UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     For fiscal year ended December 31, 1998
                         Commission file number 1-13253

                           THE PEOPLES HOLDING COMPANY
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                             Mississippi 64-0676974
                ------------------------------- -----------------
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) identification No.)

                                 209 Troy Street
                         Tupelo, Mississippi 38802-0709
                  ------------------------------ -------------
                    (Address of principal offices) (Zip Code)

                  Registrant's Telephone Number: (601) 680-1001

                        Securities registered pursuant to
                            Section 12(b) of the Act:

       (Title of Class)               Name of each exchange on which registered
- ------------------------------        -----------------------------------------
Common Stock, $5.00 Par Value                American Stock Exchange 

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES__X___NO_____

Disclosure of delinquent  filings pursuant to Item 405 of Regulation S-K will be
contained in the  registrant's  proxy  statement for its 1999 annual  meeting of
shareholders,  which  statement is incorporated by reference in Part III of this
Form 10-K. Yes____ No__X__

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 23, 1999 was $197,981,489.

On March 23, 1999, there were 5,844,472 shares of common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1998 Annual  Shareholders'  Report are incorporated by reference
into Parts I and II of this report.

Portions of annual Proxy Statement dated March 22, 1999,  relating to the annual
meeting of  shareholders  of The Peoples Holding  Company,  are  incorporated by
reference into Part III.

                                                             

                                 
                            Exhibit Index on Page 17

                           THE PEOPLES HOLDING COMPANY

                                    FORM 10-K

                      For the year ended December 31, 1998

                                    CONTENTS

PART I

         Item  1.  Business.............................................3
         Item  2.  Properties..........................................12
         Item  3.  Legal Proceedings...................................12
         Item  4.  Submission of Matters to a Vote of Security Holders.12

PART II

         Item  5.  Market for Registrant's Common Stock
                   and Related Stockholder Matters.....................12
         Item  6.  Selected Financial Data.............................13
         Item  7.  Management's Discussion and Analysis of
                   Financial Condition and Results of Operations.......13
         Item 7A.  Quantitative and Qualitative Disclosures About
                   Market Risk.........................................13
         Item  8.  Financial Statements and Supplementary Data.........13
         Item  9.  Changes in and Disagreements with Accountants on
                       Accounting and Financial Disclosure.............13

PART III

         Item  10. Directors and Executive Officers of the Registrant..13
         Item  11. Executive Compensation..............................13
         Item  12. Security Ownership of Certain Beneficial Owners
                   and Management......................................13
         Item  13. Certain Relationships and Related Transactions......13

PART IV.

         Item  14. Exhibits, Financial Statement Schedules and
                   Reports on Form 8-K.................................14

                                       2

                                     PART I

This  Annual  Report  on Form  10-K may  contain  or  incorporate  by  reference
statements which may constitute "forward-looking  statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended,  and Section 21 of the
Securities Exchange Act of 1934, as amended. Prospective investors are cautioned
that  any  such  forward-looking   statements  are  not  guarantees  for  future
performance  and involve risks and  uncertainties,  and that actual  results may
differ materially from those  contemplated by such  forward-looking  statements.
Important  factors currently known to management that could cause actual results
to  differ  materially  from  those  in   forward-looking   statements   include
significant  fluctuations  in interest  rates,  inflation,  economic  recession,
significant  changes in the federal and state legal and regulatory  environment,
significant  underperformance  in the Company's  portfolio of outstanding loans,
and competition in the Company's  markets.  The Company undertakes no obligation
to update or revise  forward-looking  statements to reflect changed assumptions,
the occurrence of unanticipated  events or changes to future  operating  results
over time.

ITEM 1. BUSINESS

General

The Peoples Holding Company (the "Registrant" or "Company"), was organized under
the laws of the State of Mississippi  and  incorporated on November 10, 1982, in
order to acquire all of the common  stock of The Peoples  Bank & Trust  Company,
Tupelo, Mississippi (the "Bank").

Organization

The  Registrant  commenced  business on July 1, 1983 and the  acquisition of the
Bank  was  also  consummated  at  that  time.  All of the  Registrant's  banking
activities  are conducted  through the Bank,  which on December 31, 1998, had 41
banking offices in Tupelo,  Aberdeen,  Amory,  Batesville,  Booneville,  Calhoun
City, Coffeeville,  Corinth, Grenada, Guntown,  Hernando, Iuka, Louisville,  New
Albany,  Okolona,  Olive  Branch,  Plantersville,  Pontotoc,  Saltillo,  Sardis,
Shannon,  Smithville,  Southaven,  Verona, Water Valley, West Point, and Winona,
Mississippi.

All members of the Board of Directors of the  Registrant are also members of the
Board of Directors of the Bank.  Responsibility  for the  management of the Bank
and its branches  remains with the Board of Directors  and Officers of the Bank;
however, management services rendered to the Bank by the Registrant are intended
to  supplement  the  internal  management  of the Bank and  expand  the scope of
banking services normally offered by them.

The Bank,  which is the  Registrant's  primary  subsidiary,  was  established in
February 1904, as a state  chartered  bank. It is insured by the Federal Deposit
Insurance Corporation.

As a commercial  bank, a complete  range of banking and  financial  services are
provided to  individuals  and small- to medium-size  businesses.  These services
include  checking and savings  accounts,  business and personal  loans,  interim
construction and residential mortgage loans,  student loans,  equipment leasing,
as well as safe  deposit  and  night  depository  facilities.  Automated  teller
machines  located  throughout our market area provide 24-hour banking  services.
The Bank also offers to its  customers  the VISA and  MasterCard  credit  cards.
Accounts  receivable  factoring is also  available to qualified  businesses.  In
addition to a wide  variety of  fiduciary  services,  the Bank  administers  (as
trustee  or  in  other   fiduciary  or   representative   capacities)   pension,
profit-sharing and other employee benefit plans and personal trusts and estates.
The Company also offers  annuities and mutual funds.  Neither the Registrant nor
the Bank has any foreign activities.

                                       3

Competition

Vigorous  competition  exists in all major  areas where the  Registrant  and its
subsidiary are engaged in business. Not only does the Registrant compete through
its  subsidiary  bank with state and national  banks in its service  areas,  but
also,  with savings and loan  associations,  credit unions,  finance  companies,
mortgage  companies,   insurance  companies,  brokerage  firms,  and  investment
companies for available loans and depository accounts. All of these institutions
compete in the delivery of services and products through availability,  quality,
and pricing.  Within the  Registrant's  market area, none of the competitors are
dominant.

Supervision and Regulation

The Registrant is a bank holding  company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Act"),  and is registered as such with the
Board of Governors of the Federal  Reserve System (the "Board").  The Registrant
is required to file with the Board an annual  report and such other  information
as the Board may require. The Board may also make examinations of the Registrant
and its subsidiary  pursuant to the Act. The Board also has the authority (which
it has not  exercised) to regulate  provisions  of certain bank holding  company
debt.

The Act  requires  every bank holding  company to obtain  prior  approval of the
Board before acquiring  direct or indirect  ownership or control of more than 5%
of the voting  shares of any bank  which is not  already  majority-owned  by the
Registrant.  The Act provides that the Board shall not approve any  acquisition,
merger or  consolidation  which  would  result in  monopoly or which would be in
furtherance  of any  combination  or  conspiracy  to  monopolize  or  attempt to
monopolize  the  business of banking,  or any other  transactions  the effect of
which might substantially lessen competition, or in any manner be a restraint on
trade,  unless the  anti-competitive  effects of the  proposed  transaction  are
clearly  outweighed  in the  public  interest  by  the  probable  effect  of the
transaction in meeting the convenience and needs of the community to be served.

The Act also prohibits a bank holding  company,  with certain  exceptions,  from
itself  engaging in or acquiring  direct or indirect  control of more than 5% of
the  voting  shares  of any  company  engaged  in  non-banking  activities.  The
principal  exception is for engaging in or acquiring  shares of a company  whose
activities  are  found by the  Board to be so  closely  related  to  banking  or
managing banks as to be a proper incident thereto. In making such determinations
the Board is required to consider  whether the performance of such activities by
a bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater  convenience,  increased  competition  or
gains in efficiency of resources,  versus the risks of possible  adverse effects
such as  decreased  or unfair  competition,  conflicts  of  interest  or unsound
banking practices.

The Act prohibits the  acquisition by a bank holding  company of more than 5% of
the  outstanding  voting shares of a bank located outside the state in which the
operations of its banking subsidiaries are principally conducted, unless such an
acquisition is specifically authorized by statute of the state in which the bank
to be acquired is located.

The Registrant and its subsidiary are subject to certain restrictions imposed by
the Federal Reserve Act and the Federal Deposit  Insurance Act on any extensions
of credit to the bank holding company or its  subsidiary,  on investments in the
stock or other securities of the bank holding company or its subsidiary,  and on
taking such stock or other securities as collateral for loans of any borrower.

                                       4

The Bank was chartered under the laws of the State of Mississippi and is subject
to the supervision  of, and is regularly  examined by, the Department of Banking
and Consumer  Finance of the State of  Mississippi.  The Bank is also insured by
the Federal  Deposit  Insurance  Corporation  and is subject to examination  and
review by that regulatory authority.

Mississippi banks are permitted to merge with other existing banks statewide and
to acquire or be acquired,  by banks or bank holding  companies.  Section 102 of
the Riegle-Neal  Interstate Banking and Branching Efficiency Act of 1994 removed
territorial  restrictions  for interstate  bank mergers,  effective May 1, 1997.
Out-of-state  bank holding companies may establish a bank in Mississippi only by
acquiring a Mississippi bank or Mississippi bank holding company.

Certain  restrictions  exist regarding the ability of the Bank to transfer funds
to the Company in the form of cash dividends,  loans, or advances.  The approval
of the Mississippi  Department of Banking and Consumer Finance is required prior
to the Bank paying dividends and is limited to earned surplus in excess of three
times the Bank's capital stock.

Federal  Reserve  regulations  also  limit the  amount  the Bank may loan to the
Company  unless  such  loans are  collateralized  by  specific  obligations.  At
December 31, 1998,  the maximum  amount  available for transfer from the Bank to
the Company in the form of loans was 11% of consolidated net assets.

