<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1998
Commission file number 1-13253
THE PEOPLES HOLDING COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Mississippi 64-0676974
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
209 Troy Street
Tupelo, Mississippi 38802-0709
------------------------------ -------------
(Address of principal offices) (Zip Code)
Registrant's Telephone Number: (601) 680-1001
Securities registered pursuant to
Section 12(b) of the Act:
(Title of Class) Name of each exchange on which registered
- ------------------------------ -----------------------------------------
Common Stock, $5.00 Par Value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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_____
Disclosure of delinquent filings pursuant to Item 405 of Regulation S-K will be
contained in the registrant's proxy statement for its 1999 annual meeting of
shareholders, which statement is incorporated by reference in Part III of this
Form 10-K. Yes____ No__X__
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 1999 was $197,981,489.
On March 23, 1999, there were 5,844,472 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Shareholders' Report are incorporated by reference
into Parts I and II of this report.
Portions of annual Proxy Statement dated March 22, 1999, relating to the annual
meeting of shareholders of The Peoples Holding Company, are incorporated by
reference into Part III.
<PAGE>
Exhibit Index on Page 17
THE PEOPLES HOLDING COMPANY
FORM 10-K
For the year ended December 31, 1998
CONTENTS
PART I
Item 1. Business.............................................3
Item 2. Properties..........................................12
Item 3. Legal Proceedings...................................12
Item 4. Submission of Matters to a Vote of Security Holders.12
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters.....................12
Item 6. Selected Financial Data.............................13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......13
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.........................................13
Item 8. Financial Statements and Supplementary Data.........13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............13
PART III
Item 10. Directors and Executive Officers of the Registrant..13
Item 11. Executive Compensation..............................13
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................13
Item 13. Certain Relationships and Related Transactions......13
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................14
2
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PART I
This Annual Report on Form 10-K may contain or incorporate by reference
statements which may constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the
Securities Exchange Act of 1934, as amended. Prospective investors are cautioned
that any such forward-looking statements are not guarantees for future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include
significant fluctuations in interest rates, inflation, economic recession,
significant changes in the federal and state legal and regulatory environment,
significant underperformance in the Company's portfolio of outstanding loans,
and competition in the Company's markets. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
ITEM 1. BUSINESS
General
The Peoples Holding Company (the "Registrant" or "Company"), was organized under
the laws of the State of Mississippi and incorporated on November 10, 1982, in
order to acquire all of the common stock of The Peoples Bank & Trust Company,
Tupelo, Mississippi (the "Bank").
Organization
The Registrant commenced business on July 1, 1983 and the acquisition of the
Bank was also consummated at that time. All of the Registrant's banking
activities are conducted through the Bank, which on December 31, 1998, had 41
banking offices in Tupelo, Aberdeen, Amory, Batesville, Booneville, Calhoun
City, Coffeeville, Corinth, Grenada, Guntown, Hernando, Iuka, Louisville, New
Albany, Okolona, Olive Branch, Plantersville, Pontotoc, Saltillo, Sardis,
Shannon, Smithville, Southaven, Verona, Water Valley, West Point, and Winona,
Mississippi.
All members of the Board of Directors of the Registrant are also members of the
Board of Directors of the Bank. Responsibility for the management of the Bank
and its branches remains with the Board of Directors and Officers of the Bank;
however, management services rendered to the Bank by the Registrant are intended
to supplement the internal management of the Bank and expand the scope of
banking services normally offered by them.
The Bank, which is the Registrant's primary subsidiary, was established in
February 1904, as a state chartered bank. It is insured by the Federal Deposit
Insurance Corporation.
As a commercial bank, a complete range of banking and financial services are
provided to individuals and small- to medium-size businesses. These services
include checking and savings accounts, business and personal loans, interim
construction and residential mortgage loans, student loans, equipment leasing,
as well as safe deposit and night depository facilities. Automated teller
machines located throughout our market area provide 24-hour banking services.
The Bank also offers to its customers the VISA and MasterCard credit cards.
Accounts receivable factoring is also available to qualified businesses. In
addition to a wide variety of fiduciary services, the Bank administers (as
trustee or in other fiduciary or representative capacities) pension,
profit-sharing and other employee benefit plans and personal trusts and estates.
The Company also offers annuities and mutual funds. Neither the Registrant nor
the Bank has any foreign activities.
3
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Competition
Vigorous competition exists in all major areas where the Registrant and its
subsidiary are engaged in business. Not only does the Registrant compete through
its subsidiary bank with state and national banks in its service areas, but
also, with savings and loan associations, credit unions, finance companies,
mortgage companies, insurance companies, brokerage firms, and investment
companies for available loans and depository accounts. All of these institutions
compete in the delivery of services and products through availability, quality,
and pricing. Within the Registrant's market area, none of the competitors are
dominant.
Supervision and Regulation
The Registrant is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Act"), and is registered as such with the
Board of Governors of the Federal Reserve System (the "Board"). The Registrant
is required to file with the Board an annual report and such other information
as the Board may require. The Board may also make examinations of the Registrant
and its subsidiary pursuant to the Act. The Board also has the authority (which
it has not exercised) to regulate provisions of certain bank holding company
debt.
The Act requires every bank holding company to obtain prior approval of the
Board before acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank which is not already majority-owned by the
Registrant. The Act provides that the Board shall not approve any acquisition,
merger or consolidation which would result in monopoly or which would be in
furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking, or any other transactions the effect of
which might substantially lessen competition, or in any manner be a restraint on
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be served.
The Act also prohibits a bank holding company, with certain exceptions, from
itself engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in non-banking activities. The
principal exception is for engaging in or acquiring shares of a company whose
activities are found by the Board to be so closely related to banking or
managing banks as to be a proper incident thereto. In making such determinations
the Board is required to consider whether the performance of such activities by
a bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency of resources, versus the risks of possible adverse effects
such as decreased or unfair competition, conflicts of interest or unsound
banking practices.
The Act prohibits the acquisition by a bank holding company of more than 5% of
the outstanding voting shares of a bank located outside the state in which the
operations of its banking subsidiaries are principally conducted, unless such an
acquisition is specifically authorized by statute of the state in which the bank
to be acquired is located.
The Registrant and its subsidiary are subject to certain restrictions imposed by
the Federal Reserve Act and the Federal Deposit Insurance Act on any extensions
of credit to the bank holding company or its subsidiary, on investments in the
stock or other securities of the bank holding company or its subsidiary, and on
taking such stock or other securities as collateral for loans of any borrower.
4
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The Bank was chartered under the laws of the State of Mississippi and is subject
to the supervision of, and is regularly examined by, the Department of Banking
and Consumer Finance of the State of Mississippi. The Bank is also insured by
the Federal Deposit Insurance Corporation and is subject to examination and
review by that regulatory authority.
Mississippi banks are permitted to merge with other existing banks statewide and
to acquire or be acquired, by banks or bank holding companies. Section 102 of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removed
territorial restrictions for interstate bank mergers, effective May 1, 1997.
Out-of-state bank holding companies may establish a bank in Mississippi only by
acquiring a Mississippi bank or Mississippi bank holding company.
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Company in the form of cash dividends, loans, or advances. The approval
of the Mississippi Department of Banking and Consumer Finance is required prior
to the Bank paying dividends and is limited to earned surplus in excess of three
times the Bank's capital stock.
Federal Reserve regulations also limit the amount the Bank may loan to the
Company unless such loans are collateralized by specific obligations. At
December 31, 1998, the maximum amount available for transfer from the Bank to
the Company in the form of loans was 11% of consolidated net assets.
Mississippi laws authorize multi-bank holding companies but there are no
statutes regulating the operation of such companies.
Monetary Policy and Economic Controls
The earnings and growth of the banking industry, the Bank and, to a larger
extent, the Registrant, are affected by the policies of regulatory authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit in order to
combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U. S. Government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements against bank
deposits. These instruments are used in varying degrees to influence overall
growth of bank loans, investments and deposits and may also affect interest
rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve System have had a significant
effect on the operating results of commercial banks in the past and are expected
to do so in the future. In view of changing conditions in the national economy
and in the various money markets as well as the effect of actions by monetary
and fiscal authorities including the Federal Reserve System, the effect on
future business and earnings of the Registrant and its subsidiary cannot be
predicted with accuracy.
In the past few years, the trend seems to be toward competitive equality within
the financial services industry. This was evidenced in 1980 by the formation of
the Depository Institution Deregulation Committee (the "DIDC"). The DIDC's sole
purpose was to eliminate the restrictions imposed upon the rates of interest a
depository institution could pay on a deposit account. The trend was again
evidenced in 1982 with the passage of the Garn-St. Germain Depository
Institutions Act. This act provided for, among other things, the money market
account. This account was designed to operate in a manner similar to the money
market mutual funds being offered by the investment brokers. It would earn a
market rate of interest, with limited third-party withdrawals and a minimum
balance requirement.
5
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Source and Availability of Funds
The funds essential to the business of the Registrant and its subsidiary consist
primarily of funds derived from customer deposits and borrowings of federal
funds by the banking subsidiary, and from loans under established lines of
credit. The availability of such funds is primarily dependent upon the economic
policies of the federal government, the economy in general and the general
credit market for loans.
Personnel
Alex Sheshunoff Management Services completed a comprehensive strategic
assessment of the Bank and designed an action plan to facilitate
organization-wide structural changes. The action plan addressed operational
costs, risk management, redundant activities, manual processes, under-utilized
automation, and the future automation of inefficient work methods. With this
move to automation came the need to displace selected jobs. Normal attrition,
retirement, and our displacement schedule have reduced the Registrant's number
of employees to 480 on a full-time basis at December 31, 1998.
Dependence Upon a Single Customer
Neither the Registrant nor its subsidiary is dependent upon a single customer or
upon a limited number of customers.
Segment Reporting
The information under the caption "Note P - Segment Reporting" on Pages 19 and
20 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.
Acquisition of Certain Assets and Liabilities
In the past several years, the Bank has acquired several banks and continues to
examine other possible candidates for acquisition by cash or stock or a
combination of both. During December 1998, the Company entered into an agreement
with Inter-City Federal Bank for Savings in Louisville, Mississippi, to acquire
approximately $34,890,000 in loans and $38,530,000 in deposits. The information
under the caption "Note B - Mergers and Acquisitions" on Page 10 of the
Registrant's 1998 Annual Report to Shareholders is incorporated herein by
reference.
Executive Officers of The Registrant
The principal executive officer of the Company and its subsidiary as of December
31, 1998, is as follows:
Name Age
---- ---
John W. Smith 63
Position and Office: Director and Executive Vice President of the Company from
July 1983 until August 1993; Director and President of the Company since August
1993, and Vice Chairman of the Board since April 1997. Director and Executive
Vice President of the Bank from 1978 and 1976, respectively, until August 1993;
Director, President, and Chief Executive Officer of the Bank since August 1993,
and Vice Chairman of the Board since April 1997.
All of the Registrant's officers are appointed annually by the appropriate Board
of Directors to serve at the discretion of the Board.
6
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Net Interest Income
The following table sets forth for The Peoples Holding Company, as of December
31 for the years indicated, a summary of the changes in interest earned and
interest paid resulting from changes in volume and rates.
1998 COMPARED TO 1997
INCREASE(DECREASE) DUE TO
-------------------------
VOLUME RATE NET (1)
------ ---- -------
(In Thousands)
Earning assets:
Loans, net of
unearned income ................ $ 5,390 $ (986) $ 4,404
Securities
U. S. government
securities and agencies ...... (802) (19) (821)
Obligations of states and
political subdivisions ....... 928 (229) 699
Mortgage-backed securities ..... 1,459 (296) 1,163
Other securities ............... 13 4 17
Other ............................ 243 7 250
-------- -------- --------
Total earning assets ............. $ 7,231 $ (1,519) $ 5,712
-------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand
deposit accounts ............... $ (14) $ 14 $ 0
Savings accounts ................. 1,133 307 1,440
Time deposits .................... 1,911 288 2,199
Other ............................ 183 17 200
-------- -------- --------
Total interest-bearing
liabilities .................... $ 3,213 $ 626 $ 3,839
-------- -------- --------
Change in net interest
income ......................... $ 4,018 $ (2,145) $ 1,873
======== ======== ========
(1) The change in interest due to both volume and rate has been allocated on a
pro-rata basis using the absolute ratio value of amounts calculated.
7
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1997 COMPARED TO 1996
INCREASE(DECREASE) DUE TO
-------------------------
VOLUME RATE NET (1)
------ ---- -------
(In Thousands)
Earning assets:
Loans, net of
unearned income ................ $ 5,362 $ (292) $ 5,070
Securities
U. S. government
securities and agencies ...... (199) (62) (261)
Obligations of states and
political subdivisions ....... 242 (56) 186
Mortgage-backed securities ..... 1,158 (31) 1,127
Other securities ............... (25) 10 (15)
Other ............................ (339) 8 (331)
-------- -------- --------
Total earning assets ............. $ 6,199 $ (423) $ 5,776
-------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand
deposit accounts ............... $ (1,042) $ 32 $ (1,010)
Savings accounts ................. 967 552 1,519
Time deposits .................... 1,901 383 2,284
Other ............................ 558 209 767
-------- -------- --------
Total interest-bearing
liabilities .................... $ 2,384 $ 1,176 $ 3,560
-------- -------- --------
Change in net interest
income ......................... $ 3,815 $ (1,599) $ 2,216
======== ======== ========
(1) The change in interest due to both volume and rate has been allocated on a
pro-rata basis using the absolute ratio value of amounts calculated.
8
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Investment Portfolio
The following table sets forth the amortized cost of securities at the dates
indicated:
December 31
-----------
1998 1997 1996
--------- -------- --------
(In Thousands)
U.S. Government and
Agency Securities .... $ 104,997 $ 110,683 $ 125,087
Obligations of State and
Political Subdivisions 76,893 59,893 52,051
Other Securities ....... 107,852 77,153 68,610
------ ------ ------
$ 289,742 $ 247,729 $ 245,748
========= ========= ========
The following table sets forth the maturity distribution in thousands and
weighted average yield by maturity of securities at December 31, 1998:
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Government
and Agency
Securities ... $ 47,377 6.24% $ 35,635 6.07% $ 21,985 6.25% $ 0 0.00%
Obligations of
States and
Political
Subdivisions . 3,179 9.20% 14,668 8.50% 41,941 7.40% 17,105 7.40%
Other Securities 34,098 6.22% 51,157 6.19% 22,597 6.10% 0 0.00%
------ ------ ----- ------
Total .......... $ 84,654 $101,460 $ 86,523 $ 17,105
====== ======= ====== ======
</TABLE>
The maturity of mortgage-backed securities, included as other securities,
reflects scheduled repayments when the payment is due.
