-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VGlCQU4X4/WH6bM3Hk1mt/geIgUQfaAn1KOuqT1u/w75XgdnaZXUy7eMWGqiuINM GSPp0Qj9ghAsQ0Hvz693IA== 0000718077-98-000004.txt : 19980313 0000718077-98-000004.hdr.sgml : 19980313 ACCESSION NUMBER: 0000718077-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES FIRST CORP CENTRAL INDEX KEY: 0000718077 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 611023747 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16839 FILM NUMBER: 98564540 BUSINESS ADDRESS: STREET 1: 100 SOUTH FOURTH ST CITY: PADUCAH STATE: KY ZIP: 42002-2200 BUSINESS PHONE: 5024411200 MAIL ADDRESS: STREET 1: P O BOX 2200 CITY: PADUCAH STATE: KY ZIP: 42002-2200 10-K 1 _______________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, For the Fiscal Year Ended December 31, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number Number 0-16839 PEOPLES FIRST CORPORATION (Exact name of registrant as specified in its charter) Kentucky 61-1023747 (State or other jurisdiction of (I R S Employer incorporation or organization) Identification No.) 100 South Fourth Street Paducah, Kentucky 42002-2200 (Address of principal exective offices) (Zip Code) Registrant's telephone number, including area code: (502) 441-1200 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 16, 1998: Common stock, no par value - $313,847,000. The number of shares outstanding of the Registrant's only class of stock as of February 16, 1998: Common stock, no par value - 10,024,311 shares outstanding. Documents Incorporated by Reference - None _____________________________________________________________________________1 INDEX Page _______________________________________________________________________________ PART I. Item 1. Business 3 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Securities Holders 15 PART II. Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 16 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62 PART III. Item 10. Directors and Executive Officers of the Registrant 63 Item 11. Executive Compensation 67 Item 12. Security Ownership of Certain Beneficial Owners and Management 70 Item 13. Certain Relationships and Related Transactions 71 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 71 Signatures 73 2 PART I Item 1. Business Peoples First Corporation (the "Company") is a multi-bank and unitary savings and loan holding company registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board") pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. Its primary business is banking. In recent years, the Company has been one of the ten largest independent financial institutions headquartered in Kentucky. The Company conducts a complete range of commercial and personal banking activities through two wholly owned subsidiaries: The Peoples First National Bank & Trust Company of Paducah ("Peoples Bank") in the Kentucky counties of McCracken, Marshall, Ballard, Livingston, Calloway and Graves Counties, and in the Tennessee county of Montgomery; and, Peoples First, F.S.B. of Central City (Saving Bank) in Muhlenberg, Ohio, McLean and Butler Counties. As a part of the Company's banking services, it subsidiaries are engaged in mortgage orgination and servicing, investment management and trust services, the issuance of credit and debit cards, the sale of loans, full-service brokerage services and the sale of bank-eligible insurance products. Its primary market is western Kentucky and northwestern Tennessee and 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 Bank in 1983. The Company acquired (and subsequently merged into Peoples Bank during 1994) First Liberty Bank in 1985, First National Bank of LaCenter in 1987, Salem Bank, Inc. in 1989, Bank of Murray in 1992 and Liberty Bank and Trust in 1994. The Savings Bank was acquired in 1994. During 1996 the Company acquired all of the outstanding shares of Guaranty FSB (and subsequently merged into Peoples Bank during 1997) in exchange for 315,002 shares of Peoples First Corporation common stock. Guaranty FSB's had three locations immediately southeast of the market area served by Peoples Bank. Dividends from Peoples Bank and the Savings Bank (collectively the "banks") are the principal source of cash flow for the Company. Legal limitations are imposed on the amount of dividends that may be paid by the 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 Western Kentucky region through its main office in Paducah, Kentucky and twelve full service branch offices, three limited service branch offices and one business operations office. 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 $1,030.7 million at December 31, 1997 and is the first or second largest commercial banking operation in each of the six Kentucky counties it operates. At December 31, 1997, Peoples Bank had 483 full-time equivalent employees. 3 The Savings Bank, organized in 1934, provides a broad array of banking services to the Western Kentucky region through its main office in Central City, Kentucky and five branch offices. Residential real estate mortgage lending is the primary source of operating income. First Kentucky FSB had total deposits of $146.9 million at December 31, 1997 and is largest financial institution headquartered in their immediate West-Central Kentucky market area. At December 31, 1997, the Savings Bank had 70 full-time equivalent employees. Management considers employee relations to be good with all of the bank employees, none of which are covered by a collective bargining agreement. 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 or savings and loan associations. For example, the banks compete for funds with 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 finance companies, credit unions, certain governmental agencies and merchants who extend their own credit selling to consumers and other customers. Many of the 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 (FRB) and files reports with and is subject to examination by that body. Peoples Bank, chartered under the National Bank Act, is subject to the supervi- sion of and is regularly examined by the Comptroller of the Currency of the United States. By law, Peoples Bank is a member of the Federal Reserve System and insured members of the Bank Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). As such, it is subject to regulation by these federal agencies. The Savings Bank is a federally chartered savings association, subject to the supervision of and are regularly examined by Office of Thrift Supervision. It is subject to certain reserve requirements of the FRB and are insured members of the Savings Association Insurance Fund of the FDIC, and, as such, are subject to regulation and examined by these federal agencies. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was principally designed to deal with the financial crisis involving the thrift industry and the Federal Savings and Loan Insurance Corporation. FIRREA contains many provisions which affect banks and bank holding companies. FIRREA included substantial increases in the enforcement powers available to regulators. The FDIC's enforcement powers were expanded. Several civil and 4 criminal penalties were added which address misconduct and knowingly or recklessly causing a substantial loss to an insured institution. FIERRA expanded the power of bank holding companies by permitting them to acquire any savings assocation, including healthy as well as troubled institutions. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) contained many provisions affecting the banking industry. FDICIA included provisions, among others to: 1) reform the deposit insurance system, 2) establish a format for closer monitoring of financial institutions and to enable prompt corrective action by banking regulators when a financial institution begins to experience difficulty, 3) establish five capital levels for financial institutions that would impose more scrutiny and restriction on less capitalized insstitutions, 4) require regulators to set operational and managerial standards for all insured institutions, including limits on excessive compensation to executive officers, directors and principal shareholders, and establish standards for loans secured by real estate, 5) adopt certain accounting reforms and require annual on-site examinations of federally insured institutions and the ability to require independent audits, 6) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. Further FDCIA permited the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury Department and other sources or for any other purpose the FDIC deems necessary. Future legislative actions, possibly including restructuring and modernization of financial institution regulation, could have dramatic effect on the cost of doing business and competitiveness. The terms or timing of future legislation or regulatory actions that may be adopted cannot be predicted, accordingly, the potential effect on the Company is unknown. Changes in the national economy and in the money markets, together with the effects of actions by monetary and fiscal authorities, 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 Company and its subsidiaries. 5 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) 1997 1996 1995 _______________________________________________________________________________ INTEREST-EARNING ASSETS Loans (1) $1,063,185 $960,726 $865,707 Taxable securities 252,993 244,917 251,107 Non-taxable securities 61,416 61,734 64,835 Short-term investments 2,644 2,512 2,877 --------- --------- --------- 1,380,238 1,269,889 1,184,526 NONINTEREST-EARNING ASSETS Cash and due from banks 30,324 35,586 33,515 Allowance for loan losses (14,965) (14,066) (12,691) Other assets 47,844 44,221 40,582 --------- --------- --------- $1,443,441 $1,335,630 $1,245,932 ========= ========= ========= INTEREST-BEARING LIABILITIES Transaction accounts $352,563 $310,666 $253,689 Savings deposits 79,864 84,684 87,618 Time deposits 618,628 588,289 598,514 Short-term borrowings 100,285 112,459 86,400 Long-term borrowings 44,524 9,785 7,946 Other liabilities 1,060 1,382 1,292 --------- --------- --------- 1,196,924 1,107,265 1,035,459 NONINTEREST-BEARING LIABILITIES Demand deposits 84,176 82,269 82,752 Other liabilities 13,330 11,523 9,176 STOCKHOLDERS' EQUITY 149,011 134,573 118,545 --------- --------- --------- $1,443,441 $1,335,630 $1,245,932 ========= ========= ========= (1) Nonperforming loans are included in average loans 6 B. ANALYSIS OF NET INTEREST EARNINGS For the Year Ended December 31, (in thousands) 1997 1996 1995 _______________________________________________________________________________ INTEREST INCOME Loans (TE) (2) $97,017 $87,950 $78,573 Taxable securities 16,733 15,842 16,082 Non-taxable securities (TE) (2) 5,364 5,704 5,847 Short-term investments 133 122 160 ------- ------- ------- 119,247 109,618 100,662 INTEREST EXPENSE Transaction accounts 14,122 11,606 9,101 Saving deposits 2,309 2,422 2,460 Time deposits 35,030 32,874 34,047 Short-term borrowings 5,452 5,958 4,939 Long-term borrowings 2,588 608 515 Other liabilities 80 91 90 ------- ------- ------- 59,581 53,559 51,152 ------- ------- ------- NET INTEREST INCOME (TE) (2) 59,666 56,059 49,510 TE Basis Adjustment (1,775) (1,945) (1,916) ------- ------- ------- NET INTEREST EARNINGS $57,891 $54,114 $47,594 ======= ======= ======= (2) Tax equivalent (TE) interest income is based upon a Federal income tax rate of 35%. 7 B. AVERAGE YIELDS AND RATES PAID For the Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ AVERAGE YIELDS FOR INTEREST-EARNING ASSETS Loans (TE) (1) (2) 9.13% 9.15% 9.08% Taxable securities 6.61% 6.47% 6.40% Non-taxable securities (TE) (2) 8.73% 9.24% 9.02% Short-term investments 5.03% 4.86% 5.56% All interest-earning assets 8.64% 8.63% 8.50% AVERAGE RATES FOR INTEREST-BEARING LIABILITIES Transaction accounts 4.01% 3.74% 3.59% Saving deposits 2.89% 2.86% 2.81% Time deposits 5.66% 5.59% 5.69% Short-term borrowings 5.44% 5.30% 5.72% Long-term borrowings 5.81% 6.21% 6.48% Other liabilities 7.55% 6.58% 6.97% All interest-bearing liabilities 4.98% 4.84% 4.94% ---- ---- ---- NET INTEREST-RATE SPREAD (TE) (2) 3.66% 3.79% 3.56% ==== ==== ==== NET YIELD ON INTEREST-EARNING ASSETS 4.32% 4.41% 4.18% ==== ==== ==== (1) Nonperforming loans are included in average loans (2) Tax equivalent (TE) interest income is based upon a Federal income tax rate of 35%. 8 C. FOR THE LAST TWO FISCAL YEARS CHANGES ATTRIBUTABLE TO VOLUME AND RATE Change Due to Due to (in thousands) 1997/1996 Volume Rate (3) _______________________________________________________________________________ INTEREST INCOME Loans (1) (2) $9,067 $9,380 ($313) Taxable securities 891 522 369 Non-taxable securities (TE) (2) (340) (29) (311) Short-term investments 11 6 5 ------ 9,629 9,525 104 INTEREST EXPENSE Transaction accounts 2,516 1,565 951 Saving deposits (113) (138) 25 Time deposits 2,156 1,695 461 Short-term borrowings (506) (645) 139 Long-term borrowings 1,980 2,159 (179) Other liabilities (11) (21) 10 ------ 6,022 4,337 1,685 ------ ------ ------ NET INTEREST INCOME (TE) (2) $3,607 $5,188 ($1,581) ====== ====== ====== (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. 9 CHANGES ATTRIBUTABLE TO VOLUME AND RATE Change Due to Due to (in thousands) 1996/1995 Volume Rate (3) _______________________________________________________________________________ INTEREST INCOME Loans (TE) (1) $9,377 $8,624 $753 Taxable securities (240) (396) 156 Non-taxable securities (TE) (2) (143) (280) 137 Short-term investments (38) (20) (18) ------ 8,956 7,254 1,702 INTEREST EXPENSE Transaction accounts 2,505 2,044 461 Saving deposits (38) (82) 44 Time deposits (1,173) (582) (591) Short-term borrowings 1,019 1,490 (471) Long-term borrowings 93 119 (26) Other liabilities 1 6 (5) ------ 2,407 3,547 (1,140) ------ ------ ------ NET INTEREST INCOME (TE) (2) $6,549 $3,707 $2,842 ====== ====== ====== (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. 10 II. Security Portfolios A. Footnote 4 to the Consolidated Financial Statements included herein on page 43 presents the book value as of the end of 1997 and 1996 of securities by type of security. B. Footnote 4 to the Consolidated Financial Statements included herein on page 43 presents the amortized cost, estimated market value and the weighted average yield of securities at December 31, 1997, by contractual maturity range. C. As of December 31, 1997, 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 1997 and 1996. 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, 1997: Loan Portfolio Maturities 1 year 1 to 5 Over December 31, 1997 or less years 5 years Total _______________________________________________________________________________ (in thousands) Commercial, financial and agricultural $81,459 $28,485 $9,980 $119,924 Real estate construction 18,284 3,744 2,129 24,157 ------- ------- ------- ------- $99,743 $32,229 $12,109 $144,081 ======= ======= ======= ======= The amounts of these loans due after one year which have predetermined rates and adjustable rates are $17.9 million and $26.4 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, 1993 through 1997, 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: 11
Interest Income on Nonaccrual and Restructured Loans Year ended December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands) Contractual interest $749 $504 $421 $209 $407 Interest recognized 441 343 351 192 279
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, 1997, loans with a total principal balance of $26.5 million had been identified which may become nonperforming in the future, compared to $26.4 million at December 31, 1996. 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, 1997, a total of $7.4 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, 1997, 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. 12 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, 1997, 1996, 1995, 1994, and 1993:
Analysis of the Allowance for Loan Losses Year ended December 31, 1997 1996 1995 1994 1993 _______________________________________________________________________________ _____________ (in thousands) Balance at beginning of year $14,795 $13,371 $12,188 $10,715 $8,606 Allowance associated with loans acquired -- 481 -- -- -- Provision charged to expense 5,041 2,664 2,167 1,723 2,541 Loan charge-offs Commercial, financial and agricultural (463) (467) (450) (248) (463) Real estate mortgage (848) (401) (225) (81) (240) Installment loans (1,984) (1,273) (540) (279) (317) Consumer revolving credit (447) (383) (92) (78) (24) ------ ------ ------ ------ ------ (3,742) (2,524) (1,307) (686) (1,044) Loan charge-off recoveries Commercial, financial and agricultural 135 556 133 339 376 Real estate mortgage 34 59 63 9 110 Installment loans 133 141 117 76 122 Consumer revolving credit 46 47 10 12 4 ------ ------ ------ ------ ------ 348 803 323 436 612 ------ ------ ------ ------ ------ Net loan charge-offs (3,394) (1,721) (984) (250) (432) ------ ------ ------ ------ ------ Balance at end of year $16,442 $14,795 $13,371 $12,188 $10,715 ====== ====== ====== ====== ====== Year end balance of loans $1,101,707 $1,036,429 $914,497 $805,947 $704,037 Average loans outstanding 1,063,185 960,726 865,707 755,314 660,345 Allowance / year end loans 1.49% 1.42% 1.46% 1.51% 1.52% Provision / net chargeoffs 148.53% 154.79% 220.22% 689.20% 588.19% Nonperforming assets 13,067 12,187 6,806 6,679 6,591 Potential problem loans 26,488 26,362 14,300 14,800 22,400
