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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1999 Commission File Number 1-13253 THE PEOPLES HOLDING COMPANY ------------------------------------------------------- (Exact name of the registrant as specified in its charter) MISSISSIPPI 64-0676974 ------------------------ -------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 209 Troy Street, P. O. Box 709, Tupelo, Mississippi 38801 ---------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number including area code 601-680-1001 Indicate by check 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, and (2) has been subject to such filing requirements for the past 90 days. YES__X__NO_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as to the latest practicable date. Common stock, $5 Par Value, 6,232,384 shares outstanding as of August 13, 1999 1
THE PEOPLES HOLDING COMPANY INDEX PART 1. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998................. 3 Condensed Consolidated Statements of Income - Three Months and Six Months Ended June 30, 1999 and 1998.. 4 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and 1998............. 5 Notes to Condensed Consolidated Financial Statements..... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................... 15 Item 2. Changes in Securities................................... 15 Item 4. Submission of Matters to a Vote of Shareholders......... 15 Item 6.(b) Reports on Form 8-K..................................... 15 Signatures.................................................. 16 2
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (Restated) JUNE 30 DECEMBER 31 1999 1998 ------------ ----------- (Unaudited) (Note 1) Assets Cash and due from banks .................. $ 38,270 $ 32,453 Federal funds sold ....................... 0 0 ---------- --------- Cash and cash equivalents ........... 38,270 32,453 Interest bearing balances with banks ..... 22,494 6,104 Securities held-to-maturity (market value-$87,061 and $80,868 at June 30, 1999 and December 31, 1998, respectively) ................... 85,474 79,176 Securities available-for-sale (amortized cost-$203,532 and $213,138 at June 30, 1999 and December 31, 1998, respectively) ................... 200,255 214,463 Loans, net of unearned income ............ 762,903 729,157 Allowance for loan losses ............. (10,615) (9,744) ---------- --------- Net Loans ....................... 752,288 719,413 Premises and equipment ................... 27,966 26,805 Other assets ............................. 33,340 29,381 ---------- --------- Total Assets .................... $ 1,160,087 $ 1,107,795 ========== ========= Liabilities Deposits: Noninterest-bearing ................... $ 139,061 $ 152,496 Certificates of deposit exceeding $100,000 .......................... 126,317 129,347 Interest bearing ...................... 712,076 678,452 ---------- --------- Total Deposits .............. 977,454 960,295 Treasury tax and loan note account ....... 9,262 2,455 Borrowings ............................... 44,688 20,021 Other liabilities ........................ 14,465 14,814 ---------- --------- Total Liabilities ........... 1,045,869 997,585 Shareholders' Equity Common Stock, $5 par value - 15,000,000 shares authorized, 6,232,384 and 6,191,854 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively ........................... 31,162 30,959 Additional paid-in capital ............... 44,365 43,290 Treasury Stock, at cost................... (155) 0 Accumulated other comprehensive income ... (2,055) 830 Retained earnings ........................ 40,901 35,131 ---------- --------- Total Shareholders' Equity ..... 114,218 110,210 ---------- --------- Total Liabilities and Shareholders' Equity ......... $ 1,160,087 $ 1,107,795 ========== ========= See Notes to Condensed Consolidated Financial Statements 3
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data) SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30 (Restated) (Restated) 1999 1998 1999 1998 ---- ---- ---- ---- (Unaudited) (Unaudited) Interest Income Loans ................................ $ 32,977 $ 30,826 $ 16,815 $ 15,530 Securities: Taxable ......................... 6,114 6,765 3,103 3,564 Tax-exempt ...................... 2,029 1,732 1,040 906 Other ................................ 420 566 44 185 ------- ------- ------- ------- Total interest income ...... 41,540 39,889 21,002 20,185 Interest Expense Time deposits exceeding $100,000 ..... 2,050 2,184 1,031 736 Other deposits ....................... 15,512 15,305 7,756 8,149 Borrowings .......................... 841 734 480 381 ------- ------- ------- ------- Total interest expense ..... 18,403 18,223 9,267 9,266 ---------- ---------- ---------- ---------- Net interest income ........ 23,137 21,666 11,735 10,919 Provision for loan losses .................. 