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 quarterly period ended June 30, 2002
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 38802-0709
------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code 662-680-1001
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, 5,590,474 shares outstanding
as of August 12, 2002
1
THE PEOPLES HOLDING COMPANY
INDEX
PART 1. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001................. 3
Condensed Consolidated Statements of Income - Three
Months and Six Months Ended June 30, 2002 and 2001.. 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001............. 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk................................... 16
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings....................................... 16
Item 4.
Submission of Matters to a Vote of Shareholders......... 16
Item 6.
Exhibits and Reports on Form 8-K........................ 17
Signatures.................................................. 17
2
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30 DECEMBER 31
2002 2001
------------ ------------
(Unaudited) (Note 1)
Assets
Cash and due from banks .................. $ 49,569 $ 41,475
Federal funds sold ....................... 7,000
Interest-bearing balances with banks ..... 3,073 22,937
---------- ----------
Cash and cash equivalents ... 52,642 71,412
Securities available-for-sale ............ 344,752 277,293
Loans, net of unearned income ............ 835,789 827,696
Allowance for loan losses ............. (11,658) (11,354)
---------- ----------
Net loans ................... 824,131 816,342
Premises and equipment, net .............. 28,844 28,346
Other assets ............................. 60,556 61,334
---------- ----------
Total assets .................... $ 1,310,925 $ 1,254,727
========== ==========
Liabilities
Deposits:
Noninterest-bearing ................... $ 150,512 $ 145,690
Interest-bearing ...................... 956,281 917,365
---------- ----------
Total deposits .............. 1,106,793 1,063,055
Treasury tax and loan note account ....... 8,643 6,181
Advances from the Federal Home Loan Bank . 50,773 41,145
Other liabilities ........................ 17,999 20,764
---------- ----------
Total liabilities ........... 1,184,208 1,131,145
Shareholders' equity
Common Stock, $5 par value - 15,000,000
shares authorized, 6,212,284 shares
issued; 5,606,874 and 5,704,680 shares
outstanding at June 30, 2002 and
December 31, 2001, respectively ........ 31,061 31,061
Treasury stock, at cost .................. (16,272) (12,856)
Additional paid-in capital ............... 39,856 39,850
Retained earnings ........................ 67,777 63,391
Accumulated other comprehensive income ... 4,295 2,136
---------- ----------
Total shareholders' equity .. 126,717 123,582
---------- ----------
Total liabilities and
shareholders' equity ......... $ 1,310,925 $ 1,254,727
========== ==========
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
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest income
Loans ................................... $ 30,664 $ 36,146 $ 15,347 $ 17,966
Securities:
Taxable ............................ 6,641 6,350 3,588 3,233
Tax-exempt ......................... 1,992 2,013 1,011 998
Other ................................... 203 586 25 225
--------- --------- --------- ---------
Total interest income .............. 39,500 45,095 19,971 22,422
Interest expense
Deposits ................................ 12,627 21,728 6,123 10,508
Borrowings ............................. 1,183 731 597 360
--------- --------- --------- ---------
Total interest expense ............. 13,810 22,459 6,720 10,868
--------- --------- --------- ---------
Net interest income ................ 25,690 22,636 13,251 11,554
Provision for loan losses ..................... 2,200 2,250 1,075 1,125
--------- --------- --------- ---------
Net interest income after
provision for loan losses ...... 23,490 20,386 12,176 10,429
Noninterest income
Service charges on deposit accounts ..... 6,000 5,608 3,064 2,816
Fees and commissions .................... 4,275 3,453 2,226 1,665
Trust revenue ........................... 462 530 231 265
Securities gains ........................ 8 45 8 2
Other ................................... 2,514 1,940 1,121 1,098
--------- --------- --------- ---------
Total noninterest income ........... 13,259 11,576 6,650 5,846
Noninterest expense
Salaries and employee benefits .......... 14,319 12,423 7,390 6,346
Data processing ......................... 1,881 1,727 959 869
Net occupancy ........................... 1,584 1,605 777 777
Equipment ............................... 1,594 1,462 790 733
Other ................................... 5,446 5,213 2,610 2,650
--------- --------- --------- ---------
Total noninterest expense .......... 24,824 22,430 12,526 11,375
--------- --------- --------- ---------
Income before taxes and cumulative effect
of accounting change ...................... 11,925 9,532 6,300 4,900
Income taxes .................................. 3,371 2,643 1,811 1,313