Mississippi  laws  authorize  multi-bank  holding  companies  but  there  are no
statutes regulating the operation of such companies.

Monetary Policy and Economic Controls

The  earnings  and growth of the  banking  industry,  the Bank and,  to a larger
extent, the Registrant,  are affected by the policies of regulatory authorities,
including  the Federal  Reserve  System.  An  important  function of the Federal
Reserve  System is to regulate  the  national  supply of bank credit in order to
combat  recession and curb  inflationary  pressures.  Among the  instruments  of
monetary policy used by the Federal  Reserve to implement  these  objectives are
open market operations in U. S. Government  securities,  changes in the discount
rate on bank  borrowings  and  changes  in  reserve  requirements  against  bank
deposits.  These  instruments are used in varying  degrees to influence  overall
growth of bank loans,  investments  and  deposits  and may also affect  interest
rates charged on loans or paid for deposits.

The  monetary  policies of the  Federal  Reserve  System have had a  significant
effect on the operating results of commercial banks in the past and are expected
to do so in the future.  In view of changing  conditions in the national economy
and in the  various  money  markets as well as the effect of actions by monetary
and fiscal  authorities  including  the Federal  Reserve  System,  the effect on
future  business and earnings of the  Registrant  and its  subsidiary  cannot be
predicted with accuracy.

In the past few years, the trend seems to be toward competitive  equality within
the financial services industry.  This was evidenced in 1980 by the formation of
the Depository Institution  Deregulation Committee (the "DIDC"). The DIDC's sole
purpose was to eliminate the  restrictions  imposed upon the rates of interest a
depository  institution  could  pay on a  deposit  account.  The trend was again
evidenced  in  1982  with  the  passage  of  the  Garn-St.   Germain  Depository
Institutions  Act. This act provided for,  among other things,  the money market
account.  This account was designed to operate in a manner  similar to the money
market mutual funds being  offered by the  investment  brokers.  It would earn a
market rate of interest,  with  limited  third-party  withdrawals  and a minimum
balance requirement.
                
                                       5

Source and Availability of Funds

The funds essential to the business of the Registrant and its subsidiary consist
primarily of funds  derived from  customer  deposits and  borrowings  of federal
funds by the  banking  subsidiary,  and from loans  under  established  lines of
credit. The availability of such funds is primarily  dependent upon the economic
policies  of the  federal  government,  the  economy in general  and the general
credit market for loans.

Personnel

Alex  Sheshunoff   Management  Services  completed  a  comprehensive   strategic
assessment   of  the  Bank  and   designed   an   action   plan  to   facilitate
organization-wide  structural  changes.  The action plan  addressed  operational
costs, risk management,  redundant activities, manual processes,  under-utilized
automation,  and the future  automation of inefficient  work methods.  With this
move to automation came the need to displace  selected jobs.  Normal  attrition,
retirement,  and our displacement  schedule have reduced the Registrant's number
of employees to 480 on a full-time basis at December 31, 1998.

Dependence Upon a Single Customer

Neither the Registrant nor its subsidiary is dependent upon a single customer or
upon a limited number of customers.

Segment Reporting

The information  under the caption "Note P - Segment  Reporting" on Pages 19 and
20 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.

Acquisition of Certain Assets and Liabilities

In the past several years,  the Bank has acquired several banks and continues to
examine  other  possible  candidates  for  acquisition  by  cash or  stock  or a
combination of both. During December 1998, the Company entered into an agreement
with Inter-City Federal Bank for Savings in Louisville,  Mississippi, to acquire
approximately  $34,890,000 in loans and $38,530,000 in deposits. The information
under  the  caption  "Note  B -  Mergers  and  Acquisitions"  on  Page 10 of the
Registrant's  1998  Annual  Report to  Shareholders  is  incorporated  herein by
reference.

Executive Officers of The Registrant

The principal executive officer of the Company and its subsidiary as of December
31, 1998, is as follows:

                   Name                             Age
                   ----                             ---
               John W. Smith                         63

Position and Office:  Director and Executive  Vice President of the Company from
July 1983 until August 1993;  Director and President of the Company since August
1993,  and Vice  Chairman of the Board since April 1997.  Director and Executive
Vice President of the Bank from 1978 and 1976, respectively,  until August 1993;
Director,  President, and Chief Executive Officer of the Bank since August 1993,
and Vice Chairman of the Board since April 1997.

All of the Registrant's officers are appointed annually by the appropriate Board
of Directors to serve at the discretion of the Board.

                                       6

Net Interest Income

The following table sets forth for The Peoples Holding  Company,  as of December
31 for the years  indicated,  a summary of the  changes in  interest  earned and
interest paid resulting  from changes in volume and rates.  

                                            1998 COMPARED TO 1997

                                          INCREASE(DECREASE) DUE TO
                                          -------------------------
                                       VOLUME        RATE      NET (1)
                                       ------        ----      -------
                                               (In Thousands)
Earning assets:
Loans, net of
  unearned income ................   $  5,390    $   (986)  $  4,404    

Securities
  U. S. government
    securities and agencies ......       (802)        (19)      (821) 
  Obligations of states and
    political subdivisions .......        928        (229)       699
  Mortgage-backed securities .....      1,459        (296)     1,163
  Other securities ...............         13           4         17

Other ............................        243           7        250
                                     --------    --------   --------
Total earning assets .............   $  7,231    $ (1,519)  $  5,712
                                     --------    --------   --------

Interest-bearing liabilities:
Interest-bearing demand
  deposit accounts ...............   $    (14)   $     14   $      0
Savings accounts .................      1,133         307      1,440
Time deposits ....................      1,911         288      2,199
Other ............................        183          17        200 
                                     --------    --------   --------
Total interest-bearing
  liabilities ....................   $  3,213    $    626   $  3,839
                                     --------    --------   --------
Change in net interest
  income .........................   $  4,018    $ (2,145)  $  1,873
                                     ========    ========   ========

(1) The change in interest due to both volume and rate has been  allocated on a
    pro-rata basis using the absolute ratio value of amounts calculated.

                                                             
                                       7

                                             1997 COMPARED TO 1996

                                          INCREASE(DECREASE) DUE TO
                                          -------------------------
                                       VOLUME        RATE      NET (1)
                                       ------        ----      -------
                                               (In Thousands)
Earning assets:
Loans, net of
  unearned income ................   $  5,362    $   (292)  $  5,070

Securities
  U. S. government
    securities and agencies ......       (199)        (62)      (261) 
  Obligations of states and
    political subdivisions .......        242         (56)       186
  Mortgage-backed securities .....      1,158         (31)     1,127
  Other securities ...............        (25)         10        (15)

Other ............................       (339)          8       (331)
                                     --------    --------   --------
Total earning assets .............   $  6,199    $   (423)  $  5,776
                                     --------    --------   --------

Interest-bearing liabilities:
Interest-bearing demand
  deposit accounts ...............   $ (1,042)   $     32   $ (1,010)
Savings accounts .................        967         552      1,519
Time deposits ....................      1,901         383      2,284
Other ............................        558         209        767 
                                     --------    --------   --------
Total interest-bearing
  liabilities ....................   $  2,384    $  1,176   $  3,560
                                     --------    --------   --------
Change in net interest
  income .........................   $  3,815    $ (1,599)  $  2,216
                                     ========    ========   ========

(1) The change in interest  due to both volume and rate has been  allocated on a
    pro-rata basis using the absolute ratio value of amounts calculated.

                                                           
                                       8

Investment Portfolio

The  following  table sets forth the  amortized  cost of securities at the dates
indicated:

                                     December 31
                                     -----------
                              1998        1997        1996
                           ---------    --------    --------
                                    (In Thousands)

U.S. Government and             
  Agency Securities ....  $ 104,997    $ 110,683   $ 125,087
Obligations of State and                                   
  Political Subdivisions     76,893       59,893      52,051
Other Securities .......    107,852       77,153      68,610
                             ------       ------      ------
                          $ 289,742    $ 247,729   $ 245,748
                          =========    =========    ========

The  following  table sets forth the  maturity  distribution  in  thousands  and
weighted average yield by maturity of securities at December 31, 1998:

                                         After One           After Five   
                         Within          But Within          But Within           After
                        One Year         Five Years          Ten Years          Ten Years
                        --------         -----------         ----------         ---------

U.S Government
  and Agency
  Securities ...   $ 47,377  6.24%     $ 35,635  6.07%    $ 21,985  6.25%   $      0  0.00% 

Obligations of
  States and
  Political
  Subdivisions .      3,179  9.20%       14,668  8.50%      41,941  7.40%     17,105  7.40%

Other Securities     34,098  6.22%       51,157  6.19%      22,597  6.10%          0  0.00%
                     ------              ------              -----            ------
Total ..........   $ 84,654            $101,460           $ 86,523          $ 17,105
                     ======             =======             ======            ======

The  maturity  of  mortgage-backed  securities,  included  as other  securities,
reflects scheduled repayments when the payment is due.

Weighted average yields on tax-exempt  obligations have been computed on a fully
tax-equivalent  basis assuming a federal tax rate of 35% and a Mississippi state
tax rate of 3.3%, which is net of federal tax benefit.

                                       9

Loans Outstanding

The following table sets forth loans  outstanding as of December 31, 1998, which
based on remaining  scheduled  repayments of  principal,  are due in the periods
indicated. Real estate mortgage loans and consumer loans are excluded, while net
receivables  on leased  equipment  are  included in  commercial,  financial  and
agricultural loans in the consolidated  financial statements.  Also, amounts due
after  one year  are  classified  according  to their  sensitivity  to  changing
interest rates.