2,021 1,289 1,275 644 --------- --------- --------- --------- Net interest income after provision for loan losses .. 21,116 20,377 10,460 10,275 Noninterest income: Service charges on deposit accounts .. 4,002 3,557 2,069 1,829 Fees and commissions ................. 1,310 1,115 631 571 Trust revenue ........................ 420 360 210 180 Gains on sale of securities and loans. 4,158 427 3,962 197 Other ................................ 1,646 1,364 676 615 ------- ------- ------- ------- Total noninterest income ... 11,536 6,823 7,548 3,392 Noninterest expenses: Salaries and employee benefits ....... 10,599 10,435 5,522 5,198 Net occupancy ........................ 1,477 1,344 704 689 Equipment ............................ 1,137 997 591 480 Other ................................ 7,437 6,349 3,506 3,401 --------- --------- --------- --------- Total noninterest expenses . 20,650 19,125 10,323 9,768 ---------- ---------- ---------- ---------- Income before income taxes ................. 12,002 8,075 7,685 3,899 Income taxes ............................... 3,630 2,310 2,528 1,089 --------- --------- --------- --------- Net income ................. $ 8,372 $ 5,765 $ 5,157 $ 2,810 ========== ========== ========== ========== Basic and diluted earnings per share ...... $ 1.35 $ 0.93 $ 0.83 $ 0.45 ====== ====== ====== ====== Weighted average shares outstanding ....... 6,193,430 6,206,854 6,194,988 6,206,854 ========= ========= ========= ========= See Notes to Condensed Consolidated Financial Statements 4
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except share data) SIX MONTHS ENDED JUNE 30 (Restated) 1999 1998 ---- ---- (Unaudited) Operating Activities Net Cash Provided by Operating Activities .................... $ 5,639 $ 5,902 Investing Activities Net (increase) decrease in balances with other banks ................... (15,943) 13,894 Proceeds from maturities/calls of securities held-to-maturity ........ 3,687 1,944 Proceeds from maturities/calls of securities available-for-sale ...... 68,589 32,046 Proceeds from sales of securities available-for-sale ...... 4,108 5,078 Purchases of securities held-to-maturity ................... (9,958) (17,185) Purchases of securities available-for-sale ................. (63,134) (74,510) Net increase in loans ................... (57,104) (54,004) Proceeds from sales of loans ............ 26,330 38,227 Proceeds from sales of premises and equipment ...................... 232 267 Purchases of premises and equipment ..... (2,506) (2,287) ---------- ---------- Net Cash Used in Investing Activities .................... (45,699) (56,530) Financing Activities Net increase (decrease) in noninterest-bearing deposits ........ (13,435) 3,691 Net increase in interest-bearing deposits ........... 30,593 42,893 Net increase in treasury tax and loan note account and federal funds purchased .......... .......... 29,808 3,899 Net increase (decrease) in borrowings ... 1,667 (190) Acquisition of treasury stock ........... (155) 0 Cash dividends paid ..................... (2,601) (2,176) ---------- ---------- Net Cash Provided by Financing Activities ................... 45,877 48,117 ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents ......... 5,817 (2,511) Cash and Cash Equivalents at beginning of period ............... 32,453 39,349 ---------- ---------- Cash and Cash Equivalents at end of period ..................... $ 38,270 $ 36,838 ========== ========== Non-cash transactions: Transfer of loans to other real estate .............................. $ 369 $ 556 ========== ========== See Notes to Condensed Consolidated Financial Statements 5
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 (in thousands, except share data) Note 1 Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in The Peoples Holding Company and Subsidiary's (collectively, the Company) annual report on Form 10-K for the year ended December 31, 1998. The historical financial information presented in this Form 10-Q has been restated to include the results of Inter-City Federal Bank for Savings (Inter- City). Inter-City was acquired in a pooling-of-interests transaction on March 26, 1999. In accordance with the pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of Inter-City. However, the financial information has been restated to include the results of Inter-City for all stated periods prior to the combination. Note 2 Mergers and Acquisitions On June 24, 1999, the Company purchased Reed-Johnson Insurance Agency, Inc. (Reed-Johnson) with the issuance of 40,530 shares of the Company's common stock. Located in Tupelo, Mississippi, Reed-Johnson is an independent insurance agency representing property and casualty companies and providing personal and business coverages. Reed-Johnson will retain its name and staff and will operate as a wholly owned subsidiary of The Peoples Bank and Trust Company. The transaction has been accounted for under the purchase method of accounting. On March 26, 1999, the Company exchanged 347,382 shares of common stock for all of the outstanding shares of Inter-City, which is located in Louisville, Mississippi. The transaction has been accounted for under the pooling-of- interests method of accounting. The following tables present selected financial information, split between the Company and Inter-City for the six months ended and three months ended June 30, 1999 and 1998, respectively. 6