13 B. The following tables present a breakdown of the allowance for loan losses at December 31, 1997, 1996, 1995, 1994 and 1993:
Allocation of the Allowance for Loan Losses December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands) Commercial, financial and agricultural $4,000 $3,107 $2,951 $3,134 $2,973 Real estate Construction 150 150 97 97 61 Residential mortgage 2,000 1,612 1,598 1,496 1,285 Commercial mortgage 3,498 4,100 3,905 4,050 3,626 Consumer loans 6,200 5,526 4,581 3,215 2,598 Consumer revolving credit 594 300 239 196 172 ------ ------ ------ ------ ------ $16,442 $14,795 $13,371 $12,188 $10,715 ====== ====== ====== ====== ====== Percent of Loans in Each Category to Total Loans December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ Commercial, financial and agricultural 10.9% 11.6% 12.5% 13.9% 16.9% Real estate mortgage Construction 2.2% 2.9% 2.1% 2.4% 1.7% Residential mortgage 42.5% 40.7% 39.9% 39.5% 38.3% Commercial mortgage 17.1% 16.8% 17.3% 17.3% 18.1% Consumer loans 27.1% 27.9% 28.0% 26.6% 24.6% Other 0.2% 0.1% 0.2% 0.3% 0.4% ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
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, 1997, 1996 and 1995. C. Foreign Deposits The Company had no foreign deposits during the past three years. 14 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, 1997, of $100,000 or more by maturity: Maturity of $100,000 Time Deposits December 31, 1997 _______________________________________________________________________________ (in thousands) Maturing 3 months or less $15,878 Maturing over 3 months through 6 months 12,336 Maturing over 6 months through 12 months 33,043 Maturing over 12 months 44,336 ------- $105,593 ======= For the Year Ended December 31, VI. RETURN ON EQUITY AND ASSETS 1997 1996 1995 _______________________________________________________________________________ 1. Return on average assets 1.12% 1.29% 1.19% 2. Return on average equity 10.86% 12.75% 12.46% 3. Dividend payout ratio 50.62% 36.00% 31.17% 4. Equity to assets ratio 10.31% 10.08% 9.51% VII. SHORT-TERM BORROWINGS A. Footnote 8 to the Consolidated Financial Statements included herein on page 49 presents for each category of short-term borrowings, the amounts outstanding at the end of the reported periods, the weighted average interest rate, the maximum amount of borrowings in each catergory at any month-end and the approximate weighted interest rate. 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 twenty-seven other banking offices of the banks, twenty-four are owned and three are leased by their respective bank. Item 3. LEGAL PROCEEDINGS - None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None 15 PART II 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". Share and per share information have been adjusted to give effect to 5% stock dividends declared on January 17, 1996 and January 21, 1997. The high and low stock prices and the quarterly dividends declared on the Company's common stock for each quarter of 1997 and 1996 are as follows: High and Low Stock Prices First Second Third Fourth Dividends Declared quarter quarter quarter quarter _______________________________________________________________________________ High 1997 $26.50 $29.25 $34.75 $39.50 Low 1997 23.33 23.50 27.75 28.50 Cash dividends declared 0.19 0.19 0.22 0.22 High 1996 $22.38 $22.62 $21.90 $24.29 Low 1996 19.50 19.76 20.00 20.95 Cash dividends declared 0.14 0.15 0.15 0.19 Holders The approximate number of holders of registrant's only class of common stock as of February 16, 1998, was 3,250. 16
SELECTED FINANCIAL DATA December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands) Interest-Earning Assets Loans, net $1,087,405 $1,023,520 $901,126 $793,759 $693,322 Securities 316,493 304,311 306,642 333,527 375,366 Short-term investments 0 0 0 0 3,100 --------- --------- --------- --------- --------- 1,403,898 1,327,831 1,207,768 1,127,286 1,071,788 Cash and due from banks 46,820 43,285 37,524 39,333 42,591 Premises and equipment 20,310 19,376 18,226 16,980 16,698 Other assets 29,969 27,272 24,078 26,957 25,429 --------- --------- --------- --------- --------- $1,500,997 $1,417,764 $1,287,596 $1,210,556 $1,156,506 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity Interest-bearing deposits $1,086,487 $1,029,877 $960,744 $910,598 $906,646 Noninterest-bearing deposits 90,354 85,376 86,360 87,985 86,250 Short-term borrowings 114,472 132,167 93,469 84,567 32,502 Long-term borrowings 43,104 14,013 7,757 9,536 16,555 Other liabilities 11,853 11,782 11,094 7,607 8,182 --------- --------- --------- --------- --------- 1,346,270 1,273,215 1,159,424 1,100,293 1,050,135 Stockholders' equity 154,727 144,549 128,172 110,263 106,371 --------- --------- --------- --------- --------- $1,500,997 $1,417,764 $1,287,596 $1,210,556 $1,156,506 ========= ========= ========= ========= ========= ____________________________________________________________________________________________
As more fully explained in Note 2 to the consolidated financial statements, additional banking organizations were acquired in 1996 and 1994. 17
Year ended December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands except per share data) Results of Operations Interest income $117,472 $107,673 $98,746 $84,404 $80,845 Interest expense 59,581 53,559 51,152 38,855 37,997 ------- ------- ------- ------- ------- Net interest income 57,891 54,114 47,594 45,549 42,848 Provision for loan losses 5,041 2,664 2,167 1,723 2,541 Net interest income after ------- ------- ------- ------- ------- provision for loan losses 52,850 51,450 45,427 43,826 40,307 Noninterest income 10,548 8,535 7,944 7,076 6,683 Noninterest expense 39,280 34,843 32,158 32,312 29,373 ------- ------- ------- ------- ------- Income before tax expense 24,118 25,142 21,213 18,590 17,617 Income tax expense 7,931 7,978 6,446 5,465 4,807 ------- ------- ------- ------- ------- Net Income $16,187 $17,164 $14,767 $13,125 $12,810 ======= ======= ======= ======= ======= Average shares outstanding Basic 9,998 9,787 9,600 9,943 9,854 Assuming dilution 10,188 9,956 9,804 9,730 9,705 Earnings per common share Basic $1.62 $1.75 $1.54 $1.35 $1.32 Assuming dilution 1.59 1.72 1.51 1.32 1.30 Cash dividends per common share 0.82 0.63 0.48 0.39 0.34 ____________________________________________________________________________________________
Shares outstanding and per share amounts have been adjusted for a two-for-one stock split on January 4, 1994 and 5% stock dividends on April 19, 1995, January 17, 1996 and January 21, 1997. As more fully explained in Note 2 to the consolidated financial statements, additional banking organizations were acquired in 1996 and 1994. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis includes forward-looking statements. Many factors affect Peoples First Corporation's (Company) financial position and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services. Because these factors are unpredictable and beyond the Company's control, earnings may fluctuate from period to period. The purpose of this discussion and analysis is to provide annual report readers with information relevant to understanding and assessing the financial condition and results of operations of the Company. Headquartered in Paducah, Kentucky, the Company is a bank and unitary savings and loan holding company registered with the Federal Reserve Board. The Company's market area is primarily western Kentucky and the contiguous interstate areas. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. The Company's one commercial banking subsidiary and one savings bank subsidiary operate principally in a single business segment offering general commercial and savings bank services through 28 banking offices. Commercial banking services, mortgage banking and consumer financing are all activities the Company considers to be their one business segment. EARNING ASSETS Average earning assets of the Company for 1997, increased 8.7%, or $110.3 million to $1,380.2 million from $1,269.9 million for 1996. This compares to growth of average earning assets of 7.2% and 6.3%, for 1996 and 1995, respectively. The Company maintains a consistently favorable ratio of average earning assets to average total assets. The ratio was 95.6% and 95.1%, for 1997 and 1996, respectively. The Company's principal business is making real estate, consumer and commercial loans. As such, loans are the Company's primary earning assets and loans are an increasing part of total earning assets. Average loans for 1997 increased 10.7%, or $102.5 million, to $1,063.1 million, while average loan growth for 1996 and 1995 was 11.0% and 14.6%, respectively. Table 1 Average Earning Assets Year ended December 31, 1997 1996 1995 _______________________________________________________________________________ (dollars in thousands) Total average earning assets $1,380,238 $1,269,889 $1,184,526 Percent of average earning assets Average loans 77.0% 75.7% 73.1% Average securities 22.8 24.1 26.7 Average other earning assets 0.2 0.2 0.2 19 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 real estate mortgage and consumer loans during the last three years.
Table 2 Types of Loans December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands) Commercial, financial and agricultural $119,924 $120,283 $113,929 $111,929 $118,906 Real estate Construction 24,157 29,933 19,386 19,421 12,255 Residential mortgage 468,330 421,129 364,607 318,551 269,265 Commercial mortgage 188,502 174,576 158,429 139,629 127,666 Consumer, net 298,724 289,653 255,975 214,309 173,191 Other 2,070 855 1,463 1,952 2,250 --------- --------- --------- --------- --------- 1,101,707 1,036,429 913,789 805,791 703,533 Allowance for loan losses (16,442) (14,795) (13,371) (12,188) (10,715) --------- --------- --------- --------- --------- $1,085,265 $1,021,634 $900,418 $793,603 $692,818 ========= ========= ========= ========= =========
The Company maintains a portfolio of securities held for sale as an available source of funding for loan growth. In prior years, reductions in the investment portfolios were used to fund loan growth. Beginning in 1997, in order to further leverage stockholders' equity without creating excessive interest-rate risk, management reduced the amount of loan funding derived from security maturities. Average securities increased $7.8 million during 1997, following decreases of $9.3 million during 1996 and $39.0 million during 1995. U. S. treasury and agency obligations represent approximately 75.0% of the securities portfolios at December 31, 1997. At December 31, 1997, mortgage-backed securities which included Real Estate Mortgage Investment Conduit (REMIC) and CMO instruments were approximately 52.6% of the securities portfolios, compared to approximately 53.5% at December 31, 1996. The REMIC issues are 100% U. S. agencies issues. The CMO issues are marketable, collateralized mortgage obligations backed by agency-pooled collateral or whole-loan collateral. All nonagency issues held are currently rated AA or AAA by either Standard & Poors or Moody's. At December 31, 1997, approximately 15.0% of the mortgage-backed securities are floating-rate issues, the majority being indexed to the Constant Maturity Treasury index. Management's normal practice is to purchase securities at or near par value to reduce risk of premium write-offs resulting from unexpected prepayments. At December 31, 1997, the Company did not have any structured notes (as currently defined by regulatory agencies) in the securities portfolios since management believes the uncertainty of cash flows from these securities, which are driven by interest-rate movements, could expose the Company to greater market risk than traditional securities. 20 FUNDING An important and stable source of funding is core deposits, considered by management to include demand deposits, interest-bearing transaction accounts, saving deposits and time deposits under $100,000. Average core deposits for 1997 increased 6.4%, or $62.1 million to $1,029.4 million from $967.3 million for 1996. Excluding the 1997 branch purchase and the 1996 savings bank acquisiton, the 1997 increase was 2.7%, or $26.1 million, compared to 3.8%, or $37.2 million for 1996. Local markets for deposits are competitive. Core deposits are a decreasing portion of average interest-bearing liabilities. The core deposit base is supplemented with brokered deposits, short-term and long-term borrowings to fully fund loan growth. Average brokered deposits amounted to $13.9 million, $22.8 million and $24.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. Average short-term and long-term borrowings were $144.8 million for 1997, up from $122.2 million for 1996 and $94.3 million for 1995. Management plans to continue to increase reliance on non-core funding. The Company's subsidiary banks have obtained various short-term and long-term advances from the Federal Home Loan Bank (FHLB) under Blanket Agreements for Advances and Security Agreements (Agreements). The Agreements entitle the banks to borrow additional funds from the FHLB to fund mortgage loan programs and satisfy other funding needs. Additional funding totaling approximately $182.8 million is available at December 31, 1997 from undrawn federal funds purchased, lines-of-credit for U.S. treasury notes and FHLB advances. Table 3 Average Interest-bearing Liabilities Year ended December 31, 1997 1996 1995 _______________________________________________________________________________ (dollars in thousands) Total average interest-bearing liabilities $1,196,924 $1,107,265 $1,035,459 Percent of average total interest- bearing liabilities Interest-bearing core deposits 78.9% 80.5% 81.4% CDs of $100,000 or more 7.7 6.2 7.0 Brokered deposits 1.2 2.1 2.4 Average short-term borrowings 8.4 10.2 8.3 Average long-term borrowings 3.7 0.9 0.8 Other 0.1 0.1 0.1 NONPERFORMING ASSETS AND RISK ELEMENTS The Company's loan underwriting guidelines, credit review procedures and policies are designed to protect the Company from avoidable credit losses. Some losses although inevitably occur. The Company's process for monitoring loan quality includes detailed, monthly analyses of delinquencies, nonperforming assets and potential problem loans. Management extensively monitors credit policies, including policies related to appraisals, assessment of the financial condition of borrowers, restrictions on out-of-area lending and avoidance of loan concentrations. 21 The amount of nonperforming assets at December 31, 1997 remains at managable levels. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At December 31, 1997, the Company had no concentrations of ten percent or more of total loans in any single industry nor geographical area outside the Paducah, Kentucky, western Kentucky regions, the immediate market area of the banks. Nonperforming assets, including nonaccrual, 90-day past due and restructured loans and foreclosed properties, totaled $13.1 million at December 31, 1997, compared to $12.2 million and $6.8 million at December 31, 1996 and 1995, respectively. Nonperforming assets as a percentage of total loans and other real estate increased to 1.18% at December 31, 1997 compared to 1.17% and 0.74% at December 31, 1996 and 1995, respectively. The 1997 nonaccrual loan balance is comprised of twelve residential rental and commercial loans with outstanding balances between $100,000 and $500,000, and numerous consumer loans with an average balance of $22,000. The 1996 increase in nonperforming assets is principally due to one $3.0 million loan that was past due 90 days, one $1.0 million nonaccrual loan and numerous small consumer loans. Management was prepared for the increased level of consumer chargeoffs and nonperforming loans and believes that the level will remain relatively high compared to prior periods due to increased outstandings and to the cyclical nature of consumer credit. There are generally good economic conditions in the market area and management believes the Company's comprehensive loan administration and workout procedures are adequate to manage the credit risks. 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.