                                 Loans Maturing
                  -----------------------------------------
                                             
                            After One     After
                   Within   But Within    Five
                  One Year  Five Years    Years     Total
                  --------  ----------    -----     -----
                                 (In Thousands)
Commercial,
  financial and
  agricultural   $  85,892  $  37,725  $  13,655  $ 137,272
Real estate-
  construction      22,767      2,641        154     25,562
                  --------   --------   --------   --------
                 $ 108,659  $  40,366  $  13,809  $ 162,834
                  ========   ========   ========   ========

                                Interest Sensitivity
                                --------------------
                                                                            
                             Fixed             Variable
                              Rate               Rate
                              ----               ----
                                                                             
                                   (In Thousands)
Due after 1 but within 5
  years .................   $37,493            $ 2,873
Due after 5 years .......    13,772                 37  
                            -------             ------
                            $51,265            $ 2,910
                            =======            =======

                                       10

Allowance for Loan Losses

The  allowance  for loan losses  provides  coverage  for losses  inherent in the
Company's loan portfolio.  Management  reviews the adequacy of the allowance for
loan  losses  each  quarter.  The  overall  allowance  is  evaluated  based on a
continuing assessment of problem loans, historical loss experience,  new lending
products,  emerging  credit  trends,  changes in the size and  character of loan
categories,  and other  factors  including  its risk rating  system,  regulatory
guidance and economic  conditions.  Management has determined that the allowance
for loan losses is adequate,  although  financial  market  volatility,  economic
reversals  or  decreased  corporate  earnings  could  require an increase in the
required allowance.

Management allocates the allowance for loan losses by loan category. Commercial,
financial and agricultural and real estate - mortgage allocations are based on a
quarterly  review of individual  loans  outstanding  and binding  commitments to
lend. Reserves are allocated based on actual loss experience and to credits with
similar risk characteristics. Consumer loan allocations are based on an analysis
of product mix, credit scoring,  migration analyses,  bankruptcy  experience and
historical and expected delinquency and charge-off statistics.

No portion of the  allowance is restricted  to any  individual  loan or group of
loans,  rather the entire  allowance  is  restricted  to absorb  losses from the
entire loan portfolio.

The Company also maintains an  unallocated  allowance to recognize the existence
of other exposures,  including but not limited to, the risk in concentrations to
specific  borrowers,  financings of highly leveraged  transactions,  products or
industries.

The following  table presents the allocation of the allowance for loan losses by
loan category at December 31 for each of the years presented:

                                               (In Thousands)
                                          Allowance for Loan Losses
                               ----------------------------------------------
                                1998      1997      1996      1995      1994
                               ------    ------    ------    ------    ------ 
Commercial, financial,
   agricultural and real
   estate - mortgage ........ $ 7,382   $ 6,875   $ 6,681   $ 5,406   $ 4,924
Consumer ....................   1,933     1,892     1,813     1,577     1,348
Unallocated .................     305       337       815     1,832     1,911
                               ------    ------    ------    ------    ------  
Total ....................... $ 9,620   $ 9,104   $ 9,309   $ 8,815   $ 8,183
                               ======    ======    ======    ======    ======

                                                         

                                       11

Time Deposits

The  following  table  shows the  maturity  of time  deposits  over  $100,000 in
thousands.

       Less than 3 Months        $  41,765
       3 Months- 6 Months           30,179
       6 Months-12 Months           31,109
       Over 12 Months               20,862
                                  --------
                                 $ 123,915 
                                 =========

ITEM 2. PROPERTIES

The main  offices of the  Registrant  and its  subsidiary,  The Peoples Bank and
Trust Company, are located at 209 Troy Street, Tupelo,  Mississippi.  All floors
of the five-story  building are occupied by various departments within the Bank.
The Technology Center located in Tupelo, Mississippi, houses the electronic data
processing,  proof,  purchasing,  and statement rendering. In addition, the Bank
operated  thirty-two (32) full-service  branches,  and nine (9)  limited-service
branches.  The Bank has two (2) full-service branches in both Southaven and West
Point;  one (1)  full-service  branch and two (2)  limited-service  branches  in
Booneville;  one (1) full-service branch and one (1)  limited-service  branch in
Amory,  Corinth,  and Pontotoc;  one (1)  full-service  branch each at Aberdeen,
Batesville,  Calhoun  City,  Coffeeville,   Grenada,  Guntown,  Hernando,  Iuka,
Louisville, New Albany, Okolona, Saltillo, Sardis, Shannon, Verona, Water Valley
and Winona,  Mississippi;  one (1) limited-service  branch each at Olive Branch,
Plantersville, and Smithville,  Mississippi; and seven (7) full-service branches
and one (1) limited-service branch in Tupelo, Mississippi.

The Registrant  leases,  on a long-term  basis,  two branch locations for use in
conducting  banking  activities.  The  aggregate  annual  rental  for all leased
premises  during the year ending  December 31, 1998, did not exceed five percent
of the Bank's operating expenses.

It is  anticipated  that in the  next  several  years,  branch  renovations  and
construction will be completed at Corinth, Olive Branch, and a new location west
of Tupelo,  Mississippi.  The other  facilities owned or occupied under lease by
the Bank are considered by management to be adequate.

ITEM 3. LEGAL PROCEEDINGS

There were no material legal  proceedings  pending or threatened at December 31,
1998,  which in the opinion of the Company could have a material  adverse effect
upon the Company's business or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None during the fourth quarter of 1998.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

The information  under the captions  "Market Value of Stock by Quarters" on Page
26 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.

At March 23, 1999,  the total number of  shareholders  of the  Company's  common
stock was 2,572.

The  Registrant's  common stock trades on the American  Stock Exchange under the
symbol PHC.
                                       12

ITEM 6. SELECTED  FINANCIAL  DATA 

The information under the caption "Selected Financial Information" on Page 25 of
the  Registrant's  1998 Annual Report to Shareholders is incorporated  herein by
reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The  information on Pages 26 through 39 of the  Registrant's  1998 Annual Report
to Shareholders is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption "Interest Rate Risk" on Pages 32 and 33 of the
Registrant's  1998  Annual  Report to  Shareholders  is  incorporated  herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of independent  auditors and  consolidated  financial  statements are
included  on Pages 4  through  24 of the  Registrant's  1998  Annual  Report  to
Shareholders and are incorporated herein by reference.

The  information  on  Page  23  of  the  Registrant's   1998  Annual  Report  to
Shareholders   reflecting   unaudited   quarterly   results  of   operations  is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and nominees of the Registrant appear under "Election of Directors" on
Pages 3 through 5 of the Company's  definitive Proxy Statement,  dated March 22,
1999, which is incorporated herein by reference.

Information  concerning  executive officers of the Registrant and its subsidiary
appears  on Page 6 under  the  caption  "Executive  Officers"  of the  Company's
definitive Proxy Statement,  dated March 22, 1999, which is incorporated  herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information appearing under "Summary Compensation Table-Annual Compensation"
on Pages 7 through 11 of the Company's  definitive Proxy Statement,  dated March
22, 1999, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information appearing under "Principal Holders of Voting Security" on Page 3
of  the  Company's  definitive  Proxy  Statement,   dated  March  22,  1999,  is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information appearing under "Transactions with Management" on Page 12 of the
Company's  definitive  Proxy  Statement,  dated March 22, 1999, is  incorporated
herein by reference.

                                       13

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) (1) and (2) and (c) The response to this portion of Item 14 is
          submitted as a separate section of this report.

         (3) Listing of Exhibits:
           (3) Articles of Incorporation and Bylaws of
               the Registrant are incorporated herein by
               reference to exhibits filed with the
               Registration Statement on Form S-14,
               File No. 2-21776.
                   
          (13) Annual Report to Shareholders for the
               year ended December 31, 1998
          
          (23) Consent of Independent Auditors

          (27) Financial Data Schedule 
      
      (b) No Form 8-K was filed during the quarter ended December
          31, 1998.

      (d) Financial Statement Schedules -- None.

                                       14

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized.

THE PEOPLES HOLDING COMPANY

DATED: March 26, 1999                   By /s/ John W. Smith
- ----------------------                  -----------------------------
                                        John W. Smith, President & CEO

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the date indicated.

John W. Smith,
President and Director
(Chief Executive Officer) .....          /s/ John W. Smith

Robert C. Leake,
Chairman of the Board and
Director ......................          /s/ Robert C. Leake

William M. Beasley, Director ..          /s/ William M. Beasley

George H. Booth, II, Director .          /s/ George H. Booth, II

Frank B. Brooks, Director .....          /s/ Frank B. Brooks

John M. Creekmore, Director ...          /s/ John M. Creekmore

Marshall H. Dickerson, Director          /s/ Marshall H. Dickerson

A. M. Edwards, Jr., Director ..          /s/ A. M. Edwards, Jr.

Eugene B. Gifford, Jr.,
Director ......................          /s/ Eugene B. Gifford, Jr.

C. Larry Michael, Director ....          /s/ C. Larry Michael

Jimmy S. Threldkeld, Director .          /s/ Jimmy S. Threldkeld

J. Heywood Washburn, Director .          /s/ J. Heywood Washburn

Robert H. Weaver, Director ....          /s/ Robert H. Weaver

J. Larry Young, Director ......          /s/ J. Larry Young

                                       15

Form 10-K--Item 14 (a) (1) and (2)

THE PEOPLES HOLDING COMPANY AND SUBSIDIARY

LIST OF FINANCIAL STATEMENTS

The  following  consolidated  financial  statements  and  report of  independent
auditors of The Peoples  Holding  Company and subsidiary  included in the Annual
Report to  Shareholders  of the registrant for the year ended December 31, 1998,
are incorporated by reference in Item 8.

                         Report of Independent Auditors

            Consolidated Balance Sheets--December 31, 1998 and 1997

                 Consolidated Statements of Income--Years ended
                       December 31, 1998, 1997, and 1996

          Consolidated Statements of Shareholders' Equity--Years ended
                        December 31, 1998, 1997, and 1996

         Consolidated Statements of Cash Flows--Years ended December 31,
                              1998, 1997, and 1996

         Notes to Consolidated Financial Statements--December 31, 1998

Schedules to the consolidated financial statements required by Article
9 of Regulation S-X are not required under the related instructions or are not
applicable and therefore, have been omitted.