Six Months Ended June 30 1999 1998 ------------------ Revenue The Peoples Holding Company............... $ 52,212 $ 44,975 Inter-City Federal Bank for Savings (1)... 864 1,737 ------- ------- $ 53,076 $ 46,712 ======= ======= Net Income The Peoples Holding Company............... $ 8,501 $ 5,570 Inter-City Federal Bank for Savings (1)... (129) 195 ------- ------- $ 8,372 $ 5,765 ======= ======= (1) The 1999 amounts reflect the results of operations from January 1, 1999 through March 26, 1999. The results of operations from March 27, 1999 through June 30, 1999 are included in The Peoples Holding Company amounts. Three Months Ended June 30 1999 1998 ------------------ Revenue The Peoples Holding Company............... $ 28,550 $ 22,702 Inter-City Federal Bank for Savings (1)... 0 875 ------- ------- $ 28,550 $ 23,577 ======= ======= Net Income The Peoples Holding Company............... $ 5,157 $ 2,714 Inter-City Federal Bank for Savings (1)... 0 96 ------- ------- $ 5,157 $ 2,810 ======= ======= (1) The results of operations from April 1, 1999 through June 30, 1999 are included in The Peoples Holding Company amounts. Note 3 Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. For the six month periods ended June 30, 1999 and 1998, total comprehensive income amounted to $5,487 and $6,105, respectively. For the quarters ended June 30, 1999 and 1998, total comprehensive income amounted to $2,901 and $3,009, respectively. 7
Note 4 Segment Reporting In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which established 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 had no impact on the financial condition or operating results of the Company. Segment information for the six months ended June 30, 1999 and 1998, is presented below. Six Months Ended June 30, 1999 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 20,971 $ 2,129 $ 37 $ 23,137 Provision for loan loss .... 846 1,091 84 2,021 ------- ------- ------- ------- Net interest income after provision for loan loss .. 20,125 1,038 (47) 21,116 Non-interest income ........ 5,482 5,261 793 11,536 Non-interest expense ....... 12,387 2,377 5,886 20,650 ------- ------- ------- ------- Income before income taxes . 13,220 3,922 (5,140) 12,002 Income taxes ............... 0 0 3,630 3,630 ------- ------- ------- ------- Net income ................. $ 13,220 $ 3,922 $ (8,770) $ 8,372 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 273 $ (273) $ 0 $ 0 ======= ======= ======= ======= Six Months Ended June 30, 1998 Specialized Branches Products All Other Total -------- ----------- --------- --------- Net interest income ........ $ 19,890 $ 1,691 $ 85 $ 21,666 Provision for loan loss .... 889 327 73 1,289 ------- ------- ------- ------- Net interest income after provision for loan loss .. 19,001 1,364 12 20,377 Non-interest income ........ 4,859 1,460 504 6,823 Non-interest expense ....... 12,133 2,074 4,918 19,125 ------- ------- ------- ------- Income before income taxes . 11,727 750 (4,402) 8,075 Income taxes ............... 0 0 2,310 2,310 ------- ------- ------- ------- Net income ................. $ 11,727 $ 750 $ (6,712) $ 5,765 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 238 $ (238) $ 0 $ 0 ======= ======= ======= ======= 8
Segment information for the three months ended June 30, 1999 and 1998, is presented below. Three Months Ended June 30, 1999 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 10,572 $ 1,154 $ 9 $ 11,735 Provision for loan loss .... 391 845 39 1,275 ------- ------- ------- ------- Net interest income after provision for loan loss .. 10,181 309 (30) 10,460 Non-interest income ........ 2,782 4,462 304 7,548 Non-interest expense ....... 5,553 1,343 3,427 10,323 ------- ------- ------- ------- Income before income taxes . 7,410 3,428 (3,153) 7,685 Income taxes ............... 0 0 2,528 2,528 ------- ------- ------- ------- Net income ................. $ 7,410 $ 3,428 $ (5,681) $ 5,157 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 180 $ (180) $ 0 $ 0 ======= ======= ======= ======= Three Months Ended June 30, 1998 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 10,007 $ 843 $ 69 $ 10,919 Provision for loan loss .... 429 176 39 644 ------- ------- ------- ------- Net interest income after provision for loan loss .. 9,578 667 30 10,275 Non-interest income ........ 