Table 4 Nonperforming Assets December 31, 1997 1996 1995 1994 1993 ____________________________________________________________________________________________ (in thousands) Nonaccrual loans $5,848 $4,680 $1,817 $531 $835 Loans past due 90 days 4,451 4,710 1,471 1,838 503 Renegotiated loans 2,532 2,707 2,874 2,741 2,995 Other real estate owned 236 90 644 1,569 2,258 ------ ------ ------ ------ ------ $13,067 $12,187 $6,806 $6,679 $6,591 ====== ====== ====== ====== ====== Nonperforming assets as a percent of total loans and other real estate 1.18% 1.17% 0.74% 0.83% 0.93% Allowance for loan losses coverage of nonperform- ing assets 126% 121% 196% 182% 163%
22 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, 1997, loans with a total principal balance of $26.5 million have been identified that may become nonperforming in the future, compared to $26.4 million at December 31, 1996 and $12.8 million at December 31, 1995. The 1996 increase was due to two commercial loan relationships. Management works closely with these borrowers in their efforts to resolve potential cash flow problems. Potential problem loans are not included in nonperforming assets since the borrowers currently meet all applicable loan agreement terms. CAPITAL RESOURCES AND DIVIDENDS The board of directors develops and reviews the capital goals and policies of the consolidated entity and of the banks. The Company's capital policies are designed to retain sufficient amounts for healthy financial ratios, considering future planned asset growth and to leverage stockholders' equity to a desirable degree. The Company's banks were "well capitalized" based on the regulatory defined minimums of a Tier I leverage ratio of 5%, a Tier I capital ratio of 6% and a total capital ratio of 10%. Stockholders' equity was 10.3% of assets at December 31, 1997, an increase from 10.2% at December 31, 1996. Unrealized gain or loss on securities held for sale, net of applicable income taxes, is recorded directly to stockholders' equity. Exclusive of the $1.2 million unrealized net gain on securities held for sale, net of applicable income taxes, stockholders' equity increased $8.9 million, or 6.2%, during 1997. This compares to an increase, exclusive of the $0.6 million unrealized net loss on securities held for sale, net of applicable income taxes, of $17.0 million, or 13.4%, during 1996. The capital base has been strengthened through the issuance of common stock and earnings retention. Common stock was issued through various shareholder and employee plans and for the savings bank acquisition in 1996. The earnings retention rate, which the board of directors adjusts through declaration of cash dividends, was 49.4% for 1997, 64.0% for 1996 and 68.8% for 1995. The board of directors raised the quarterly dividend to $0.14 per share in the third quarter of 1995, to $0.15 per share in the second quarter of 1996 to $0.19 per share in the fourth quarter of 1996 and to $0.22 per share in the third quarter of 1997. Stock dividends of 5% were declared in April 1995, in January 1996 and January 1997. Proceeds from the sale of common stock through shareholder and employee plans amounted to $1.8 million in 1997, $1.7 million in 1996 and $2.2 million in 1995. During 1996, the board of directors authorized the repurchase of up to 400,000 shares of the Company's common stock in the open market. A total of 64,606 were repurchased during 1997 for $0.9 million and 89,005 shares were repurchased during 1996 for $1.9 million. Following the fourth dividend in 1997, the Company terminated the stockholders' dividend reinvestment plan and cancelled the repurchase authorization pursuant to the merger agreement with Union Planters Corporation dated November 17, 1997. Subsidiary bank dividends are the principal source of funds for the Company's payment of dividends to its stockholders. At December 31, 1997, approximately $28.7 million in retained earnings of the banks was available for dividend 23 payments to the Company without regulatory approval or without reducing capital of the respective banks below minimum standards. Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies, the minimum ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) is currently 8.0%. The minimum Tier I capital to risk-adjusted assets is 4.0%. The Company's total capital and Tier I capital to risk-adjusted assets ratio was 14.90% and 13.64%, respectively, at December 31, 1997 compared with 14.33% and 13.15%, respectively at December 31, 1996. The Federal Reserve Board also requires bank holding companies to comply with minimum leverage ratio guidelines. The leverage ratio is the ratio of Tier I capital to its total consolidated quarterly average assets, less goodwill and certain other intangible assets. The guidelines require a minimum leverage ratio of 3.0% for companies that meet certain specified criteria. The Company's leverage ratio was 9.76% at December 31, 1997, compared with 9.55% at December 31, 1996. The Federal Deposit Insurance Act requires federal bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. As of December 31, 1997, all of the Company's insured depository institutions met the criteria to be classified as "well capitalized". RESULTS OF OPERATIONS Net income for the year ended December 31, 1997 was $16.2 million, down 5.8% from $17.2 million for the year ended December 31, 1996, which was an increase of 16.2% from $14.8 million for the year ended December 31, 1995. Increased revenue was offset by additional provision for loan losses and noninterest expense. Revenues improved due to loan growth and better fee income. Overhead increased due to costs associated with consolidation of some bank systems, consulting fees and merger related expenses. Basic earnings per common share for the year ended December 31, 1997 was $1.62, down 7.4% from $1.75 for the year ended December 31, 1996, and compared to $1.54 for the year ended December 31, 1995. Basic earnings per common share for the fourth quarter of 1997, decreased 45.3% to $0.29 from $0.53 for the fourth quarter of 1996. The effect of stock options, the Company's only dilutive securities, is minimal. Earnings per common share assuming dilution for the year ended December 31, 1997 was $1.59, compared to $1.72 for the year ended December 31, 1996, and to $1.51 for the year ended December 31, 1995. Return on average stockholders' equity for the years ended December 31, 1997, 1996 and 1995 was 10.86%, 12.75% and 12.46%, respectively. Return on average assets for the years ended 1997, 1996 and 1995 was 1.12%, 1.29% and 1.19%, respectively. NET INTEREST INCOME The operating results of the Company depend primarily on its net interest income, which is the difference between interest income earned on interest-bearing assets and interest expense on interest-bearing liabilities, consisting mainly of deposits. Net interest income is determined by the difference between yields earned on assets and rates paid on liabilities (interest-rate spread) and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest-rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. 24 For the year ended December 31, 1997, net interest income, on a tax-equivalent (TE) basis, increased 6.4%, or $3.6 million to $59.7 million compared to $56.1 million for 1996. For the year ended December 31, 1996, net interest income (TE) increased 13.3%, or $6.6 million from $49.5 million for 1995. The 1997 increase is attributable to increased volume of earning assets, while volume and interest-rate spread improvement played a balanced role in the 1996 increase. Net interest income (TE) as a percent of average earning assets was 4.32%, 4.41% and 4.18% for the years ended December 31, 1997, 1996 and 1995, respectively. Management attributes the 1997 drop to the concentration on secured real estate lending and competitive consumer loan markets. The banks generally maintain a relatively balanced position between volumes of rate-repricing assets and liabilities to guard to some degree against adverse effects to net interest income from possible fluctuations in interest rates. PROVISION FOR LOAN LOSSES The Company's primary business of making real estate, consumer and commercial loans entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond the control of the Company. The provision for loan losses reflects management's judgement of the cost associated with credit risk inherent in the loan portfolio. The provision for loan losses amounted to $5.0 million for 1997, an increase of 85.2% compared to $2.7 million for 1996, which was an increase of 22.7% compared to $2.2 million in 1995. The provision for loan losses as a percentage of average loans was 0.47% for the year ended December 31, 1997, up from 0.28% for the year ended December 31, 1996 and 0.25% for the year ended December 31, 1995. The increase in the 1997 provision was essential to provide for the growth in outstanding loans and the continuing trend of increasing consumer loan chargeoffs. Net chargeoffs for 1997 were $3.4 million compared to $1.7 million for 1996 and $1.0 million for 1995. Net chargeoffs were $1.0 million in both the third and fourth quarters of 1997. As a percentage of average loans, net chargeoffs were 0.32% for 1997, up from 0.18% for 1996 and 0.11% for 1995. The allowance for loan losses 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. At December 31, 1997, the allowance for loan losses is 1.49% of outstanding loans compared 1.42% of outstanding loans at December 31, 1996. The December 31, 1997 allowance is 126% of nonperforming assets compared to 121% at December 31, 1996. NONINTEREST INCOME During the last two years, the Company has continued to engage outside consulting firms to review banking products, services and charges. As a result, fees from traditional deposit services as well as revenues from brokerage services, trust services and other commission business have been increased by management's focus on improving all areas of noninterest income. Noninterest income is an important but not yet significant source of revenue for the Company, representing 15.0% of tax equivalent net revenues in 1997, compared to 13.1% in 1995 and 13.7% in 1995. Noninterest income amounted to $10.5 million in 1997, a 23.5% increase compared to $8.5 million in 1996 which was an increase of 7.6% compared to $7.9 million in 1995. 25 Service charges on deposit accounts, the largest component of noninterest income, increased 26.2% in 1997 and 7.5% in 1996. The increases are primarily attributable to a change in the assessment of overdraft fees. This level of increase is not expected to continue in future years. Trust fees for 1997 increased 12.4% from 1996 which increased 9.0% from 1995. These increases match the growth in the amount of trust assets managed which were primarily in estate and personal trust accounts. The fall in insurance commissions is due to more competition. Income from bankcards, investment brokerage services and property and casualty insurance products all generated higher level of fees in 1997 due to account growth. NONINTEREST EXPENSE The ratio of noninterest expense net of noninterest income exclusive of securities gains to average total assets has been very consistent despite many re-engineering efforts, and was 1.99% for 1997, 1.97% for 1996 and 1.96% for 1995. Since internal asset growth is not expected to reach significant levels, management wants to focus on controlling the rate of increase of noninterest expense through more employee productivity. The Company consolidated one of the previously separate corporate subsidiaries into the lead bank during 1997 and six in 1995 and 1994 to allow the personnel at all locations to better focus on consistent quality customer service, increasing the volume of business and to reduce a small amount of redundant costs. Also during 1997, two data processing systems were converted to the Company's primary data processor to allow for uniform product delivery and better employee utilization. Noninterest expense for 1997, which includes costs associated with consolidation of bank systems, additional consulting fees and merger related expenses, increased 12.9%, to $39.3 million, compared to $34.8 million for 1996. Noninterest expense for 1996, reflecting higher equipment and data processing costs, increased 8.1%, compared to $32.2 million for 1995. Noninterest expense for 1995 decreased 0.3% due to reduced deposit insurance rates and the absence of merger-related professional fees. Salaries and employee benefits increased 8.4% in 1997, compared to 4.1% in 1996. Staffing levels, considering the branch acquisition in 1997 and the savings bank acquisition in 1996, were comparable at December 31, 1997 and 1995. The Company has made investments in equipment and facilities of approximately $8.6 million during the last three years as technology has advanced and the need to leverage personnel costs has intensified. Occupancy expense increased 11.5% in 1997, 2.5% in 1996 and 5.5% in 1995. Equipment expense increased 23.9% in 1997, 15.2% in 1996 and 13.2% in 1995 due to depreciation and maintenance of new equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from two to ten years for equipment. Much of the recent years' equipment purchases are electronic and technology sensitive items which the Company depreciates over a five year or shorter period. Management plans to continue to invest in technology for new product delivery systems. Due to the current level of soundness of the Federal Deposit Insurance Corporation (FDIC), deposit insurance assessments are now a minimal amount. In the second quarter of 1995, the FDIC reduced the rate paid by most commercial 26 banks from $0.23 to $0.04 per $100 of insured deposits and effective January 1996, the rate was reduced to a $2,000 minimum per bank. All of the Company's subsidiaries received the lowest applicable deposit assessment rates from the FDIC. In the third quarter of 1996, the FDIC made a special assessment on savings banks' deposits of $0.657 for every $100 of saving bank deposits on March 31, 1995 to support the failing savings bank industry. The amount of the special assessment paid in 1996 by the Company's savings bank subsidiaries was $1.3 million. Management expects the level of deposit insurance expense to be insignificant in 1998. Increased data processing expense is attributable to a greater volume of activity and the outsourcing of some activities. The increase was 18.9% in 1997 and 15.4% in 1996. Excluding system conversion costs, the increase in 1997 was 12.2%. Kentucky Bankshare tax legislation was passed in 1997, reforming the assessment of this tax. The tax increased 5.2% in 1997 and increased 13.6% in 1996. The banks are required to maintain significant noninterest-bearing balances with the Federal Reserve and to pay fees to regulatory agencies for periodic examinations by the agencies. The significant $1.5 million increase in legal, accounting and consulting fees in 1997 are due to the combining of subsidiaries, product and system reviews by consultants and the Union Planters merger. INCOME TAXES The Company's income tax planning is based on the goal of maximizing, long-term, after-tax profitability. Income tax expense is impacted by the mix of taxable versus tax-exempt revenues from securities and loans as well as certain nondeductible expenses. The Company manages the effective tax rate to some degree based upon changing tax laws, particularly alternative minimum tax provisions, the availability and price of nontaxable debt securities and other portfolio considerations. The decrease in income tax expense for 1997 and the increase in 1996 are attributable to corresponding changes in operating earnings and increasingly higher effective tax rates in both years. The Company's effective income tax rate was 32.9%, 31.7% and 30.4%, for the years ended December 31, 1997, 1996 and 1995, respectively. The effective tax rate increased due to the continued decline in nontaxable income and an increase in nondeductible merger-related expenses and interstate taxation. LIQUIDITY AND INTEREST-RATE SENSITIVITY The objective of liquidity management is to ensure the ability to access funding which enables each bank to efficiently satisfy the cash flow requirements of depositors and borrowers. The goal of the asset/liability management (ALM) process is to manage the structure of the balance sheet to provide the maximum level of net interest income while maintaining acceptable levels of interest sensitivity risk. The Company's objective of liquidity management is to ensure the ability to access funding which enables each bank to 27 efficiently satisfy the cash flow requirements of depositors and borrowers. 