--------- --------- --------- ---------
Income before cumulative
effect of accounting change .... 8,554 6,889 4,489 3,587
Cumulative effect of accounting change ........ (1,300)
--------- --------- --------- ---------
Net income ......................... $ 7,254 $ 6,889 $ 4,489 $ 3,587
========= ========= ========= =========
Basic and diluted earnings per share:
Income before cumulative effect of
accounting change .................... $ 1.52 $ 1.15 $ 0.80 $ 0.60
Cumulative effect of accounting change ... (0.23)
--------- --------- --------- ---------
Net income ............................... $ 1.29 $ 1.15 $ 0.80 $ 0.60
========= ========= ========= =========
Weighted average shares outstanding .......... 5,635,854 5,992,167 5,614,265 5,935,987
Weighted average shares outstanding - diluted . 5,641,245 5,992,167 5,622,047 5,935,987
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
2002 2001
---- ----
(Unaudited)
Operating activities
Net cash provided (used) by
operating activities .......... $ 10,003 $ (8,567)
Investing activities
Purchases of securities
available-for-sale ................. (124,737) (50,854)
Proceeds from sales of securities
available-for-sale ................. 24,022 7,004
Proceeds from calls/maturities of
securities available-for-sale ...... 36,255 42,974
Net increase in loans ................... (11,922) (7,171)
Proceeds from sales of premises
and equipment ...................... 124 16
Purchases of premises and equipment ..... (2,059) (934)
---------- ----------
Net cash used in investing
activities .................... (78,317) (8,965)
Financing activities
Net increase in
noninterest-bearing deposits ........ 4,822 16,982
Net increase in
interest-bearing deposits ........... 38,916 4,268
Net increase in
short-term borrowings ............... 2,462 5,323
Proceeds from other borrowings .......... 16,248 1,000
Repayments of other borrowings .......... (6,620) (976)
Acquisition of treasury stock ........... (3,416) (5,879)
Cash dividends paid ..................... (2,868) (2,782)
---------- ----------
Net cash provided by financing
activities ................... 49,544 17,936
---------- ----------
(Decrease) increase in cash
and cash equivalents ......... (18,770) 404
Cash and cash equivalents at
beginning of period ............... 71,412 56,817
---------- ----------
Cash and cash equivalents at
end of period ..................... $ 52,642 $ 57,221
============ ============
Supplemental disclosures:
Non-cash transactions:
Transfer of loans to other real estate .. $ 1,933 $ 1,167
============ ============
See Notes to Condensed Consolidated Financial Statements
5
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(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, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002.
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, 2001.
Note 2 Other Accounting Pronouncements
In the first quarter of 2002, the Company completed the transitional impairment
test required by Financial Accounting Standards Board (FASB) Statement No. 142,
"Goodwill and Intangible Assets." As a result of this test, the Company recorded
a goodwill impairment charge of $1,300 as a cumulative effect of a change in
accounting principle. The Company identified its reporting units as banking
operations and insurance operations for purposes of measuring impairment of
goodwill. The impairment was specific to the insurance subsidiary. The fair
value of the insurance reporting unit was estimated using the expected present
value of future cash flows. The insurance subsidiary acquisition was a tax-free
exchange; therefore, there was no tax offset to the impairment cost booked.
As of June 30, 2002
--------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- --------------
Amortized intangible assets:
Core deposit intangible assets .. $ 507 $ (342)
Other intangible assets ......... 3,282 (1,886)
---------- ----------
Total ........................... $ 3,789 $ (2,228)
========== ==========
Unamortized goodwill $ 7,190 $ (2,142)
========== ==========
6
Note 2 Other Accounting Pronouncements (continued)
Aggregate amortization expense:
For the period ended June 30, 2002 ....... $ 247
Estimated amortization expense in future years:
For the year ended December 31, 2002 ..... $ 493
For the year ended December 31, 2003 ..... 493
For the year ended December 31, 2004 ..... 423
For the year ended December 31, 2005 ..... 399
For the year ended December 31, 2006 ..... 0
The changes in the carrying amount of intangible assets for the six months ended
June 30, 2002, are as follows:
Other
Goodwill Intangibles
----------- -----------
Balance as of January 1, 2002 .............. $ 6,348 $ 1,808
Impairment losses ........................ (1,300)
Amortization expense ..................... (247)
----------- -----------
Balance as of June 30, 2002 ................ $ 5,048 $ 1,561
=========== ===========
The table below presents net income for the prior periods as reported as well as
adjusted for the exclusion of goodwill amortization and the cumulative effect of
the transitional impairment.