2,406 735 251 3,392 Non-interest expense ....... 6,048 1,094 2,626 9,768 ------- ------- ------- ------- Income before income taxes . 5,936 308 (2,345) 3,899 Income taxes ............... 0 0 1,089 1,089 ------- ------- ------- ------- Net income ................. $ 5,936 $ 308 $ (3,434) $ 2,810 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 124 $ (124) $ 0 $ 0 ======= ======= ======= ======= Note 5 Subsequent Events As of June 30, 1999, the Company had repurchased 5,000 shares of its common stock in the open market during the year. Subsequent to that time, the Company purchased an additional 4,500 shares of its common stock. As of August 12, 1999, the Company had repurchased a total of 9,500 shares of the Company's stock during the year at an average price of $31.42 per share. 9
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except share data) This Form 10-Q 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 21E 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. The historical financial information presented in this Form 10-Q has been restated to include the results of Inter-City Federal Bank for Savings (Inter- City). Inter-City was acquired in a pooling-of-interests transaction on March 26, 1999. In accordance with the pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of Inter-City. However, the financial information has been restated to include the results of Inter-City for all stated periods prior to the combination. Financial Condition Total assets of The Peoples Holding Company grew from $1,107,795 on December 31, 1998, to $1,160,087 on June 30, 1999, or 4.72% for the six month period. Total securities decreased from $293,639 on December 31, 1998, to $285,729 on June 30, 1999. While U. S. Government Treasury and Agency securities and mortgage-backed securities have declined within the portfolio, state, county, and municipal securities have increased since the beginning of the year. This change in the mix was used to enhance portfolio yields. Total loans, net of unearned income, increased $33,746, or 4.63%, from the beginning of the year despite the sale of approximately $18,000 of credit card loans during the second quarter of 1999. Most of the loan growth has come from commercial loan accounts. Total deposits for the first half of 1999 grew from $960,295 on December 31, 1998 to $977,454 on June 30, 1999, or an increase of 1.79%, with the majority of growth in public fund checking and time deposits. Short-term borrowings were utilized during the second quarter to assist in funding loan demand. Equity capital to total assets was 9.85% and 9.95% for June 30, 1999 and December 31, 1998, respectively. Capital grew 3.64% from December 31, 1998 to June 30, 1999. While capital was improved by earnings and the acquisition of Reed-Johnson, the growth was curtailed due to the change in accumulated comprehensive income relating to unrealized portfolio losses as interest rates rose and the purchase of 5,000 shares of Company stock. Cash dividends for the first two quarters of 1999 have been $.21 per share, an increase from $.19 per share in December of 1998. 10
Results of Operations The Company's net income for the six month period ending June 30, 1999, was $8,372, representing an increase of $2,607, or 45.22%, over net income for the six month period ending June 30, 1998, which totaled $5,765. While improvements in net income were generated from the usual and customary deposit gathering and lending operations and improved efficiencies from the Sheshunoff consulting engagement, the biggest impact was an after tax gain of $2,344 recognized on the sale of credit card loans. The sale of approximately $18,000 in credit card loans was the first step in liquidating the portfolio. The Company also recognized an additional increase of $633 in its loan loss reserve principally related to the remaining portion of the credit card portfolio. Without the effects of the gain and the addition to the reserve, core earnings of $6,414 for the six month period ending June 30, 1999, were up $649, or 11.26%, over the same period of 1998. Net income was $5,157 and $2,810 for the quarters ending June 30, 1999 and 1998, respectively. The annualized return on average assets for the six month periods ending June 30, 1999 and 1998, was 1.31% and 1.11%, respectively. Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of the Company's net income. The primary concerns in managing net interest income are the mix and the maturities of rate-sensitive assets and liabilities. Net interest margin was 4.69% and 4.76% for the six month periods ending June 30, 1999 and 1998, respectively. The decline in net interest margin is due in large part to the current pricing environment. Despite the decrease in net interest margin, our continued growth in volume has allowed net interest income to increase over prior performance. As average earning assets increased from $968,460 for the six month period ending June 30, 1998, to $1,051,694 for the same period in 1999, net interest income grew from $21,666 for the six month period ending June 30, 1998, to $23,137 for the same period in 1999. For the three month periods ending June 30, 1999 and 1998, net interest income was $11,735 and $10,919, respectively. The provision for loan losses charged to operating expense is an amount which, in the judgement of management, is necessary to maintain the allowance for loan losses at a level that is adequate to meet the inherent risks of losses on the Company's current portfolio of loans. The appropriate level of the allowance is based on a quarterly analysis of the loan portfolio including consideration of such factors as the risk rating of individual credits, size and diversity of the portfolio, economic conditions, prior loss experience, and the results of periodic credit reviews by internal loan review and regulators. The provision for loan losses totaled $2,021 and $1,289 for the six month periods ending June 30, 1999 and 1998, respectively. For the quarters ending June 30, 1999 and 1998, the provision for loan losses totaled $1,275 and $644, respectively. An additional $633 was charged to the provision for loan losses relating to the remaining portion of the credit card portfolio. The allowance for loan losses as a percentage of loans outstanding was 1.39% and 1.34% as of June 30, 1999 and December 31, 1998, respectively. Net charge-offs to average loans was .16% and .14% for the six month periods ending June 30, 1999 and 1998, respectively. Including a pre-tax gain of $3,843 on the sale of credit cards, noninterest income increased $4,713, or 69.08%, to $11,536 for the six month period ending June 30, 1999, when compared to $6,823 for the same period in 1998. Excluding gains from the sales of securities and loans, noninterest income was $7,378 for the three month period ending June 30, 1999, compared to $6,396 for the same period in 1998, or an increase of 15.35%. The increase between core noninterest income for 1999 and 1998 is due to fees associated with the increases in loans and deposits and the increased emphasis in sales of miscellaneous services and products such as financial investment alternatives and cash management. 11
While non-sufficient fund fees accounted for the majority of the increase in service charges, other increases were the result of annuity sales, mortgage loan fees, merchant processing, interchange fees, skip payment fees, and loan document preparation fees. Noninterest income, excluding gains from the sales of securities and loans, for the quarter ending June 30, 1999, increased $391, or 12.24%, compared to the same period in 1998 due in part to the aforementioned items. Noninterest expenses were $20,650 for the six month period ending June 30, 1999, compared to $19,125 for the same period in 1998, or an increase of 7.97%. Significant increases in noninterest expenses between these periods include depreciation of new premises and equipment, computer processing costs associated with technology enhancements, fees related to the Sheshunoff efficiency consulting engagement, and fees related to the Inter-City acquisition. The remaining components of noninterest expenses reflect normal increases for banking related expenses and general inflation in the cost of services and supplies purchased by the Company. Noninterest expenses for the quarter ending June 30, 1999, increased $555, or 5.68%, compared to the same period in 1998. Income tax expense was $3,630 for the six month period ending June 30, 1999, compared to $2,310 for the same period in 1998. A net tax adjustment of $1,499 was charged as a result of the sale of credit cards. The Company also continues to invest in assets whose earnings are given favorable tax treatment. 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, such as those of our loan customers, will be converted on a timely basis which could have a material effect on the Company. The Company has not incurred significant operating expenses nor will it be 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. Nearly all other mission critical applications were successfully tested during the first quarter of 1999 and testing for year 2000 compliance was substantially completed by March 31, 1999. There are three systems still in process of being tested to validate their year 2000 compatibility. Contingency plans for year 2000 issues have been tested with revisions in progress. These contingency plans address potential business interruptions related to the year 2000 as well as liquidity and cash availability contingencies as the millennium approaches. 12