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 monitors funds available from a number of sources to meet its objectives. The primary source of liquidity for the banks, in addition to loan repayments, is their debt securities portfolios. Securities classified as held for sale are those that the Company intends to use as part of its asset/liability management and that may be sold prior to maturity in response to changes in interest rates, resultant prepayment risks and other factors. The Company's access to the retail deposit market through individual locations in nine different counties has been a reliable source of funds. Additional funds for liquidity are available by borrowing federal funds from correspondent banks, Federal Home Loan Bank borrowings and brokered deposits. Various types of analyses are performed to ensure adequate liquidity, and to evaluate the desirability of the relative interest rate sensitivity of assets and liabilities. Management considers current liquidity positions of the banks to be adequate to meet depositor and borrower needs. Because banks must assume interest rate risks as part of their normal opera- tions, the Company actively manages its interest rate sensitivity as well as liquidity positions. Both interest rate sensitivity and liquidity are affected by maturing assets and sources of funds; however, management must also consider those assets and liabilities with interest rates which are subject to change prior to maturity. Management does not make interest bets, but instead seeks to fairly closely match the duration of repricing assets and liabilities over time. The Company's ALM policy provides limits for interest rate risk. Declines in simulated net interest income for the following twelve months are limited to 5% based upon immediate up or down shifts in interest rate of 200 basis points. At December 31, 1997, this simulation estimated net interest income exposure to be 4.9%. Simulated declines in economic value are limited to 20.0% of capital. At December 31, 1997, the estimated economic exposure was 5.9% of capital. Currently, the Company does not employ interest rate swaps, financial futures or options to affect interest rate risks. The banks and the Company collectively measure their level of earnings exposure to future interest rate movements. Simulation and interest rate gap analyses are used to scrutinize the sensitivity of net interest income over a relatively short (1-2 years) time horizon. The analyses are used to examine the impact on earnings of an immediate interest rate shock as well as other forecasted interest rate scenarios. Each scenario incorporates what management believes to be the most reasonable assumptions about such variables as volumes, prepayment rates for mortgage assets and repricing characteristics. A valuation analysis is also performed to measure the sensitivity of the Company's net interest income. This analysis involves discounting projected future cash flows of assets, liabilities and off-balance sheet positions to arrive at an estimated net present economic value. 28
Table 5 Interest Rate Sensitivity Analysis 1-90 91-365 Total at >1 - <3 >3 - <5 >5 - <15 Over 15 December 31, 1997 Days Days 1 year years years years years Total ___________________________________________________________________________________________________________________________________ (in thousands) Rate Sensitive Assets Securities, at cost U.S. treasury and agencies $0 $13,211 $13,211 $17,029 $41,307 $4,475 $1,544 $77,566 Mortgage-backed 12,360 29,479 41,839 42,318 34,660 43,237 2,732 164,786 Municipal bonds 1,585 2,040 3,625 7,689 8,351 42,772 176 62,613 Other 7,471 66 7,537 35 1,601 0 0 9,173 ------- ------- ------- ------- --------- --------- --------- --------- 21,416 44,796 66,212 67,071 85,919 90,484 4,452 314,138 Loans 330,681 424,711 755,392 168,413 101,948 74,822 3,272 1,103,847 ------- ------- ------- ------- --------- --------- --------- --------- 352,097 469,507 821,604 235,484 187,867 165,306 7,724 1,417,985 Rate Sensitive Liabilities Deposits Transaction and savings 238,814 0 238,814 30,739 30,739 153,694 22,407 476,393 Time 152,233 250,929 403,162 186,593 16,563 3,776 0 610,094 Short-term borrowings 57,759 56,713 114,472 0 0 0 0 114,472 Long-term borrowings 33,703 2,420 36,123 937 837 3,596 1,611 43,104 ------- ------- ------- ------- --------- --------- --------- --------- 482,509 310,062 792,571 218,269 48,139 161,066 24,018 1,244,063 ------- ------- ------- ------- --------- --------- --------- --------- Period Gap ($130,412) $159,445 $29,033 $17,215 $139,728 $4,240 ($16,294) $173,922 ======= ======= ======= ======= ========= ========= ========= ========= Cumulative Gap at 12/31/97 ($130,412) $29,033 $29,033 $46,248 $185,976 $190,216 $173,922 $173,922
Management made the following assumptions in preparing the Interest Rate Sensitivity Analysis: 1 Assets and liabilities are generally scheduled according to their earliest repricing dates regardless of their contractual maturities. 2 Nonaccrual loans are included in the rate-sensitive category. 3 The scheduled maturities of mortgage-backed securities assume principal prepayments on dates estimated by management, relying primarily on current and concensus interest-rate forecasts in conjunction with historical prepayment schedules. 4 Transaction and savings deposits that have no contractual maturities are scheduled according to management's best estimate of their re- pricing in response to changes in market rates. 29 DATA PROCESSING SYSTEMS AND THE YEAR 2000 RISK FACTOR In June 1997, the Company implemented its "Y2K Project" to address a potential problem with which substantially all users of automated data processing and information systems are faced. This problem arises from the use by older systems of only two digits, rather than the full four digits, to represent the year applicable to a transaction. Computer systems so programmed may not operate properly when the last two digits or the year become "00" as will occur on January 1, 2000. In some cases inputting a date later than December 31, 1999, would cause a computer to stop operating while in other cases incorrect output may result. This potential problem could adversely effect a wide variety of automated information systems such as mainframe applications, personal computers, communication systems and other information systems routinely utilized in all industries. Substantially all of the date-sensitive software/applications utitlized by the Company is provided by outside vendors. The Company primarily uses a third-party to provide "core" operating system/application software to process data pertaining to its demand deposits, saving accounts, CDs and other deposits, loans and like items. On August 15, 1997, this third-party provider certified the Company's core operating system to be Year-2000 compliant, and testing is expected to be completed by December of 1998. Other third-party-provided application software is used to process substan- tially all of the Company's other data, such as credit cards, trust accounts, investment-security management, accounts payable and others. Testing of these systems is expected to be completed by September of 1998 and Year-2000 compliance achieved prior to December of 1998 either through installation of presently available software upgrades or through installation of, and conversion to, presently available alternative systems. Each third-party provider is contractually bound at its own expense to bring its software into Year-2000 compliance and to maintain it in compliance should problems be identified during testing. By December of 1998, testing of all third-party-provided software and hardware is expected to be completed. The banks continue to bear some risk arising from the advent of the Year-2000 and could be adversely affected should significant bank customers fail to address the issue appropiately. At present, management has no reason to believe that any customer with which it has significant banking relationships are failing to take appropriate action to effect Year-2000 compliance or that its software/application vendors will be unable to perform under their contracts. Based on currently available information, management does not anticipate that the cost to address the Year 2000 issues will have a material adverse impact on the Company's financial condition, results of operations, or liquidity. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Stardards No. 130 and No. 131. They are effective for the Company's next year financial statements. Management does not believe these statements will have a material impact on the Company's financial statements. 30 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP St. Louis, Missouri January 23, 1998 31 December 31, December 31, CONSOLIDATED BALANCE SHEETS 1997 1996 _______________________________________________________________________________ (in thousands) ASSETS Cash and due from banks $46,820 $43,285 Securities held for sale 217,871 182,352 Securities held for investment 98,622 121,959 Loans held for sale 2,140 1,886 Loans receivable, net 1,085,265 1,021,634 Goodwill and other intangible assets 12,106 10,923 Premises and equipment 20,310 19,376 Other assets 17,863 16,349 --------- --------- $1,500,997 $1,417,764 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand deposits $90,354 $85,376 Interest-bearing transaction accounts 402,955 335,977 Savings deposits 73,438 85,145 Time deposits 610,094 608,755 --------- --------- 1,176,841 1,115,253 Short-term borrowings 114,472 132,167 Long-term borrowings 43,104 14,013 Other liabilities 11,853 11,782 --------- --------- Total liabilities 1,346,270 1,273,215 Stockholders' Equity Common stock 7,818 7,812 Surplus 70,627 69,691 Retained earnings 74,754 66,762 Unrealized net gain on securities held for sale 1,528 284 --------- --------- 154,727 144,549 --------- --------- $1,500,997 $1,417,764 ========= ========= Fair value of securities held for investment $102,191 $125,061 Common shares issued and outstanding 10,007 9,999 See accompanying notes to consolidated financial statements. 32 Year Ended December 31, CONSOLIDATED STATEMENTS OF INCOME 1997 1996 1995 _______________________________________________________________________________ (in thousands except per share data) INTEREST INCOME Interest and fees on loans $96,948 $87,872 $78,487 Taxable interest on securities 16,733 15,842 16,082 Nontaxable interest on securities 3,658 3,837 4,017 Interest on short-term investments 133 122 160 ------- ------- ------- 117,472 107,673 98,746 INTEREST EXPENSE Interest on deposits 51,461 46,902 45,608 Other interest expense 8,120 6,657 5,544 ------ ------ ------ 59,581 53,559 51,152 ------ ------ ------ Net Interest Income 57,891 54,114 47,594 Provision for Loan Losses 5,041 2,664 2,167 ------ ------ ------ Net Interest Income after Provision for Loan Losses 52,850 51,450 45,427 Noninterest Income 10,548 8,535 7,944 Noninterest Expense 39,280 34,843 32,158 ------ ------ ------ Income Before Income Tax Expense 24,118 25,142 21,213 Income Tax Expense 7,931 7,978 6,446 ------ ------ ------ NET INCOME $16,187 $17,164 $14,767 ====== ====== ====== EARNINGS PER COMMON SHARE Basic $1.62 $1.75 $1.54 Assuming dilution 1.59 1.72 1.51 CASH DIVIDENDS PER COMMON SHARE 0.82 0.63 0.48 See accompanying notes to consolidated financial statements. 33
Unrealized net gain (loss) Debt on CONSOLIDATED STATEMENTS OF CHANGES Common Retained on securities ESOP IN STOCKHOLDERS' EQUITY stock Surplus earnings held for sale shares Total ______________________________________________________________________________________________________________________ (in thousands, except share data) BALANCE AT DECEMBER 31, 1994 $6,422 $34,859 $73,739 ($4,624) ($133) $110,263 Net income 14,767 14,767 Cash dividends declared ($0.48 per share) (4,604) (4,604) Common stock dividends declared (5%) 665 16,359 (17,024) 0 Issuance of 168,938 common shares pursuant to shareholder and employee plans 120 2,051 2,171 Reduction of ESOP debt 25 25 Change in unrealized net gain (loss) on securities held for sale 5,550 5,550 ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1995 7,207 53,269 66,878 926 (108) 128,172 Net income 17,164 17,164 Cash dividends declared ($0.63 per share) (6,169) (6,169) Common stock dividend declared (5%) 372 10,739 (11,111) 0 Issuance of 87,457 common shares pursuant to shareholder and employee plans 65 1,696 1,761 Issuance of 315,002 common shares for acquisition 234 5,803 6,037 Repurchase of 89,005 common shares (66) (1,816) (1,882) Reduction of ESOP debt 108 108 Change in unrealized net gain (loss) on securities held for sale (642) (642) ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1996 $7,812 $69,691 $66,762 $284 $0 $144,549 Net income 16,187 16,187 Cash dividends declared ($0.82 per share) (8,195) (8,195) Issuance of 72,127 common shares pursuant to shareholder and employee plans 56 1,770 1,826 Repurchase of 64,606 common shares (50) (834) (884) Change in unrealized net gain (loss) on securities held for sale 1,244 1,244 ------ ------ ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1997 $7,818 $70,627 $74,754 $1,528 $0 $154,727 ====== ====== ====== ====== ====== =======
See accompanying notes to consolidated financial statements. 34
Year Ended December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS 1997 1996 1995 ____________________________________________________________________________________________ OPERATING ACTIVITIES Net income $16,187 $17,164 $14,767 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,681 3,126 2,752 Net premium amortization 135 575 953 Provision for loan losses 5,041 2,664 2,167 Net increase in loans held for sale (254) (377) (553) Provision for deferred income taxes (972) 352 (316) Increase (decrease) in accrued items (1,807) (152) 3,167 Other, net (1,886) (1,026) (718) ------ ------ ------ Net Cash Provided by Operating Activities 20,125 22,326 22,219 INVESTING ACTIVITIES Proceeds from sales of securities held for sale 3,677 0 12,086 Proceeds from maturities, calls and prepayments of securities held for sale 11,620 24,266 4,000 Proceeds from maturities, calls and prepayments of securities held for investment 11,278 26,263 30,307 Principal collected on mortgage-backed securities held for sale 25,045 17,412 9,045 Principal collected on mortgage-backed securities held for investment 20,633 21,545 14,332 Purchase of securities held for sale (73,467) (73,565) (33,033) Purchase of securities held for investment (8,590) (6,502) (1,775) Net increase in loans (69,068) (78,072) (109,011) Purchases of premises and equipment (3,379) (2,044) (3,190) Net cash received in acquisition 0 1,185 0 ------ ------ ------ Net Cash Used by Investing Activities (82,251) (69,512) (77,239) See accompanying notes to consolidated financial statements. 35 CONSOLIDATED STATEMENTS OF Year Ended December 31, CASH FLOWS - CONTINUED 1997 1996 1995 ____________________________________________________________________________________________ (in thousands) FINANCING ACTIVITIES Net increase in deposits $61,588 $25,620 $48,521 Net increase (decrease) in other short-term borrowings (17,695) 34,447 8,903 Proceeds from long-term borrowings 43,500 0 139 Repayments of long-term borrowings (14,409) (830) (1,919) Proceeds from issuance of common stock 401 696 1,418 Repurchase of common stock (884) (1,882) 0 Cash dividends paid (6,840) (5,104) (3,851) ------ ------ ------ Net Cash Provided by Financing Activities 65,661 52,947 53,211 ------ ------ ------ Cash and Cash Equivalents Decrease 3,535 5,761 (1,809) Beginning of Year 43,285 37,524 39,333 ------ ------ ------ End of Year $46,820 $43,285 $37,524 ====== ====== ====== SUPPLEMENTAL DISCLOSURES Cash paid for interest expense $58,764 $54,279 $48,642 Cash paid for income taxes 8,500 8,824 5,558 NONCASH INVESTING AND FINANCING TRANSACTIONS Other real estate transferred from loans, net 397 108 30 Dividends reinvested 1,356 1,065 753 Common stock issued in acquisition 0 6,037 0