Six Months Three Months Six Months Three Months
Ended Ended Year Ended Ended Ended
June 30, 2002 June 30, 2002 December 31, 2001 June 30, 2001 June 30, 2001
------------- ------------- ----------------- ------------- -------------
Reported net income ................. $ 7,254 $ 4,489 $ 14,587 $ 6,889 $ 3,587
Goodwill amortization, net of tax ... 407 204 102
Transitional impairment ............. 1,300
---------- ---------- ----------- ---------- ----------
Adjusted net income ................. $ 8,554 $ 4,489 $ 14,994 $ 7,093 $ 3,689
========== ========== =========== ========== ==========
Basic and diluted earnings per share:
Reported net income ................. $ 1.29 $ 0.80 $ 2.48 $ 1.15 $ 0.60
Goodwill amortization, net of tax ... 0.07 0.03 0.02
Transitional impairment ............. 0.23
---------- ---------- ----------- ---------- ----------
Adjusted net income ................. $ 1.52 $ 0.80 $ 2.55 $ 1.18 $ 0.62
========== ========== =========== ========== ==========
Note 3 Comprehensive Income
For the six month periods ended June 30, 2002 and 2001, total comprehensive
income was $9,413 and $9,688, respectively. For the quarters ended June 30, 2002
and 2001, total comprehensive income amount to $7,701 and $3,865, respectively
Total comprehensive income consists of net income and the change in the
unrealized gain (loss) on securities available for sale.
7
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 our portfolio of outstanding loans, and competition in our
markets. We undertake 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
Total assets of The Peoples Holding Company increased from $1,254,727 on
December 31, 2001, to $1,310,925 on June 30, 2002, or 4.48% for the six month
period. Most of the growth in assets occurred in the investment portfolio, which
increased from $277,293 on December 31, 2001, to $344,752 on June 30, 2002.
Federal funds sold and interest bearing bank balances decreased $26,864 from the
beginning of the year as funds were shifted to the investment portfolio. For the
second quarter of 2002, security purchases, which included both mortgage-backed
securities and municipal securities, were $26,608, down from $98,129 in the
first quarter. The majority (74%) of the purchases continue to be in the
mortgage-back sector because of the cash flow provided by the principal and
interest payback each month. This cash flow provides a higher reinvestment
opportunity that will be advantageous as rates begin to rise.
Last year, we changed our investment policy, eliminating the minimum requirement
of 18% of the portfolio being invested in Treasury securities. We have steadily
replaced investments in Treasury securities since that time with investments in
other sectors in order to enhance yield. Treasury security balances have
decreased approximately $9,000 since December 31, 2001, and approximately
$28,200 since June 30, 2001.
Loan balances have increased $8,093, from $827,696 at December 31, 2001, to
$835,789 at June 30, 2002. Loan demand began to improve at the end of the first
quarter. A strategic decision to curtail our sales finance division in July,
2000 continues to impact loan volume. At the time of the curtailment, the
balance was approximately $32 million and has since decreased to approximately
$10 million. The purpose of the decision was twofold - to reduce risk and to
enhance yield. The sales finance balance decreased approximately $5,000 from
December 31, 2001.
8
The majority of our loan growth in the second quarter was in real estate loans.
Our loan portfolio continues to be heavily weighted in real estate loans, with
approximately 69% of the portfolio in that type. We have experienced declines in
retail installment loans and in commercial, financial and agricultural loans. In
addition, mortgage loans held for resale are down approximately $7,200 due to a
decline in origination volume toward the end of the first quarter. The fact that
mortgage interest rates were higher the entire second quarter of 2002 was a
significant factor in the volume decline. The average loan to deposit ratios
were 74.76% and 76.68% at June 30, 2002, and December 31, 2001, respectively.
