount reported for cash, due from banks, accrued interest receiv- able, Federal funds sold, Federal funds purchased and accrued interest payable approximates the fair value for those assets and liabilities.
DEBT SECURITIES For both securities held for sale and investment, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not avialable, fair value is estimated using quoted prices for similar securities.
LOANS RECEIVABLE Loan balances were assigned fair values based on a discounted cash flow analysis. The discount rate was based on the treasury yield curve, with rate adjustments for credit risk, liquidity, sevicing costs and the prepayment uncertainty.
DEPOSIT LIABILITIES AND REPURCHASE AGREEMENTS The fair value for demand deposits, any interest bearing deposit with no fixed maturity date or short-term repurchase agreement liabilities was considered to be equal to the amount payable on demand or maturity date at the reporting date. Time deposits and repurchase agreement liabilities other than short-term, were assigned fair values based on a discounted cash flow analysis using discount rates which approximate interest rates currently being offered on liabilities with comparable maturities.
NOTES PAYABLE Long-term debt was fair valued using discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements.
UNRECOGNIZED FINANCIAL INSTRUMENTS No fair value of loan commitments is presented since the Company does not generally collect fees for loan commitments. The fair value of guarantees and letters of credit is based on equivalent fees that would be charged for similar agreements and is less than $10,000 for 1993 and 1992.
The book values and estimated fair values for financial instruments as of December 31, 1993 and 1992 are reflected below.
Financial Instruments December 31, 1993 Book value Fair value _______________________________________________________________________________ (in thousands)
Financial Assets Cash and due from banks $27,272 $27,272 Federal funds sold 2,100 2,100 Securities held for sale 42,934 42,934 Investment securities 182,279 190,214 Loans, net 548,173 558,309 Accrued interest receivable 6,526 6,526
Financial Liabilities Deposits 712,158 716,846 Repurchase agreements 19,705 19,705 Federal funds purchased 12,600 12,600 Notes payable 9,589 9,613 Accrued interest payable 3,447 3,447
Financial Instruments December 31, 1992 Book value Fair value _______________________________________________________________________________ (in thousands)
Financial Assets Cash and due from banks $24,713 $24,713 Federal funds sold 13,750 13,750 Securities held for sale 41,859 41,957 Investment securities 211,624 217,747 Loans, net 474,873 482,056 Accrued interest receivable 7,309 7,309
Financial Liabilities Deposits 694,653 700,530 Repurchase agreements 19,534 19,534 Notes payable 12,117 12,170 Accrued interest payable 3,833 3,833
IMPACT OF INFLATION AND CHANGING PRICES Inflation has a minor effect on banking concerns since most of the assets and liabilities are monetary in nature. Monetary assets are those which can be readily converted into a fixed number of dollars. Management believes that the effect of inflation on nonmonetary assets such as bank premises and equipment is not material to the Company as a whole.
QUARTERLY FINANCIAL INFORMATION (unaudited) (in thousands, except per share data)
First Second Third Fourth 1993 quarter quarter quarter quarter _______________________________________________________________________________
Net interest income $7,583 $8,109 $8,443 $8,158 Provision for loan losses 636 621 488 362 Net income 2,149 2,401 2,506 2,478 Net income per share $0.34 $0.38 $0.39 $0.38 Cash dividend per share 0.095 0.095 0.105 0.105 Return on average equity 12.37% 13.32% 13.37% 12.85% Net interest margin 4.42 4.58 4.60 4.42 Net charge-offs / loans 0.05 0.00 0.11 0.10 Bookvalue per share $11.68 $11.98 $12.29 $12.63 Common stock trading range End of period 16.000 16.625 20.000 25.500 High 16.500 16.875 20.000 25.500 Low 16.000 16.000 16.625 19.250
QUARTERLY FINANCIAL INFORMATION (unaudited) (in thousands, except per share data)
First Second Third Fourth 1992 quarter quarter quarter quarter _______________________________________________________________________________
Net interest income $5,460 $6,655 $7,406 $7,692 Provision for loan losses 579 820 624 750 Net income 1,577 1,725 2,345 1,922 Net income per share $0.32 $0.29 $0.38 $0.31 Cash dividend per share 0.085 0.085 0.095 0.095 Return on average equity 13.90% 12.33% 13.93% 11.11% Net interest margin 4.68 4.34 4.28 4.41 Net charge-offs / loans 0.56 1.24 0.32 0.25 Bookvalue per share $9.58 $10.88 $11.17 $11.41 Common stock trading range End of period 15.125 17.250 16.125 16.250 High 15.125 17.375 17.250 16.500 Low 11.875 15.375 15.750 15.625
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - None
PART III
Item 10.



Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information with respect to all directors and all persons nominated to become directors of the registrant appearing in the table and footnotes on pages 3 through 6 and the first narrative paragraph on page 8 of Peoples First Corporation's definitive proxy statement, filed with the Securities and Exchange Commission on March 10, 1994, is incorporated herein by reference.