                                       16                     

Exhibit
Number          Description                               Page
- ------          -----------                               ----

13          Annual Report to Shareholders ...............  18 

23          Consent of Independent Auditors .............  58

                                       17

Financial Statements

Consolidated Balance Sheets

                                                                              (In Thousands, Except Share Data)
                                                                                         December 31
                                                                                         -----------
                                                                                      1998         1997
                                                                                      ----         ----
                                                                                                 
Assets
         Cash and due from banks .............................................  $    32,944    $  32,932
         Federal funds sold ..................................................            0        6,000
                                                                                    -------      -------
                                    Cash and Cash Equivalents ................       31,944       38,932

         Interest-bearing balances with banks ................................          433       14,973
         Securities held to maturity (market value - $78,585 and
                  $60,556 at December 31, 1998 and 1997, respectively) .......       76,893       59,893
         Securities available for sale (amortized cost - $212,849 and
                  $187,836 at December 31, 1998 and 1997, respectively) ......      214,174      188,738

         Loans
                  Commercial, financial, and agricultural ....................      137,272      120,412
                  Real estate - construction .................................       25,562       24,365
                  Real estate - mortgage .....................................      382,179      344,212
                  Consumer ...................................................      158,096      148,472
                  Unearned income ............................................       (8,826)      (9,515)
                                                                                    -------      ------- 
                                    Total Loans, Net of Unearned Income ......      694,283      627,946

                  Allowance for loan losses ..................................       (9,620)      (9,104)
                                                                                    -------      ------- 
                                    Net Loans ................................      684,663      618,842

         Premises and equipment, net .........................................       26,356       23,493
         Other assets ........................................................       28,902       26,184
                                                                                    -------      -------
                                    Total Assets .............................  $ 1,063,365    $ 971,055
                                                                                  =========      =======

Liabilities and Shareholders' Equity

Liabilities
         Deposits
                  Noninterest-bearing ........................................  $   149,433    $ 120,829
                  Interest-bearing ...........................................      772,253      714,085
                                                                                    -------      -------
                                    Total Deposits ...........................      921,686      834,914

         Treasury tax and loan note account ..................................        2,455        6,101
         Borrowings ..........................................................       19,567       18,454
         Other liabilities ...................................................       14,598       13,435
                                                                                    -------      -------
                                    Total Liabilities ........................      958,306      872,904

Shareholders' Equity
         Common stock, $5 par value, 15,000,000  shares  authorized
                  5,844,472 and 5,859,472 issued and outstanding at
                  December 31, 1998 and 1997, respectively ...................       29,222       29,297
         Additional paid-in capital ..........................................       39,876       39,876
         Accumulated other comprehensive income ..............................          830          566
         Retained earnings ...................................................       35,131       28,412
                                                                                    -------      -------
                                    Total Shareholders' Equity ...............      105,059       98,151
                                                                                    -------      -------
                                    Total Liabilities and Shareholders' Equity  $ 1,063,365   $  971,055
                                                                                  =========      =======

See notes to consolidated financial statements.

                                       18

Consolidated Statements Of Income

                                                              (In Thousands, Except Share Data)
                                                                    Year Ended December 31
                                                                    ----------------------
                                                                  1998       1997       1996
                                                                  ----       ----       ----
                                                                                     
Interest income
         Loans ..............................................  $ 60,054   $ 55,650   $ 50,580
         Securities:
                  Taxable ...................................    13,416     13,057     12,206
                  Tax-exempt ................................     3,650      2,951      2,765

         Other ..............................................       793        543        874
                                                                 ------     ------     ------
                                    Total Interest Income ...    77,913     72,201     66,425

Interest expense
         Deposits ...........................................    34,179     30,540     27,747
         Borrowings .........................................     1,464      1,264        497
                                                                 ------     ------     ------
                                    Total Interest Expense ..    35,643     31,804     28,244
                                                                 ------     ------     ------
                                    Net Interest Income .....    42,270     40,397     38,181
Provision for loan losses ...................................     2,563      2,280      2,813
                                                                 ------     ------     ------
                                    Net Interest Income After
                                    Provision For Loan Losses    39,707     38,117     35,368

Noninterest income
         Service charges on deposit accounts ................     7,186      6,768      6,565
         Fees and commissions ...............................     1,891      1,447      1,397
         Trust revenue ......................................       846        719        643
         Securities gains (losses) ..........................        61        (41)       110
         Other ..............................................     4,314      3,127      2,315
                                                                 ------     ------     ------
                                    Total Noninterest Income     14,298     12,020     11,030

Noninterest expense
         Salaries and employee benefits .....................    20,757     19,533     18,218
         Net occupancy ......................................     2,683      2,599      2,269
         Equipment ..........................................     1,908      1,780      1,595
         Other ..............................................    12,778     11,097     10,748
                                                                 ------     ------     ------
                                    Total Noninterest Expense    38,126     35,009     32,830
                                                                 ------     ------     ------
Income before income taxes ..................................    15,879     15,128     13,568
Income taxes ................................................     4,511      4,488      4,052
                                                                 ------     ------     ------
                                    Net Income ..............  $ 11,368   $ 10,640   $  9,516
                                                                 ======     ======     ======

Basic and diluted earnings per share ........................  $   1.94   $   1.82   $   1.62
                                                                 ======     ======     ======
Weighted average shares outstanding ......................... 5,853,679  5,859,472  5,859,472
                                                              =========  =========  =========

See notes to consolidated financial statements.

                                       19

Consolidated Statements Of Shareholders' Equity
(In Thousands, Except Share Data)

                                                                                                       Accumulated              
                                             Common Stock                                                 Other
                                          ------------------    Paid-in    Comprehensive   Retained   Comprehensive
                                          Shares      Amount    Capital       Income       Earnings       Income        Total
                                          ------      ------   ---------   -------------   --------   -------------     ----- 

Balance at January 1, 1996 .............. 2,604,760  $ 13,024   $ 39,876                    $ 30,892     $  1,169     $  84,961

  Net Income for 1996 ...................                                    $  9,516          9,516                      9,516
  Other comprehensive income, net of tax:                                      ------
    Unrealized losses on securities
       available for sale ...............                                        (942)                                     (942)
                                                                               ------
  Other comprehensive income ............                                        (942)                       (942)
                                                                               ------
 Comprehensive income ...................                                    $  8,574
                                                                               ======
  Cash dividends ($.50 per share) .......                                                     (2,950)                    (2,950) 
  Stock split effected in the form
    of a stock dividend ................. 1,301,915     6,509                                 (6,509)
  Payment of fractional 
    shares for stock dividend ...........                                                        (24)                       (24) 
                                         ----------    ------     ------                      ------       ------        ------
Balance at December 31, 1996 ...........  3,906,675  $ 19,533   $ 39,876                    $ 30,925     $    277     $  90,561 

  Net Income for 1997 ...................                                    $ 10,640         10,640                     10,640
  Other comprehensive income, net of tax:                                      ------
    Unrealized gains on securities
       available for sale ...............                                         339                                       339
                                                                               ------
  Other comprehensive income ............                                         339                         339
                                                                               ------
 Comprehensive income ...................                                    $ 10,979
                                                                               ======
  Cash dividends ($.57 per share) .......                                                     (3,360)                    (3,360) 
  Stock split effected in the form
    of a stock dividend ................. 1,952,797     9,764                                 (9,764)
  Payment of fractional 
    shares for stock dividend ...........                                                        (29)                       (29) 
                                         ----------    ------     ------                      ------       ------        ------
Balance at December 31, 1997 ...........  5,859,472  $ 29,297   $ 39,876                    $ 28,412     $    566     $  98,151  

  Net Income for 1998 ...................                                    $ 11,368         11,368                     11,368
  Other comprehensive income, net of tax:                                      ------
    Unrealized gains on securities
       available for sale, net of
       reclassification adjustment ......                                         264                                       264
                                                                               ------
  Other comprehensive income ............                                         264                         264
                                                                               ------
 Comprehensive income ...................                                    $ 11,632
                                                                               ======
  Cash dividends ($.72 per share) .......                                                     (4,184)                    (4,184) 
  Treasury stock purchased and retired ..   (15,000)      (75)                                  (465)                      (540)    
                                         ----------    ------     ------                      ------       ------        ------
Balance at December 31, 1998 ...........  5,844,472  $ 29,222   $ 39,876                    $ 35,131     $    830     $ 105,059   
                                         ==========    ======     ======                      ======       ======       =======

Disclosure of 1998 reclassification amount:
  Unrealized holding gains arising during period .............. $    322
  Less: reclassification adjustment for 
        gains included in net income ..........................      (58)
                                                                  ------
  Net unrealized gains on securities .......................... $    264
                                                                  ======

See notes to consolidated financial statements. 

                                       20

Consolidated Statements Of Cash Flows

                                                                                       (In Thousands, Except Share Data)
                                                                                             Year Ended December 31
                                                                                      ------------------------------------
                                                                                         1998         1997         1996
                                                                                      ----------   ----------   ----------
                                                                                                                 
Operating Activities
         Net income ................................................................  $  11,368    $  10,640    $   9,516
         Adjustments to reconcile net income to net cash
           provided by operating activities:
                           Provision for loan losses ...............................      2,563        2,280        2,813
                           Provision for depreciation and amortization .............      2,593        2,330        2,179
                           Net amortization of securities
                              premiums/discounts ...................................        795          342           71
                           (Gains) losses on sale of loans .........................       (797)        (323)
                           (Gains) losses on sales/calls of securities .............         61           41         (110)
                           Increase in other liabilities ...........................      1,440        1,277        1,677
                           Deferred income tax benefit .............................       (423)        (243)        (179)
                           (Gains) losses on sales of premises and equipment .......        157          233          (16)
                           Increase in other assets ................................     (2,486)      (2,300)        (986)
                                                                                        -------      -------      ------- 
                                    Net Cash Provided By Operating Activities ......     15,271       14,277       14,965
                                                                                        -------      -------      ------- 
Investing Activities
         Net (increase) decrease in balances with other banks ......................     14,540      (13,149)       6,990
         Proceeds from sales of securities available for sale ......................     16,242       48,988       32,600
         Proceeds from maturities/calls of securities
                  held to maturity .................................................      4,796        4,245        2,997
         Proceeds from maturities/calls of securities
                  available for sale ...............................................     63,692       71,322       54,505
         Purchases of securities held to maturity ..................................    (21,739)     (12,552)      (9,424)
         Purchases of securities available for sale ................................   (105,184)    (114,367)    (114,018)
         Net increase in loans .....................................................   (150,451)    (101,773)     (43,982)
         Proceeds from sale of loans ...............................................     81,333       33,290      
         Proceeds from sales of premises and equipment .............................        272           62          122
         Purchases of premises and equipment .......................................     (5,274)      (3,996)      (2,937)
                                                                                        -------      -------      -------
                                    Net Cash Used In Investing Activities ..........   (101,773)     (87,930)     (73,147)
                                                                                        -------      -------      -------
Financing Activities
         Net increase in noninterest-bearing deposits ..............................     28,604        2,190        1,744
         Net increase in interest-bearing deposits .................................     58,168       59,882       31,553
         Net increase (decrease) in short-term borrowings ..........................     (1,146)        (253)       3,954
         Net increase (decrease) in other borrowings ...............................     (1,388)       7,280        6,861
         Cash dividends paid .......................................................     (4,184)      (3,360)      (2,950)
         Cash paid on fractional shares for stock dividend .........................                     (29)         (24)
         Acquisition of treasury stock .............................................       (540)
                                                                                        -------      -------      -------
                                    Net Cash Provided By Financing Activities ......     79,514       65,710       41,138
                                                                                        -------      -------      -------
                                    Increase (Decrease) In Cash and Cash Equivalents     (6,988)      (7,943)     (17,044)
Cash and Cash Equivalents at Beginning of Year .....................................     38,932       46,875       63,919
                                                                                        -------      -------      -------
                                    Cash and Cash Equivalents at End of Year .......  $  31,944    $  38,932    $  46,875
                                                                                        =======      =======      =======
Non-Cash Transactions
         Transfer of loans to other real estate ....................................  $   1,531    $   1,128    $   1,224
                                                                                        =======      =======      =======

See notes to consolidated financial statements.