While we are committed to increasing loan volume and recognize that doing so is
imperative in order to become a top-performing bank, we are not willing to
compromise credit quality in that endeavor. We recognize that the sluggish
economy is impacting our ability to expand loan volume at present, however, we
are taking action to improve loan volume now. During the second quarter a
seasoned commercial lender was assigned to franchise managers to assist in
attracting and pricing high dollar commercial business. This has added
approximately $6,000 in new loans for various franchises during the second
quarter. A second regional commercial lender was added at the end of June.
Total deposits for the first six months of 2002 increased from $1,063,055 on
December 31, 2001, to $1,106,793 on June 30, 2002, or an increase of 4.11%. The
majority of our growth has been in interest bearing demand accounts (57%). The
Bank has also experienced accelerated growth in time deposits (34%), primarily
from public funds, during the second quarter. The Bank is benefitting from a
lower percentage of time deposits to total deposits (on average) this year. The
ratios were 51.18% and 54.48% for June 30, 2002 and December 31, 2001,
respectively. In addition, 11% of the increase in deposits from year end is
attributable to noninterest bearing demand deposit accounts. Our average
noninterest bearing demand deposit accounts as a percent of total average
deposits have increased from 13.53% at December 31, 2001 to 13.87% at June 30,
2002.
Other borrowed funds have increased $12,090 from year end. Approximately $9,628
of the increase was due to additional funds borrowed from the Federal Home Loan
Bank (FHLB). We minimize rate risk by funding loans with FHLB borrowings having
similar terms, locking in fixed rates based on a spread over the FHLB note
rates.
The equity capital to total assets ratios were 9.67% and 9.85% at June 30, 2002,
and December 31, 2001, respectively. Capital increased $3,135, or 2.54%, from
December 31, 2001, to June 30, 2002. There were a number of factors contributing
to the increase in capital. Normal transactions such as net income and
unrealized portfolio gains contributed to the increase in capital, offset by
dividends and the purchase of treasury stock. The increase in the unrealized
gains on the investment portfolio was due primarily to market conditions. Cash
dividends declared were $.25 per share in the first quarter and $.26 per share
in the second quarter of 2002. We continued to purchase treasury stock,
purchasing 97,806 shares at an average cost of $34.87 per share over the six
month period ending June 30, 2002.
9
Results of Operations
Our core operating income for the six month period ended June 30, 2002, was
$8,554. This represented an increase of $1,461, or 20.60% over comparable net
income for the six month period ended June 30, 2001. Core operating income
excluding goodwill amortization for the six month period ending June 30, 2001
was $7,093. For the three month periods ended June 30, 2002 and 2001, core net
income was $4,489 and $3,689, respectively. Core earnings per share for the six
month period ended June 30, 2002 were $1.52, an increase of 28.81% from $1.18
for the comparable period a year ago. The increase in core operating income for
the three and six month periods ended June 30, 2002, compared to the same period
of 2001 resulted from usual and customary deposit gathering and lending
operations and increases in noninterest income for sales of other products such
as insurance, mutual funds and annuities. The annualized core return on average
assets on the same basis for the three month periods ending June 30, 2002 and
2001, was 1.37% and 1.16%, respectively and for the six month periods ending
June 30, 2002 and 2001 was 1.29% and 1.14%, respectively. Core operating income
is defined as income before the effect of the change in accounting principle and
excluding goodwill amortization.
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of our net
income. The primary concerns in managing net interest income are the mix and the
repricing of rate-sensitive assets and liabilities. We have maintained steady
growth in our asset base. Net interest income has improved due in part to a
shift from time deposits to other interest bearing deposits. Total deposits have
grown 3.65% over June 30, 2001. Time deposits, the highest cost funding source,
represented approximately 55% of total average deposits for the six month period
ended June 30, 2001, compared to approximately 51% for the same period during
2002.
Net interest income for the six month periods ending June 30, 2002 and 2001 was
$25,690 and $22,636, respectively, while earning assets for the same periods
averaged $1,172,963 and $1,119,622, respectively. The bank's repricing position
was favorable under the falling rate environment in which we have been
operating. The Federal Reserve Bank lowered rates five times during the last
twelve months. This, combined with our repricing strategy and mix change in both
assets and liabilities, increased net interest margin.