See accompanying notes to consolidated financial statements. 36 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Peoples First Corporation (Company) through its subsidiaries, Peoples First National Bank and Trust Company and Peoples First, F.S.B., operates principally in a single business segment offering a full range of banking services to individual and corporate customers in the western Kentucky and contiguous interstate area. The Company and the subsidiary banks are subject to the regulations of various Federal and state agencies and undergo periodic examination by regulators. The accounting policies and reporting practices of the Company and its subsidiaries conform to generally accepted accounting principles and general practices within the banking industry. In preparing financial statements, management is required to make assumptions and estimates which affect the Company's reported amounts of assets and liabilities and the results of operations. Estimates and assumptions involve future events and may change. The more significant accounting policies are summarized below. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Prior period financial statements are also restated to include the accounts of companies which are acquired and accounted for as pooling of interests. Results of operations of companies acquired subject to purchase accounting are included from the dates of acquisition. In accordance with purchase accounting, assets and liabilities of purchased companies are stated at fair values, less accumulated amortization and depreciation since the dates of acquisition. The excess of cost over fair value of the net assets acquired is being amortized on the straight-line method over a fifteen-year period. SECURITIES HELD FOR SALE AND INVESTMENT At acquisition, securities are classified into one of three categories: trading, held for sale or investment. 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 stock- holders' 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 amortization or accretion of premiums or discounts on the associated securities. Trading securities are bought and held principally with the intention of selling them in the near term. The Company currently has no trading securities. Securities that are being held for indefinite periods of time, including secur- ities that management intends to use as a part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepay- ment risk, to meet liquidity needs, the need to increase regulatory capital or other similar factors, are classified as securities held for sale and are stated 37 at fair value. Fair value is based on market prices quoted in financial publi- cations or other independent sources. Net unrealized gains or losses are excluded from earnings and reported, net of applicable income taxes, as a separate component of stockholders' equity until realized. Securities for which the Company has the ability and positive intent to hold until maturity are classified as securities held for investment and are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income on the level yield method. Certain changes in circumstances and other events that are isolated, nonrecurring and unusual for the Company that could not have been reasonably anticipated may cause the Company to change its intent to hold a certain security to maturity without necessarily calling into question its intent to hold other securities for investment. Realized gains or losses on securities held for sale or investment are accounted for using the specific security. A decline in the fair value of any security held for sale or investment below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Mortgage-backed securities represent a significant portion of the security portfolios. Amortization of premiums and accretion of discounts on mortgage-backed securities are analyzed in relation to the corresponding prepayment rates, both historical and estimated, using a method which approximates the level yield method. LOANS HELD FOR SALE The Company's operations include a limited amount of mortgage banking. Mortgage banking activities include the origination of residential mortgage loans for sale to various investors. Mortgage loans originated and intended for sale in the secondary market, principally under programs with the Government National Mortgage Association (GNMA) or the Federal National Mortgage Association (FNMA), are carried at the lower of cost or market value. Mortgage banking revenues, including origination fees, servicing fees, net gains on sales of servicing rights, net gains or losses on sales of mortgages and other fee income amount to less than 1% of the Company's total revenue for the years ended December 31, 1997, 1996 and 1995. Loans sold with retained servicing rights are also an immaterial amount. 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. The Company evaluates the collectibility of both contractual interest and contractual principal of all receivables when assessing the need for loss recognition. 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, 38 that loan is generally placed on nonaccrual status. 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. The Company recognizes interest income on nonaccrual impaired loans equal to the amount of interest received, if any, in cash. All changes in the present value of estimated future cash flows are recorded as an adjustment to the allowance for loan losses and ultimately the provision for loan losses. No interest income is recognized for changes in present value attributable to the passage of time. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions for loan losses charged to operations and is maintained at a level adequate to absorb estimated credit losses associated with the loan portfolio, including binding commitments to lend and off-balance sheet credit instruments. The allowance for loan losses is decreased by charge offs, net of recoveries. 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 loan loss experience, 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. Certain impaired loans are reported 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, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to be increased, such increase is recorded as provision for loan losses. GOODWILL AND OTHER INTANGIBLE ASSETS Net assets of subsidiaries acquired in purchase transactions are recorded at fair value at the date of acquisition. The excess of cost over net assets acquired (goodwill) is amortized by systematic charges in the statement of income over the period benefited. Management evaluates the periods of amortization continually to determine whether later events and circumstances warrant revised estimates. Currently, amortization is provided on a straight-line basis over fifteen years. Accumulated amortization was $5.1 million at December 31, 1997 and $4.1 million at December 31, 1996. Amortization expense was $977,724, $879,164 and $829,884, for the years ended December 31, 1997, 1996 and 1995, respectively. 39 Included on the consolidated balance sheets, are core deposit intangibles arising from purchase acquisitions in 1997 and 1996. The carrying amount at December 31, 1997 is $2,497,628. Currently, amortization of the intangible asset is provided on an accelerated basis over ten years. Accumulated amortization was $190,056 at December 31, 1997 and $21,724 at December 31, 1996. Amortization expense was $168,332 and $21,724 for the years ended December 31, 1997 and 1996, respectively. The Company recognizes a loss on impaired assets, other than loans, when the carrying amount of the asset may not be recoverable. Management periodically evaluates whether events or circumstances have occurred that would result in impairment in the value or life of goodwill or other intangibles. Management considers an intangible to be potentially impaired if internal management reports for respective business units show a net loss before amortization of intangibles. The recoverability of the asset is then evaluated using undiscounted cash flow projections. 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. STOCK OPTIONS The Company recognizes no compensation cost for stock option grants in the financial statements. INCOME TAXES Income tax expense is reported as the total of current income taxes payable and the net change in deferred income taxes payable provided for temporary differences. Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the values for income tax purposes. Deferred income taxes are recorded at the statutory Federal rates in effect at the time that the temporary differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based upon management's judgment of available evidence, are not expected to be realized. The significant components of deferred tax assets and liabilities are 40 principally related to unrealized net gain or loss on securities, provision for loan losses, amortization of premiums on debt securities, depreciation and deferred compensation. The Company files a consolidated Federal income tax return which includes its subsidiaries. PER COMMON SHARE (EPS) DATA Share and per share information have been adjusted to give effect to stock dividends in the three years ended December 31, 1997. EPS Reconciliation Per share Year Ended December 31, 1997 Income Shares amount _______________________________________________________________________________ (in thousands) Basic EPS Income available to common stockholders $16,187 9,998 $1.62 ==== Effect of dilutive securities Stock options -- 190 ------ ------ Diluted EPS $16,187 10,188 $1.59 ==== EPS Reconciliation Per share Year Ended December 31, 1996 Income Shares amount _______________________________________________________________________________ (in thousands) Basic EPS Income available to common stockholders $17,164 9,787 $1.75 ==== Effect of dilutive securities Stock options -- 169 ------ ------ Diluted EPS $17,164 9,956 $1.72 ==== EPS Reconciliation Per share Year Ended December 31, 1995 Income Shares amount _______________________________________________________________________________ (in thousands) Basic EPS Income available to common stockholders $14,767 9,600 $1.54 ==== Effect of dilutive securities Stock options -- 204 ------ ------ Diluted EPS $14,767 9,804 $1.51 ==== 41 CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks and highly liquid securities purchased with a maturity of three months or less to be cash equivalents. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform with the 1997 presentation. The reclassifications had no effect on previously reported stockholders' equity or net income. 2. BUSINESS COMBINATIONS During the three year period ended December 31, 1997, the Company was a party to one business combination, which was accounted for using the purchase method of accounting. Results of operations subject to purchase accounting are included from the date of acquisition. Disclosure of pro forma condensed results of operations as if this acquisition were consummated as of the beginning of the period have been omitted due to the immaterial effect on operations. On August 30, 1996, the Company consummated the acquisition of Peoples First, F.S.B., formerly Guaranty Federal Savings Bank, and subsequent merged the Savings Bank into Peoples Bank during 1997. The Company acquired all of the outstanding shares of the Savings Bank in exchange for 315,002 shares of Peoples First Corporation common stock. The Saving Bank had three locations in Clarksville, Tennessee, immediately southeast of the market area served by the Company's other subsidiary banks. Immediately prior to the acquisition, the savings bank had total assets of approximately $55.9 million. On October 9, 1997, the lead bank consummated the purchase of Republic Bank & Trust Company's Benton, Kentucky branch. The cash purchase included one branch office facility and deposits of approximately $33.0 million. This purchase doubled the lead bank's presence in Marshall County, Kentucky. On November 17, 1997, the Company entered into a definitive Agreement and Plan of Merger (Agreement) with Union Planters Corporation (Union Planters). Under the agreement, each common outstanding share of the Company will be exchanged for 0.6 share of Union Planters' common stock. Each of the Company's out- standing incentive stock option and nonqualified stock option will be converted to options to acquire Union Planters' common stock at the same 0.6 exchange ratio. In connection with the Agreement, the Company granted Union Planters an option to purchase 19.9% of its common stock in certain circumstances. The transaction is subject to regulatory approval, Company shareholder approval and other customary terms and conditions. The merger is expected to be consummated in May 1998. 3. CASH AND DUE FROM BANKS The Company's banking subsidiaries are required to maintain certain reserve balances in cash with Federal Reserve Banks (FRB). The reserve balances maintained in accordance with FRB requirements, partially satisfied by vault cash on hand, as of December 31, 1997 and 1996 were $8.8 million and $8.0 million, respectively. The average amount of required reserves were $7.7 million and $12.8 million, respectively, for the years ended December 31, 1997 and 1996. 42 4. SECURITIES HELD FOR SALE AND INVESTMENT The amortized cost and fair value of securities held for sale as of December 31, 1997 and 1996 are summarized as follows: Gross Gross Securities Held For Sale Amortized unrealized unrealized Fair December 31, 1997 cost gains losses value _______________________________________________________________________________ (in thousands) U.S. treasury and agencies $74,858 $700 ($84) $75,474 Mortgage-backed securities 131,585 1,875 (136) 133,324 Federal Home Loan Bank stock 7,472 0 0 7,472 Federal Reserve Bank stock 1,601 0 0 1,601 ------- ------- ------- ------- $215,516 $2,575 ($220) $217,871 ======= ======= ======= ======= Gross Gross Securities Held For Sale Amortized unrealized unrealized Fair December 31, 1996 cost gains losses value _______________________________________________________________________________ (in thousands) U.S. treasury and agencies $58,604 $307 ($310) $58,601 Mortgage-backed securities 108,487 916 (501) 108,902 Federal Home Loan Bank stock 13,395 30 0 13,425 Federal Reserve Bank stock 1,424 0 0 1,424 ------- ------- ------- ------- $181,910 $1,253 ($811) $182,352 ======= ======= ======= ======= The amortized cost and fair value of securities held for investment as of December 31, 1997 and 1996 are summarized as follows: Securities Gross Gross Held for Investment Amortized unrealized unrealized Fair December 31, 1997 cost gains losses value _______________________________________________________________________________ (in thousands) U.S. treasury and agencies $2,708 $3 ($12) $2,699 Mortgage-backed securities 33,200 322 (67) 33,455 State and political subdivisions 62,614 3,323 0 65,937 Other 100 0 0 100 ------- ------- ------- ------- $98,622 $3,648 ($79) $102,191 ======= ======= ======= ======= 43 Securities Gross Gross Held for Investment Amortized unrealized unrealized Fair December 31, 1996 cost gains losses value _______________________________________________________________________________ (in thousands) U.S. treasury and agencies $7,102 $7 ($35) $7,074 Mortgage-backed securities 53,819 486 (168) 54,137 State and political subdivisions 60,938 2,830 (18) 63,750 Other 100 0 0 100 ------- ------- ------- ------- $121,959 $3,323 ($221) $125,061 ======= ======= ======= ======= Proceeds from sales of securities during 1997 and 1995 were $3,676,900 and $12,085,690, respectively. Gross gains of $0 and $178,143 and no gross losses were realized on those sales during 1997 and 1995, respectively. There were no sales of securities during 1996. The amortized cost, estimated fair value and the weighted average yield of securities held for sale and held for investment at December 31, 1997, by estimated maturity, are shown below. Actual maturities will differ from the depicted maturities because of the borrowers' right to call or prepay obligations with or without prepayment penalties. Management evaluates, on an ongoing 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 Weighted Maturity Distribution Amortized Fair average December 31, 1997 cost value yield _______________________________________________________________________________ (in thousands) U.S. treasury and agencies 1 year or less $13,002 $12,986 5.49% Over 1 through 5 years 56,716 57,266 6.44 Over 5 through 10 years 5,140 5,222 6.68 Over 10 years 0 0 -- Mortgage-backed securities 1 year or less 9,721 9,763 6.54 Over 1 through 5 years 99,128 100,437 6.76 Over 5 through 10 years 15,232 15,523 6.98 Over 10 years 7,504 7,601 6.27 Federal Home Loan Bank stock 7,472 7,472 7.17 Federal Reserve Bank stock 1,601 1,601 6.00 ------- ------- $215,516 $217,871 6.59% ======= ======= ==== 44 Securities Held for Investment Weighted Maturity Distribution Amortized Fair average December 31, 1997 cost value yield _______________________________________________________________________________ (in thousands) U.S. treasury and agencies 1 year or less $209 $208 4.99% Over 1 through 5 years 2,499 2,491 6.27 Mortgage-backed securities 1 year or less 12,691 12,685 5.75 Over 1 through 5 years 14,829 15,020 7.05 Over 5 through 10 years 3,238 3,268 5.90 Over 10 years 2,443 2,481 7.04 State and political subdivisions 1 year or less 4,811 4,853 6.38 Over 1 through 5 years 16,827 17,689 6.25 Over 5 through 10 years 29,305 31,174 5.78 Over 10 years 11,670 12,222 5.36 Other Over 1 through 5 years 100 100 7.88 ------- ------- $98,622 $102,191 6.07% ======= ======= ==== At December 31, 1997 and 1996, securities with carrying values of approxi- mately $186.4 million and $151.8 million, respectively, were pledged to secure repurchase agreements, public and trust deposits and for other purposes as required by law. Amounts advanced under repurchase agreements represent short-term borrowings and are reflected as liabilities in the consolidated balance sheets. 5. LOANS RECEIVABLE The Company's lending activities are concentrated primarily in 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, 1997 and 1996, total loans to any group of customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans, although the geographical concentration is a necessary factor for regional banks. 