View:
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 September 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 November 12, 1999 1
THE PEOPLES HOLDING COMPANY INDEX PART 1. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998............. 3 Condensed Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1999 and 1998.... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 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 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) SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- (Unaudited) (Note 1) Assets Cash and due from banks .................. $ 36,935 $ 32,453 Interest bearing balances with banks ..... 280 6,105 Securities held-to-maturity (market value-$83,534 and $80,868 at September 30, 1999 and December 31, 1998, respectively) ................... 84,776 79,176 Securities available-for-sale (amortized cost-$196,015 and $213,138 at September 30, 1999 and December 31, 1998, respectively) ................... 192,764 214,463 Loans, net of unearned income ............ 786,490 729,157 Allowance for loan losses ............. (10,460) (9,744) ---------- --------- Net Loans ....................... 776,030 719,413 Premises and equipment ................... 27,659 26,634 Other assets ............................. 33,429 29,551 ---------- --------- Total Assets .................... $ 1,151,873 $ 1,107,795 ========== ========= Liabilities Deposits: Noninterest-bearing ................... $ 133,833 $ 152,496 Certificates of deposit exceeding $100,000 .......................... 134,648 129,347 Interest bearing ...................... 718,369 678,452 ---------- --------- Total Deposits .............. 986,850 960,295 Treasury tax and loan note account ....... 8,644 2,455 Borrowings ............................... 25,496 20,020 Other liabilities ........................ 14,974 14,816 ---------- --------- Total Liabilities ........... 1,035,964 997,586 Shareholders' Equity Common Stock, $5 par value - 15,000,000 shares authorized, 6,232,384 and 6,191,854 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively ..................... 31,162 30,959 Additional paid-in capital ............... 44,367 43,289 Treasury Stock, at cost................... (373) 0 Accumulated other comprehensive income ... (2,038) 830 Retained earnings ........................ 42,791 35,131 ---------- --------- Total Shareholders' Equity ..... 115,909 110,209 ---------- --------- Total Liabilities and Shareholders' Equity ......... $ 1,151,873 $ 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) NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30 (Restated) (Restated) 1999 1998 1999 1998 ---- ---- ---- ---- (Unaudited) (Unaudited) Interest Income Loans ................................ $ 49,621 $ 46,850 $ 16,644 $ 16,024 Securities: Taxable ......................... 9,207 10,248 3,093 3,483 Tax-exempt ...................... 3,081 2,689 1,052 957 Other ................................ 520 687 100 121 ------- ------- ------- ------- Total interest income ...... 62,429 60,474 20,889 20,585 Interest Expense Time deposits exceeding $100,000 ..... 3,193 3,382 1,143 1,198 Other deposits ....................... 23,269 23,312 7,757 8,007 Borrowings .......................... 1,232 1,114 391 380 ------- ------- ------- ------- Total interest expense ..... 27,694 27,808 9,291 9,585 ---------- ---------- ---------- ---------- Net interest income ........ 34,735 32,666 11,598 11,000 Provision for loan losses .................. 2,551 1,935 530 646 --------- --------- --------- --------- Net interest income after provision for loan losses .. 32,184 30,731 11,068 10,354 Noninterest income: Service charges on deposit accounts .. 6,190 5,381 2,188 1,824 Fees and commissions ................. 2,038 1,825 728 710 Trust revenue ........................ 630 540 210 180 Gains on sale of securities and loans. 4,197 709 39 282 Other ................................ 2,390 2,003 744 639 ------- ------- ------- ------- Total noninterest income ... 15,445 10,458 3,909 3,635 Noninterest expenses: Salaries and employee benefits ....... 16,353 15,703 5,754 5,268 Net occupancy ........................ 2,219 2,084 742 740 Equipment ............................ 1,596 1,502 459 505 Other ................................ 10,819 9,603 3,382 3,254 --------- --------- --------- --------- Total noninterest expenses . 30,987 28,892 10,337 9,767 ---------- ---------- ---------- ---------- Income before income taxes ................. 16,642 12,297 4,640 4,222 Income taxes ............................... 