Quarter ending Year ending Quarter ending
June 30, 2002 December 31, 2001 June 30, 2001
-------------- ----------------- --------------
Net interest margin ....... 4.75% 4.54% 4.43%
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 our
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 loan loss provision totaled
$2,200 and $2,250, respectively for each of the six month periods ending June
30, 2002 and 2001. The tables below present pertinent data and ratios.
10
Loans and Credit Quality
Nonperforming Net Charge-offs
Loans* Loans Six Months Ended
June 30 June 30 June 30
------------------ ------------------ ------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Commercial, financial, agricultural ... $152,321 $159,469 $ 563 $ 601 $ 463 $ 367
Real estate - construction ............ 31,889 27,542 159 117 88 18
Real estate - mortgage ................ 552,541 517,173 2,736 4,518 926 304
Consumer .............................. 99,038 116,291 213 715 419 694
-------- -------- -------- -------- -------- --------
$835,789 $820,475 $ 3,671 $ 5,951 $ 1,896 $ 1,383
======== ======== ======== ======== ======== ========
* Net of unearned income.
Allowance for Loan Losses
2002 2001
-------------------- ------------------------------------------
2nd 1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- ---------
Balance at beginning of period ............. $ 11,811 $ 11,354 $ 11,166 $ 11,403 $ 11,067 $ 10,536
Loans charged off .......................... 1,310 985 1,196 1,534 870 702
Recoveries of loans previously charged off . 82 317 69 72 81 108
--------- --------- --------- --------- --------- ---------
Net Charge-offs ....................... 1,228 668 1,127 1,462 789 594
Provision for loan losses .................. 1,075 1,125 1,315 1,225 1,125 1,125
--------- --------- --------- --------- --------- ---------
Balance at end of year ..................... $ 11,658 $ 11,811 $ 11,354 $ 11,166 $ 11,403 $ 11,067
========= ========= ========= ========= ========= =========
Allowance for loan losses to total loans ... 1.39% 1.44% 1.37% 1.35% 1.39% 1.36%
Reserve coverage ratio ..................... 317.57 207.25 178.65 218.20 191.62 143.34
Net charge-offs to total loans ............. 0.15 0.08 0.14 0.18 0.10 0.07
Nonperforming loans to total loans ......... 0.44 0.70 0.77 0.62 0.73 0.95
11
Noninterest income, excluding gains from the sales of securities, was $13,251
for the six month period ending June 30, 2002, compared to $11,531 for the same
period in 2001, or an increase of 14.92%. Approximately 58% of the increase in
noninterest income was attributable to usual and customary loan and deposit
services. Income derived from the mortgage loan business continued to be strong
for the first six months of 2002. Another significant portion of the increase
was due to the income booked as the result of Bank Owned Life Insurance (BOLI)
purchased on key management personnel in May, 2001. The additional income
derived from BOLI of approximately $512 has been used to offset rising benefits
cost, primarily health and life insurance.
We continued to place emphasis on sales of insurance and alternative financial
instruments. We implemented an integration in 2001 aimed at improving our
cross-selling between the bank and the insurance company. As a result, our
insurance commission income increased $193 over that reported in 2001, making up
11% of the total increase in noninterest income. A secondary, yet significant,
benefit resulting from the implementation of the insurance integration plan was
an improvement in contingency income of $91. Contingency income is a bonus
received from the insurance underwriters and is based both on commission income
and claims experience on our customers during the previous year.
For the three month periods ended June 30, 2002 and 2001, noninterest income,
excluding gains from the sales of securities, was $6,641 and $5,844,
respectively. Approximately 67% of this increase was due to customary loan and
deposit services. While income derived from the mortgage loan business remained
relatively strong during the second quarter of 2002, we did experience a decline
in mortgage business from the recent quarters. Mortgage interest rates increased
during the second quarter this year, reducing refinancing activity. Higher
rates, coupled with current general economic conditions, did little to stimulate
new home loan activity. The increase in income derived from the purchase of BOLI
is approximately $210, making up 26% of the increase over the second quarter of
2001.