45 Major classification of loans receivable are as follows: December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Commercial, financial and agricultural $119,924 $120,283 Real estate Construction 24,157 29,933 Residential mortgage 468,330 421,129 Commercial mortgage 188,502 174,576 Consumer, net of unearned income of $1,410 and $4,854 at December 31, 1997 and 1996 298,724 289,653 Other 2,070 855 --------- --------- 1,101,707 1,036,429 Allowance for loan losses (16,442) (14,795) --------- --------- $1,085,265 $1,021,634 ========= ========= 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 borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, income producing commercial properties, real estate and other property owned by the borrowers. Activity in the allowance for loan losses was as follows for the three-year period ended December 31, 1997: Allowance for Loan Losses Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) Balance at beginning of year $14,795 $13,371 $12,188 Allowance associated with loans acquired --- 481 --- Provision charged to expense 5,041 2,664 2,167 Loans charged off (3,742) (2,524) (1,307) Recoveries of loans previously charged off 348 803 323 ------ ------ ------ Net loans charged off (3,394) (1,721) (984) ------ ------ ------ Balance at end of year $16,442 $14,795 $13,371 ====== ====== ====== Nonaccrual and renegotiated loans totaled $8.4 million and $7.4 million at December 31, 1997 and 1996, respectively. Loans, except large groups of smaller-balance homogeneous loans, for which the full collection of principal 46 and interest is not probable, or a delay in payments is expected, are evaluated for impairment. The Company measures and reports impaired loans that are not part of a homogenous pool of similar loans at either the present value of expected future cash flows discounted at the loan's effective rate, the market price of the loan, or fair value of the underlying collateral if the loan is collateral dependent. Information regarding impaired loans at December 31, 1997 and 1996 is as follows: Impaired Loans December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Recorded investment in impaired loans $6,300 $4,454 Less portion for which no allowance for loan losses is allocated 0 325 ------ ------ Portion of impaired loan balance for which an allowance for loan losses is allocated $6,300 $4,129 ====== ====== Portion of allowance for loan losses allocated to the impaired loan balance $1,638 $1,142 ====== ====== Information regarding impaired loans is as follows for the years ended December 31, 1997 and 1996: Impaired Loans Year Ended December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Average investment in impaired loans $5,176 $4,926 Interest income recognized on impaired loans 572 488 Interest income recognized on impaired loans on cash basis 38 0 Certain officers and directors of the Company and its subsidiaries and certain corporations and individuals related to them are loan customers of the Company's banks. The activity of these loans during the years ended December 31, 1997 and 1996 is summarized below. Such 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. These loans did not involve more than the normal risk of collectibility. 47 Loans to Officers and Directors Year Ended December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Balance at beginning of year $23,007 $13,445 Additions 642 9,905 Repayments (438) (743) Changes in officer and director status (14,803) 400 ------ ------ Balance at end of year $8,408 $23,007 ====== ====== 6. PREMISES AND EQUIPMENT A summary of premises and equipment is as follows: December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Land $3,528 $2,738 Buildings 20,112 19,580 Equipment 16,282 14,544 Leasehold improvements 994 994 ------ ------ 40,916 37,856 Accumulated depreciation and amortization (20,606) (18,480) ------ ------ $20,310 $19,376 ====== ====== The amount of depreciation and amortization related to premises and equipment that was charged to operating expenses in 1997, 1996 and 1995 was $2,439,843 $2,148,864 and $1,857,202 respectively. 7. DEPOSIT LIABILITIES The aggregate amount of time deposits, each with a minimum balance of $100,000, was $105.6 million and $102.5 million at December 31, 1997 and 1996, respectively. Interest expense on time deposits over $100,000 was $6.4 million, $5.3 million and $6.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Also included in deposit liabilities were brokered time deposits of $13.4 million and $15.5 million at December 31, 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities of time deposits were as follows: 48 Time Deposit Maturities For the years ending December 31, __________________________________________________________________ (in thousands) 1998 $380,395 1999 151,931 2000 57,677 2001 12,258 2002 and thereafter 7,833 ------- $610,094 ======= 8. SHORT-TERM BORROWINGS Federal funds purchased, repurchase agreements and U.S. treasury notes generally represent borrowings with overnight maturities as do certain short-term advances from the Federal Home Loan Bank (FHLB) of Cincinnati. Information pertaining to the subsidiary banks' short-term borrowings is summarized below: Short-term Borrowings 1997 1996 1995 _______________________________________________________________________________ (dollars in thousands) Federal funds purchased Average balance $21,125 $19,284 $13,414 Year end balance 26,824 21,525 15,100 Highest month-end balance 46,725 33,100 35,000 Average interest rate 5.69% 5.44% 6.07% Year end interest rate 5.82% 6.40% 5.60% Repurchase agreements Average balance $27,273 $28,041 $25,794 Year end balance 33,810 28,415 23,869 Highest month-end balance 33,810 36,624 32,120 Average interest rate 4.69% 4.48% 4.64% Year end interest rate 4.43% 4.74% 4.05% Short-term FHLB advances Average balance $48,382 $63,161 $46,733 Year end balance 50,800 79,400 54,500 Highest month-end balance 79,900 83,700 54,500 Average interest rate 5.72% 5.51% 6.19% Year end interest rate 5.95% 5.54% 5.85% U.S. treasury notes Average balance $3,505 $1,973 $0 Year end balance 3,038 2,826 0 Highest month-end balance 11,828 4,899 0 Average interest rate 5.32% 5.06% -- Year end interest rate 5.26% 5.16% -- At December 31, 1997, the subsidiary banks had total lines-of-credit for Federal funds purchased from unaffiliated banks of $55.0 million, of which $28.2 million was undrawn and available, and total lines-of-credit for U.S. treasury notes of $15.0 million, of which $11.9 million was undrawn and available. 49 9. LONG-TERM BORROWINGS Information pertaining to the subsidiary banks' long-term borrowings is summarized below: December 31, 1997 1996 __________________________________________________________________ (in thousands) Federal Home Loan Bank advances $43,104 $14,013 ====== ====== The subsidiary banks obtain various short-term and long-term advances from the FHLB under Blanket Agreements for Advances and Security Agreements (Agreements). The Agreements entitle the subsidiary banks to borrow funds from the FHLB to fund mortgage loan programs and satisfy other funding needs. At December 31, 1997, the subsidiary banks had total secured lines-of-credit from the FHLB of $235.6 million, of which $141.7 million was undrawn and available. Interest rates on long-term advances at December 31, 1997 range from 5.10% to 8.10%. Most all interest rates are variable and at December 31, 1997, no rates are fixed for more than a one-year period. FHLB advances are collateralized by the banks' FHLB stock, other securities in the approximate amount of $9.5 million and certain single-family first mortgage loans in the approximate amount of $339.2 million. As members of the FHLB system, the Company's subsidiary banks must hold a minimum of FHLB stock equal to one percent of home mortgage related assets. Additional FHLB stock ownership is required as the level of advances increases. The subsidiary banks are in compliance with the FHLB stock ownership requirements with a total required investment of $7.5 million at December 31, 1997. The long-term advances provide for scheduled monthly payments but may be prepaid at the option of the subsidiary banks with the payment of a premium. Annual minimum principal repayment requirements for long-term borrowings for the years 1998 through 2002 are $1,040,459, $10,575,667, $20,504,617, $545,424 and $3,574,931, respectively. 10. 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 50 necessarily represent future cash requirements. Commitments to extend credit and standby letters of credit are subject to the same underwriting and collater- alizing standards as on-balance-sheet items. Contractual commitments to extend credit and standby letters of credit at December 31, 1997 and 1996 are summarized as follows: Financial Instruments with Off-Balance-Sheet Risk December 31, 1997 1996 _______________________________________________________________________________ (in thousands) Contractual commitments to extend credit $136,256 $126,331 Standby letters of credit 15,160 11,882 Of the total commitments to extend credit at December 31, 1997 and 1996, $0 and $1,000, respectively, represent fixed-rate loan commitments. 11. EMPLOYEE BENEFITS The Company maintains a noncontributory Employee Stock Ownership Plan (ESOP) and an employer matching 401(k) Plan. The 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 $260,000, $236,130 and $215,360 for the years ended 1997, 1996 and 1995, respectively. The ESOP's investments include 230,990 and 300,363 shares of the Company's common stock at December 31, 1997 and 1996, respectively. The fair value of the Company's common stock owned by the ESOP was $9.0 million and $7.3 million at December 31, 1997 and 1996, respectively. Participants may elect to receive their benefits either in a lump-sum cash amount or in shares of Company stock. 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, 1997, 1996 and 1995, the Company's required matching contribution amounted to $302,496, $258,747 and $243,924, respectively. Employees have several investment options in which contributions may be invested. 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 retired employee's expense. There was no cost for employee benefits for retired employees in 1997, 1996 and 1995. 12. STOCKHOLDERS' EQUITY AUTHORIZED CAPITAL STOCK The Company has six million authorized shares of no par preferred stock and thirty million authorized shares of no par, $0.7812 stated value common stock. 51 SHARE PURCHASE RIGHTS PLAN In January of 1995, the Board of Directors of the Company adopted a Share Purchase Rights Plan and distributed a dividend of one Preferred Share Purchase Right (Right) for each outstanding common share of the Company and for each common share issued thereafter. The Rights are generally designed to deter coercive takeover tactics and to encourage all persons interested in acquiring control of the Company to deal with each shareholder on a fair and equal basis. Each Right trades in tandem with its respective share of common stock until the occurrence of certain events, in which case it would separate from the common stock and entitle the registered holder, subject to the terms of the Rights Agreement, to purchase certain equity securities at a price below their market value. The Company has not issued any of the authorized no par preferred stock. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN In 1987, the Board of Directors of the Company adopted the Peoples First Corporation Share Owner Dividend Reinvestment and Stock Purchase Plan (DRIP), and amended the plan during 1994. The DRIP provided for the issuance of 1,203,930 shares of authorized but previously unissued common stock. On certain investment dates, shares may be purchased with all or a portion of reinvested dividends or with optional cash payments not to exceed $3,000. The price of shares purchased pursuant to the DRIP is the average market price reported by NASDAQ for the last five trading days of the month preceding the dividend payment month. At December 31, 1997 and 1996, 694,930 shares and 756,032 shares were reserved for issuance under the DRIP. Shares issued under the DRIP totaled 61,102, 74,717 and 71,858 shares in 1997, 1996 and 1995, respectively. After the fourth quarter dividend cycle of 1997, the Board of Directors terminated the DRIP. STOCK OPTION PLAN The Peoples First Corporation 1986 Stock Option Plan (Option Plan), as amended in 1994, authorizes the granting to key employees of the Company incentive stock options and nonqualified stock options to purchase common stock of the Company at market value at the time the options are granted. The Option Plan authorizes grants of options to purchase up to ten percent of the Company's outstanding common shares. The authorized number of option shares at December 31, 1997 was 1,000,712 of which 150,675 is available for further grant under the Option Plan. Shares sold under the Option Plan may be either unissued authorized shares or shares reacquired by the Company. Options granted are exercisable, subject to vesting and other requirements, at varying times from the first through the tenth year after the grant date. Optionees may exercise their options with cash or with shares of the Company's common stock. No compensation cost is recognized for stock option grants in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options, the Company's net income and net income per common share would have been the pro forma amounts indicated below, considering only options granted in 1997, 1996 and 1995. The full impact of calculating compensation cost for stock options is not reflected because compensation cost is reflected over the options' vesting period of up to ten years and compensation cost for options granted prior to January 1, 1995 is not considered. 52 Pro Forma Net Income Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands, except per share data) Net Income As reported $16,187 $17,164 $14,767 Pro forma 16,120 17,103 14,749 Earnings per Common Share - Basic As reported 1.62 1.75 1.54 Pro forma 1.62 1.75 1.54 Earnings per Common Share - Assuming dilution As reported 1.59 1.72 1.51 Pro forma 1.59 1.72 1.51 The per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $5.87, $4.92 and $5.03 on the date of grant using an option-pricing model (Black Scholes) with the following weighted-average assumptions: 1997 - 3.67% expected dividend yield, 24.72% expected volatility, 6.29% risk-free interest rate and ten year expected life; 1996 - 3.28% expected dividend yield, 24.63% expected volatility, 6.16% risk-free interest rate and eight year expected life; 1995 - 2.50% expected dividend yield, 23.21% expected volatility, 5.53% risk-free interest rate and ten year expected life. Weighted average Number exercise Stock Option Plan Activity of shares price _______________________________________________________________________________ Outstanding at December 31, 1994 602,844 11.04 Granted 43,549 21.32 Exercised (114,281) 7.67 Forfeited (25,051) 13.93 ------- Outstanding at December 31, 1995 507,061 12.53 Granted 82,974 23.22 Exercised (12,740) 8.59 Forfeited (10,304) 19.56 ------- Outstanding at December 31, 1996 566,991 $14.06 Granted 15,000 26.13 Exercised (11,025) 9.70 Forfeited (13,891) 20.81 ------- Outstanding at December 31, 1997 557,075 $14.31 ======= At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $6.40 - $26.13 and 4.5 years, respectively. At December 31, 1997 and 1996, the number of shares subject to options that were exercisable was 557,075 and 329,709, respectively. 53 RETAINED EARNINGS RESTRICTION In connection with the Company's savings bank subsidiary conversion from mutual to stock form of ownership during 1991, the subsidiary restricted the amount of retained earnings at that date by establishing a liquidation account equal to $6,750,000 for the purpose of granting to eligible depositors a priority in the event of future liquidation. Only in such an event, an eligible depositor who continues to maintain an account will be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account decreases in an amount proportionately corresponding to decreases in the deposit account balances of the eligible account holders. DIVIDEND LIMITATIONS Payment of dividends by the subsidiary banks, which is the principal source of funds for payment of cash dividends by the Company to its shareholders, are subject to various national and/or state regulatory restrictions. At December 31, 1997, total retained earnings of the Company's direct subsidiaries was approximately $89.2 million, of which $28.7 million was available for payment of dividends without approval by the applicable regulatory authority. REGULATORY CAPITAL The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of the entity's assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The Company's and subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Company and subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Managements believes, as of December 31, 1997, that the Company and subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notification from the Office of the Comptroller of the Currency categorized the Company's only significant subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since those notifications that management believes have changed the institutions' category. 54 The Company's and Peoples Bank's actual capital amounts and ratios are also presented in the following table. Totals of $0.0 and $3.7 million were effectively deducted from capital for interest-rate risk in 1997 and 1996, respectively.