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a federal tax rate of 35% and a Mississippi state
tax rate of 3.3%, which is net of federal tax benefit.
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Loans Outstanding
The following table sets forth loans outstanding as of December 31, 1998, which
based on remaining scheduled repayments of principal, are due in the periods
indicated. Real estate mortgage loans and consumer loans are excluded, while net
receivables on leased equipment are included in commercial, financial and
agricultural loans in the consolidated financial statements. Also, amounts due
after one year are classified according to their sensitivity to changing
interest rates.
Loans Maturing
-----------------------------------------
After One After
Within But Within Five
One Year Five Years Years Total
-------- ---------- ----- -----
(In Thousands)
Commercial,
financial and
agricultural $ 85,892 $ 37,725 $ 13,655 $ 137,272
Real estate-
construction 22,767 2,641 154 25,562
-------- -------- -------- --------
$ 108,659 $ 40,366 $ 13,809 $ 162,834
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
---- ----
(In Thousands)
Due after 1 but within 5
years ................. $37,493 $ 2,873
Due after 5 years ....... 13,772 37
------- ------
$51,265 $ 2,910
======= =======
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Allowance for Loan Losses
The allowance for loan losses provides coverage for losses inherent in the
Company's loan portfolio. Management reviews the adequacy of the allowance for
loan losses each quarter. The overall allowance is evaluated based on a
continuing assessment of problem loans, historical loss experience, new lending
products, emerging credit trends, changes in the size and character of loan
categories, and other factors including its risk rating system, regulatory
guidance and economic conditions. Management has determined that the allowance
for loan losses is adequate, although financial market volatility, economic
reversals or decreased corporate earnings could require an increase in the
required allowance.
Management allocates the allowance for loan losses by loan category. Commercial,
financial and agricultural and real estate - mortgage allocations are based on a
quarterly review of individual loans outstanding and binding commitments to
lend. Reserves are allocated based on actual loss experience and to credits with
similar risk characteristics. Consumer loan allocations are based on an analysis
of product mix, credit scoring, migration analyses, bankruptcy experience and
historical and expected delinquency and charge-off statistics.
No portion of the allowance is restricted to any individual loan or group of
loans, rather the entire allowance is restricted to absorb losses from the
entire loan portfolio.
The Company also maintains an unallocated allowance to recognize the existence
of other exposures, including but not limited to, the risk in concentrations to
specific borrowers, financings of highly leveraged transactions, products or
industries.
The following table presents the allocation of the allowance for loan losses by
loan category at December 31 for each of the years presented:
(In Thousands)
Allowance for Loan Losses
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Commercial, financial,
agricultural and real
estate - mortgage ........ $ 7,382 $ 6,875 $ 6,681 $ 5,406 $ 4,924
Consumer .................... 1,933 1,892 1,813 1,577 1,348
Unallocated ................. 305 337 815 1,832 1,911
------ ------ ------ ------ ------
Total ....................... $ 9,620 $ 9,104 $ 9,309 $ 8,815 $ 8,183
====== ====== ====== ====== ======
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Time Deposits
The following table shows the maturity of time deposits over $100,000 in
thousands.
Less than 3 Months $ 41,765
3 Months- 6 Months 30,179
6 Months-12 Months 31,109
Over 12 Months 20,862
--------
$ 123,915
=========
ITEM 2. PROPERTIES
The main offices of the Registrant and its subsidiary, The Peoples Bank and
Trust Company, are located at 209 Troy Street, Tupelo, Mississippi. All floors
of the five-story building are occupied by various departments within the Bank.
The Technology Center located in Tupelo, Mississippi, houses the electronic data
processing, proof, purchasing, and statement rendering. In addition, the Bank
operated thirty-two (32) full-service branches, and nine (9) limited-service
branches. The Bank has two (2) full-service branches in both Southaven and West
Point; one (1) full-service branch and two (2) limited-service branches in
Booneville; one (1) full-service branch and one (1) limited-service branch in
Amory, Corinth, and Pontotoc; one (1) full-service branch each at Aberdeen,
Batesville, Calhoun City, Coffeeville, Grenada, Guntown, Hernando, Iuka,
Louisville, New Albany, Okolona, Saltillo, Sardis, Shannon, Verona, Water Valley
and Winona, Mississippi; one (1) limited-service branch each at Olive Branch,
Plantersville, and Smithville, Mississippi; and seven (7) full-service branches
and one (1) limited-service branch in Tupelo, Mississippi.
The Registrant leases, on a long-term basis, two branch locations for use in
conducting banking activities. The aggregate annual rental for all leased
premises during the year ending December 31, 1998, did not exceed five percent
of the Bank's operating expenses.
It is anticipated that in the next several years, branch renovations and
construction will be completed at Corinth, Olive Branch, and a new location west
of Tupelo, Mississippi. The other facilities owned or occupied under lease by
the Bank are considered by management to be adequate.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending or threatened at December 31,
1998, which in the opinion of the Company could have a material adverse effect
upon the Company's business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information under the captions "Market Value of Stock by Quarters" on Page
26 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.
At March 23, 1999, the total number of shareholders of the Company's common
stock was 2,572.
The Registrant's common stock trades on the American Stock Exchange under the
symbol PHC.
12
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ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Information" on Page 25 of
the Registrant's 1998 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information on Pages 26 through 39 of the Registrant's 1998 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Interest Rate Risk" on Pages 32 and 33 of the
Registrant's 1998 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements are
included on Pages 4 through 24 of the Registrant's 1998 Annual Report to
Shareholders and are incorporated herein by reference.
The information on Page 23 of the Registrant's 1998 Annual Report to
Shareholders reflecting unaudited quarterly results of operations is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and nominees of the Registrant appear under "Election of Directors" on
Pages 3 through 5 of the Company's definitive Proxy Statement, dated March 22,
1999, which is incorporated herein by reference.
Information concerning executive officers of the Registrant and its subsidiary
appears on Page 6 under the caption "Executive Officers" of the Company's
definitive Proxy Statement, dated March 22, 1999, which is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Summary Compensation Table-Annual Compensation"
on Pages 7 through 11 of the Company's definitive Proxy Statement, dated March
22, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing under "Principal Holders of Voting Security" on Page 3
of the Company's definitive Proxy Statement, dated March 22, 1999, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under "Transactions with Management" on Page 12 of the
Company's definitive Proxy Statement, dated March 22, 1999, is incorporated
herein by reference.
13
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) and (c) The response to this portion of Item 14 is
submitted as a separate section of this report.
(3) Listing of Exhibits:
(3) Articles of Incorporation and Bylaws of
the Registrant are incorporated herein by
reference to exhibits filed with the
Registration Statement on Form S-14,
File No. 2-21776.
(13) Annual Report to Shareholders for the
year ended December 31, 1998
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended December
31, 1998.
(d) Financial Statement Schedules -- None.
14
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE PEOPLES HOLDING COMPANY
DATED: March 26, 1999 By /s/ John W. Smith
- ---------------------- -----------------------------
John W. Smith, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the date indicated.
John W. Smith,
President and Director
(Chief Executive Officer) ..... /s/ John W. Smith
Robert C. Leake,
Chairman of the Board and
Director ...................... /s/ Robert C. Leake
William M. Beasley, Director .. /s/ William M. Beasley
George H. Booth, II, Director . /s/ George H. Booth, II
Frank B. Brooks, Director ..... /s/ Frank B. Brooks
John M. Creekmore, Director ... /s/ John M. Creekmore
Marshall H. Dickerson, Director /s/ Marshall H. Dickerson
A. M. Edwards, Jr., Director .. /s/ A. M. Edwards, Jr.
Eugene B. Gifford, Jr.,
Director ...................... /s/ Eugene B. Gifford, Jr.
C. Larry Michael, Director .... /s/ C. Larry Michael
Jimmy S. Threldkeld, Director . /s/ Jimmy S. Threldkeld
J. Heywood Washburn, Director . /s/ J. Heywood Washburn
Robert H. Weaver, Director .... /s/ Robert H. Weaver
J. Larry Young, Director ...... /s/ J. Larry Young
15
<PAGE>
Form 10-K--Item 14 (a) (1) and (2)
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements and report of independent
auditors of The Peoples Holding Company and subsidiary included in the Annual
Report to Shareholders of the registrant for the year ended December 31, 1998,
are incorporated by reference in Item 8.
Report of Independent Auditors
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Income--Years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows--Years ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements--December 31, 1998
Schedules to the consolidated financial statements required by Article
9 of Regulation S-X are not required under the related instructions or are not
applicable and therefore, have been omitted.
16
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
13 Annual Report to Shareholders ............... 18
23 Consent of Independent Auditors ............. 58
17
<PAGE>
Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and due from banks ............................................. $ 32,944 $ 32,932
Federal funds sold .................................................. 0 6,000
------- -------
Cash and Cash Equivalents ................ 31,944 38,932
Interest-bearing balances with banks ................................ 433 14,973
Securities held to maturity (market value - $78,585 and
$60,556 at December 31, 1998 and 1997, respectively) ....... 76,893 59,893
Securities available for sale (amortized cost - $212,849 and
$187,836 at December 31, 1998 and 1997, respectively) ...... 214,174 188,738
Loans
Commercial, financial, and agricultural .................... 137,272 120,412
Real estate - construction ................................. 25,562 24,365
Real estate - mortgage ..................................... 382,179 344,212
Consumer ................................................... 158,096 148,472
Unearned income ............................................ (8,826) (9,515)
------- -------
Total Loans, Net of Unearned Income ...... 694,283 627,946
Allowance for loan losses .................................. (9,620) (9,104)
------- -------
Net Loans ................................ 684,663 618,842
Premises and equipment, net ......................................... 26,356 23,493
Other assets ........................................................ 28,902 26,184
------- -------
Total Assets ............................. $ 1,063,365 $ 971,055
========= =======
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing ........................................ $ 149,433 $ 120,829
Interest-bearing ........................................... 772,253 714,085
------- -------
Total Deposits ........................... 921,686 834,914
Treasury tax and loan note account .................................. 2,455 6,101
Borrowings .......................................................... 19,567 18,454
Other liabilities ................................................... 14,598 13,435
------- -------
Total Liabilities ........................ 958,306 872,904
Shareholders' Equity
Common stock, $5 par value, 15,000,000 shares authorized
5,844,472 and 5,859,472 issued and outstanding at
December 31, 1998 and 1997, respectively ................... 29,222 29,297
Additional paid-in capital .......................................... 39,876 39,876
Accumulated other comprehensive income .............................. 830 566
Retained earnings ................................................... 35,131 28,412
------- -------
Total Shareholders' Equity ............... 105,059 98,151
------- -------
Total Liabilities and Shareholders' Equity $ 1,063,365 $ 971,055
========= =======
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements Of Income
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans .............................................. $ 60,054 $ 55,650 $ 50,580
Securities:
Taxable ................................... 13,416 13,057 12,206
Tax-exempt ................................ 3,650 2,951 2,765
Other .............................................. 793 543 874
------ ------ ------
Total Interest Income ... 77,913 72,201 66,425
Interest expense
Deposits ........................................... 34,179 30,540 27,747
Borrowings ......................................... 1,464 1,264 497
------ ------ ------
Total Interest Expense .. 35,643 31,804 28,244
------ ------ ------
Net Interest Income ..... 42,270 40,397 38,181
Provision for loan losses ................................... 2,563 2,280 2,813
------ ------ ------
Net Interest Income After
Provision For Loan Losses 39,707 38,117 35,368
Noninterest income
Service charges on deposit accounts ................ 7,186 6,768 6,565
Fees and commissions ............................... 1,891 1,447 1,397
Trust revenue ...................................... 846 719 643
Securities gains (losses) .......................... 61 (41) 110
Other .............................................. 4,314 3,127 2,315
------ ------ ------
Total Noninterest Income 14,298 12,020 11,030
Noninterest expense
Salaries and employee benefits ..................... 20,757 19,533 18,218
Net occupancy ...................................... 2,683 2,599 2,269
Equipment .......................................... 1,908 1,780 1,595
Other .............................................. 12,778 11,097 10,748
------ ------ ------
Total Noninterest Expense 38,126 35,009 32,830
------ ------ ------
Income before income taxes .................................. 15,879 15,128 13,568
Income taxes ................................................ 4,511 4,488 4,052
------ ------ ------
Net Income .............. $ 11,368 $ 10,640 $ 9,516
====== ====== ======
Basic and diluted earnings per share ........................ $ 1.94 $ 1.82 $ 1.62
====== ====== ======
Weighted average shares outstanding ......................... 5,853,679 5,859,472 5,859,472
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements Of Shareholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------ Paid-in Comprehensive Retained Comprehensive
Shares Amount Capital Income Earnings Income Total
------ ------ --------- ------------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 .............. 2,604,760 $ 13,024 $ 39,876 $ 30,892 $ 1,169 $ 84,961
Net Income for 1996 ................... $ 9,516 9,516 9,516
Other comprehensive income, net of tax: ------
Unrealized losses on securities
available for sale ............... (942) (942)
------
Other comprehensive income ............ (942) (942)
------
Comprehensive income ................... $ 8,574
======
Cash dividends ($.50 per share) ....... (2,950) (2,950)
Stock split effected in the form
of a stock dividend ................. 1,301,915 6,509 (6,509)
Payment of fractional
shares for stock dividend ........... (24) (24)
---------- ------ ------ ------ ------ ------
Balance at December 31, 1996 ........... 3,906,675 $ 19,533 $ 39,876 $ 30,925 $ 277 $ 90,561
Net Income for 1997 ................... $ 10,640 10,640 10,640
Other comprehensive income, net of tax: ------
Unrealized gains on securities
available for sale ............... 339 339
------
Other comprehensive income ............ 339 339
------
Comprehensive income ................... $ 10,979
======
Cash dividends ($.57 per share) ....... (3,360) (3,360)
Stock split effected in the form
of a stock dividend ................. 1,952,797 9,764 (9,764)
Payment of fractional
shares for stock dividend ........... (29) (29)
---------- ------ ------ ------ ------ ------
Balance at December 31, 1997 ........... 5,859,472 $ 29,297 $ 39,876 $ 28,412 $ 566 $ 98,151
Net Income for 1998 ................... $ 11,368 11,368 11,368
Other comprehensive income, net of tax: ------
Unrealized gains on securities
available for sale, net of
reclassification adjustment ...... 264 264
------