The emphasis placed on the integration of insurance products has significantly
enhanced noninterest income. Substantially all of the increase in insurance
commissions occurred in the second quarter. Offsetting the commission increase
somewhat is a decrease in contingency income for the quarter of $47. While
contingency income has increased, we received most of our income during the
first quarter this year, compared to an even division between the first and
second quarters last year. In addition, income generated from alternative
financial products (annuities and mutual funds) was down this quarter, largely
attributable to the economy and uncertainties in the market. As discussed above,
emphasis is being placed on sales of alternative financial products. During the
second quarter, staffing changes were made in our Wealth Management division,
which encompasses both trust services and alternative financial products. A new
business plan is being implemented, directed toward increasing the number of
services per client for our existing client base as well as increasing our
affluent client base.
12
Noninterest expense was $24,824 for the six month period ended June 30, 2002,
compared to $22,430 for the same period in 2001, an increase of $2,394, or
10.67%. Core noninterest expense was $24,824 for the six month period ending
June 30, 2002 compared to $22,148 for the same period in 2001, an increase of
$2,676, or 12.08%. One significant factor for the increase was health and life
insurance cost which was approximately 25%, or $674, of the change in core
noninterest expense. This increase was due to the rising cost of health care as
well as higher claims experienced this year. As noted above, BOLI was purchased
to generate revenue to offset the rising cost of benefits and has offset
approximately $512 in cost.
Our Company has a performance based reward (PBR) plan which allows for an
incentive payment to employees based on improvement in net income over an
established baseline. This cost is linked to performance and increases as
performance improves. The increase for incentive cost was $585, or 22% of the
total increase in core noninterest expenses. Since a significant amount of the
improvement in earnings for 2001 occurred in the last half of the year, we
recorded 73% of the total incentive cost during the third and fourth quarters.
Other factors contributing to the increase in expense include depreciation,
maintenance contract and computer processing costs associated with technological
enhancements made during the last year. We installed a teller platform system in
2001, and upgraded our deposit platform system and portions of our loan system,
particularly the credit scoring module, this year. In addition, we upgraded data
storage to a robotic DVD device which provides near on-line access to data
(check images) and purchased software to enhance read rates in item processing.
During the fourth quarter of 2002, we will be implementing a new loan platform
system. These upgrades have enhanced productivity, reduced losses for the bank,
and provided better service for our clients. We have noted improvement in both
cash short and fraud/forgery losses as a result of the teller platform and
deposit platform systems. All these enhancements improve our position for
business continuity should we be faced with disaster. Finally, in recognition of
the sophistication of hackers and the damage that can be done by such
individuals, information security has been enhanced through software, hardware,
and retention of services by experts in that field. It has been, and will
continue to be, our practice to seek technological improvements, evaluate the
benefit to our company and clients, and to progress with implementation of such
if a cost/benefit analysis justifies it. This practice is directly influenced by
our vision to be the financial services advisor and provider of choice in the
communities we serve.
Although expenses increased, we have improved our efficiency ratio on a GAAP
basis. The increase in core noninterest expense, excluding increases in PBR plan
cost and health and life insurance cost was 6.40%
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
-------------- --------------
Efficiency ratio ................. 61.28% 62.44%
13
For the three month periods ending June 30, 2002 and 2001, noninterest expense
was $12,526 and $11,375, respectively, an increase of $1,151, or 10.12%. For the
three month periods ending June 30, 2002 and 2001, core noninterest expense was
$12,526 and $11,234, respectively, an increase of $1,292, or 11.50%. Health and
life insurance expense was $373 greater than second quarter last year and the
cost of the PBR plan was $302 greater. Salary cost was $177, or 3.96%, higher
than last year. During 2002, employee evaluation reviews were changed from each
employee's anniversary date to March. All employees are now reviewed in March
and merit/cost of living raises are given in April. Insurance commission expense
is $104 more than last year. This cost is directly linked to the increase in
insurance commission income which was discussed in noninterest income. The
increase in health and life insurance expense and PBR plan cost comprised 59% of
the increase in core noninterest expense.
Computer depreciation, maintenance contracts and computer processing cost
increased $170, or approximately 15% of the increase in core noninterest
expense, due to the previously discussed technological enhancements. Offsetting
the higher cost associated with the enhancements are decreases in fraud/forgery
losses and supplies cost of approximately $103.
Although expenses increased, we have significantly improved our efficiency ratio
on a GAAP basis. The increase in core noninterest expense, excluding increases
in PBR plan cost and health and life insurance cost was 5.49%.