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 a key to assuring liquidity. When evaluating the movement of these funds even during times of large interest rate changes, it is apparent that the Company continues to attract deposits that can be used to meet cash flow needs. Management continues to monitor the liquidity and potentially volatile liabilities ratios to ensure compliance with Asset-Liability Committee targets. These targets are set to ensure that the Company meets the liquidity requirements deemed necessary by management and regulators. Another source available for meeting the Company's liquidity needs is 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 that provides day-to-day funds to meet liquidity needs and may also obtain advances from the Federal Home Loan Bank (FHLB) or the treasury tax and loan note account. Historically, the Company has not relied upon these sources to meet long-term liquidity needs. Sources of funds derived from the FHLB are used primarily to match mortgage loan originations in order to minimize interest rate risk, but may be used to provide short-term funding. Capital Resources 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. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum balances 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). 13
As of June 30, 1999, 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. In the opinion of management, there are no conditions or events since the last notification that have changed the institution's category. The Bank's actual capital amounts and applicable ratios are as follows: Actual Amount Ratio ------ ----- (000) As of June 30, 1999 Total Capital .................... $ 119,847 15.5% (to Risk Weighted Assets) Tier I Capital ................... $ 110,169 14.3% (to Risk Weighted Assets) Tier I Capital ................... $ 110,169 9.7% (to Adjusted Average Assets) As of December 31, 1998 Total Capital .................... $ 112,850 15.2% (to Risk Weighted Assets) Tier I Capital ................... $ 103,577 14.0% (to Risk Weighted Assets) Tier I Capital ................... $ 103,577 9.8% (to Adjusted Average Assets) Management recognizes the importance of maintaining a strong capital base. As the above ratios indicate, the Company exceeds the requirements for a well capitalized bank. Book value per share was $18.44 and $17.80 at June 30, 1999 and December 31, 1998, respectively. Quarterly cash dividends were $.21 per share during the first and second quarters of 1999, up from $.19 per share during the fourth quarter of 1998. All per-share figures have been restated to reflect the 50% stock dividend issued January 20, 1998. The Company's capital policy is to evaluate future needs based on growth, earnings trends and anticipated acquisitions. 14
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes to our disclosure on quantitative and qualitative disclosures about market risk since December 31, 1998. For additional information, see the Company's Form 10-K for the year ended December 31, 1998. Part II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material proceedings against the Company during the quarter ending June 30, 1999. Item 2. Changes in Securities On June 24, 1999, the Company purchased the business of Reed-Johnson Insurance Agency, Inc. with the issuance of 40,530 shares of the Company's common stock. The transaction is being accounted for under the purchase method of accounting, and increased the outstanding shares of common stock of the Company from 6,191,854 to 6,232,384. Item 4. Submission of Matters to a Vote of Shareholders The annual meeting of the shareholders of The Peoples Holding Company was held on April 13, 1999, for the purpose of electing four members to the board of directors for a three year term and to ratify the appointment of the independent auditors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934. Election of Directors For Withheld Not Voting THREE-YEAR TERM William M. Beasley 3,882,485 56,751 1,905,236 Marshall H. Dickerson 3,876,219 63,017 1,905,236 Eugene B. Gifford, Jr. 3,883,820 55,416 1,905,236 H. Joe Trulove 3,884,225 55,011 1,905,236 For Against Abstain Ratify appointment of Ernst & Young LLP as independent auditors for 1999 3,907,248 83 1,937,141 Item 6(b) Reports on Form 8-K There were no reports filed on Form 8-K during the second quarter of 1999. 15
SIGNATURES Pursuant to the requirements of the Securities and 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 --------------------------- Registrant DATE: August 13, 1999 /s/ John W. Smith --------------------------- John W. Smith President & Chief Executive Officer 16
9 1,000 6-MOS DEC-31-1999 JUN-30-1999 38,270 22,494 0 0 200,255 85,474 87,061 762,903 10,615 1,160,087 977,454 34,762 14,465 19,188 0 0 31,162 83,056 1,160,087 32,977 8,143 420 41,540 17,562 18,403 23,137 2,021 34 20,650 12,002 12,002 0 0 8,372 1.35 1.35 4.69 250 6,944 166 0 9,744 1,324 174 10,615 10,615 0 336