Other comprehensive income ............ 264 264
------
Comprehensive income ................... $ 11,632
======
Cash dividends ($.72 per share) ....... (4,184) (4,184)
Treasury stock purchased and retired .. (15,000) (75) (465) (540)
---------- ------ ------ ------ ------ ------
Balance at December 31, 1998 ........... 5,844,472 $ 29,222 $ 39,876 $ 35,131 $ 830 $ 105,059
========== ====== ====== ====== ====== =======
</TABLE>
Disclosure of 1998 reclassification amount:
Unrealized holding gains arising during period .............. $ 322
Less: reclassification adjustment for
gains included in net income .......................... (58)
------
Net unrealized gains on securities .......................... $ 264
======
See notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
Year Ended December 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities
Net income ................................................................ $ 11,368 $ 10,640 $ 9,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................... 2,563 2,280 2,813
Provision for depreciation and amortization ............. 2,593 2,330 2,179
Net amortization of securities
premiums/discounts ................................... 795 342 71
(Gains) losses on sale of loans ......................... (797) (323)
(Gains) losses on sales/calls of securities ............. 61 41 (110)
Increase in other liabilities ........................... 1,440 1,277 1,677
Deferred income tax benefit ............................. (423) (243) (179)
(Gains) losses on sales of premises and equipment ....... 157 233 (16)
Increase in other assets ................................ (2,486) (2,300) (986)
------- ------- -------
Net Cash Provided By Operating Activities ...... 15,271 14,277 14,965
------- ------- -------
Investing Activities
Net (increase) decrease in balances with other banks ...................... 14,540 (13,149) 6,990
Proceeds from sales of securities available for sale ...................... 16,242 48,988 32,600
Proceeds from maturities/calls of securities
held to maturity ................................................. 4,796 4,245 2,997
Proceeds from maturities/calls of securities
available for sale ............................................... 63,692 71,322 54,505
Purchases of securities held to maturity .................................. (21,739) (12,552) (9,424)
Purchases of securities available for sale ................................ (105,184) (114,367) (114,018)
Net increase in loans ..................................................... (150,451) (101,773) (43,982)
Proceeds from sale of loans ............................................... 81,333 33,290
Proceeds from sales of premises and equipment ............................. 272 62 122
Purchases of premises and equipment ....................................... (5,274) (3,996) (2,937)
------- ------- -------
Net Cash Used In Investing Activities .......... (101,773) (87,930) (73,147)
------- ------- -------
Financing Activities
Net increase in noninterest-bearing deposits .............................. 28,604 2,190 1,744
Net increase in interest-bearing deposits ................................. 58,168 59,882 31,553
Net increase (decrease) in short-term borrowings .......................... (1,146) (253) 3,954
Net increase (decrease) in other borrowings ............................... (1,388) 7,280 6,861
Cash dividends paid ....................................................... (4,184) (3,360) (2,950)
Cash paid on fractional shares for stock dividend ......................... (29) (24)
Acquisition of treasury stock ............................................. (540)
------- ------- -------
Net Cash Provided By Financing Activities ...... 79,514 65,710 41,138
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents (6,988) (7,943) (17,044)
Cash and Cash Equivalents at Beginning of Year ..................................... 38,932 46,875 63,919
------- ------- -------
Cash and Cash Equivalents at End of Year ....... $ 31,944 $ 38,932 $ 46,875
======= ======= =======
Non-Cash Transactions
Transfer of loans to other real estate .................................... $ 1,531 $ 1,128 $ 1,224
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Notes To Consolidated Financial Statements December 31, 1998
(In Thousands, Except Share Data)
Note A - Significant Accounting Policies
The Peoples Holding Company (the Company) is a one-bank holding company,
offering a diversified range of banking services to retail and commercial
customers, primarily in North Mississippi, through The Peoples Bank & Trust
Company (the Bank). The accounting and reporting policies of the Company conform
to generally accepted accounting principles and general practices within the
financial services industry.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company carries its investment in subsidiary at its equity in
the underlying net assets.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Securities: Securities are classified as held to maturity when purchased if
management has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Securities not
classified as held to maturity or trading are classified as available for sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity.
The amortized cost of securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts. Such
amortization and accretion is included in interest income from securities. Stock
dividends are also included in interest income from securities. Realized gains
and losses, as well as declines in value judged to be other than temporary, are
included in net securities gains (losses). The cost of securities sold is based
on the specific identification method.
Revenue Recognition: Interest on loans is accrued and credited to operations
based upon the principal amount outstanding. Generally, the accrual of income is
discontinued when the full collection of principal or interest is in doubt, or
when the payment of principal or interest has become contractually 90 days past
due unless the obligation is both well secured and in the process of collection.
The Company recognizes loan origination and commitment fees in the period the
loan or commitment is granted to reflect reimbursement of the related costs
associated with originating those loans and commitments. This method is not
materially different from the results which would be obtained had the Company
implemented Statement of Financial Accounting Standards (SFAS) No. 91,
"Accounting for Non-refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
Allowance for Loan Losses: The allowance for loan losses is established through
provisions for loan losses charged against income. Loans deemed uncollectible
are charged against the allowance for loan losses, and any subsequent recoveries
are credited to the allowance.
22
<PAGE>
The allowance for loan losses related to loans that are identified for
evaluation in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," is
based on discounted cash flows using the loan's initial effective interest rate
or fair value of the collateral for certain collateral-dependent loans. The
allowance for loan losses is maintained at a level believed adequate by
management to absorb inherent losses in the loan portfolio. Management's
determination of the allowance is based on an evaluation of the portfolio, past
experience, current economic conditions, volume, growth, composition of the loan
portfolio, and other relevant factors. This evaluation is inherently subjective,
as it requires material estimates that may be susceptible to significant change.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed primarily by
use of the straight-line method for furniture, fixtures, equipment, and
premises. Leasehold improvements are amortized over the period of the leases or
the estimated useful lives of the improvements, whichever is shorter.
Other Real Estate: Other real estate of $907 and $774 at December 31, 1998 and
1997, respectively, is included in other assets and consists of properties
acquired through a foreclosure proceeding or acceptance of a deed in lieu of
foreclosure. These properties are carried at the lower of cost or fair market
less estimated selling costs. Losses arising from the acquisition of properties
are charged against the allowance for loan losses. The net cost of holding other
real estate and losses (gains) on the sale of properties totaled ($26), $150,
and $410 for the years ending December 31, 1998, 1997, and 1996, respectively.
Unamortized Cost in Excess of Fair Value of Net Assets Acquired: Goodwill,
included in other assets, represents unamortized cost in excess of fair value of
net assets acquired and is being amortized on the straight-line method over 13
to 15 years. Goodwill was $5,357 and $5,886 at December 31, 1998 and 1997,
respectively. Total amortization of intangible assets was $602 for the year
ending December 31, 1998, and $566 for the year ending December 31, 1997.
Mortgage Servicing Rights: The Company capitalizes purchased and
internally-originated mortgage servicing rights based on the fair value of the
mortgage servicing rights relative to the loan as a whole. Mortgage servicing
rights are amortized in proportion to, and over the period of estimated net
servicing income. The fair value of mortgage servicing rights is determined
using assumptions that market participants would use in estimating future net
servicing income. Mortgage servicing rights are stratified by loan type
(government or conventional) and interest rate for purposes of measuring
impairment on a quarterly basis. An impairment loss is recognized to the extent
by which the unamortized capitalized mortgage servicing rights for each stratum
exceeds the current fair value.
Income Taxes: Income taxes are accounted for under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company and its subsidiary
file a consolidated federal income tax return. The Bank provides for income
taxes on a separate-return basis and remits to the Company amounts determined to
be currently payable.
Earnings Per Share: Basic and diluted earnings per share is calculated in
accordance with SFAS No. 128, "Earnings Per Share." All earnings per share
amounts for all periods have been presented to conform to the requirements of
SFAS No. 128.
23
<PAGE>
Statements of Cash Flows: Cash equivalents include cash and due from banks and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods. During 1998, 1997, and 1996, cash paid for interest was $35,735,
$31,349, and $27,951, respectively. During 1998, 1997, and 1996, cash paid for
income taxes was $5,187, $5,091, and $3,245, respectively.
Impact of Recently Issued Accounting Standards: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June 15,
1999. Because the Company does not currently use derivatives or intend to use
derivatives, the adoption of this Statement will not have an impact on earnings
or the financial position of the Company.
Note B - Mergers and Acquisitions
On December 14, 1998, the Company entered into an agreement to merge with
Inter-City Federal Bank for Savings (Inter-City) located in Louisville,
Mississippi. On December 31, 1998, total assets, loans, and deposits for
Inter-City totaled $44,368, $34,890, and $38,530, respectively. The transaction
is expected to be accounted for as a pooling of interests. The exchange ratio
will be 2.78 shares of the Company for each share of Inter-City (approximately
347,405 shares). The transaction is expected to be consummated in March 1999.
Effective October 1997, the Company purchased approximately $11,036 of selected
assets and assumed approximately $15,232 of deposit liabilities from one branch
office of Magnolia Federal Bank for Savings located in Grenada, Mississippi.
Goodwill of approximately $2,123 was recorded in connection with this
acquisition.
Note C - Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash And Due From Banks: The carrying amount reported in the consolidated
balance sheet for cash and due from banks approximates fair value.
Federal Funds Sold: The carrying amount reported in the consolidated balance
sheet for federal funds sold approximates fair value.
Interest-Bearing Balances With Banks: The carrying amount reported in the
consolidated balance sheet for interest-bearing balances with banks approximates
fair value.
Securities: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fixed-rate loan
fair values, including mortgages, commercial, agricultural, and consumer loans
are estimated using a discounted cash flow analysis based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
24
<PAGE>
Deposits: The fair values disclosed for demand deposits, both interest-bearing
and noninterest-bearing, are, by definition, equal to the amount payable on
demand at the reporting date. The fair values of certificates of deposit and
individual retirement accounts are estimated by discounting cash flows based on
currently effective interest rates for similar types of accounts.
Treasury Tax And Loan Note Account: The carrying amounts reported in the
consolidated balance sheet approximate the fair value.
Borrowings: The fair value was determined by discounting cash flows using the
current market rate.
Off-Balance Sheet: Off-balance-sheet items are primarily short-term commitments,
often at variable rates which are tied to prime.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
1998 1997
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks .......... $ 31,944 $ 31,944 $ 32,932 $ 32,932
Federal funds sold ............... 6,000 6,000
Interest-bearing balances
with banks .............. 433 433 14,973 14,973
Securities ....................... 291,067 292,759 248,631 249,294
Loans net of unearned income ..... 694,283 700,074 627,946 629,981
Allowance for loan losses (9,620) (9,620) (9,104) (9,104)
------- ------- ------- -------
Net loans ........................ 684,663 690,454 618,842 620,877
Financial liabilities
Deposits ......................... 921,686 923,648 834,914 834,438
Treasury tax and loan note account 2,455 2,455 6,101 6,101
Borrowings ....................... 19,567 19,745 18,454 18,447
</TABLE>
Note D - Restrictions on Cash and Due From Banks
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amounts of those balances for the years ended December
31, 1998 and 1997, were approximately $13,618 and $12,953, respectively.
25
<PAGE>
Note E - Securities
The amortized cost and estimated fair values of securities held to maturity and
available for sale at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
-------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Values
--------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions..... $ 76,893 $ 1,855 $ (163) $ 78,585
========= ========= ========= =========
Securities Available For Sale
-------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Values
--------- ---------------- ----------------- -------------
U.S. Treasury securities ........... $ 54,397 $ 432 $ $ 54,829
Obligations of other U.S. Government
agencies and corporations . 50,600 378 (10) 50,968
Mortgage-backed securities ......... 104,788 675 (150) 105,313
Preferred stock .................... 3,064 3,064
------- ------- ------- -------
$ 212,849 $ 1,485 $ (160) $ 214,174
========= ========= ========= =========
</TABLE>
The amortized cost and estimated market values of securities held to maturity
and available for sale at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
-------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Values
--------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions..... $ 59,893 $ 986 $ (323) $ 60,556
========= ========= ========= =========
Securities Available For Sale
-------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Values
--------- ---------------- ----------------- -------------
U.S. Treasury securities ........... $ 70,634 $ 352 $ (11) $ 70,975
Obligations of other U.S. Government
agencies and corporations . 40,049 116 (36) 40,129
Mortgage-backed securities ......... 74,266 572 (91) 74,747
Preferred stock .................... 2,887 2,887
------- ------- ------- -------
$ 187,836 $ 1,040 $ (138) $ 188,738
========= ========= ========= =========
</TABLE>
26
<PAGE>
The amortized cost and estimated market value of securities held to maturity and
available for sale at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Estimated
Amortized Market
Securities Held to Maturity Cost Value
- --------------------------- --------- ---------
Due in one year or less ................. $ 3,179 $ 3,201
Due after one year through five years ... 14,668 15,029
Due after five years through ten years .. 41,941 43,094
Due after ten years ..................... 17,105 17,261
------- -------
$ 76,893 $ 78,585
========= =========
Estimated
Amortized Market
Securities Available for Sale Cost Value
- ----------------------------- --------- ---------
Due in one year or less ................. $ 47,377 $ 47,693
Due after one year through five years ... 35,635 35,938
Due after five years through ten years .. 21,985 22,166
------- -------
104,997 105,797
Mortgage-backed securities .............. 104,788 105,313
Preferred stock ......................... 3,064 3,064
------- -------
$ 212,849 $ 214,174
========= =========
At December 31, 1998 and 1997, securities with an amortized cost of
approximately $167,208 and $157,285, respectively, were pledged to secure
government, public, and trust deposits.