Quarter ending Quarter ending
June 30, 2002 June 30, 2001
-------------- --------------
Efficiency ratio ................. 60.54% 62.30%
Income tax expense was $3,371 for the six month period ended June 30, 2002,
(with an effective tax rate of 28.27%) compared to $2,643 (with an effective tax
rate of 27.73%) for the same period in 2001. The increase in the effective tax
rate this year was due in part to less tax-free interest income.
Income tax expense was $1,811 and $1,313 for the three month periods ending June
30, 2002 and 2001 respectively. The effective tax rate for the second quarters
of 2002 and 2001 were 28.75% and 26.80%, respectively.
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 we
continue 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 we meet the liquidity requirements deemed
necessary by management and regulators.
14
Another source available for meeting our 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.
Other sources available for meeting liquidity needs include federal funds sold
and interest bearing balances with the FHLB. In addition, we may obtain advances
from the FHLB or the Federal Reserve Bank. Funds obtained from the FHLB are used
primarily to match-fund real estate loans in order to minimize interest rate
risk, and may be used to meet day to day liquidity needs.
Capital Resources
We are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. Our
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 us 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). As of June 30, 2002, we met all capital adequacy
requirements to which we are subject.
As of June 30, 2002, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized us as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we 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 and do not differ materially from that of the
Company.
Actual
Amount Ratio
------ -----
As of June 30, 2002
Total Capital .................... $ 125,604 14.5%
(to Risk Weighted Assets)
Tier I Capital ................... $ 114,795 13.3%
(to Risk Weighted Assets)
Tier I Capital ................... $ 114,795 8.8%
(to Adjusted Average Assets)
As of December 31, 2001
Total Capital .................... $ 122,162 14.5%
(to Risk Weighted Assets)
Tier I Capital ................... $ 111,622 13.3%
(to Risk Weighted Assets)
Tier I Capital ................... $ 111,622 9.1%
(to Adjusted Average Assets)
15
Management recognizes the importance of maintaining a strong capital base. As
the above ratios indicate, we continue to exceed the requirements for a well
capitalized bank.
Book value per share was $22.60 and $21.66 at June 30, 2002 and December 31,
2001, respectively.
Our capital policy is to evaluate future needs based on growth, earnings trends
and anticipated acquisitions.
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, 2001. For
additional information, see our Form 10-K for the year ended December 31, 2001.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material proceedings against us during the
quarter ending June 30, 2002.
Item 4. Submission of Matters to a Vote of Shareholders
The annual meeting of the shareholders of the The Peoples Holding
Company was held on April 16, 2002, for the purpose of electing
six members to the board of directors for a three year term, one
member for a two 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 5,311,163 25,356 875,765
Marshall H. Dickerson 5,314,158 22,361 875,765
Eugene B. Gifford, Jr. 5,313,056 23,463 875,765
Richard L. Heyer, Jr. 5,314,158 22,361 875,765
J. Niles McNeel 5,313,758 22,761 875,765
H. Joe Trulove 5,313,456 23,063 875,765
TWO-YEAR TERM
Theodore S. Moll 5,313,456 23,063 875,765
For Against Abstain
--------- --------- ----------
Ratify appointment of 5,333,846 1,761 876,677
Ernst & Young LLP as
independent auditors
for 2002
16
Item 6.(a) Exhibits
99.1 Statement of the Chief Executive Officer and the Chief
Financial Officer
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the second quarter
of 2002; however, a Form 8-K (Second Quarter Earning Release) was
filed July 18, 2002.
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 14, 2002 /s/ E. Robinson McGraw
---------------------------
E. Robinson McGraw
President & Chief Executive Officer
17
EXHIBIT 99.1
STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER
OF THE PEOPLES HOLDING COMPANY
PURSUANT TO 18 U.S.C. SECTION 1350
Each of the undersigned hereby certifies in his capacity as an officer of The
Peoples Holding Company and its subsidiary (collectively the "Company") that
this Quarterly Report on Form 10-Q for the period ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (this "Report"),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in this Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
DATE: August 14, 2002 /s/ E. Robinson McGraw
-----------------------
E. Robinson McGraw
Chief Executive Officer
DATE: August 14, 2002 /s/ Stuart R. Johnson
-----------------------
Stuart R. Johnson
Chief Financial Officer