                                       21

Notes To Consolidated Financial Statements December 31, 1998
(In Thousands, Except Share Data)

Note A - Significant Accounting Policies

The  Peoples  Holding  Company  (the  Company)  is a one-bank  holding  company,
offering a  diversified  range of  banking  services  to retail  and  commercial
customers,  primarily  in North  Mississippi,  through The Peoples  Bank & Trust
Company (the Bank). The accounting and reporting policies of the Company conform
to generally  accepted  accounting  principles and general  practices within the
financial services industry.

Principles of Consolidation:  The consolidated  financial statements include the
accounts  of  the  Company  and  its  wholly-owned  subsidiary,  the  Bank.  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation. The Company carries its investment in subsidiary at its equity in
the underlying net assets.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Securities:  Securities  are  classified as held to maturity  when  purchased if
management  has the  intent  and  ability to hold the  securities  to  maturity.
Held-to-maturity  securities  are  stated  at  amortized  cost.  Securities  not
classified as held to maturity or trading are  classified as available for sale.
Available-for-sale  securities  are stated at fair  value,  with the  unrealized
gains and losses,  net of tax, reported as a separate component of shareholders'
equity.

The amortized cost of securities classified as held to maturity or available for
sale is adjusted for  amortization of premiums and accretion of discounts.  Such
amortization and accretion is included in interest income from securities. Stock
dividends are also included in interest income from  securities.  Realized gains
and losses, as well as declines in value judged to be other than temporary,  are
included in net securities gains (losses).  The cost of securities sold is based
on the specific identification method.

Revenue  Recognition:  Interest on loans is accrued and  credited to  operations
based upon the principal amount outstanding. Generally, the accrual of income is
discontinued  when the full  collection of principal or interest is in doubt, or
when the payment of principal or interest has become  contractually 90 days past
due unless the obligation is both well secured and in the process of collection.
The Company  recognizes  loan  origination and commitment fees in the period the
loan or  commitment  is granted to reflect  reimbursement  of the related  costs
associated  with  originating  those loans and  commitments.  This method is not
materially  different  from the results  which would be obtained had the Company
implemented   Statement  of  Financial   Accounting  Standards  (SFAS)  No.  91,
"Accounting for  Non-refundable  Fees and Costs  Associated with  Originating or
Acquiring Loans and Initial Direct Costs of Leases."

Allowance for Loan Losses: The allowance for loan losses is established  through
provisions for loan losses charged  against income.  Loans deemed  uncollectible
are charged against the allowance for loan losses, and any subsequent recoveries
are credited to the allowance.

                                       22

The  allowance  for loan  losses  related  to  loans  that  are  identified  for
evaluation  in  accordance  with SFAS No.  114,  "Accounting  by  Creditors  for
Impairment  of a Loan,"  which  was  amended  by SFAS No.  118,  "Accounting  by
Creditors for Impairment of a Loan - Income  Recognition  and  Disclosures,"  is
based on discounted cash flows using the loan's initial effective  interest rate
or fair value of the  collateral  for certain  collateral-dependent  loans.  The
allowance  for  loan  losses  is  maintained  at a level  believed  adequate  by
management  to  absorb  inherent  losses  in the  loan  portfolio.  Management's
determination of the allowance is based on an evaluation of the portfolio,  past
experience, current economic conditions, volume, growth, composition of the loan
portfolio, and other relevant factors. This evaluation is inherently subjective,
as it requires material estimates that may be susceptible to significant change.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated depreciation and amortization. Depreciation is computed primarily by
use  of  the  straight-line  method  for  furniture,  fixtures,  equipment,  and
premises.  Leasehold improvements are amortized over the period of the leases or
the estimated useful lives of the improvements, whichever is shorter.

Other Real  Estate:  Other real estate of $907 and $774 at December 31, 1998 and
1997,  respectively,  is included  in other  assets and  consists of  properties
acquired  through a  foreclosure  proceeding  or acceptance of a deed in lieu of
foreclosure.  These  properties  are carried at the lower of cost or fair market
less estimated selling costs.  Losses arising from the acquisition of properties
are charged against the allowance for loan losses. The net cost of holding other
real estate and losses (gains) on the sale of properties  totaled  ($26),  $150,
and $410 for the years ending December 31, 1998, 1997, and 1996, respectively.

Unamortized  Cost in  Excess of Fair  Value of Net  Assets  Acquired:  Goodwill,
included in other assets, represents unamortized cost in excess of fair value of
net assets acquired and is being amortized on the  straight-line  method over 13
to 15 years.  Goodwill  was  $5,357 and $5,886 at  December  31,  1998 and 1997,
respectively.  Total  amortization  of  intangible  assets was $602 for the year
ending December 31, 1998, and $566 for the year ending December 31, 1997.

Mortgage   Servicing   Rights:   The   Company    capitalizes    purchased   and
internally-originated  mortgage  servicing rights based on the fair value of the
mortgage  servicing rights relative to the loan as a whole.  Mortgage  servicing
rights are  amortized in  proportion  to, and over the period of  estimated  net
servicing  income.  The fair value of mortgage  servicing  rights is  determined
using  assumptions that market  participants  would use in estimating future net
servicing  income.  Mortgage  servicing  rights  are  stratified  by  loan  type
(government  or  conventional)  and  interest  rate for  purposes  of  measuring
impairment on a quarterly  basis. An impairment loss is recognized to the extent
by which the unamortized  capitalized mortgage servicing rights for each stratum
exceeds the current fair value.

Income Taxes:  Income taxes are accounted for under the liability method.  Under
this  method,  deferred  tax  assets and  liabilities  are  determined  based on
differences  between financial reporting and tax bases of assets and liabilities
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the  differences  are expected to reverse.  The Company and its  subsidiary
file a  consolidated  federal  income tax return.  The Bank  provides for income
taxes on a separate-return basis and remits to the Company amounts determined to
be currently payable.

Earnings  Per Share:  Basic and  diluted  earnings  per share is  calculated  in
accordance  with SFAS No. 128,  "Earnings  Per Share."  All  earnings  per share
amounts for all periods have been  presented to conform to the  requirements  of
SFAS No. 128.

                                      23

Statements of Cash Flows:  Cash equivalents  include cash and due from banks and
federal funds sold. Generally,  federal funds are purchased and sold for one-day
periods.  During  1998,  1997,  and 1996,  cash paid for  interest  was $35,735,
$31,349, and $27,951,  respectively.  During 1998, 1997, and 1996, cash paid for
income taxes was $5,187, $5,091, and $3,245, respectively.

Impact of Recently  Issued  Accounting  Standards:  In June 1998,  the Financial
Accounting  Standards  Board (FASB)  issued  Statement  of Financial  Accounting
Standards  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities,"  which is required to be adopted in years  beginning after June 15,
1999.  Because the Company does not currently use  derivatives  or intend to use
derivatives,  the adoption of this Statement will not have an impact on earnings
or the financial position of the Company.

Note B - Mergers and Acquisitions

On December  14,  1998,  the Company  entered  into an  agreement  to merge with
Inter-City  Federal  Bank  for  Savings   (Inter-City)  located  in  Louisville,
Mississippi.  On December  31,  1998,  total  assets,  loans,  and  deposits for
Inter-City totaled $44,368, $34,890, and $38,530,  respectively. The transaction
is expected to be accounted  for as a pooling of interests.  The exchange  ratio
will be 2.78 shares of the Company for each share of  Inter-City  (approximately
347,405 shares). The transaction is expected to be consummated in March 1999.

Effective October 1997, the Company purchased  approximately $11,036 of selected
assets and assumed  approximately $15,232 of deposit liabilities from one branch
office of Magnolia  Federal  Bank for Savings  located in Grenada,  Mississippi.
Goodwill  of   approximately   $2,123  was  recorded  in  connection  with  this
acquisition.

Note C - Disclosures About Fair Value of Financial Instruments

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash And Due From  Banks:  The  carrying  amount  reported  in the  consolidated
balance sheet for cash and due from banks approximates fair value.

Federal Funds Sold: The carrying  amount  reported in the  consolidated  balance
sheet for federal funds sold approximates fair value.

Interest-Bearing  Balances  With  Banks:  The  carrying  amount  reported in the
consolidated balance sheet for interest-bearing balances with banks approximates
fair value.

Securities:  Fair values for securities are based on quoted market prices, where
available.  If quoted market prices are not available,  fair values are based on
quoted market prices of comparable instruments.

Loans: For variable-rate  loans that reprice  frequently and with no significant
change in credit risk, fair values are based on carrying values. Fixed-rate loan
fair values, including mortgages,  commercial,  agricultural, and consumer loans
are  estimated  using a discounted  cash flow analysis  based on interest  rates
currently  being  offered for loans with  similar  terms to borrowers of similar
credit quality.