Note F - Deposits
Deposit accounts are summarized as follows:
December 31
-------------------
1998 1997
-------------------
Noninterest-bearing ...................... $149,433 $120,829
Interest-bearing DDA ..................... 71,242 70,907
Savings accounts ......................... 44,501 44,770
Money Market accounts .................... 194,837 139,584
Certificates of deposit exceeding $100,000 123,915 106,952
Other time deposits ...................... 337,758 351,872
------- -------
Total ........................... $921,686 $834,914
======== ========
At December 31, 1998, the approximate scheduled maturities of time deposits are
as follows:
(In Thousands)
1999 ............................ $ 350,169
2000 ............................ 74,780
2001 ............................ 18,661
2002 ............................ 10,810
2003 and thereafter ............. 7,253
---------
Total ........................... $ 461,673
===========
27
<PAGE>
Note G - Borrowings
Borrowings primarily consist of balances due to the Federal Home Loan Bank of
$17,067 and $18,452 at December 31, 1998 and 1997, respectively.
During 1998, the Company obtained from the Federal Home Loan Bank an advance
totaling $1,000, with an interest rate of 6.03% and a maturity date of June 2,
2008. During 1997, the Company obtained four advances from the Federal Home Loan
Bank totaling $9,400. These advances were $5,000, $400, $500, and $3,500, with
interest rates of 6.44%, 6.44%, 6.34%, and 6.46%, respectively. Maturity dates
are February 1, 2007, August 3, 2009, November 1, 2007, and January 1, 2018,
respectively. All advances are secured by one-to-four family first mortgages.
Future minimum payments, by year and in the aggregate, related to the Federal
Home Loan Bank advances with initial or remaining terms of one year or more,
consisted of the following at December 31, 1998:
1999 ......................... $ 2,247
2000 ......................... 1,502
2001 ......................... 4,422
2002 ......................... 3,553
2003 ......................... 563
Thereafter ................... 4,780
-------
Total ........................ $ 17,067
========
Note H - Loans to Related Parties
Certain Bank executive officers and directors and their associates are customers
of and have other transactions with the Bank. Related party loans and
commitments are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than a normal risk of collectibility.
The aggregate dollar amount of these loans was $10,551 and $2,807 at December
31, 1998 and 1997, respectively. During 1998, $14,854 of new loans were made and
payments received totaled $7,110. Total deposits for these related parties at
December 31, 1998, were approximately $2,675.
Note I - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year .................. $ 9,104 $ 9,309 $ 8,815
Charge-offs ................................... (2,514) (3,043) (2,593)
Recoveries .................................... 467 558 274
------ ------ ------
Net Charge-offs ...................... (2,047) (2,485) (2,319)
Provision for loan losses ..................... 2,563 2,280 2,813
------ ------ ------
Balance at End of Year $ 9,620 $ 9,104 $ 9,309
======= ======= =======
</TABLE>
28
<PAGE>
Impaired loans recognized in conformity with SFAS No. 114, as amended by SFAS
No. 118, were as follows:
Year Ended December 31
------------------------------
1998 1997 1996
-------- -------- --------
Impaired loans with a related
allowance for loan losses .................. $ 3,212 $ 2,486 $ 2,946
Impaired loans without a specific
allowance for loan losses .................. 1,061 891 1,057
----- ----- -----
Total impaired loans .......................... $ 4,273 $ 3,377 $ 4,003
======= ======= =======
Specific allowance for loan losses
for impaired loans ......................... $ 1,127 $ 778 $ 734
Average recorded investment in impaired loans . $ 3,825 $ 3,690 $ 3,439
Interest income recognized using the
accrual basis of income recognition ........ $ 340 $ 237 $ 336
Interest income recognized using the
cash basis of income recognition ........... 13 18 70
----- ----- -----
Total interest income recognized
on impaired loans .................... $ 353 $ 255 $ 406
======= ======= =======
Note J - Nonaccrual and Past Due Loans
Nonaccrual and past due loans were as follows:
December 31
--------------------
1998 1997
-------- --------
Nonaccrual loans outstanding ................... $ 204 $ 1,070
Accruing loans past due 90 days
or more outstanding ......................... 3,249 3,466
At December 31, 1998 and 1997, there were no significant commitments to lend any
of these debtors additional funds.
Note K - Premises and Equipment
Premises and equipment accounts are summarized as follows:
December 31
--------------------
1998 1997
-------- --------
Land ....................................... $ 5,662 $ 5,185
Premises ................................... 21,898 19,423
Equipment, furniture, and fixtures ......... 16,231 13,880
Construction in progress ................... 666 1,009
------- -------
44,457 39,497
Accumulated depreciation and amortization .. (18,101) (16,004)
------- -------
$ 26,356 $ 23,493
======== ========
Depreciation expense ....................... $ 1,991 $ 1,768
======== ========
29
<PAGE>
Note L - Income Taxes
Deferred income taxes, included in other assets, reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. No
valuation allowance was recognized as the deferred tax assets were determined to
be realizable in future years. This determination was based on the Company's
earnings history with no basis for believing future performance will not
continue to follow the same pattern. Significant components of the Company's
deferred tax assets and liabilities as of December 31, 1998 and 1997, are as
follows:
(In Thousands)
----------------------
1998 1997
----------------------
Deferred tax assets
Allowance for loan losses ............... $ 3,588 $ 3,396
Deferred compensation ................... 1,415 1,298
Other ................................... 449 267
------ ------
Total deferred tax assets ............ 5,452 4,961
------ ------
Deferred tax liabilities
Depreciation ............................ 1,254 1,245
Net unrealized gains on securities
available for sale ................... 495 337
Other ................................... 852 793
------ ------
Total deferred tax liabilities ....... 2,601 2,375
------ ------
Net deferred tax assets at end of year $ 2,851 $ 2,586
========= =========
Significant components of the provision for income taxes (benefits) are as
follows:
1998 1997 1996
Allocated to net income: ------- ------- -------
Current
Federal ............................. $ 4,485 $ 4,311 $ 3,902
State ............................... 449 420 329
------ ------ ------
4,934 4,731 4,231
------ ------ ------
Deferred
Federal ............................. (368) (210) (155)
State ............................... (55) (33) (24)
------ ------ ------
(423) (243) (179)
------ ------ ------
$ 4,511 $ 4,488 $ 4,052
======= ======= =======
Allocated to other comprehensive income:
Deferred
Federal ............................. $ 137 $ 175 $ (473)
State ............................... 21 27 (74)
------ ------ ------
$ 158 $ 202 $ (547)
======= ======= =======
30
<PAGE>
The reconciliation of income taxes (benefits) computed at the United States
federal statutory tax rates to the provision for income taxes is:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate ............ $ 5,558 35.0% $ 5,295 35.0% $ 4,749 35.0%
Tax-exempt interest income ......... (1,498) (9.4%) (1,201) (7.9%) (1,047) (7.7%)
State income tax, net of federal
deduction ....................... 255 1.6% 252 1.7% 199 1.5%
Amortization of intangible assets .. 27 0.2% 58 0.4% 71 0.5%
Dividends received deduction ....... (12) (0.1%) (11) (0.1%) (16) (0.1%)
Other items - net .................. 181 1.1% 95 0.6% 96 0.7%
------ ------ ------ ------ ------ ------
$ 4,511 28.4% $ 4,488 29.7% $ 4,052 29.9%
======= ====== ======= ====== ======= ======
</TABLE>
Note M - Restrictions on Bank Dividends, Loans, or Advances
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Company in the form of cash dividends, loans, or advances. The approval
of the Mississippi Department of Banking and Consumer Finance is required prior
to the Bank paying dividends, which are limited to earned surplus in excess of
three times the Bank's capital stock. At December 31, 1998, the unrestricted
surplus was approximately $88,615.
Federal Reserve regulations also limit the amount the Bank may loan to the
Company unless such loans are collateralized by specified obligations. At
December 31, 1998, the maximum amount available for transfer from the Bank to
the Company in the form of loans was 11% of consolidated net assets. There were
no loans outstanding from the Bank to the Company at December 31, 1998.
Note N - Employee Benefit Plans
The Company and its Bank sponsor a defined benefit noncontributory pension plan,
The Peoples Bank & Trust Company Amended and Restated Pension Plan (the Plan),
generally covering all full-time employees completing a minimum of one thousand
hours of service during a twelve month period. The plan was not open to new
participants after December 31, 1996. Effective August 1, 1996, an early
retirement window was implemented. Effective December 31, 1996, future benefit
accruals were eliminated, and the benefits were frozen as of that date. The
curtailment and early retirement window were accounted for under the provisions
of SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits." The normal
retirement benefit, one-twelfth of which is payable monthly for life with 120
payments guaranteed, is determined as the sum of (A) 1.4% of average earnings,
plus (B) 0.6% of average earnings in excess of covered compensation, times (C)
years of service at retirement limited to 25, and compensation in both (A) and
(B) are limited by Section 401 (a) (17) of the Internal Revenue Code as amended.
The Company's funding policy is to contribute annually an amount that is at
least equal to the minimum amount determined by consulting actuaries in
accordance with the Employee Retirement Income Security Act of 1974. There were
significant matters affecting comparability of net periodic pension cost and
other information for the year ended December 31, 1996. The SFAS No. 88 cost for
the early retirement window was $452. The curtailment reduced the projected
benefit obligation by $3,539. All unrecognized gain/loss, transition assets, and
prior service cost were recognized. The SFAS No. 88 impact for the curtailment
was an increase to income of $729 in 1996.
31
<PAGE>
Net periodic post retirement benefit cost was also affected by changes made for
the year ended December 31, 1996. A curtailment resulted from special
termination benefits offered in 1996, in the form of an early retirement window,
to employees who would attain a certain age and number of service years by
December 31, 1996. The effect of the curtailment decreased the unrecognized net
gain by $57 and resulted in special termination benefits expense of $44.
The Company also provides certain health care and/or life insurance to retired
employees. Substantially all of the Company's employees may become eligible for
these benefits if they reach normal or early retirement while working for the
Company. The Company pays one-half of the health insurance premium. Up to age
70, each retired employee receives life insurance coverage paid entirely by the
Company. The Company has accounted for its obligation related to these plans in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions."
The Company has limited its liability for the rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate ) to the rate of
inflation assumed to be 4% each year. The health care cost trend rate assumption
has little effect on the amounts reported. For example, increasing or decreasing
the assumed health care cost trend rates by one percentage point in each year
would not increase or decrease the accumulated postretirement benefit obligation
nor the service and interest cost components of net periodic postretirement
benefit cost as of December 31, 1998, and for the year then ended.
The following table sets forth the required disclosures. Pension Benefits
represents the pension plan offered by the Bank and Other Benefits represents
the postretirement medical plan. There is no additional minimum pension
liability required to be recognized.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year ......... $ 11,237 $ 9,600 $ 442 $ 423
Service cost .................................... 27 25
Interest cost ................................... 820 789 31 32
Plan participants' contributions ................ 29 28
Actuarial gain (loss) ........................... 914 1,368 65 (4)
Benefits paid ................................... (554) (520) (139) (62)
------ ------ ------ ------
Benefit obligation at end of year ............... $ 12,417 $ 11,237 $ 455 $ 442
======== ======== ======== ========
Change in plan assets
Fair value of plan assets at beginning of year .. $ 12,096 $ 10,947
Actual return on plan assets .................... 1,473 1,669
Benefits paid ................................... (554) (520)
------ ------
Fair value of plan assets at end of year ........ $ 13,015 $ 12,096
======== ========
Funded (underfunded) status ..................... $ 598 $ 859 $ (455) $ (442)
Unrecognized net actuarial (gain) loss .......... 568 178 34 (32)
Unamortized prior service cost .................. 320 349
------ ------ ------ ------
Prepaid (accrued) benefit cost .................. $ 1,486 $ 1,386 $ (421) $ (474)
======== ======== ======== ========
Weighted-average assumptions
as of December 31
Discount rate ................................... 7.0% 7.5% 7.0% 7.5%
Expected return on plan assets .................. 8.0% 8.0% N/A N/A
Actual return on plan assets .................... 11.7% 14.5% N/A N/A
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------------
Year Ended December 31 Year Ended December 31
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost (income)
Service cost ......................... $ $ $ 543 $ 27 $ 25 $ 23
Interest cost ........................ 820 789 918 31 32 25
Expected return on plan assets ....... (950) (859) (842)
Prior service cost recognized ........ 30 30
Special termination benefits cost .... 44
----- ----- ----- ----- ----- -----
Net periodic benefit cost (income) ... $ (100) $ (40) $ 619 $ 58 $ 57 $ 92
====== ====== ====== ====== ====== ======
</TABLE>
Effective January 1, 1997, the Company adopted two defined contribution plans: a
money purchase pension plan and a 401(k) plan. The money purchase pension plan
is a noncontributory pension plan. The Company contributes 5% of compensation
for each participant annually into this plan. The Company contributed $738 and
$651 to the money purchase pension plan in 1998 and 1997, respectively. The
401(k) plan is a contributory plan. Employees may contribute up to 10% of
pre-tax earnings into this plan. In addition, the Company provides for a
matching contribution up to 3% of compensation for each employee who has
attained age 21 and completes a year of service and is employed on the last day
of the plan year. The Company's costs related to the 401(k) plan in 1998 and
1997, were $381 and $369, respectively.
The Company and its subsidiary also sponsor an employee stock ownership plan
covering substantially all full-time employees who are 21 years of age and have
completed one year of employment. Contributions are determined by the Board of
Directors and may be paid in either cash or the Company's common stock. Total
contributions to the Plan charged to operating expenses were $300, $100, and
$325 in 1998, 1997, and 1996, respectively.
Note O - Other Noninterest Expenses
Components of other noninterest expenses which exceed 1% of total revenues were
as follows:
1998 1997 1996
------- ------- -------
Noninterest Expense
Computer processing cost ........ $ 3,296 $ 2,740 $ 2,388
FDIC/state banking assessments .. 786
Stationery and supplies ......... 1,696
Note P - Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the
reporting of financial information from operating segments in annual and interim
financial statements. SFAS No. 131 requires that financial information be
reported on the same basis that it is reported internally for evaluating segment
performance and allocating resources to segments. Because SFAS No. 131 addresses
how supplemental financial information is disclosed in annual and interim
reports, its adoption in 1998 had no impact on the financial condition or
operating results of the Company.
The Peoples Holding Company has defined two reportable segments: branches and
specialized products. Branches offer commercial, consumer, and mortgage loans as
well as a full range of deposit services. Specialized products include leasing,
student loans, credit cards, accounts receivable factoring, trust services, and
financial investment alternatives.
33
<PAGE>
The Company evaluates performance based on profit or loss from operations. The
reportable segments do not receive any allocations for income taxes or gains and
losses from security sales. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies.