To Be Well Capitalized Under For Capital Prompt Corrective Regulatory Capital Actual Adequacy Purposes Action Provisions December 31, 1997 and 1996 Amount Ratio Amount Ratio Amount Ratio ______________________________________________________________________________________________________________________ (amounts in thousands) As of December 31, 1997: Total Capital to Risk Weighted Assets Company $154,040 14.61% $84,335 8.00% $105,419 10.00% Peoples Bank 127,963 13.35 76,656 8.00 95,819 10.00 Tier I Capital to Risk Weighted Assets Company 140,824 13.36 42,168 4.00 63,251 6.00 Peoples Bank 115,945 12.10 38,328 4.00 57,492 6.00 Tier I Capital to Average Assets Company 140,824 9.56 58,916 4.00 73,645 5.00 Peoples Bank 115,945 8.95 51,830 4.00 64,788 5.00 As of December 31, 1996: Total Capital to Risk Weighted Assets Company $144,908 14.33% $80,914 8.00% $101,143 10.00% Peoples Bank 120,572 13.77 70,045 8.00 87,556 10.00 Tier I Capital to Risk Weighted Assets Company 132,986 13.15 40,457 4.00 60,686 6.00 Peoples Bank 109,920 12.55 35,022 4.00 52,534 6.00 Tier I Capital to Average Assets Company 132,986 9.55 55,688 4.00 69,609 5.00 Peoples Bank 109,920 9.42 46,690 4.00 58,362 5.00
13. INCOME TAXES The current and deferred portions of income tax expense were as follows: Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) Current taxes $8,903 $7,626 $6,762 Deferred taxes (972) 352 (316) ----- ----- ----- Income tax expense $7,931 $7,978 $6,446 ===== ===== ===== 55 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, 1997 1996 1995 _______________________________________________________________________________ (in thousands) Tax computed at statutory rates $8,598 $8,800 $7,425 Increase (decrease) in taxes resulting from: Tax-exempt income (1,162) (1,266) (1,328) Goodwill and other intangible asset amortization 343 308 290 Other, net 152 136 59 ----- ----- ----- Income tax expense $7,931 $7,978 $6,446 ===== ===== ===== Not all temporary differences are accounted for through income tax expense on the consolidated statements 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, 1997 1996 _______________________________________________________________________________ (in thousands) Deferred tax assets: Allowance for loan losses $5,494 $4,871 Deferred compensation 257 487 Other 184 111 ----- ----- 5,935 5,469 Deferred tax liabilities: Unrealized security gains (139) (35) Stock dividends on securities (885) (675) Premises and equipment (1,409) (1,346) Other (512) (470) ----- ----- (2,945) (2,526) ----- ----- Net deferred tax assets $2,990 $2,943 ===== ===== Deferred tax assets have not been reduced by a valuation allowance. Based on the weight of available evidence, management believes it is more likely than not all of the deferred tax assets will be realized. Neither current or deferred taxes have been provided for approximately $3.3 million of income at December 31, 1997 and 1996 which represents allocations for bad debt deductions for tax purposes only. Under existing tax regulations, if the amounts that qualify for Federal income tax purposes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to Federal income tax at the then current corporate rate. 56 14. CONTINGENCIES LEGAL PROCEEDINGS In the ordinary course of business, there are various legal proceedings pending against the Company and its subsidiaries. Management, after consultation with legal counsel, is of the opinion that the ultimate resolution of these proceedings will have no material effect on the consolidated financial condition or results of operations of the Company. 15. SUPPLEMENTAL INCOME STATEMENT INFORMATION Details of noninterest income and noninterest expense are as follows: Noninterest Income Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) Service fees on deposits $5,199 $4,119 $3,831 Net securities gains 0 0 178 Trust department fees 1,495 1,330 1,220 Insurance commissions 507 578 664 Bankcard fees 695 648 565 Other income 2,652 1,860 1,486 ------ ------ ------ $10,548 $8,535 $7,944 ====== ====== ====== Noninterest Expense Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) Salaries $15,096 $13,854 $13,302 Employee benefits 2,634 2,500 2,411 Occupancy expense 2,022 1,814 1,769 Equipment expense 2,689 2,171 1,885 FDIC insurance expense 208 1,637 1,338 Data processing expense 3,080 2,590 2,245 Bankshare taxes 1,612 1,533 1,349 Goodwill and other intangible asset amortization 1,146 901 830 Legal, accounting and consulting fees 1,996 534 705 Other expense 8,797 7,309 6,324 ------ ------ ------ $39,280 $34,843 $32,158 ====== ====== ====== 16. PARENT COMPANY FINANCIAL INFORMATION Following are condensed balance sheets of Peoples First Corporation (parent company only) as of December 31, 1997 and 1996, and the related condensed statements of income and cash flows for the years ended 1997, 1996 and 1995: 57 Condensed Balance Sheets December 31, 1997 1996 __________________________________________________________________ (in thousands) ASSETS Cash in subsidiary bank $6,305 $3,329 Investment in subsidiaries 148,108 141,257 Other assets 562 320 ------- ------- $154,975 $144,906 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $248 $357 Stockholders' equity Common stock 7,818 7,812 Surplus 70,627 69,691 Retained earnings 74,754 66,762 Unrealized net gain on securities held for sale 1,528 284 ------- ------- 154,727 144,549 ------- ------- $154,975 $144,906 ======= ======= Common shares issued and outstanding 10,007 9,999 58 Condensed Statements of Income Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) INCOME Dividends from subsidiaries $11,500 $9,100 $5,078 Other income 4 3 3 ------ ------ ------ 11,504 9,103 5,081 EXPENSE Interest expense 6 11 44 Legal and accounting fees 962 217 284 Other expense 380 390 378 ------ ------ ------ 1,348 618 706 ------ ------ ------ Income before income tax benefit and equity in undistributed income of subsidiaries 10,156 8,485 4,375 Income tax benefit 425 200 164 Income before equity in ------ ------ ------ undistributed income of subsidiaries 10,581 8,685 4,539 Equity in undistributed income of subsidiaries 5,606 8,479 10,228 ------ ------ ------ NET INCOME $16,187 $17,164 $14,767 ====== ====== ====== 59 Condensed Statement of Cash Flows Year Ended December 31, 1997 1996 1995 _______________________________________________________________________________ (in thousands) OPERATING ACTIVITIES Net income $16,187 $17,164 $14,767 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (5,606) (8,479) (10,228) Amortization and other, net (282) 137 (271) Net Cash Provided by ------ ------ ------ Operating Activities 10,299 8,822 4,268 FINANCING ACTIVITIES Repayments of notes payable 0 0 (1,530) Proceeds from issuance of common stock 401 696 1,418 Repurchase of common stock (884) (1,882) 0 Cash dividends paid (6,840) (5,104) (3,851) ------ ------ ------ Net Cash Used by Financing Activities (7,323) (6,290) (3,963) Net Increase (Decrease) in Cash 2,976 2,532 305 and Cash Equivalents Cash and Cash Equivalents at Beginning of Year 3,329 797 492 ------ ------ ------ Cash and Cash Equivalents at End of Year $6,305 $3,329 $797 ====== ====== ====== SUPPLEMENTAL DISCLOSURES Cash paid for interest expense $0 $0 $53 Cash received for income taxes (244) (558) (345) NONCASH INVESTING AND FINANCING TRANSACTIONS Dividends reinvested 1,356 1,065 753 17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS To value financial instruments for both on- and off-balance sheet assets and liabilities where it is practicable to estimate that value, quoted market prices are utilized by the Company where readily available. If quoted market prices are not available, fair values are based on estimates using present value and other valuation techniques. These techniques are 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. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company. 60 The following methods and assumptions were used in estimating the fair value for financial instruments. CASH, DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE AND SHORT-TERM BORROWINGS The carrying amount reported for cash, due from banks, accrued interest receiv- able, accrued interest payable and short-term borrowings approximates the fair value for those assets and liabilities. DEBT AND EQUITY SECURITIES For securities held both for sale and investment, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. LOANS Loan balances are assigned fair values based on a discounted cash flow analysis. The discount rate is based on the treasury yield curve, with rate adjustments for credit risk, liquidity, servicing costs and the prepayment uncertainty. DEPOSITS The fair value for demand deposits and interest-bearing deposits with no fixed maturity date is considered to be equal to the amount payable on demand or maturity date. Time deposits are 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. LONG-TERM BORROWINGS The fair value of long-term borrowings is based on a 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 $100,000 for 1997 and 1996. 61 The book values and estimated fair values for financial instruments as of December 31, 1997 and 1996 are reflected below. Financial Instruments December 31, 1997 Book value Fair value _______________________________________________________________________________ (in thousands) Financial Assets Cash and due from banks $46,820 $46,820 Securities held for sale 217,871 217,871 Securities held for investment 98,622 102,191 Loans held for sale 2,140 2,140 Loans receivable, net 1,085,265 1,136,838 Accrued interest receivable 10,910 10,910 Financial Liabilities Deposits 1,176,841 1,183,277 Short-term borrowings 114,472 114,472 Long-term borrowings 43,104 43,157 Accrued interest payable 7,035 7,035 Financial Instruments December 31, 1996 Book value Fair value _______________________________________________________________________________ (in thousands) Financial Assets Cash and due from banks $43,285 $43,285 Securities held for sale 182,352 182,352 Securities held for investment 121,959 125,061 Loans held for sale 1,886 1,886 Loans receivable, net 1,021,634 1,063,034 Accrued interest receivable 9,850 9,850 Financial Liabilities Deposits 1,115,253 1,118,860 Short-term borrowings 132,167 132,167 Long-term borrowings 14,013 13,854 Accrued interest payable 6,297 6,297 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the years ended December 31, 1997, 1996 and 1995 and in the subsequent interim period, there has been no change in, or disagreements on accounting matters with, the Company's independent auditor. 62 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's Board of Directors consists of 17 members, divided into three classes. Directors are elected to three-year terms, and one class of directors is elected at each annual meeting of shareholders. The Company's Articles of Incorporation provide that the number of its directors will be fixed from time to time by the Board of Directors. Between meetings of shareholders held for the election of directors, the Board of Directors may increase or decrease the number of directors last approved by the shareholders by thirty percent (30%) or less. Any vacant directorship, whether resulting from an increase in the number of directors or otherwise, may be filled by the affirmative vote of the majority of the Directors then in office, whether or not a quorum of the Board of Directors exists at the time of the vote, for a term of office continuing only until the next election of directors by the shareholders. A decrease in the number of directors, however, will not have the effect of shortening the term of any incumbent director. The following information is furnished as of December 31, 1997, with respect to each of the Company's directors and nondirector executive officers. Unless otherwise indicated, each person has been engaged in the listed occupation for the past five years.