                                       24

Deposits:  The fair values disclosed for demand deposits,  both interest-bearing
and  noninterest-bearing,  are, by  definition,  equal to the amount  payable on
demand at the reporting  date.  The fair values of  certificates  of deposit and
individual  retirement accounts are estimated by discounting cash flows based on
currently effective interest rates for similar types of accounts.

Treasury  Tax And Loan  Note  Account:  The  carrying  amounts  reported  in the
consolidated balance sheet approximate the fair value.

Borrowings:  The fair value was determined by  discounting  cash flows using the
current market rate.

Off-Balance Sheet: Off-balance-sheet items are primarily short-term commitments,
often at variable rates which are tied to prime.

                                                        December 31
                                     ------------------------------------------------- 
                                              1998                      1997
                                     ----------------------    -----------------------
                                     Carrying       Fair        Carrying       Fair
                                      Amount        Value        Amount        Value
                                     ---------    ---------    ---------     ---------
                                                                      
Financial assets
 Cash and due from banks ..........  $  31,944    $  31,944    $  32,932     $  32,932
 Federal funds sold ...............                                6,000         6,000
 Interest-bearing balances
          with banks ..............        433          433       14,973        14,973
 Securities .......................    291,067      292,759      248,631       249,294
 Loans net of unearned income .....    694,283      700,074      627,946       629,981
          Allowance for loan losses     (9,620)      (9,620)      (9,104)       (9,104)
                                       -------      -------      -------       -------
 Net loans ........................    684,663      690,454      618,842       620,877

Financial liabilities
 Deposits .........................    921,686      923,648      834,914       834,438
 Treasury tax and loan note account      2,455        2,455        6,101         6,101
 Borrowings .......................     19,567       19,745       18,454        18,447

Note D - Restrictions on Cash and Due From Banks

The Bank is required  to  maintain  average  reserve  balances  with the Federal
Reserve Bank. The average amounts of those balances for the years ended December
31, 1998 and 1997, were approximately $13,618 and $12,953, respectively.

                                       25

Note E - Securities

The amortized cost and estimated fair values of securities  held to maturity and
available for sale at December 31, 1998, are as follows:

                                                        Securities Held to Maturity
                                     -------------------------------------------------------------
                                     Amortized  Gross Unrealized   Gross Unrealized    Estimated
                                       Cost          Gains             Losses        Market Values
                                     ---------  ----------------  -----------------  -------------
                                                                              
Obligations of states and
         political subdivisions..... $  76,893      $   1,855         $    (163)        $  78,585
                                     =========      =========         =========         =========

                                                        Securities Available For Sale
                                     -------------------------------------------------------------
                                     Amortized  Gross Unrealized   Gross Unrealized    Estimated
                                       Cost          Gains             Losses        Market Values
                                     ---------  ----------------  -----------------  -------------
U.S. Treasury securities ........... $  54,397      $     432         $                 $  54,829
Obligations of other U.S. Government
         agencies and corporations .    50,600            378               (10)           50,968
Mortgage-backed securities .........   104,788            675              (150)          105,313
Preferred stock ....................     3,064                                              3,064
                                       -------        -------           -------           -------
                                     $ 212,849      $   1,485         $    (160)        $ 214,174
                                     =========      =========         =========         =========

The amortized  cost and estimated  market values of securities  held to maturity
and available for sale at December 31, 1997, are as follows:

                                                        Securities Held to Maturity
                                     -------------------------------------------------------------
                                     Amortized  Gross Unrealized   Gross Unrealized    Estimated
                                       Cost          Gains             Losses        Market Values
                                     ---------  ----------------  -----------------  -------------
                                                                              
Obligations of states and
         political subdivisions..... $  59,893      $     986         $    (323)        $  60,556
                                     =========      =========         =========         =========

                                                        Securities Available For Sale
                                     -------------------------------------------------------------
                                     Amortized  Gross Unrealized   Gross Unrealized    Estimated
                                       Cost          Gains             Losses        Market Values
                                     ---------  ----------------  -----------------  -------------
U.S. Treasury securities ........... $  70,634      $     352         $     (11)        $  70,975
Obligations of other U.S. Government
         agencies and corporations .    40,049            116               (36)           40,129
Mortgage-backed securities .........    74,266            572               (91)           74,747
Preferred stock ....................     2,887                                              2,887
                                       -------        -------           -------           -------
                                     $ 187,836      $   1,040         $    (138)        $ 188,738
                                     =========      =========         =========         =========

                                       26

The amortized cost and estimated market value of securities held to maturity and
available  for sale at December 31, 1998,  by  contractual  maturity,  are shown
below.  Expected  maturities  will differ from  contractual  maturities  because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.

                                                       Estimated
                                          Amortized      Market
Securities Held to Maturity                  Cost        Value   
- ---------------------------               ---------    --------- 
Due in one year or less ................. $   3,179    $   3,201
Due after one year through five years ...    14,668       15,029
Due after five years through ten years ..    41,941       43,094
Due after ten years .....................    17,105       17,261
                                            -------      ------- 
                                          $  76,893    $  78,585
                                          =========    =========

                                                       Estimated
                                          Amortized      Market
Securities Available for Sale                Cost        Value
- -----------------------------             ---------    ---------
Due in one year or less ................. $  47,377    $  47,693
Due after one year through five years ...    35,635       35,938
Due after five years through ten years ..    21,985       22,166
                                            -------      -------
                                            104,997      105,797
Mortgage-backed securities ..............   104,788      105,313
Preferred stock .........................     3,064        3,064
                                            -------      -------
                                          $ 212,849    $ 214,174
                                          =========    =========    

At  December  31,  1998  and  1997,   securities   with  an  amortized  cost  of
approximately  $167,208  and  $157,285,  respectively,  were  pledged  to secure
government, public, and trust deposits.

Note F - Deposits

Deposit accounts are summarized as follows:
                                                 December 31
                                            ------------------- 
                                               1998      1997
                                            -------------------
Noninterest-bearing ......................  $149,433   $120,829
Interest-bearing DDA .....................    71,242     70,907
Savings accounts .........................    44,501     44,770
Money Market accounts ....................   194,837    139,584
Certificates of deposit exceeding $100,000   123,915    106,952
Other time deposits ......................   337,758    351,872
                                             -------    -------
         Total ...........................  $921,686   $834,914
                                            ========   ========

At December 31, 1998, the approximate  scheduled maturities of time deposits are
as follows:
                                          (In Thousands)
         1999 ............................ $   350,169
         2000 ............................      74,780
         2001 ............................      18,661
         2002 ............................      10,810
         2003 and thereafter .............       7,253
                                             ---------
         Total ........................... $   461,673
                                           ===========

                                       27

Note G - Borrowings

Borrowings  primarily  consist of balances  due to the Federal Home Loan Bank of
$17,067 and $18,452 at December 31, 1998 and 1997, respectively.

During  1998,  the Company  obtained  from the Federal Home Loan Bank an advance
totaling  $1,000,  with an interest rate of 6.03% and a maturity date of June 2,
2008. During 1997, the Company obtained four advances from the Federal Home Loan
Bank totaling $9,400.  These advances were $5,000,  $400, $500, and $3,500, with
interest rates of 6.44%, 6.44%, 6.34%, and 6.46%,  respectively.  Maturity dates
are  February 1, 2007,  August 3, 2009,  November 1, 2007,  and January 1, 2018,
respectively. All advances are secured by one-to-four family first mortgages.

Future minimum  payments,  by year and in the aggregate,  related to the Federal
Home Loan Bank  advances  with initial or  remaining  terms of one year or more,
consisted of the following at December 31, 1998:

         1999 ......................... $  2,247
         2000 .........................    1,502
         2001 .........................    4,422
         2002 .........................    3,553
         2003 .........................      563
         Thereafter ...................    4,780
                                         -------
         Total ........................ $ 17,067
                                        ========

Note H - Loans to Related Parties

Certain Bank executive officers and directors and their associates are customers
of  and  have  other  transactions  with  the  Bank.  Related  party  loans  and
commitments are made on substantially the same terms,  including  interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than a normal risk of  collectibility.
The  aggregate  dollar  amount of these loans was $10,551 and $2,807 at December
31, 1998 and 1997, respectively. During 1998, $14,854 of new loans were made and
payments  received  totaled $7,110.  Total deposits for these related parties at
December 31, 1998, were approximately $2,675.

Note I - Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

                                                    Year Ended December 31
                                                ------------------------------  
                                                  1998       1997       1996  
                                                --------   --------   --------
                                                                     
Balance at beginning of year .................. $ 9,104    $ 9,309    $ 8,815
Charge-offs ...................................  (2,514)    (3,043)    (2,593)
Recoveries ....................................     467        558        274
                                                 ------     ------     ------
         Net Charge-offs ......................  (2,047)    (2,485)    (2,319)
Provision for loan losses .....................   2,563      2,280      2,813
                                                 ------     ------     ------
                         Balance at End of Year $ 9,620    $ 9,104    $ 9,309
                                                =======    =======    ======= 

                                       28

Impaired  loans  recognized in conformity  with SFAS No. 114, as amended by SFAS
No. 118, were as follows:

                                                    Year Ended December 31
                                                ------------------------------
                                                  1998       1997       1996
                                                --------   --------   --------
Impaired loans with a related
   allowance for loan losses .................. $ 3,212    $ 2,486    $ 2,946
Impaired loans without a specific
   allowance for loan losses ..................   1,061        891      1,057
                                                  -----      -----      ----- 
Total impaired loans .......................... $ 4,273    $ 3,377    $ 4,003
                                                =======    =======    =======  
Specific allowance for loan losses
   for impaired loans ......................... $ 1,127    $   778    $   734
Average recorded investment in impaired loans . $ 3,825    $ 3,690    $ 3,439

Interest income recognized using the
   accrual basis of income recognition ........ $   340    $   237    $   336
Interest income recognized using the
   cash basis of income recognition ...........      13         18         70
                                                  -----      -----      -----
         Total interest income recognized
         on impaired loans .................... $   353    $   255    $   406
                                                =======    =======    =======  

Note J - Nonaccrual and Past Due Loans

Nonaccrual and past due loans were as follows:
                                                     December 31
                                                 --------------------
                                                   1998        1997
                                                 --------    --------
Nonaccrual loans outstanding ................... $    204    $  1,070
Accruing loans past due 90 days
   or more outstanding .........................    3,249       3,466

At December 31, 1998 and 1997, there were no significant commitments to lend any
of these debtors additional funds.