5,078 3,522 1,448 1,212 --------- --------- --------- --------- Net income ................. $ 11,564 $ 8,775 $ 3,192 $ 3,010 ========== ========== ========== ========== Basic and diluted earnings per share ...... $ 1.86 $ 1.41 $ 0.51 $ 0.49 ====== ====== ====== ====== Weighted average shares outstanding ....... 6,203,218 6,204,164 6,222,421 6,204,164 ========= ========= ========= ========= 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) NINE MONTHS ENDED SEPTEMBER 30 (Restated) 1999 1998 ---- ---- (Unaudited) Operating Activities Net Cash Provided by Operating Activities .................... $ 10,558 $ 12,415 Investing Activities Net decrease in balances with other banks ................... 6,270 15,134 Proceeds from maturities/calls of securities held-to-maturity ........ 5,026 5,879 Proceeds from maturities/calls of securities available-for-sale ...... 95,098 47,655 Proceeds from sales of securities available-for-sale ...... 12,382 16,242 Purchases of securities held-to-maturity ................... (10,586) (20,857) Purchases of securities available-for-sale ................. (90,504) (101,006) Net increase in loans ................... (89,929) (93,183) Proceeds from sales of loans ............ 34,873 54,375 Proceeds from sales of premises and equipment ...................... 235 530 Purchases of premises and equipment ..... (2,886) (3,645) ---------- ---------- Net Cash Used in Investing Activities .................... (40,021) (78,876) Financing Activities Net increase (decrease) in noninterest-bearing deposits ........ (18,662) 2,198 Net increase in interest-bearing deposits ........... 45,218 55,536 Net increase in treasury tax and loan note account and federal funds purchased ..................... 9,389 2,343 Net increase in borrowings .............. 2,276 5,188 Acquisition of treasury stock ........... (373) (541) Cash dividends paid ..................... (3,903) (3,199) ---------- ---------- Net Cash Provided by Financing Activities ................... 33,945 61,525 ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents ......... 4,482 (4,936) Cash and Cash Equivalents at beginning of period ............... 32,453 39,349 ---------- ---------- Cash and Cash Equivalents at end of period ..................... $ 36,935 $ 34,413 ========== ========== Non-cash transactions: Transfer of loans to other real estate .............................. $ 410 $ 1,159 ========== ========== See Notes to Condensed Consolidated Financial Statements 5
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 nine-month period ended September 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 has retained its name and staff and operates 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 nine months ended and three months ended September 30, 1999 and 1998, respectively. 6
Nine Months Ended September 30 1999 1998 ------------------ Revenue The Peoples Holding Company............... $ 77,010 $ 68,303 Inter-City Federal Bank for Savings (1)... 864 2,629 ------- ------- $ 77,874 $ 70,932 ======= ======= Net Income The Peoples Holding Company............... $ 11,693 $ 8,503 Inter-City Federal Bank for Savings (1)... (129) 272 ------- ------- $ 11,564 $ 8,775 ======= ======= (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 September 30, 1999 are included in The Peoples Holding Company amounts. Three Months Ended September 30 1999 1998 ------------------ Revenue The Peoples Holding Company............... $ 24,798 $ 23,328 Inter-City Federal Bank for Savings ...... 0 892 ------- ------- $ 24,798 $ 24,220 ======= ======= Net Income The Peoples Holding Company............... $ 3,192 $ 2,933 Inter-City Federal Bank for Savings ...... 0 77 ------- ------- $ 3,192 $ 3,010 ======= ======= Note 3 Comprehensive Income For the nine month periods ended September 30, 1999 and 1998, total comprehensive income amounted to $8,696 and $11,115, respectively. For the quarters ended September 30, 1999 and 1998, total comprehensive income amounted to $3,209 and $5,010, 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 nine months ended September 30, 1999 and 1998, is presented below. Nine Months Ended September 30, 1999 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 31,726 $ 2,972 $ 37 $ 34,735 Provision for loan loss .... 1,297 1,128 126 2,551 ------- ------- ------- ------- Net interest income after provision for loan loss .. 30,429 1,844 (89) 32,184 Non-interest income ........ 8,339 5,760 1,346 15,445 Non-interest expense ....... 17,996 3,188 9,803 30,987 ------- ------- ------- ------- Income before income taxes . 20,772 4,416 (8,546) 16,642 Income taxes ............... 