Shares of Director or Common Name, Age, Principal Occupation or Position, Executive Stock Other Directorships Officer Term Beneficially Percentage since ends Owned (1) of Class (2) DIRECTORS Walter L. Apperson, 64 1992 2000 1,981 * President and Chief Executive Officer, Murray Ledger and Times, a daily newspaper Glen Berryman, 59 1996 1998 8,520 * Independent insurance agent, Berryman Insurance William R. Dibert, 59 1989 2000 11,101 * President and Chief Executive Officer of Crounse Corporation, a river transportation company Joe Dick, 69 1992 1998 30,599 (3) * Vice Chairman of the Corporation R. E. Fairhurst, Jr., 50 1987 2000 114,943 (4) 1.10% Owner of Fairhurst Realty, real estate broker William Rowland Hancock, 49 1989 1998 42,154 (5) * President of Hancock Fabrics, Inc., a fabric retailer 63 Shares of Director or Common Name, Age, Principal Occupation or Position, Executive Stock Other Directorships Officer Term Beneficially Percentage since ends Owned (1) of Class (2) DIRECTORS - CONTINUED James T. Holloway, 66 Consultant, Peoples Security 1994 1999 54,491 (6) * Finance Co. Director, Southern Finance Co. Dennis W. Kirtley, 53 1994 2000 92,277 (7) * President and Chief Executive Officer of First Kentucky Federal Savings Bank Allan B. Kleet, 48 1986 1999 122,346 (8) * Principal Accounting Officer of the Corporation Aubrey W. Lippert, 56 1983 2000 222,537 (9) 2.10% Chairman of the Board, President, and Chief Executive Officer of the Corporation; Chairman of the Board and Chief Executive Officer of PFNB Joe Harry Metzger, 67 1983 1998 27,275 (10) * Vice President of R & M Grocery Co. Jerry L. Page, 63 1983 1998 135,219 (11) 1.30% Business Consultant Rufus E. Pugh, 62 1987 1999 8,796 (12) * President of Golden Eagle Distributing, Inc. a wholesale beer distributor Neal H. Ramage, 58 1989 1999 48,537 (13) * President of Peoples First of Livingston County Allan Rhodes, Jr., 46 1991 2000 19,841 (14) * President of Bluegrass Honda-BMW, Inc., an automobile dealership Mary Warren Sanders, 48 1992 1999 89,463 (15) * Certified Public Accountant with Michael D. Pierce, CPA Victor F. Speck, Jr., 61 1987 1999 42,813 (16) * President of Pico Properties, Real Estate Investments Former President of Welders Supply Company, Inc., a supplier of welding products and equipment 64 Shares of Director or Common Name, Age, Principal Occupation or Position, Executive Stock Other Directorships Officer Term Beneficially Percentage since ends Owned (1) of Class (2) EXECUTIVE OFFICERS George B. Shaw, 51 1993 9,044 (17) * President of PFNB Former President and Chief Executive Officer of Bowling Green Bank & Trust Co. David A. Long, 36 1996 7,679 (18) * Chief Operating Officer of PFNB Former President and Chief Executive Officer of Peoples First Marshall County.
* Represents 1% or less of the outstanding Common Stock. (1) In the table above, the named person has sole voting and dispositive power with respect to the reported shares unless otherwise indicated. When joint ownership is noted, the joint owners share voting and dispositive power with respect to the shares. When holdings of a family member are included but are noted as being held "individually," the family member has sole voting and investment powers with respect to the indicated shares. Employees of the Corporation or PFNB have voting but no investment power with respect to shares held in the employee's ESOP account. (2) Shares of Common Stock subject to currently exercisable options are deemed outstanding for computing the percentage of class of the person holding such options but are not deemed outstanding for computing the percentage of calss of any other person. (3) Includes 586 shares held jointly by Mr. Dick and his wife. (4) Of the listed shares, Mr. Fairhurst's wife holds 6,112 shares individually, and Mr. Fairhurst's sons hold 1,110 shares. In addition, Mr. Fairhurst holds 67,788 shares as trustee for two trusts created by his father's estate, with respect to which he has sole voting and investment power. (5) Includes 9,529 shares held jointly by Mr. Hancock and his wife and 2,258 shares owned by Mr. Hancock's minor children. (6) Includes 53,762 shares owned jointly by Mr. Holloway and his wife. (7) Includes 72,188 shares held jointly by Mr. Kirtley and his wife, 1,312 shares held individually by Mr. Kirtley's wife and 3,744 shares held in Mr. Kirtley's First Kentucky Federal ESOP account for which he has voting but no investment power. 65 (8) Includes 117,768 shares subject to currently exercisable stock options, 753 shares held individually by Mr. Kleet's wife, and 3,825 shares held in Mr. Kleet's ESOP account. Mr. Kleet disclaims beneficial ownership of the share held by his wife. (9) Includes 157,479 shares subject to currently exercisable stock options and 24,277 shares held in Mr. Lippert's ESOP account, and 210 shares held by Mr. Lippert as custodian for his grandchildren. (10) Includes 23,889 shares held individually by Mr. Metzger's wife. (11) Includes 112,843 shares held in trust for the joint benefit of Mr. Page and his wife. (12) Includes 2,210 shares held jointly by Mr. Pugh and his wife. (13) Includes 22,689 shares subject to currently exercisable stock options, 904 shares held in Mr. Ramage's ESOP account, and 24,755 shares held jointly by Mr. Ramage and his wife. (14) Includes 19,378 shares held jointly by Mr. Rhodes and his wife. (15) Includes 9,908 shares held individually by Ms. Sanders' husband and 78,594 held in trust of which Ms. Sanders is beneficial owner with voting and dispositive rights. (16) Includes 5,594 shares held individually by Mr. Speck's wife. (17) Includes 8,764 shares subject to currently exercisable stock options, and 49 shares held in Mr. Shaw's ESOP account. (18) Includes 5,478 shares subject to currently exercisable stock options and 1,594 shares held in Mr. Long's ESOP account. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors and officers of the Corporation and persons who beneficially own ten percent or more of the Common Stock to file reports with the Securities and Exchange Commission and the Corporation with respect to their beneficial ownership of the Corporation's equity securities. Based on its review of the reports furnished to the Corporation during and with respect to 1997, the Corporation believes that its directors, officers, and beneficial owners have filed all required reports in a timely manner. 66 Item 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information with respect to the compensation of the Corporation's Chief Executive Officer and its most highly compensated executive officers whose total annual salary and bonus for 1997 exceeded $100,000.
Annual Compensation Other Annual Long-Term All other Name and Principal compensa- compensation compensa- Position Year Salary Bonus tion(1) options(#) tion(2) Aubrey W. Lippert 1997 $290,000 $0 $0 $0 $8,977 Chairman of the Board, 1996 247,500 60,241 0 15,750 8,936 President and Chief 1995 225,000 43,402 0 13,230 8,798 Executive Officer of the Corporation Chairman of the Board and Chief Executive Officer of PFNB Allan B. Kleet 1997 $181,385 $0 $0 $0 $8,977 Principal Accounting Officer 1996 143,774 34,994 0 33,600 8,490 of the Corporation 1995 138,244 26,667 0 6,836 8,036 George B. Shaw 1997 $136,000 $0 $0 $0 $7,590 President of PFNB 1996 155,700 0 0 0 8,875 1995 133,560 0 0 6,615 7,765 Dennis W. Kirtley 1997 $115,224 $9,132 $14,200 $0 $6,431 President and Chief 1996 112,224 9,132 14,200 0 5,827 Executive Officer of 1995 107,096 8,674 14,200 0 6,372 Peoples First, F.S.B.
(1) Does not include perquisites, the value of which in all cases did not exceed 10% of the total of the named individual's salary and bonus. Listed amounts represent fees for service as directors of the Corporation and affiliate Banks. (2) The following amounts are included in the above table. Contributions made under the Employee Stock Ownership Plans in 1997 were Mr. Lippert $3,631; Mr. Kleet $3,631; Mr. Shaw $3,086; Mr. Kirtley $2,615. Contributions made under the 401(k) Plan in 1997 were: Mr. Lippert $4,800,; Mr. Kleet $4,800; Mr. Shaw $4,080; Mr. Kirtley $3,457. Life insurance premiums paid in 1997 were Mr. Lippert $546; Mr. Kleet $546; Mr. Shaw $424; Mr. Kirtley $359. 67 Options/SAR Grants in Last Fiscal Year
Individual Grants: Potential realizable Number of % of total value at assumed securities total options/ annual rates of stock underlying SARs granted Exercise price appreciation for options/ to employees or base Expiration option/SAR term Name SARs granted in 1997 price date 5.00% 10.00% ____________________________________________________________________________________________ Aubrey W. Lippert 0 --- --- --- --- --- Allan B. Kleet 0 --- --- --- --- --- George B. Shaw 0 --- --- --- --- --- Dennis W. Kirtley 0 --- --- --- --- --- Aggregated Otion/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values Number of securities Value of unexercised Shares underlying unexercised in-the-money options acquired on Value options at year end at year end Name exercise realized Exercisable Unexercisable Exercisable Unexercisable ____________________________________________________________________________________________ Aubrey W. Lippert 0 --- 157,479 0 $4,209,597 $0 Allan B. Kleet 0 --- 117,768 0 2,908,048 0 George B. Shaw 0 --- 23,980 0 497,458 0 Dennis W. Kirtley 0 --- 0 0 0 0
68 Director Compensation Nonemployee and employee directors other than Mr. Lippert and Mr. Kleet receive an annual fee of $4,000 for their services. Directors may elect to defer directors fees until they leave the Board. Deferred amount are deemed to have been invested in either a 30 month certificate of deposit or (effective in May 1997) in Common Stock. Joe Dick, Vice Chairman and a director of the Corporation and the former President, Chief Executive Officer and Chairman of Bank of Murray (now Peoples First of Calloway County), provided advisory services with respect to marketing, business development and oeprations to Peoples First of Calloway County from his retirement as of January 1, 1993 through December 31, 1997. For his consulting services, Mr. Dick was paid $100,000 per year during the five-year term of a consulting and non-competition agreement with the Corporation. Dennis W. Kirtley, a director of the Corporation and President of First Kentucky Federal Savings Bank, entered into a three-year employment agreement with First Kentucky as of March 10, 1994. The employment agreement provided for Mr. Kirtley's continued employment as President and Chief Executive Officer of First Kentucky (which was merged with PFNB effective February 12, 1998) for three years from that date at a base salary, wich was $115,224 in 1997. The agreement also provided for the payment of compensation and other benefits to Mr. Kirtley upon termination of his employment in certain circumstances during the term of the agreement. 69 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 1997, certain information with respect to each person known to the Corporation to beneficially own five percent or more of the outstanding Common Stock, as well as the aggregate number of shares of Common Stock beneficially owned by all of the directors and officers of the Corporation and executive officers of the Corporation's affiliate banks (the "Banks") as a group. Number of shares and nature of beneficial Percentage Name and Address ownership of class ________________________________________________________________________________ Peoples First National 1,147,544 11.5% Bank and Trust Company (1) 100 S. 4th Street P.O. Box 1920 Paducah, Kentucky 42001 All Directors and Officers of the Corporation and Executive Officers of the Banks as a Group (29) persons 1,165,406 11.2% (2) (3) (1) Includes 847,181 share PFNB holds in a Fiduciary capacity, as trustee, executor or otherwise, including 693,024 shares held with sole voting and dispositive power, and 154,157 shares held with shared voting and dispositive power. In addition, PFNB holds 300,363 shares as Trustee for the Corporation's Employee Stock Ownership Plan (the "ESOP"), with respect to which PFNB has sole dispositive power. PFNB must vote 300,363 shares as specifically directed by each ESOP member with respect to the shares allocated to that member's account. (2) The number of shares owned by individual directors and executive officers of the Corproation and the nature of their beneficial ownership are set forth in the table under "Item 10. Directors and Executive Officers of the Registrant." Other officers of the Corporation and executive officers of the Banks beneficially own 114,562 shares. (3) Shares of Common Stock subject to options that are or will become exercisable within 60 days have been deemed outstanding for computing the percentage of class of the group, whose members hold the options, but are not deemed outstanding for computing the percentage of class of any other person. 70 Item 13. CERTAIN RELATIONSAHIPS AND RELATED TRANSACTIONS. The Corporation's subsidiary PFNB has engaged, and may engage in the future, in banking transactions in the ordinary course of business with various directors and officers of the Corporation and the Banks and with many of their associates. Loans to these parties have been made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with others, and in the opinion of management, such loans did not involve more than normal risk of collectability, or present other unfavorable features. The aggegate balance of outstanding loans to directors and officers of the Corporation and the Banks and certain corporations and individuals related to such persons totaled $8.4 million or 5.4% of the Corporation's stockholders' equity as of December 31, 1997. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements are 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, 1994. (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. (10.1)Peoples First Corporation 1986 Stock Option Plan is incorporated herein by reference to Exhibit 10 to Form 10-Q/A for the quarter ended March 31, 1994. (21) Subsidiaries of Registrant. (23) Consent of KPMG Peat Marwick LLP, independent public accountants. (27) Financial Data Schedules (SEC use only). (99) Undertakings. 71 (b) Reports on Form 8-K Peoples First Corporation filed a current report on Form 8-K dated November 17, 1997 on November 24, 1997 to report the execution of a definitive Plan and Agreement of Merger with Union Planters Corporation 72 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: 03/11/98 /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 03/11/98 Aubrey W. Lippert of the Board /s/ Allan B. Kleet Principal Accounting Officer 03/11/98 Allan B. Kleet /s/ William R. Dibert Director 03/11/98 William R. Dibert /s/ Joe Dick Director 03/11/98 Joe Dick /s/ Richard E. Fairhurst, Jr. Director 03/11/98 Richard E. Fairhurst, Jr. /s/ William Rowland Hancock Director 03/11/98 William Rowland Hancock /s/ Dennis W. Kirtley Director 03/11/98 Dennis W. Kirtley 73 Signature Title Date _____________________ ______________________ ________ /s/ Jerry L. Page Director 03/11/98 Jerry L. Page /s/ Rufus E. Pugh Director 03/11/98 Rufus E. Pugh /s/ Victor F. Speck, Jr. Director 03/11/98 Victor F. Speck, Jr. 74 EX-21 2 Peoples First National Bank & Trust Company Fourth and Kentucky Avenue Paducah, Kentucky 42002-2200 Wholly owned Peoples First, F.S.B. 214 North First Street Central City, Kentucky 42330-0110 Wholly owned EX-23 3 The Board of Directors Peoples First Corporation: We consent to incorporation by reference in the Registration Statements No. 33-28301 on Form S-3 and No. 33-28304 on Form S-8 of Peoples First Corporation of our report dated January 23, 1998, relating to the consolidated balance sheets of Peoples First Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stock- holders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Peoples First Corporation. /s/ KPMG Peat Marwick LLP St. Louis, Missouri March 11, 1998 EX-27 4
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 46,820 0 0 0 217,871 98,622 102,191 1,101,707 16,442 1,500,997 1,176,841 114,472 11,853 43,104 7,818 0 0 146,909 1,500,997 96,948 20,391 133 117,472 51,461 59,581 57,891 5,041 0 39,280 24,118 24,118 0 0 16,187 1.62 1.59 4.32 5,848 4,451 0 26,500 14,795 3,742 348 16,442 16,442 0 0
EX-99 5 (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's Annual Report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemni- fication is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemni- fication against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being regis- tered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----