Note K - Premises and Equipment

Premises and equipment accounts are summarized as follows:

                                                     December 31
                                                 -------------------- 
                                                   1998        1997
                                                 --------    --------
    Land ....................................... $  5,662    $  5,185
    Premises ...................................   21,898      19,423
    Equipment, furniture, and fixtures .........   16,231      13,880
    Construction in progress ...................      666       1,009
                                                  -------     ------- 
                                                   44,457      39,497

    Accumulated depreciation and amortization ..  (18,101)    (16,004)
                                                  -------     -------
                                                 $ 26,356    $ 23,493
                                                 ========    ======== 
    Depreciation expense ....................... $  1,991    $  1,768
                                                 ========    ========

                                       29

Note L - Income Taxes

Deferred income taxes, included in other assets,  reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial  reporting  purposes and the amounts used for income tax purposes.  No
valuation allowance was recognized as the deferred tax assets were determined to
be  realizable in future years.  This  determination  was based on the Company's
earnings  history  with no  basis  for  believing  future  performance  will not
continue to follow the same  pattern.  Significant  components  of the Company's
deferred tax assets and  liabilities  as of December  31, 1998 and 1997,  are as
follows:
                                                      (In Thousands)
                                                 ----------------------
                                                    1998         1997
                                                 ----------------------
    Deferred tax assets
       Allowance for loan losses ............... $   3,588    $   3,396
       Deferred compensation ...................     1,415        1,298
       Other ...................................       449          267
                                                    ------       ------
          Total deferred tax assets ............     5,452        4,961
                                                    ------       ------
    Deferred tax liabilities
       Depreciation ............................     1,254        1,245
       Net unrealized gains on securities    
          available for sale ...................       495          337
       Other ...................................       852          793
                                                    ------       ------
          Total deferred tax liabilities .......     2,601        2,375
                                                    ------       ------ 
          Net deferred tax assets at end of year $   2,851    $   2,586
                                                 =========    =========     

Significant  components  of the  provision  for income taxes  (benefits)  are as
follows:

                                             1998       1997       1996
Allocated to net income:                   -------    -------    ------- 
  Current
     Federal ............................. $ 4,485    $ 4,311    $ 3,902
     State ...............................     449        420        329
                                            ------     ------     ------
                                             4,934      4,731      4,231
                                            ------     ------     ------
  Deferred
     Federal .............................    (368)      (210)      (155)
     State ...............................     (55)       (33)       (24)
                                            ------     ------     ------ 
                                              (423)      (243)      (179)
                                            ------     ------     ------ 
                                           $ 4,511    $ 4,488    $ 4,052
                                           =======    =======    =======

Allocated to other comprehensive income:
  Deferred
     Federal ............................. $   137    $   175    $  (473) 
     State ...............................      21         27        (74)
                                            ------     ------     ------ 
                                           $   158    $   202    $  (547)
                                           =======    =======    =======

                                       30

The  reconciliation  of income taxes  (benefits)  computed at the United  States
federal statutory tax rates to the provision for income taxes is:

                                               1998                  1997                  1996
                                        -------------------   -------------------   -------------------  
                                                                                  
Tax at U.S. statutory rate ............ $ 5,558       35.0%    $ 5,295      35.0%    $ 4,749      35.0%
   Tax-exempt interest income .........  (1,498)      (9.4%)    (1,201)     (7.9%)    (1,047)     (7.7%)
   State income tax, net of federal
      deduction .......................     255        1.6%        252       1.7%        199       1.5%
   Amortization of intangible assets ..      27        0.2%         58       0.4%         71       0.5%
   Dividends received deduction .......     (12)      (0.1%)       (11)     (0.1%)       (16)     (0.1%)
   Other items - net ..................     181        1.1%         95       0.6%         96       0.7%
                                         ------      ------     ------     ------     ------     ------  
                                        $ 4,511       28.4%    $ 4,488      29.7%    $ 4,052      29.9%
                                        =======      ======    =======     ======    =======     ======

Note M - Restrictions on Bank Dividends, Loans, or Advances

Certain  restrictions  exist regarding the ability of the Bank to transfer funds
to the Company in the form of cash dividends,  loans, or advances.  The approval
of the Mississippi  Department of Banking and Consumer Finance is required prior
to the Bank paying  dividends,  which are limited to earned surplus in excess of
three times the Bank's  capital stock.  At December 31, 1998,  the  unrestricted
surplus was approximately $88,615.

Federal  Reserve  regulations  also  limit the  amount  the Bank may loan to the
Company  unless  such loans are  collateralized  by  specified  obligations.  At
December 31, 1998,  the maximum  amount  available for transfer from the Bank to
the Company in the form of loans was 11% of consolidated net assets.  There were
no loans outstanding from the Bank to the Company at December 31, 1998.

Note N - Employee Benefit Plans

The Company and its Bank sponsor a defined benefit noncontributory pension plan,
The Peoples Bank & Trust Company  Amended and Restated  Pension Plan (the Plan),
generally covering all full-time employees  completing a minimum of one thousand
hours of  service  during a twelve  month  period.  The plan was not open to new
participants  after  December  31,  1996.  Effective  August 1,  1996,  an early
retirement window was implemented.  Effective  December 31, 1996, future benefit
accruals  were  eliminated,  and the benefits  were frozen as of that date.  The
curtailment and early retirement  window were accounted for under the provisions
of SFAS No. 88,  "Employers'  Accounting for  Settlements  and  Curtailments  of
Defined  Benefit  Pension  Plans  and  for  Termination  Benefits."  The  normal
retirement  benefit,  one-twelfth of which is payable  monthly for life with 120
payments  guaranteed,  is determined as the sum of (A) 1.4% of average earnings,
plus (B) 0.6% of average earnings in excess of covered  compensation,  times (C)
years of service at retirement  limited to 25, and  compensation in both (A) and
(B) are limited by Section 401 (a) (17) of the Internal Revenue Code as amended.

The  Company's  funding  policy is to  contribute  annually an amount that is at
least  equal  to the  minimum  amount  determined  by  consulting  actuaries  in
accordance with the Employee  Retirement Income Security Act of 1974. There were
significant  matters  affecting  comparability  of net periodic pension cost and
other information for the year ended December 31, 1996. The SFAS No. 88 cost for
the early  retirement  window was $452.  The  curtailment  reduced the projected
benefit obligation by $3,539. All unrecognized gain/loss, transition assets, and
prior service cost were  recognized.  The SFAS No. 88 impact for the curtailment
was an increase to income of $729 in 1996.

                                    31

Net periodic post retirement  benefit cost was also affected by changes made for
the  year  ended  December  31,  1996.  A  curtailment   resulted  from  special
termination benefits offered in 1996, in the form of an early retirement window,
to  employees  who would  attain a certain  age and number of  service  years by
December 31, 1996. The effect of the curtailment  decreased the unrecognized net
gain by $57 and resulted in special termination benefits expense of $44.

The Company also provides  certain  health care and/or life insurance to retired
employees.  Substantially all of the Company's employees may become eligible for
these  benefits if they reach normal or early  retirement  while working for the
Company.  The Company pays one-half of the health insurance  premium.  Up to age
70, each retired employee receives life insurance  coverage paid entirely by the
Company.  The Company has accounted for its obligation related to these plans in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions."

The Company has limited its liability for the rate of increase in the per capita
cost of covered  benefits  (i.e.,  health  care cost trend rate ) to the rate of
inflation assumed to be 4% each year. The health care cost trend rate assumption
has little effect on the amounts reported. For example, increasing or decreasing
the assumed  health care cost trend rates by one  percentage  point in each year
would not increase or decrease the accumulated postretirement benefit obligation
nor the service and interest  cost  components  of net  periodic  postretirement
benefit cost as of December 31, 1998, and for the year then ended.

The  following  table  sets forth the  required  disclosures.  Pension  Benefits
represents  the pension plan offered by the Bank and Other  Benefits  represents
the  postretirement  medical  plan.  There  is  no  additional  minimum  pension
liability required to be recognized.

                                                     Pension Benefits         Other Benefits
                                                    -------------------     -------------------
                                                      1998       1997         1998       1997
                                                    --------   --------     --------   --------
                                                                           
Change in benefit obligation
  Benefit obligation at beginning of year ......... $ 11,237   $  9,600     $    442   $    423
  Service cost ....................................                               27         25
  Interest cost ...................................      820        789           31         32
  Plan participants' contributions ................                               29         28 
  Actuarial gain (loss) ...........................      914      1,368           65         (4) 
  Benefits paid ...................................     (554)      (520)        (139)       (62)
                                                      ------     ------       ------     ------ 
  Benefit obligation at end of year ............... $ 12,417   $ 11,237     $    455   $    442  
                                                    ========   ========     ========   ======== 
Change in plan assets
  Fair value of plan assets at beginning of year .. $ 12,096   $ 10,947
  Actual return on plan assets ....................    1,473      1,669 
  Benefits paid ...................................     (554)      (520)
                                                      ------     ------                            
  Fair value of plan assets at end of year ........ $ 13,015   $ 12,096
                                                    ========   ======== 

  Funded (underfunded) status ..................... $    598   $    859     $   (455)  $   (442)  
  Unrecognized net actuarial (gain) loss ..........      568        178           34        (32)
  Unamortized prior service cost ..................      320        349
                                                      ------     ------       ------     ------  
  Prepaid (accrued) benefit cost .................. $  1,486   $  1,386     $   (421)  $   (474)  
                                                    ========   ========     ========   ======== 
Weighted-average assumptions
    as of December 31
  Discount rate ...................................      7.0%       7.5%         7.0%       7.5%
  Expected return on plan assets ..................      8.0%       8.0%         N/A        N/A
  Actual return on plan assets ....................     11.7%      14.5%         N/A        N/A 

                                       32

                                             Pension Benefits               Other Benefits
                                         ------------------------      ------------------------
                                          Year Ended December 31        Year Ended December 31
                                          1998     1997     1996        1998     1997     1996
                                         ------   ------   ------      ------   ------   ------
                                                                       
Components of net periodic 
    benefit cost (income)
  Service cost ......................... $        $        $  543      $   27   $   25   $   23
  Interest cost ........................    820      789      918          31       32       25  
  Expected return on plan assets .......   (950)    (859)    (842) 
  Prior service cost recognized ........     30       30
  Special termination benefits cost ....                                                     44
                                          -----    -----    -----       -----    -----    -----
  Net periodic benefit cost (income) ... $ (100)  $  (40)  $  619      $   58   $   57   $   92
                                         ======   ======   ======      ======   ======   ======       

Effective January 1, 1997, the Company adopted two defined contribution plans: a
money purchase  pension plan and a 401(k) plan. The money purchase  pension plan
is a  noncontributory  pension plan. The Company  contributes 5% of compensation
for each participant  annually into this plan. The Company  contributed $738 and
$651 to the money  purchase  pension  plan in 1998 and 1997,  respectively.  The
401(k)  plan is a  contributory  plan.  Employees  may  contribute  up to 10% of
pre-tax  earnings  into this plan.  In  addition,  the  Company  provides  for a
matching  contribution  up to 3% of  compensation  for  each  employee  who  has
attained age 21 and  completes a year of service and is employed on the last day
of the plan year.  The  Company's  costs  related to the 401(k) plan in 1998 and
1997, were $381 and $369, respectively.