0 0 5,078 5,078 ------- ------- ------- ------- Net income (loss) .......... $ 20,772 $ 4,416 $(13,624) $ 11,564 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 411 $ (411) $ 0 $ 0 ======= ======= ======= ======= Nine Months Ended September 30, 1998 Specialized Branches Products All Other Total -------- ----------- --------- --------- Net interest income ........ $ 29,890 $ 2,589 $ 187 $ 32,666 Provision for loan loss .... 1,292 524 119 1,935 ------- ------- ------- ------- Net interest income after provision for loan loss .. 28,598 2,065 68 30,731 Non-interest income ........ 7,346 2,307 805 10,458 Non-interest expense ....... 18,414 3,140 7,338 28,892 ------- ------- ------- ------- Income before income taxes . 17,530 1,232 (6,465) 12,297 Income taxes ............... 0 0 3,522 3,522 ------- ------- ------- ------- Net income (loss) .......... $ 17,530 $ 1,232 $ (9,987) $ 8,775 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 356 $ (356) $ 0 $ 0 ======= ======= ======= ======= 8
Segment information for the three months ended September 30, 1999 and 1998, is presented below. Three Months Ended September 30, 1999 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 10,755 $ 843 $ 0 $ 11,598 Provision for loan loss .... 451 37 42 530 ------- ------- ------- ------- Net interest income after provision for loan loss .. 10,304 806 (42) 11,068 Non-interest income ........ 2,857 499 553 3,909 Non-interest expense ....... 5,609 811 3,917 10,337 ------- ------- ------- ------- Income before income taxes . 7,552 494 (3,406) 4,640 Income taxes ............... 0 0 1,448 1,448 ------- ------- ------- ------- Net income (loss) .......... $ 7,552 $ 494 $ (4,854) $ 3,192 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 138 $ (138) $ 0 $ 0 ======= ======= ======= ======= Three Months Ended September 30, 1998 Specialized Branches Products All Other Total -------- ---------- --------- --------- Net interest income ........ $ 10,000 $ 898 $ 102 $ 11,000 Provision for loan loss .... 403 197 46 646 ------- ------- ------- ------- Net interest income after provision for loan loss .. 9,597 701 56 10,354 Non-interest income ........ 2,488 846 301 3,635 Non-interest expense ....... 6,281 1,066 2,420 9,767 ------- ------- ------- ------- Income before income taxes . 5,804 481 (2,063) 4,222 Income taxes ............... 0 0 1,212 1,212 ------- ------- ------- ------- Net income (loss) .......... $ 5,804 $ 481 $ (3,275) $ 3,010 ======= ======= ======= ======= Intersegment revenue (expense) ................ $ 118 $ (118) $ 0 $ 0 ======= ======= ======= ======= Note 5 Subsequent Events As of September 30, 1999, the Company had repurchased 12,000 shares of its common stock in the open market during the year. Subsequent to that time, the Company purchased an additional 5,600 shares of its common stock. As of November 12, 1999, the Company had repurchased a total of 17,600 shares of the Company's stock during the year at an average price of $31.49 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 $1,151,873 on September 30, 1999, or 3.98% for the nine month period. Total securities decreased from $293,639 on December 31, 1998, to $277,540 on September 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 $57,333, or 7.86%, from the beginning of the year despite the sale of approximately $19,000 of credit card loans during the second quarter of 1999. Most of the loan growth has come from commercial loan accounts. Total deposits have grown from $960,295 on December 31, 1998, to $986,850 on September 30, 1999, or an increase of 2.77%, with the majority of growth in public fund checking and time deposits. Equity capital to total assets was 10.06% and 9.95% for September 30, 1999 and December 31, 1998, respectively. Capital grew 5.17% from December 31, 1998 to September 30, 1999. While earnings and the acquisition of Reed-Johnson have improved capital, the growth has been curtailed due to the change in accumulated comprehensive income relating to unrealized portfolio losses as interest rates rose and the purchase of 12,000 shares of Company stock. Cash dividends for the first three quarters of 1999 have been $.21 per share, an increase from $.19 per share during the fourth quarter of 1998. 10