Intersegment transfers are recorded at cost; there is no intercompany profit or
loss on these transfers. There are no intercompany receivables.
Branches are defined as a reportable segment because, while they offer a variety
of products, they offer the same set of products, use the same delivery system,
and are evaluated by the same set of standards. Specialized products are grouped
together, not because of similarities in the products, but because of the
delivery system which is largely marketed through branch referrals and the
immateriality of the revenue generated by each division separately. The
similarity in these is that they are all specialized financial services products
which must be supported by experts.
<TABLE>
<CAPTION>
Year ended December 31, 1998 Branches Specialized Products All Other Total
--------- -------------------- --------- -----------
<S> <C> <C> <C> <C>
Net interest income ............. $ 38,700 $ 3,519 $ 51 $ 42,270
Provision for loan losses ....... 1,679 714 170 2,563
------- ------- ------- -------
Net interest income after
provision for loan losses ..... 37,021 2,805 (119) 39,707
Noninterest income .............. 9,801 4,233 264 14,298
Noninterest expense ............. 23,618 5,275 9,233 38,126
------- ------- ------- -------
Income before income taxes ...... 23,204 1,763 (9,088) 15,879
Income taxes .................... 4,511 4,511
------- ------- ------- -------
Net income ...................... $ 23,204 $ 1,763 $ (13,599) $ 11,368
========= ========= ========= ===========
Intersegment revenue (expense) .. $ 517 $ (517) $ $
========= ========= ========= ===========
Segment assets .................. $ 851,218 $ 91,385 $ 120,762 $ 1,063,365
========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997 Branches Specialized Products All Other Total
--------- -------------------- --------- -----------
<S> <C> <C> <C> <C>
Net interest income ............. $ 36,976 $ 3,372 $ 49 $ 40,397
Provision for loan losses ....... 1,799 375 106 2,280
------- ------- ------- -------
Net interest income after
provision for loan losses ..... 35,177 2,997 (57) 38,117
Noninterest income .............. 9,323 2,590 107 12,020
Noninterest expense ............. 22,091 4,948 7,970 35,009
------- ------- ------- -------
Income before income taxes ...... 22,409 639 (7,920) 15,128
Income taxes .................... 4,488 4,488
------- ------- ------- -------
Net income ...................... $ 22,409 $ 639 $ (12,408) $ 10,640
========= ========= ========= ===========
Intersegment revenue (expense) .. $ 629 $ (629) $ $
========= ========= ========= ===========
Segment assets .................. $ 773,090 $ 77,723 $ 120,242 $ 971,055
========= ========= ========= ===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 Branches Specialized Products All Other Total
--------- -------------------- --------- -----------
<S> <C> <C> <C> <C>
Net interest income ............. $ 35,180 $ 2,958 $ 43 $ 38,181
Provision for loan losses ....... 2,345 330 138 2,813
------- ------- ------- -------
Net interest income after
provision for loan losses ..... 32,835 2,628 (95) 35,368
Noninterest income .............. 8,051 2,789 190 11,030
Noninterest expense ............. 21,057 4,047 7,726 32,830
------- ------- ------- -------
Income before income taxes ...... 19,829 1,370 (7,631) 13,568
Income taxes .................... 4,052 4,052
------- ------- ------- -------
Net income ...................... $ 19,829 $ 1,370 $ (11,683) $ 9,516
========= ========= ========= ===========
Intersegment revenue (expense) .. $ 51 $ (51) $ $
========= ========= ========= ===========
Segment assets .................. $ 732,434 $ 54,772 $ 105,883 $ 893,089
========= ========= ========= ===========
</TABLE>
Note Q - Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
Loan commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Company's normal credit
policies. Collateral (e.g., securities, receivables, inventory, equipment) is
obtained based on management's credit assessment of the customer.
The Company's unfunded loan commitments (unfunded loans and unused lines of
credit) and standby letters of credit outstanding at December 31, 1998, were
approximately $198,449 and $13,207, respectively, compared to $162,751 and
$11,703, respectively, at December 31, 1997.
Market risk resulting from interest rate changes on particular off-balance sheet
financial instruments may be offset by other on- or off-balance sheet
transactions. Interest rate sensitivity is monitored by the Company for
determining the net effect of potential changes in interest rates on the market
value of both on- or off-balance sheet financial instruments.
Note R - Regulatory Matters
The Bank is 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
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
35
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios. All banks are required
to have core capital (Tier I) of at least 4% of risk-weighted assets (as
defined), 4% of average assets (as defined), and total capital of 8% of
risk-weighted assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios of 10%, 6%, and 5%, respectively. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and applicable ratios are as follows:
Actual
---------------------
Amount Ratio
-------- -----
As of December 31, 1998
Total Capital ................ $107,338 15.1%
(to Risk Weighted Assets)
Tier I Capital ............... $ 98,426 13.8%
(to Risk Weighted Assets)
Tier I Capital ............... $ 98,426 9.3%
(to Average Assets)
As of December 31, 1997
Total Capital ................ $ 99,223 15.7%
(to Risk Weighted Assets)
Tier I Capital ............... $ 91,315 14.5%
(to Risk Weighted Assets)
Tier I Capital ............... $ 91,315 9.9%
(to Average Assets)
Note S - The Peoples Holding Company (Parent Company Only)
Condensed Financial Information
Balance Sheets
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash* .......................................... $ 42 $ 59
Dividends receivable* .......................... 1,110 859
Investment in bank subsidiary* ................. 105,133 98,243
------- -------
Total Assets ................................ $106,285 $ 99,161
======== ========
Liabilities and Shareholders' Equity
Dividends payable .............................. $ 1,110 $ 859
Accrued interest payable and other liabilities . 116 151
Shareholders' equity ........................... 105,059 98,151
------- -------
Total Liabilities and Shareholders' Equity .. $106,285 $ 99,161
======== ========
</TABLE>
36
<PAGE>
Statements of Income
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
Income
Dividends from bank subsidiary* ....... $ 4,863 $ 3,360 $ 3,050
Other dividends ....................... 51 46 41
Other income .......................... 1
Interest income from bank subsidiary* . 2 2
------ ------ ------
4,914 3,409 3,093
Expenses
Other ................................. 256 251 177
------ ------ ------
Income before income tax credits and
equity in undistributed net income of
bank subsidiary ....................... 4,658 3,158 2,916
Income tax credits ...................... (84) (86) (61)
------ ------ ------
4,742 3,244 2,977
Equity in undistributed net
income of bank subsidiary* ............ 6,626 7,396 6,539
------ ------ ------
Net Income $11,368 $10,640 $ 9,516
======= ======= =======
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income ............................................. $ 11,368 $ 10,640 $ 9,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income
of bank subsidiary ................................ (6,626) (7,396) (6,539)
Increase in dividends receivable .................... (251) (78) (98)
Increase in other liabilities ....................... 216 159 105
------- ------- -------
Net Cash Provided By Operating Activities ........... 4,707 3,325 2,984
Investing Activities
Maturities (purchases) of certificates of deposit ...... 86 (5)
------- ------- -------
Net Cash Provided By (Used In) Investing Activities . 86 (5)
Financing Activities
Cash dividends ......................................... (4,184) (3,360) (2,950)
Payment of fractional shares on stock dividend ......... (29) (24)
Purchase of treasury stock ............................. (540)
------- ------- -------
Net Cash Used In Financing Activities ............... (4,724) (3,389) (2,974)
------- ------- -------
Increase In Cash .................................... (17) 22 5
Cash At Beginning Of Year .............................. 59 37 32
------- ------- -------
Cash At End Of Year ................................. $ 42 $ 59 $ 37
======== ======== ========
</TABLE>
*Eliminated in consolidation.
37
<PAGE>
Note T - Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
Mar 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
1998
<S> <C> <C> <C> <C>
Interest income ...................... $ 18,882 $ 19,349 $ 19,733 $ 19,949
Interest expense ..................... 8,528 8,823 9,133 9,159
Net interest income .................. 10,354 10,526 10,600 10,790
Provision for loan losses ............ 641 641 640 641
Noninterest income ................... 3,391 3,353 3,595 3,959
Noninterest expense .................. 9,085 9,488 9,451 10,102
Income before income taxes ........... 4,019 3,750 4,104 4,006
Income taxes ......................... 1,165 1,035 1,170 1,141
Net income ........................... 2,854 2,715 2,934 2,865
Basic and diluted earnings per share . $ .49 $ .46 $ .50 $ .49
1997
<S> <C> <C> <C> <C>
Interest income ...................... $ 17,259 $ 17,908 $ 18,370 $ 18,664
Interest expense ..................... 7,433 7,869 8,156 8,346
Net interest income .................. 9,826 10,039 10,214 10,318
Provision for loan losses ............ 570 570 570 570
Noninterest income ................... 2,850 2,858 3,059 3,253
Noninterest expense .................. 8,352 8,626 9,099 8,932
Income before income taxes ........... 3,754 3,701 3,604 4,069
Income taxes ......................... 1,153 1,071 1,057 1,207
Net income ........................... 2,601 2,630 2,547 2,862
Basic and diluted earnings per share . $ .44 $ .45 $ .44 $ .49
</TABLE>
Note U - Contingent Liabilities
Various claims and lawsuits, incidental to the ordinary course of business, are
pending against the Company and the Bank. In the opinion of management, after
consultation with legal counsel, resolution of these matters is not expected to
have a material effect on the consolidated financial statements.
38
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
The Peoples Holding Company
Tupelo, Mississippi
We have audited the accompanying consolidated balance sheets of The Peoples
Holding Company and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Peoples
Holding Company and subsidiary at December 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Memphis, Tennessee
January 22, 1999
/s/ Ernst & Young LLP
39
<PAGE>
Selected Financial Information
(Not covered by Report of Independent Auditors)
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
For the year ended December 31
<S> <C> <C> <C> <C> <C>
Interest Income .............$ 77,913 $ 72,201 $ 66,425 $ 63,009 $ 53,069
Interest Expense ............ 35,643 31,804 28,244 25,621 18,890
Provision for Loan Losses ... 2,563 2,280 2,813 2,827 2,001
Noninterest Income .......... 14,298 12,020 11,030 10,740 9,829
Noninterest Expense ......... 38,126 35,009 32,830 32,166 31,177
Income Before Taxes ......... 15,879 15,128 13,568 13,135 10,830
Income Taxes ................ 4,511 4,488 4,052 3,931 2,621
Net Income .................. 11,368 10,640 9,516 9,204 8,209
Per Common Share
Net Income ..................$ 1.94 $ 1.82 $ 1.62 $ 1.57 $ 1.40
Book Value at December 31 ... 17.98 16.75 15.46 14.50 12.58
Market Value at December 31 . 32.25 35.67 24.50 19.55 15.55
Cash Dividends Declared
and Paid .................. .72 .57 .50 .46 .40
Total at Year-End
Loans, Net of
Unearned Income ...........$ 694,283 $ 627,946 $ 562,753 $ 522,314 $ 502,048
Allowance for Loan Losses ... 9,620 9,104 9,309 8,815 8,183
Securities .................. 291,067 248,631 246,110 214,219 210,148
Assets ...................... 1,063,365 971,055 893,089 841,699 787,066
Deposits .................... 921,686 834,914 772,842 739,545 696,280
Borrowings .................. 19,567 18,454 11,175 4,313 4,650
Shareholders' Equity ........ 105,059 98,151 90,561 84,960 73,734
Selected Ratios
Return on Average
Total Assets .............. 1.11% 1.14% 1.10% 1.13% 1.05%
Shareholders' Equity ...... 11.08% 11.25% 10.88% 11.45% 11.24%
Average Shareholders' Equity
to Average Assets ......... 10.00% 10.15% 10.07% 9.83% 9.34%
At December 31
Shareholders' Equity
to Assets ............... 9.88% 10.11% 10.14% 10.09% 9.37%
Tier 1 Leverage ........... 9.33% 9.86% 9.91% 9.67% 9.22%
Risk-Based Capital Ratios
Tier 1 .................. 13.82% 14.46% 15.10% 14.87% 14.86%
Total (8.00% Required) .. 15.07% 15.71% 16.35% 16.14% 16.12%
Allowance for Loan Losses
to Total Loans .......... 1.39% 1.45% 1.65% 1.69% 1.63%
Allowance for Loan Losses
to Nonperforming Loans .. 278.60% 200.71% 211.47% 257.00% 394.55%
Nonperforming Loans to
Total Loans ............. .50% .72% .78% .66% .41%
Dividend Payout ........... 36.81% 31.58% 31.00% 29.07% 28.54%
</TABLE>
40
<PAGE>
Market Value of Stock by Quarters
The public market for The Peoples Holding Company common stock is limited.
Effective August 18, 1997, the stock began trading on the American Stock
Exchange under the ticker symbol PHC. Previously, the stock was listed on the
National Association of Securities Dealers Automated Quotations system (NASDAQ)
and was traded in the local over-the-counter market. High and low prices for the
first and second quarter of 1997 are reflective of actual trades as reported in
the NASDAQ Stock Bulletin. High and low prices for the third and fourth quarters
of 1997 and all of 1998 are reflective of actual trades as reported by the
American Stock Exchange. Dividends per share and market prices have been
adjusted to reflect the fifty percent stock dividend issued in 1998. At December
31, 1998, there were approximately 2,635 shareholders of record.
DIVIDENDS PRICES
PERIOD PER SHARE LOW HIGH
---------------- --------- ------- -------
1998
1st Quarter .... $ .175 $ 36.00 $ 38.00
2nd Quarter .... .175 36.25 41.88
3rd Quarter .... .175 32.25 32.25
4th Quarter .... .190 32.00 32.31
1997
1st Quarter .... $ .133 $ 23.66 $ 26.00
2nd Quarter .... .147 23.83 26.67
3rd Quarter .... .147 25.67 28.67
4th Quarter .... .147 27.50 37.00
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(In Thousands, Except Share Data)
Overview
The Peoples Holding Company (the Company) is a one-bank holding company
incorporated under the laws of the state of Mississippi. The Peoples Bank &
Trust Company (the Bank) was incorporated in February 1904 and became a
subsidiary of the Company in 1983. The Bank operates 41 branches located in
North and North Central Mississippi and is the sixth largest bank located in the
state.
The Company's banking subsidiary provides a wide range of banking and financial
services to its customers. Those include lending services for commercial,
consumer, and real estate loans; depository services for checking, savings,
money market, IRA, and certificate of deposit accounts; and fiduciary services.