The following table provides information as of December 31, 1993, with respect to the executive officers of the registrant:
Shares of common stock Executive Officers Officer beneficially Name and age Principal positions since owned _______________________________________________________________________________
Aubrey W. Lippert, Chairman of the Board, 1983 159,642(1) age 53 President and Chief Executive of the registrant; Chairman of the Board and Chief Executive Officer, Peoples Bank
Steve Kight, Vice President of the regis- 1983 88,894(2) age 42 trant; Director of Peoples Bank; formerly President and Chief Operating Officer of Peoples Bank
Allan B. Kleet, Chief Financial Officer and 1986 49,310(3) age 45 Treasurer of the registrant
George Shaw, Director, President and Chief 1993 200(4) age 48 Operating Officer of Peoples Bank; formerly President and Chief Executive Officer of Bowling Green Bank & Trust Company (1982-05/93)
Charles S. Foster, President and Chief Executive 1993 5,392(5) age 42 Officer of Bank of Murray; formerly Vice President and Trust Officer, Bank of Murray (1985-1992)
(1) Represents 2.5% of the class of stock. Includes 84,900 shares subject to currently exercisable stock options and 19,120 shares held in Mr. Lippert's ESOP account for which he has voting but no dispositive power.
(2) Represents 1.4% of the class of stock. Includes 15,248 shares held jointly by Mr. Kight and his wife, 68,000 shares subject to currently exercisable stock options and 5,646 shares held in Mr. Kight's ESOP account for which he has voting but no dispositive power.
(3) Represents less than 1.0% of the class of stock. Includes 40,840 shares subject to currently exercisable stock options and 2,480 shares held in Mr. Kleet's ESOP account for which he has voting but no dispositive power.
(4) Represents less than 1.0% of the class of stock.
(5) Represents less than 1.0% of the class of stock. Includes 1,200 shares subject to currently exercisable stock options and 68 shares held in Mr. Foster's ESOP account for which he has voting but no dispositive power.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The information concerning compensation appearing on pages 8 through 12 of Peoples First Corporation's definitive proxy statement, filed with the Securities and Exchange Commission on March XXX, 1994, is incorporated herein by reference.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to any person who is known to the registrant to be the beneficial owner of more than five percent of any class of the registrant's voting securities appearing in the tables and footnotes on page 2 and pages 3 through 6 of Peoples First Corporation's definitive proxy statement, filed with the Securities and Exchange Commission on March XXX, 1994, is incorporated herein by reference.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the second narrative paragraph on page 8 of Peoples First Corporation's definitive proxy statement, filed with the Securities and Exchange Commission on March XXX, 1994, is incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - Incorporated herein by reference, and listed in Item 8 hereof.
(2) Financial Statement Schedules - None
(3) List of Exhibits Filed with original:
(3.1) Amended and Restated Articles of Incorporation of Peoples First Corporation are incorporated herein by reference to Exhibit 3.1 to the registrant's Form 10-K for the year ended December 31, 1992.
(3.2) Bylaws and Amendments of Peoples First Corporation are incorporated herein by reference to Exhibit 3(b) to the Registrant's Form 10-K for the year ended December 31, 1992.
(4) May, 1992 indenture, from Peoples First Corporation to The Paducah Bank & Trust Company, relating to the 7.25% Subord- inated Short-Term Notes due 1994, is incorporated herein by reference to Exhibit 4.1 of Form S-4, registration No. 33-44235 as filed with the Securities and Exchange Commission on January 8, 1992.
(10.1)Peoples First Corporation 1986 Stock Option Plan is incorporated herein by reference to Exhibit 28 to Registration No. 33-28304 filed with the Securities and Exchange Commission on April 24, 1989.
(10.2)Employment agreement between Salem Bank, Inc. and Neal H. Ramage is herein incorporated by reference to Exhibit 10.1 of Form S-4, registration #33-29061 as filed with the Securities and Exchange Commission on June 1, 1989.
(10.3)Consulting agreement between Bank of Murray and Mr. Joe Dick is herein incorporated by reference to Exhibit 10.1 of Form S-4, registration #33-44235 as filed with the Securities and Exchange Commission on January 8, 1992.
(13) Registrant's Annual Report to Shareholders for the year ended December 31, 1993.
(21) Subsidiaries of Registrant.
(22) Undertakings.
(23) Consent of KPMG Peat Marwick, independent public accountants.
(b) Reports on Form 8-K
Registrant did not file any current reports on Form 8-K during the last quarter of the period covered by this report.
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
Date: 03/22/94 /s/ Aubrey W. Lippert Aubrey W. Lippert President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the dated indicated.
Signature Title Date _____________________ ______________________ ________
/s/ Aubrey W. Lippert President and Chairman 03/22/94 Aubrey W. Lippert of the Board
/s/ Allan B. Kleet Chief Financial Officer 03/22/94 Allan B. Kleet
/s/ William R. Dibert Director 03/22/94 William R. Dibert
/s/ Richard E. Fairhurst, Jr. Director 03/22/94 Richard E. Fairhurst, Jr.
/s/ Jerry L. Page Director 03/22/94 Jerry L. Page
Signature Title Date _____________________ ______________________ ________
/s/ Rufus E. Pugh Director 03/22/94 Rufus E. Pugh
/s/ Mary Warren Sanders Director 03/22/94 Mary Warren Sanders
/s/ Victor F. Speck, Jr. Director 03/22/94 Victor F. Speck, Jr.
INDEX TO EXHIBITS Page _______________________________________________________________________________
(21) Subsidiaries of Registrant 64
(22) Undertakings 65
(23) Consent of KPMG Peat Marwick, independent public accountants 67