Results of Operations The Company's net income for the nine month period ending September 30, 1999, was $11,564, representing an increase of $2,789, or 31.78%, over net income for the nine month period ending September 30, 1998, which totaled $8,775. Improvements in net income during the third quarter have been generated from the usual and customary deposit gathering and lending operations. System-wide changes made earlier in the year as a result of the Sheshunoff consulting engagement have also contributed to improved earnings. The largest identifiable impact on annual net income has been the effect of the sale and liquidation of the credit card loan portfolio. The after tax net effect of the sale was $1,893, which included the gain on the sale, the satisfaction of the data processing contract, and an increase to the provision for loan losses related to the sale. Eliminating the effects of the sale, core earnings of $9,671 for the nine month period ending September 30, 1999, were up $896, or 10.21%, over the same period of 1998. Net income was $3,192 and $3,010 for the quarters ending September 30, 1999 and 1998, respectively. The annualized return on average assets for the nine month periods ending September 30, 1999 and 1998, was 1.30% 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 4.67% and 4.72% for the nine month periods ending September 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 $977,464 for the nine month period ending September 30, 1998, to $1,055,023 for the same period in 1999, net interest income grew from $32,666 for the nine month period ending September 30, 1998, to $34,735 for the same period in 1999. For the three month periods ending September 30, 1999 and 1998, net interest income was $11,598 and $11,000, 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 absorb probable 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 $2,551 and $1,935 for the nine month periods ending September 30, 1999 and 1998, respectively. A one time charge of $523 has been added to the provision for loan losses relating to the sale of the credit card portfolio. For the quarters ending September 30, 1999 and 1998, the provision for loan losses totaled $530 and $646, respectively. The allowance for loan losses as a percentage of loans outstanding was 1.33% and 1.34% as of September 30, 1999 and December 31, 1998, respectively. Net charge-offs to average loans was .24% and .21% for the nine month periods ending September 30, 1999 and 1998, respectively. Including a pre-tax gain of $3,715 on the sale of credit cards, noninterest income increased $4,987, or 47.69%, to $15,445 for the nine month period ending September 30, 1999, when compared to $10,458 for the same period in 1998. Excluding all gains from the sales of securities and loans, noninterest income was $11,248 for the nine month period ending September 30, 1999, compared to $9,749 for the same period in 1998, or an increase of 15.38%. 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 September 30, 1999, increased $517, or 15.42%, compared to the same period in 1998 due in part to the aforementioned items. Noninterest expenses were $30,987 for the nine month period ending September 30, 1999, compared to $28,892 for the same period in 1998, or an increase of 7.25%. Significant increases in noninterest expenses between these periods include depreciation of new premises and equipment, computer processing costs associated with technology enhancements, 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 September 30, 1999, increased $570, or 5.84%, compared to the same period in 1998. Income tax expense was $5,078 for the nine month period ending September 30, 1999, compared to $3,522 for the same period in 1998. 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 has been working with its software vendors to assure that the Company will be 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. Contingency plans for year 2000 issues have been tested. 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 September 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 September 30, 1999 Total Capital .................... $ 122,081 15.5% (to Risk Weighted Assets) Tier I Capital ................... $ 112,217 14.2% (to Risk Weighted Assets) Tier I Capital ................... $ 112,217 9.8% (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 $18.60 and $17.80 at September 30, 1999 and December 31, 1998, respectively. Quarterly cash dividends were $.21 per share for the first three 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 ended September 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 6(b) Reports on Form 8-K There were no reports filed on Form 8-K during the third 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: November 12, 1999 /s/ John W. Smith --------------------------- John W. Smith President & Chief Executive Officer 16
9 1000 9-MOS DEC-31-1999 SEP-30-1999 36,935 280 0 0 192,764 84,776 83,534 786,490 10,460 1,151,873 986,850 14,344 14,974 19,796 0 0 31,162 84,747 1,151,873 49,621 12,288 520 62,429 26,462 27,694 34,735 2,551 85 30,987 16,642 16,642 0 0 11,564 1.86 1.86 4.67 1,674 8,010 158 0 9,744 2,320 485 10,460 10,460 0 331