The Bank maintains credit card services and is the issuer of the Mississippi
State University, the Delta State University, and the State of Mississippi
Department of Wildlife, Fisheries & Parks affinity cards. In addition, the Bank
has a number of automated teller machines located throughout its market area
that provide 24-hour banking services along with 24-hour access to customer
account information through a voice response system. The Company also offers
annuities and mutual funds.
The purpose of this discussion is to focus on important factors affecting the
Company's financial condition and results of operations. Reference should be
made to the consolidated financial statements (including the notes thereto) and
the selected financial data in this report for an understanding of the following
discussion and analysis. All per-share data is restated to reflect all stock
dividends declared through December 31, 1997.
41
<PAGE>
The Company ended 1998 with assets totaling $1,063,365, up from the prior year
total of $971,055. This represented a 9.5% growth compared to 8.7% for 1997.
Earnings were up 6.8% from the previous year with net income surpassing $11,300.
On December 14, 1998, the Company entered into an agreement to merge with
Inter-City Federal Bank for Savings (Inter-City) located in Louisville,
Mississippi. On December 31, 1998, total assets, loans, and deposits for
Inter-City totaled $44,368, $34,890, and $38,530, respectively. The transaction
is expected to be accounted for as a pooling of interests. The exchange ratio
will be 2.78 shares of the Company for each share of Inter-City (approximately
347,405 shares). The transaction is expected to be consummated in March 1999.
Effective October 1997, the Company purchased approximately $11,036 of assets
and assumed approximately $15,232 of deposit liabilities from one branch office
of Magnolia Federal Bank for Savings located in Grenada, Mississippi. Goodwill
of approximately $2,123 was recorded regarding the acquisition.
This Annual Report To Shareholders may contain or incorporate by reference
statements which may constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the
Securities Exchange Act of 1934, as amended. Prospective investors are cautioned
that any such forward-looking statements are not guarantees for future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include
significant fluctuations in interest rates, inflation, economic recession,
significant changes in the federal and state legal and regulatory environment,
significant underperformance in the Company's portfolio of outstanding loans,
and competition in the Company's markets. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
Financial Condition Review
The Company emphasizes the importance of employing a high percentage of its
assets in an earning capacity. Utilization of the Company's earning assets is a
major factor in generating profitability.
The Company employs the largest portion of its earning assets in loans. Loans,
net of unearned income, comprised 65.3% and 64.7% of the total assets at
December 31, 1998 and 1997, respectively. Overall loan growth in 1998 was 10.6%,
with the most significant percentage growth in real estate-mortgage loans,
commercial, and consumer. The increase in real estate loans was mainly due to
the growth in the residential market and the favorable rates being offered on
mortgages. Total loans increased 11.6% during 1997, with the most significant
growth in real estate-construction and real estate-mortgage loans.
42
<PAGE>
The table below sets forth loans outstanding, according to loan type, at
December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural ............ $ 137,272 $ 120,412 $ 111,687 $ 107,558 $ 98,767
Real estate - construction . 25,562 24,365 20,651 16,851 18,189
Real estate - mortgage ..... 382,179 344,212 301,078 259,918 253,154
Consumer ................... 158,096 148,472 137,704 149,218 143,948
Unearned income ............ (8,826) (9,515) (8,367) (11,231) (12,010)
-------- -------- -------- -------- --------
Total loans, net of
unearned income ....... $ 694,283 $ 627,946 $ 562,753 $ 522,314 $ 502,048
========= ========= ========= ========= =========
</TABLE>
The securities portfolio is used to provide term investments, to provide a
source of meeting liquidity needs, and to supply securities to be used in
collateralizing public funds. The types of securities purchased and the terms of
those securities depend on management's assessment of future economic
conditions.
The securities portfolio increased $42,436 or 17.1%, at December 31, 1998,
compared to December 31, 1997. The most significant increase was in mortgage
backed securities, which increased 40.9%. Investments in obligations of states
and political subdivisions accounted for the second largest change, growing
$17,000 or 28.4%. U. S. Treasury securities decreased $16,146 or 22.8%. The
change in the composition of the portfolio was largely attributable to the
widening of the spreads between U. S. Treasury securities and other investment
alternatives.
The securities portfolio was up $2,521 or 1.0% at December 31, 1997, compared to
December 31, 1996. The most significant increase was in obligations of other
U.S. Government agencies and corporations, which increased 59.4%. All other
investment categories increased slightly with the exception of preferred stock,
which decreased 68.20%. The securities portfolio represented 27.3% and 25.6% of
assets at December 31, 1998 and 1997, respectively.
Management continues to evaluate the Company's tax position in order to maximize
earnings from securities. The Company was not in an alternative minimum tax
position during 1998 or 1997. Note E of the Notes to the Consolidated Financial
Statements provides details of the securities portfolio.
Federal funds sold and interest-bearing balances with banks provide a
significant source of liquidity. These funds consist of day-to-day loans to
correspondent banks. Federal funds sold and interest-bearing balances with banks
totaled $433 and $20,973 at December 31, 1998 and 1997, respectively. The
changes in these balances between periods are typical of fluctuations in the
availability of funds caused by changes in deposits, loans, and securities.
Nonearning assets include cash and due from banks, premises and equipment, and
other assets. Cash and due from banks represented 3.0% and 3.4% of total assets
at December 31, 1998 and 1997, respectively. These funds are available for
meeting day-to-day cash requirements inclusive of reserves required to be held
by the Federal Reserve Bank. The Company has been working toward minimizing the
amount of cash on hand by both implementing changes allowed by The Federal
Reserve Bank regarding reserve requirements and the monitoring of cash needs for
the branch network. The balance of cash and due from banks may fluctuate
significantly based on bank activity.
43
<PAGE>
Net premises and equipment were $26,356 and $23,493 at December 31, 1998 and
1997, respectively. In a continued effort to upgrade and improve the branch
facilities and technology, the Company invested $5,274 in building expansion and
equipment during 1998. Additionally in 1998, two new branches were constructed
in Tupelo in strategic locations that would provide better service to an
expanding marketplace. One of the facilities replaced a branch located in a
grocery store. Construction is in process on a new branch facility located in
Hernando.
In 1997, the Company consolidated two aging branches in Grenada to a new
facility, consolidated the Water Valley branches into one branch, and
constructed a new branch in Aberdeen. The consolidation and construction of new
branches were completed to improve services to the respective communities.
Other assets were $28,902 and $26,184 at December 31, 1998 and 1997,
respectively. The major accounts in this category are interest earned not
collected, prepaid expenses, intangible assets, deferred taxes, cash surrender
value of insurance, and other real estate owned. Interest earned not collected
at December 31, 1998, totaled $10,061, up from $8,990 at the end of 1997.
Prepaid expenses were $2,163 and $1,833 at December 31, 1998 and 1997,
respectively.
Intangible assets, resulting from bank acquisitions totaled $5,357 and $5,886 at
December 31, 1998 and 1997, respectively. These intangibles are being amortized
over a period of 13 to 15 years.
Capitalized mortgage servicing rights totaled $877 and $462 at December 31, 1998
and 1997, respectively. The increase corresponds to the increase in residential
mortgage loans. Mortgage servicing rights are amortized in proportion to, and
over the period of, estimated net servicing income.
Cash surrender value of insurance equaled $5,411 and $4,593 at December 31, 1998
and 1997, respectively. The Company maintains life insurance policies on key
members of management and records the resulting cash surrender value.
The Company relies on deposits as its major source of funds. Noninterest-bearing
deposits were $149,433 and $120,829 at December 31, 1998 and 1997, respectively.
This represented 14.1% and 12.4% of total assets at December 31, 1998 and 1997,
respectively. The increase of 23.7% for 1998 was the result of the Company
implementing a more aggressive marketing and personal sales effort. During 1997,
the low growth of 1.9% was due to the depositors utilizing more interest-bearing
products.
Interest-bearing deposits were $772,253 and $714,085 at December 31, 1998 and
1997, respectively, or an 8.2% increase over 1997. The largest growth
contributing to this increase came from interest-bearing transaction accounts
and money market accounts. Those accounts accounted for approximately $38,000 of
the growth. Interest-bearing public funds increased from $23,911 to $43,368 or
81.4%.
Interest-bearing deposits at December 31, 1997, increased 9.2% over 1996. The
largest growth came from interest-bearing demand deposits and certificates of
deposit exceeding $100,000. In addition, the Magnolia Federal Bank for Savings
branch office acquisition accounted for an increase of approximately $15,232 in
1997. The remaining growth in interest-bearing deposits was due to internal
growth.
The Company maintains a note account with the Federal Reserve Bank for which tax
deposits are accepted. The account is secured through pledging of securities. On
December 31, 1998, the balance in the treasury tax and loan note account was
$2,455, down from $6,101 at the end of 1997. This account fluctuates based on
the amount of securities pledged to secure the account and the frequency with
which the Federal Reserve Bank draws on those funds.
44
<PAGE>
During 1998, the Company received advances from the Federal Home Loan Bank
(FHLB) totaling $1,000. The balance due to the FHLB at December 31, 1998 and
1997 was $17,067 and $18,452, respectively. These advances are the result of
asset/liability management decisions matching certain earning assets (first
mortgages and consumer loans) against these advances at positive rate spreads.
Note G of the Notes To Consolidated Financial Statements provides details of the
borrowings from the FHLB.
Other liabilities totaling $14,598 and $13,435 at December 31, 1998 and 1997,
respectively, include accrued interest payable, accrued expenses, current taxes
payable, and dividends payable. Accrued interest payable totaled $4,810 and
$4,902 at December 31, 1998 and 1997, respectively. Accrued retirement plan
costs totaled $1,431 and $1,075 at December 31, 1998 and 1997, respectively.
Risk Management
The management of risk is an on-going process. Risks that are associated with
the Company include, but are not limited to, credit, interest rate, and
liquidity risks.
Credit Risk
Inherent in any lending activity is credit risk, that is, the risk of loss
should a borrower or trading counterparty default. The Company's credit risk is
monitored and managed by a Loan Committee and a Loss Management Committee.
Credit quality and policies are major concerns of these committees. The Company
tries to maintain diversification within its loan portfolio in order to minimize
the effect of economic conditions within a particular industry.
The allowance for loan losses is available to absorb inherent credit losses in
the entire loan portfolio. The appropriate level of the allowance is based on a
quarterly analysis of the loan portfolio and represents an amount that
management deems adequate to provide for inherent losses, including losses on
loans assessed as impaired under SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The balance of these loans determined as impaired and
their related allowance is included in management's estimation and analysis of
the allowance for loan losses. If the allowance is deemed inadequate, management
sets aside additional reserves by increasing the charges against income.
The allowance for loan losses was $9,620 and $9,104 at December 31, 1998 and
1997, respectively. This represents a ratio of allowance to year-end loans of
1.4% and 1.5%, respectively. Management deems this allowance adequate for
inherent loan losses.
The Company's net charge-offs for 1998 and 1997 were $2,047 and $2,485,
respectively. This represented a net charge-offs to average loans ratio of .3%
and .4% for the years ending December 31, 1998 and 1997, respectively.
Management continues to monitor loans and utilize diligent collection efforts.
Nonperforming loans are those on which the accrual of interest has stopped or
the loan is contractually past due 90 days. Generally, the accrual of income is
discontinued when the full collection of principal or interest is in doubt, or
when the payment of principal or interest has been contractually 90 days past
due, unless the obligation is both well secured and in the process of
collection.
45
<PAGE>
The table below reflects the activity in the allowance for loan losses for the
years ended December 31:
Allowance for Loan Losses
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year .... $ 9,104 $ 9,309 $ 8,815 $ 8,183 $ 6,388
Provision for Loan Losses .... 2,563 2,280 2,813 2,827 2,001
Charge-Offs
Commercial, Financial,
and Agricultural .......... 433 248 273 1,286 174
Real Estate - Construction . 34 228
Real Estate - Mortgage ..... 267 667 247 93 237
Consumer ................... 1,780 1,900 2,073 1,059 684
------- ------- ------- ------- -------
Total Charge-Offs ............ 2,514 3,043 2,593 2,438 1,095
Recoveries
Commercial, Financial,
and Agricultural .......... 142 73 54 101 562
Real Estate - Construction . 11 68
Real Estate - Mortgage ..... 88 197 49 6 149
Consumer ................... 226 220 171 136 178
------- ------- ------- ------- -------
Total Recoveries ............. 467 558 274 243 889
------- ------- ------- ------- -------
Net Charge-Offs .............. 2,047 2,485 2,319 2,195 206
------- ------- ------- ------- -------
Balance at End of Year .......... $ 9,620 $ 9,104 $ 9,309 $ 8,815 $ 8,183
========= ========= ========= ========= =========
Loan Loss Analysis
Loans - Average .............. $ 646,709 $ 589,557 $ 533,548 $ 516,784 $ 466,137
Loans - Year End ............. 694,283 627,946 562,753 522,314 502,048
Net Charge-offs .............. 2,047 2,485 2,319 2,195 206
Allowance for Loan Losses .... 9,620 9,104 9,309 8,815 8,183
Ratios
Net Charge-offs to
Loans - Average ............ .32% .42% .43% .42% .04%
Allowance for Loan Losses .. 21.28% 27.30% 24.91% 24.89% 2.52%
Allowance for Loan Losses to
Loans - Year End ........... 1.39% 1.45% 1.65% 1.69% 1.63%
Nonperforming Loans ........ 278.60% 200.71% 211.47% 257.00% 394.55%
Nonperforming Loans to
Loans - Year End ........... .50% .72% .78% .66% .41%
Loans - Average ............ .53% .77% .83% .66% .44%
</TABLE>
46
<PAGE>
The following table shows the principal amounts of nonaccrual and restructured
loans at December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonperforming Loans
Nonaccruing .................. $ 204 $ 1,070 $ 1,655 $ 803 $ 877
Accruing Loans Past Due
90 Days Or More ............ 3,249 3,466 2,747 2,627 1,197
------- ------- ------- ------- -------
Total Nonperforming
Loans ...................... 3,453 4,536 4,402 3,430 2,074
Restructured Loans
Balance Outstanding ........ 178 203 224 243 260
------- ------- ------- ------- -------
Total Nonperforming Loans
Including Restructured ....... $ 3,631 $ 4,739 $ 4,626 $ 3,673 $ 2,334
========= ========= ========= ========= =========
</TABLE>
The following table presents the interest income on restructured loans, if these
loans had been current in accordance with their original terms, and the amount
of interest income on these loans that was included in income for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross Amount Of Interest That
Would Have Been Recorded
At The Original Rate ........ $ $ $ $ $ 4
Interest That Was Recognized
In Income ................... $ 15 $ 15 $ 16 $ 16 $ 21
------- ------- ------- ------- -------
Favorable Impact On
Gross Income ................ $ 15 $ 15 $ 16 $ 16 $ 17
========= ========= ========= ========= =========
</TABLE>
Nonperforming loans totaled $3,453 and $4,536 at December 31, 1998 and 1997,
respectively. These loans represented .5% and .8% of average loans for 1998 and
1997, respectively. The allowance for loan losses to nonperforming loans was
278.6% and 200.7% at December 31, 1998 and 1997, respectively. Loans that are
considered to be nonperforming are closely monitored by management and the Loss
Management Committee.
Real estate acquired through the satisfaction of loan indebtedness is recorded
at the lower of cost or fair market value, less estimated selling costs. Any
deficiency between the loan balance and the purchase price of the property is
charged to the allowance for loan losses. Subsequent property sales may result
in gains or losses to the Company.
Restructured loans are those for which concessions have been granted to the
borrower due to a deterioration of the borrower's financial condition. Such
concessions may include a reduction in interest rates, or a deferral of interest
or principal payments.
Loans that have been restructured due to cash flow requirements totaled $178 and
$203 at December 31, 1998 and 1997, respectively. The Company's loan review
staff monitors the performance of these loans.
47
<PAGE>
Interest Rate Risk
The Company has an Asset/Liability Committee (ALCO) which is duly authorized by
the Board of Directors to monitor the position of the Company and to make
decisions relating to that process. The ALCO's goal is to maximize net interest
income while providing the Company with an acceptable level of market risk due
to changes in interest rates. Market risk is the risk of loss from adverse
changes in market prices and rates. The Company's market risk arises primarily
from interest rate risk inherent in its lending and deposit taking activities.
To that end, management actively monitors and manages its interest rate risk
exposure.
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial change in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Company's exposure to
differential changes in interest rates between assets and liabilities is shown
in the Company's Maturity and Rate Sensitivity Analysis (GAP Analysis). Another
test measures the impact on net interest income and on net portfolio value (NPV)
of an immediate change in interest rates in 100 basis point increments. Net
portfolio value is defined as the net present value of assets, liabilities, and
off-balance sheet contracts. Following are the estimated impacts of immediate
changes in interest rates at the specified levels at December 31, 1998 and 1997:
Percentage Change In:
--------------------------------------
Change In Interest Rates Net Interest Net Portfolio
(In Basis Points) Income (1) Value (2)
- ------------------------- ------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
+400 .............. (15.5%) (5.4%) (8.5%) (7.0%)
+300 .............. (11.6%) (2.2%) (5.8%) (4.7%)
+200 .............. (7.7%) 0.9% (3.5%) (2.6%)
+100 .............. (3.7%) 0.3% (1.5%) (1.3%)
-100 .............. 6.5% (1.0%) 0.7% 0.8%
-200 .............. 1.3% (2.3%) (3.1%) (2.1%)
-300 .............. (0.7%) (4.6%) (5.6%) (5.9%)
-400 .............. (4.0%) (5.3%) (10.1%) (13.0%)
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the net interest income
in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Company in a stable interest rate environment versus the net portfolio
value in the various rate scenarios.
As of December 31, 1998, under the assumptions used in the table above,
immediate rate fluctuations within plus 200 basis points and minus 400 basis
points would have minimal effects on pre-tax earnings. An adverse material
impact on pre-tax earnings would not occur unless rates experienced an immediate
increase of 200 basis points or more, or an immediate decrease of 400 basis
points or more.
48
<PAGE>
As of December 31, 1997, under the assumptions used in the table above,
immediate rate fluctuations within plus 400 basis points and minus 400 basis
points would have minimal effects on pre-tax earnings. An adverse material
impact on pre-tax earnings would not occur unless rates experienced an immediate
increase of more than 400 basis points or an immediate decrease of more than 400
basis points.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while structuring the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest rate risk. The
results of the interest rate shock are within the limits set by the Board of
Directors.
The Company continually evaluates interest rate risk management opportunities,
including the possible use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective,
and therefore, has focused its efforts on increasing the Company's yield-cost
spread through retail growth opportunities.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of net interest income and NPV. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of net interest income and the net portfolio value.
Liquidity Risk
Liquidity management is the ability to meet the cash flow requirements of
customers who may be either depositors wishing to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs.
Core deposits are a major source of funds used to meet cash flow needs.
Maintaining the ability to acquire these funds as needed in a variety of money
markets is the key to assuring liquidity. Approximately 67% of the Company's
deposits are composed of accounts with balances less than $100,000. When
evaluating the movement of these funds, even during large interest rate changes,
it is apparent that the Company continues to attract deposits that can be used
to meet cash flow needs. Other sources available for meeting the Company's
liquidity needs include available-for-sale securities. The available-for-sale
portfolio is composed of securities with a readily available market that can be
used to convert to cash if the need arises. In addition, the Company maintains a
federal funds position and treasury tax and loan note account that provide
day-to-day funds to meet liquidity needs and may also obtain advances from the
Federal Home Loan Bank in order to meet liquidity needs.
Repayments and maturities of loans provide a substantial source of liquidity.
The Company has approximately 63.5% of loans maturing within the next twelve
months.
49
<PAGE>
Capital Resources
Total shareholders' equity of the Company was $105,059 and $98,151 at December
31, 1998 and 1997, respectively. Shareholders' equity grew 7.0% during 1998 and
8.4% during 1997. The growth in capital for both years was attributable to
earnings less dividends declared. In 1998, the Company raised dividends in the
second quarter. In addition, the effect of SFAS No. 115 increased capital in
1998 and 1997 by $830 and $566, respectively. Shareholders' equity as a
percentage of assets was 9.9% and 10.1% at December 31, 1998 and 1997,
respectively.
The Federal Reserve Board, the FDIC, and the OCC have issued guidelines for
governing the levels of capital that banks are to maintain. Those guidelines
specify capital tiers which include the following classification:
Tier 1 Risk- Total Risk- Leverage
Capital Tiers Based Capital Based Capital Ratio
---------------------------------- ------------- ------------- ------------
Well capitalized ................. 6% or above 10% or above 5% or above
Adequately capitalized ........... 4% or above 8% or above 4% or above
Undercapitalized ................. Less than 4% Less than 8% Less than 4%
Significantly undercapitalized ... Less than 3% Less than 6% Less than 3%
Critically undercapitalized ...... 2% or less
The Company met the guidelines for a well capitalized bank for both 1998 and
1997. At December 31, 1998, the total Tier 1 and total risk-based capital was
$98.4 and $107.3, respectively. Risk-weighted assets less excess allowance for
loan losses were $712,302 and $631,400 at December 31, 1998 and 1997,
respectively. Tier 1 and total risk-based capital at December 31, 1997, were
$91.3 and $99.2, respectively. See Note R of the Consolidated Financial
Statements for capital ratios.
During 1998, the Company raised cash dividends in the first quarter to $.17 per
share on a quarterly basis and again in the fourth quarter to $.19 per share on
a quarterly basis. This is the Company's twelfth consecutive year to raise cash
dividends. The Company returned approximately 37% of its earnings to its
shareholders in the form of dividends.
In December 1997, the Company declared a fifty percent stock dividend to
shareholders of record on January 1, 1998. Applicable per-share and book-value
information have been restated for the stock dividend. Cash dividends were
raised in the second quarter to $.1467 per share on a quarterly basis up from
$.133 per share. Book value per share was $17.98 and $16.75 at December 31, 1998
and 1997, respectively. Management places significant emphasis on internal
growth of capital. The increase in capital for both years, excluding the effects
of SFAS No. 115, was internally generated due to a retention of earnings of
63.2% and 68.0% during 1998 and 1997, respectively.
Results of Operations
Net income for the Company was $11,368, $10,640, and $9,516 for 1998, 1997, and
1996, respectively. In 1998, net income increased $728, or 6.8%, over 1997. In
1997, net income increased $1,124, or 11.8%, over 1996. Earnings per share were
$1.94, $1.82, and $1.62, for the years ending December 31, 1998, 1997, and 1996,
respectively.
Return on average assets for 1998, 1997, and 1996 was 1.11%, 1.14%, and 1.10%,
respectively. The increase in 1998 earnings compared to 1997 was the result of
an increase of $1,873, or 4.6%, in net interest income, an increase in the
provision for loan losses of $283, or 12.4%, an increase in noninterest income
of $2,278, or 19.0%, coupled with an increase in noninterest expenses of $3,117,
or 8.9%. While much of the year's earnings were the result of customary banking
services, the Company increased its noninterest income due to mortgage activity
and the sale of alternative products.
50
<PAGE>
During 1998, the Company began the most comprehensive restructuring in its
history. Alex Sheshunoff Management Services, Incorporated was retained to help
re-engineer the Company's delivery system. Changes were made in data processing,
the support and retail functions, and the number of employees. Displacements of
employees as a result of the engagement were completed on December 31, 1998.
The increase in net income for 1997 resulted from an increase in net interest
income of $2,216, or 5.8%, a decrease in the provision for loan losses of $533,
or 19.0%, and an increase in noninterest income of $989, or 9.0%, coupled with
an increase in noninterest expenses of $2,179, or 6.6%.
Net interest income is the largest component of net income for the Company. It
is an effective measurement of how well management has balanced the
interest-sensitive assets and liabilities and is the difference between the
interest earned on earning as sets and the cost paid on interest-bearing
liabilities. Net interest income was $42,270, $40,397, and $38,181, for the
years ending December 31, 1998, 1997, and 1996, respectively. This increase over
the three-year period was the result of management's ability to maximize
earnings through changes in interest rates and increased volume in earnings
assets. Net interest income, on a tax equivalent basis, for the year ending
December 31, 1998, increased approximately $3,825 due to increases in the volume
of earning assets and costing liabilities and decreased approximately $1,952 due
to changes in interest rates. The Company experienced the most significant
volume increase in loans, savings, and money market accounts. Rates were up
moderately during 1998 for all categories of deposit accounts.
Loan interest income was $60,054, $55,650, and $50,580 for the years ended
December 31, 1998, 1997, and 1996, respectively. The increase in 1998 was due to
an increase in average volume over 1997 of approximately $57,152, while the
decrease in tax-equivalent yield from 9.4% in 1998 compared to 9.5% in 1997,
resulted in a decrease of approximately $4,404 in interest income.
The increase for loan interest income in 1997 over 1996 was due to growth in the
average loan balance of approximately $56,009 and a decrease in the tax
equivalent yield of approximately 3 basis points, resulting in an increase in
interest income of approximately $5,070.
Interest income from securities was $17,066, $16,008, and $14,971 for the years
ending December 31, 1998, 1997, and 1996, respectively. The increase in interest
income in 1998 compared to 1997 was due to an increase in the average balance of
approximately $25,430, while the tax equivalent yield on securities decreased in
1998 to 6.8% from 6.9% in 1997. The effect of the increase in average volume
resulted in an increase in tax-equivalent interest income of approximately
$1,559 and the change in yield decreased tax-equivalent interest income by
approximately $501.
Interest income from securities for 1997 increased 6.9% due to the average
balance increasing $17,714 from 1996. The tax equivalent yield on securities for
1997 was 3 basis points lower than 1996.
The tax equivalent yields on average earning assets were 8.5%, 8.6%, and 8.6%,
for 1998, 1997, and 1996, respectively.
The major source of funds for the Company is deposits. Deposits represented
86.7% and 86.0% of the total assets at December 31, 1998 and 1997, respectively.
Interest-bearing accounts funded 72.6% and 73.5% of the assets for those two
years. The cost of funds is reflected in interest expense.
Interest expense for deposits and borrowings was $35,643, $31,804, and $28,244,
for the years ended December 31, 1998, 1997, and 1996, respectively. The
increase in interest expense in 1998 compared to 1997 was due to an increase in
the average balance of interest-bearing deposits of approximately $74,192, which
increased interest expense by approximately $3,481. The change in the average
interest rates by 4 basis points resulted in an increase in interest expense of
approximately $358.
51
<PAGE>
The increase in interest expenses for 1997 compared to 1996 was due to an
increase in the average balance of interest-bearing liabilities of approximately
$77,274 and an increase in the cost of interest-bearing liabilities of 4 basis
points. The change in interest expense from 1997 compared to 1996 of $3,559 was
due to an increase of approximately $2,567 in volume and approximately $992
increase in interest expense due to interest rate changes.
The net interest margin reflects the portion of the yield on earning assets that
remains after the accrual of all interest expense. Net interest margin on a tax
equivalent basis was 4.7%, 5.0%, and 5.1% for the years ending December 31,
1998, 1997, and 1996, respectively. The decrease in net interest margin since
1996 was due to management's decision to reprice products in response to
competition and the interest rate environment, while increasing net interest
income through increased volume.
The provision for loan losses was $2,563, $2,280, and $2,813 for 1998, 1997, and
1996, respectively. The increase in provision in 1998 is in response to the
growth of loans. The provision for loan losses for 1997 was down slightly from
1996 due to the lowering of the balance of non-performing loans.
Noninterest income totaled $14,298, $12,020, and $11,030, for the years ended
December 31, 1998, 1997, and 1996, respectively. This represented 33.8%, 29.8%,
and 29.0% of net interest income for the applicable year. Included in
noninterest income are service charges on deposit accounts, fees and
commissions, trust revenue, securities gains and losses, and other income.
Service charges on deposit accounts increased $419, or 6.2%, in 1998 compared to
1997. The increase was due to the growth in transaction accounts. Service
charges were up $203, or 3.1%, in 1997 compared to 1996. This increase was
mainly due to the acquisition of approximately $15,232 in deposit accounts from
Magnolia Federal Bank for Savings.
Fees and commissions were $1,891, $1,447 and $1,397, for 1998, 1997, and 1996,
respectively. Fees were up 30.7% for 1998, largely attributable to an increase
of $378 in income from annuity sales and $192 in mortgage loan fees.
Securities gains in 1998 totaled $61 compared to securities losses of $41 for
1997 and gains in 1996 of $110. The gains and losses in the portfolio are a
result of strategies implemented in the securities portfolio to maintain
liquidity and enhance future income.
Other income was $4,314, $3,127, and $2,315 for 1998, 1997, and 1996,
respectively. Credit card fees were up approximately $351, and profits on
mortgage sales were up $474. The Company began offering enhancements to loan
products that resulted in an increase in other income of $146. The increase in
1997 compared to 1996 was due to an increase in document preparation fees of
approximately $454, an increase of approximately $148 in merchant discount
revenue, and an increase in fees of approximately $70 related to credit card
services.
Noninterest expenses include salaries and employee benefits, net occupancy,
equipment, income taxes, and other noninterest expenses. The totals for these
expenses for the years ending December 31, 1998, 1997, and 1996 were $38,126,
$35,009, and $32,830, respectively. Noninterest expenses for 1998 were up 8.9%
compared to 1997. Noninterest expenses increased 7.1% and 2.2% for 1997 and
1996, respectively.
52
<PAGE>
Salaries and employee benefits, representing a major portion of the Company's
operating expenses, increased 6.3%, 7.2%, and 0.9%, during 1998, 1997, and 1996,
respectively. Management monitors these costs through the implementation of a
performance evaluation system. Jobs are graded according to levels of difficulty
using a point system which provides for salary adjustments through specified
ranges. Employee performance, in relation to goal achievement, is a major factor
contributing to the employee's salary increase. Salaries were up 3.0% over 1997.
Other increases came from health insurance and ESOP. During 1998, the Company
employed Alex Sheshunoff Management Services, Incorporated to assist in
re-engineering the delivery system. At the end of 1998, the Company displaced a
number of employees which resulted in additional costs due to severance pay.
The increase in 1997 versus 1996 was due to additional staffing related to
acquisitions and internal growth of the Company. Also, employee benefit plan
costs increased approximately $617 related to implementation of a money purchase
pension plan and a 401(k) plan.
During 1997, the Company adopted a Stakeholder performance compensation program
wherein rewards reconcile directly with performance related to profit, growth,
quality, and productivity. During 1996 and 1995, another incentive program was
utilized. The cash incentive for 1998, 1997, and 1996 was approximately $251,
$775, and $552, respectively, which also increased salaries and benefits in
1998, 1997, and 1996.
Net occupancy expense includes charges for repairs, janitorial, depreciation,
rental, and other expenses related to occupancy. Expenses for 1998, 1997, and
1996 were $2,683, $2,599, and $2,269, respectively. In accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company recognized an impairment loss of
approximately $142 for 1998 in moving a branch location at Barnes Crossing and
$226 in 1997 related to the consolidation of branch offices in Grenada and Water
Valley and construction of a new branch in Aberdeen. The increase for 1998 was
due to depreciation, janitorial, utility, and insurance expenses. Each of these
costs increased due to the construction of new facilities during 1998 or in
1997. The new branches were constructed to improve service in those locations.
Equipment expenses include computer and equipment repairs and depreciation.
These expenses totaled $1,908, $1,780, and $1,595, for 1998, 1997, and 1996,
respectively. The increase in 1998 was attributable to increases in depreciation
expense and repairs and maintenance. The increase in 1997 over 1996 was due to
depreciation and expenses incurred in completing the Technology Center and new
branches previously mentioned.
Other expenses for 1998, 1997, and 1996 were $12,778, $11,097, and $10,748,
respectively. The increase in 1998 compared to 1997 was due to education,
special community functions sponsored by the Company, correspondent bank fees,
other fees (Alex Sheshunoff Management Services, Incorporated), and computer
processing charges. The increase in 1997 compared to 1996 was due to normal
increases in cost due to inflation and approximately $296 increase in other
fees.
53
<PAGE>
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. The "year 2000" problem is pervasive and complex as
virtually every computer operation will be affected in some way by the rollover
of the two digit value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
Management is in the process of working with its software vendors to assure that
the Company is prepared for the year 2000. While the Company believes its
planning efforts are adequate to address its year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The Company has not incurred significant operating
expenses or been required to invest heavily in computer system improvements to
be year 2000 compliant. The Company successfully completed testing for its
mission critical applications processed by its third party service provider
during the fourth quarter of 1998, following the conversion to the expanded code
for year 2000. Future date testing of year 2000 critical dates will be completed
for these applications during the first quarter of 1999. Six non-compliant
systems identified had not been upgraded to year 2000 compliant applications at
year end but are projected to be compliant by June 30, 1999. Eighteen systems
were in process of being tested to validate their year 2000 compatibility, three
of which were completed during January and February, and testing will be
substantially complete by March 31, 1999. A committee will be commissioned the
first quarter of 1999 to develop contingency plans for year 2000. These
contingency plans will not only address potential business interruptions related
to the year 2000, but also liquidity and cash availability contingencies as the
millennium approaches.
Income tax expense for 1998, 1997, and 1996 was $4,511, $4,488, and $4,052,
respectively. The increase in 1998 was due to an increase in earnings. The
Company increased its holding in tax-exempt securities which lowered its
effective tax rate. The increase in income taxes for 1997 and 1996 was due to
increased profits and the Company paying state of Mississippi taxes after a net
operating loss carryforward was depleted in the first quarter of 1995. The
effective tax rate was approximately 5% for state income taxes. Effective tax
rates were 28.4%, 29.7%, and 29.9%, for 1998, 1997, and 1996, respectively. Note
L of the Notes To Consolidated Financial Statements provides further details of
the provision for income taxes.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories.
Management believes the most significant impact on financial results stems from
the Company's ability to react to changes in interest rates. Therefore,
management is constantly monitoring the Company's rate sensitivity.
SEC Form 10-K
A copy of the annual report on Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained without charge by directing a written
request to: Stuart Johnson, Executive Vice President, The Peoples Bank & Trust
Company, P. O. Box 709, Tupelo, MS 38802-0709.
54
<PAGE>
Three-Year Statistical Summary
(In Thousands)
<TABLE>
<CAPTION>
1998
---------------------------------------
Income Average
Or Balance Sheet
Expense Amounts Yields/Rates
-------- ------------- ------------
<S> <C> <C> <C>
Earning assets
Loans, net of unearned income
Commercial .............................................. $ 28,449 $ 314,527 9.10%TE
Consumer ................................................ 17,683 186,796 9.47%
Other loans ............................................. 13,922 145,386 9.72%TE
------- -------
Total Loans, Net . 60,054 646,709 9.35%TE
Other ........................................................ 793 14,626 5.42%
Taxable securities
U.S. Government securities ................................ 3,764 62,367 6.24%TE
U.S. Government agencies .................................. 3,011 48,925 6.32%TE
Mortgage-backed securities ................................ 6,413 101,838 6.30%
Other securities .......................................... 228 2,994 8.21%TE
------- -------
Total Taxable Securities . 13,416 216,124 6.31%TE
Tax-exempt securities
Obligations of states and political subdivisions .......... 3,650 70,396 8.14%TE
------- -------
Total Securities . 17,066 286,520 6.76%TE
------- -------
Total Earning Assets . 77,913 947,855 8.50%TE
Cash and due from banks ...................................... 34,215
Other assets, less allowance for loan losses ................. 44,041
-------
Total Assets . $1,026,111
==========
Interest-bearing liabilities
Interest-bearing demand deposit accounts .................. 1,855 $ 55,963 3.31%
Savings and money market accounts ......................... 7,192 234,606 3.07%
Time deposits ............................................. 25,132 468,277 5.37%
------- -------
Total Interest-Bearing Deposits . 34,179 758,846 4.50%
Total Other Interest-Bearing Liabilities . 1,464 24,340 6.01%
------- -------
Total Interest-Bearing Liabilities . 35,643 783,186 4.55%
Noninterest-bearing sources
Noninterest-bearing deposits .............................. 127,374
Other liabilities ......................................... 12,953
Shareholders' equity ...................................... 102,598
-------
Total Liabilities and Shareholders' Equity . $1,026,111
==========
Net interest income/net interest margin ................... $ 42,270 4.74%TE
========
</TABLE>
TE - Ratios have been calculated on a tax equivalent basis.
55
<PAGE>
<TABLE>
<CAPTION>
1997
---------------------------------------
Income Average
Or Balance Sheet
Expense Amounts Yields/Rates
-------- ------------- ------------
<S> <C> <C> <C>
Earning assets
Loans, net of unearned income
Commercial .............................................. $ 25,943 $ 282,262 9.25%TE
Consumer ................................................ 17,658 183,863 9.60%
Other loans ............................................. 12,049 123,432 9.87%TE
------- -------
Total Loans, Net . 55,650 589,557 9.49%TE
Other ........................................................ 543 10,102 5.37%
Taxable securities
U.S. Government securities ................................ 4,522 76,993 6.07%TE
U.S. Government agencies .................................. 3,074 48,026 6.52%TE
Mortgage-backed securities ................................ 5,250 79,690 6.59%
Other securities .......................................... 211 2,822 8.06%TE
------- -------
Total Taxable Securities . 13,057 207,531 6.40%TE
Tax-exempt securities
Obligations of states and political subdivisions .......... 2,951 53,559 8.61%TE
------- -------
Total Securities . 16,008 261,090 6.85%TE
Total Earning Assets . 72,201 860,749 8.64%TE
Cash and due from banks ...................................... 34,137
Other assets, less allowance for loan losses ................. 37,271
-------
Total Assets . $ 932,157
========
Interest-bearing liabilities
Interest-bearing demand deposit accounts .................. 1,855 $ 56,379 3.29%
Savings and money market accounts ......................... 5,752 196,011 2.93%
Time deposits ............................................. 22,933 432,264 5.31%
------- -------
Total Interest-Bearing Deposits . 30,540 684,654 4.46%
Total Other Interest-Bearing Liabilities . 1,264 21,258 5.94%
------- -------
Total Interest-Bearing Liabilities . 31,804 705,912 4.51%
Noninterest-bearing sources
Noninterest-bearing deposits .............................. 119,356
Other liabilities ......................................... 12,293
Shareholders' equity ...................................... 94,596
-------
Total Liabilities and Shareholders' Equity . $ 932,157
========
Net interest income/net interest margin ................... $ 40,397 4.95%TE
========
</TABLE>
TE - Ratios have been calculated on a tax equivalent basis.
56
<PAGE>
<TABLE>
<CAPTION>
1996
---------------------------------------
Income Average
Or Balance Sheet
Expense Amounts Yields/Rates
-------- ------------- ------------
<S> <C> <C> <C>
Earning assets
Loans, net of unearned income
Commercial .............................................. $ 23,797 $ 259,223 9.23%TE
Consumer ................................................ 18,245 187,521 9.73%
Other loans ............................................. 8,538 86,804 9.91%TE
------- -------
Total Loans, Net . 50,580 533,548 9.52%TE
Other ........................................................ 874 16,492 5.30%
Taxable securities
U.S. Government securities ................................ 4,844 83,010 6.03%TE
U.S. Government agencies .................................. 3,013 45,725 6.68%TE
Mortgage-backed securities ................................ 4,123 62,214 6.63%
Other securities .......................................... 226 3,178 7.87%TE
------- -------
Total Taxable Securities . 12,206 194,127 6.41%TE
Tax-exempt securities
Obligations of states and political subdivisions .......... 2,765 49,250 8.76%TE
------- -------
Total Securities . 14,971 243,377 6.88%TE
------- -------
Total Earning Assets . 66,425 793,417 8.62%TE
Cash and due from banks ...................................... 40,845
Other assets, less allowance for loan losses ................. 34,459
-------
Total Assets . $ 868,721
========
Interest-bearing liabilities
Interest-bearing demand deposit accounts .................. 2,865 $ 88,601 3.23%
Savings and money market accounts ......................... 4,233 159,557 2.65%
Time deposits ............................................. 20,649 395,827 5.22%
------- -------
Total Interest-Bearing Deposits . 27,747 643,985 4.31%
Total Other Interest-Bearing Liabilities . 497 10,009 4.96%
------- -------
Total Interest-Bearing Liabilities . 28,244 653,994 4.32%
Noninterest-bearing sources
Noninterest-bearing deposits .............................. 116,634
Other liabilities ......................................... 10,598
Shareholders' equity ...................................... 87,495
-------
Total Liabilities and Shareholders' Equity . $ 868,721
========
Net interest income/net interest margin ................... $ 38,181 5.06%TE
========
</TABLE>
TE - Ratios have been calculated on a tax equivalent basis.
57
<PAGE>
EXHIBIT 23
THE PEOPLES HOLDING COMPANY
CONSENT OF INDEPENDENT AUDITORS
We consent to the incoporation by reference in this Annual Report (Form 10-K) of
The Peoples Holding Company of our report dated January 22, 1999, included in
the 1998 Annual Report to Shareholders of The Peoples Holding Company.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-20108) of The Peoples Holding Company and related Prospectus
and in the Registration Statement (Form S-4, No. 333-72507) of The Peoples
Holding Company and related Prospectus, of our report dated January 22, 1999,
with respect to the consolidated financial statements of The Peoples Holding
Company incorporated by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 26, 1999
58
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,944
<INT-BEARING-DEPOSITS> 433
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,174
<INVESTMENTS-CARRYING> 76,893
<INVESTMENTS-MARKET> 78,585
<LOANS> 694,283
<ALLOWANCE> 9,620
<TOTAL-ASSETS> 1,063,365
<DEPOSITS> 921,686
<SHORT-TERM> 2,455
<LIABILITIES-OTHER> 14,598
<LONG-TERM> 19,567
0
0
<COMMON> 29,222
<OTHER-SE> 75,837
<TOTAL-LIABILITIES-AND-EQUITY> 1,063,365
<INTEREST-LOAN> 60,054
<INTEREST-INVEST> 17,066
<INTEREST-OTHER> 793
<INTEREST-TOTAL> 77,913
<INTEREST-DEPOSIT> 34,179
<INTEREST-EXPENSE> 35,643
<INTEREST-INCOME-NET> 42,270
<LOAN-LOSSES> 2,563
<SECURITIES-GAINS> 61
<EXPENSE-OTHER> 38,126
<INCOME-PRETAX> 15,879
<INCOME-PRE-EXTRAORDINARY> 15,879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,368
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 4.74
<LOANS-NON> 204
<LOANS-PAST> 3,249
<LOANS-TROUBLED> 178
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,104
<CHARGE-OFFS> 2,514
<RECOVERIES> 467
<ALLOWANCE-CLOSE> 9,620
<ALLOWANCE-DOMESTIC> 9,620
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 305
</TABLE>