The Company and its  subsidiary  also sponsor an employee  stock  ownership plan
covering  substantially all full-time employees who are 21 years of age and have
completed one year of employment.  Contributions  are determined by the Board of
Directors  and may be paid in either cash or the Company's  common stock.  Total
contributions  to the Plan charged to operating  expenses were $300,  $100,  and
$325 in 1998, 1997, and 1996, respectively.

Note O - Other Noninterest Expenses

Components of other noninterest  expenses which exceed 1% of total revenues were
as follows:
                                        1998       1997       1996
                                      -------    -------    ------- 
 Noninterest Expense
    Computer processing cost ........ $ 3,296    $ 2,740    $ 2,388
    FDIC/state banking assessments ..                           786
    Stationery and supplies .........   1,696

Note P - Segment Reporting

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and  Related  Information,"  which  establishes  standards  for  the
reporting of financial information from operating segments in annual and interim
financial  statements.  SFAS No. 131  requires  that  financial  information  be
reported on the same basis that it is reported internally for evaluating segment
performance and allocating resources to segments. Because SFAS No. 131 addresses
how  supplemental  financial  information  is  disclosed  in annual and  interim
reports,  its  adoption  in 1998 had no impact  on the  financial  condition  or
operating results of the Company.

The Peoples  Holding Company has defined two reportable  segments:  branches and
specialized products. Branches offer commercial, consumer, and mortgage loans as
well as a full range of deposit services.  Specialized products include leasing,
student loans, credit cards, accounts receivable factoring,  trust services, and
financial investment alternatives.
                                       33

The Company evaluates  performance based on profit or loss from operations.  The
reportable segments do not receive any allocations for income taxes or gains and
losses from security sales. The accounting  policies of the reportable  segments
are the  same as  those  described  in the  summary  of  significant  accounting
policies.

Intersegment  transfers are recorded at cost; there is no intercompany profit or
loss on these transfers. There are no intercompany receivables.

Branches are defined as a reportable segment because, while they offer a variety
of products,  they offer the same set of products, use the same delivery system,
and are evaluated by the same set of standards. Specialized products are grouped
together,  not  because of  similarities  in the  products,  but  because of the
delivery  system which is largely  marketed  through  branch  referrals  and the
immateriality  of  the  revenue  generated  by  each  division  separately.  The
similarity in these is that they are all specialized financial services products
which must be supported by experts.

Year ended December 31, 1998       Branches   Specialized Products   All Other        Total
                                  ---------   --------------------   ---------     -----------
                                                                       
Net interest income ............. $  38,700        $   3,519         $      51     $    42,270    
Provision for loan losses .......     1,679              714               170           2,563
                                    -------          -------           -------         -------
Net interest income after 
  provision for loan losses .....    37,021            2,805              (119)         39,707

Noninterest income ..............     9,801            4,233               264          14,298  
Noninterest expense .............    23,618            5,275             9,233          38,126
                                    -------          -------           -------         -------
Income before income taxes ......    23,204            1,763            (9,088)         15,879
Income taxes ....................                                        4,511           4,511
                                    -------          -------           -------         -------    
Net income ...................... $  23,204        $   1,763         $ (13,599)    $    11,368
                                  =========        =========         =========     =========== 
Intersegment revenue (expense) .. $     517        $    (517)        $             $
                                  =========        =========         =========     ===========    
Segment assets .................. $ 851,218        $  91,385         $ 120,762     $ 1,063,365 
                                  =========        =========         =========     ===========

Year ended December 31, 1997       Branches   Specialized Products   All Other        Total
                                  ---------   --------------------   ---------     -----------
                                                                       
Net interest income ............. $  36,976        $   3,372         $      49     $    40,397    
Provision for loan losses .......     1,799              375               106           2,280
                                    -------          -------           -------         -------
Net interest income after 
  provision for loan losses .....    35,177            2,997               (57)         38,117

Noninterest income ..............     9,323            2,590               107          12,020  
Noninterest expense .............    22,091            4,948             7,970          35,009
                                    -------          -------           -------         -------
Income before income taxes ......    22,409              639            (7,920)         15,128
Income taxes ....................                                        4,488           4,488
                                    -------          -------           -------         -------    
Net income ...................... $  22,409        $     639         $ (12,408)    $    10,640
                                  =========        =========         =========     =========== 
Intersegment revenue (expense) .. $     629        $    (629)        $             $
                                  =========        =========         =========     ===========    
Segment assets .................. $ 773,090        $  77,723         $ 120,242     $   971,055 
                                  =========        =========         =========     ===========

                                  34

Year ended December 31, 1996       Branches   Specialized Products   All Other        Total
                                  ---------   --------------------   ---------     -----------
                                                                       
Net interest income ............. $  35,180        $   2,958         $      43     $    38,181    
Provision for loan losses .......     2,345              330               138           2,813
                                    -------          -------           -------         -------
Net interest income after 
  provision for loan losses .....    32,835            2,628               (95)         35,368

Noninterest income ..............     8,051            2,789               190          11,030  
Noninterest expense .............    21,057            4,047             7,726          32,830
                                    -------          -------           -------         -------
Income before income taxes ......    19,829            1,370            (7,631)         13,568
Income taxes ....................                                        4,052           4,052
                                    -------          -------           -------         -------    
Net income ...................... $  19,829        $   1,370         $ (11,683)    $     9,516
                                  =========        =========         =========     =========== 
Intersegment revenue (expense) .. $      51        $     (51)        $             $
                                  =========        =========         =========     ===========    
Segment assets .................. $ 732,434        $  54,772         $ 105,883     $   893,089 
                                  =========        =========         =========     ===========

Note Q - Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk

Loan  commitments  are made to accommodate  the financial needs of the Company's
customers.  Standby  letters of credit  commit the  Company to make  payments on
behalf of customers when certain specified future events occur.

Both  arrangements  have credit risk  essentially  the same as that  involved in
extending  loans to customers  and are subject to the  Company's  normal  credit
policies. Collateral (e.g., securities,  receivables,  inventory,  equipment) is
obtained based on management's credit assessment of the customer.

The Company's  unfunded  loan  commitments  (unfunded  loans and unused lines of
credit) and standby  letters of credit  outstanding  at December 31, 1998,  were
approximately  $198,449  and  $13,207,  respectively,  compared to $162,751  and
$11,703, respectively, at December 31, 1997.

Market risk resulting from interest rate changes on particular off-balance sheet
financial   instruments  may  be  offset  by  other  on-  or  off-balance  sheet
transactions.  Interest  rate  sensitivity  is  monitored  by  the  Company  for
determining the net effect of potential  changes in interest rates on the market
value of both on- or off-balance sheet financial instruments.

Note R - Regulatory Matters

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking agencies.  Failure to meet minimum capital  requirements can
initiate certain mandatory,  and possibly additional  discretionary,  actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the
Bank's  financial   statements.   Under  capital  adequacy  guidelines  and  the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  that involve  quantitative  measures of the Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  The Bank's capital amounts and  classification  are also
subject to  qualitative  judgments  by the  regulators  about  components,  risk
weightings, and other factors.

                                  35

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain minimum amounts and ratios.  All banks are required
to have  core  capital  (Tier  I) of at  least 4% of  risk-weighted  assets  (as
defined),  4% of  average  assets  (as  defined),  and  total  capital  of 8% of
risk-weighted assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 1998, the most recent  notification  from the Federal Deposit
Insurance  Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios  of 10%,  6%,  and 5%,  respectively.  There are no
conditions  or events since that  notification  that  management  believes  have
changed the institution's category.

The Bank's actual capital amounts and applicable ratios are as follows:

                                                   Actual
                                           ---------------------
                                            Amount         Ratio
                                           --------        -----  
         As of December 31, 1998
            Total Capital ................ $107,338        15.1%
              (to Risk Weighted Assets)
            Tier I Capital ............... $ 98,426        13.8%
              (to Risk Weighted Assets)
            Tier I Capital ............... $ 98,426         9.3%
              (to Average Assets)

         As of December 31, 1997
            Total Capital ................ $ 99,223        15.7%
              (to Risk Weighted Assets)
            Tier I Capital ............... $ 91,315        14.5%
              (to Risk Weighted Assets)
            Tier I Capital ............... $ 91,315         9.9%
              (to Average Assets)

Note S - The Peoples Holding Company (Parent Company Only)
Condensed Financial Information

Balance Sheets

                                                        December 31
                                                   --------------------
                                                     1998        1997
                                                   --------    --------
                                                         
Assets
  Cash* .......................................... $     42    $     59
  Dividends receivable* ..........................    1,110         859
  Investment in bank subsidiary* .................  105,133      98,243
                                                    -------     -------
     Total Assets ................................ $106,285    $ 99,161
                                                   ========    ========
Liabilities and Shareholders' Equity
  Dividends payable .............................. $  1,110    $    859
  Accrued interest payable and other liabilities .      116         151
  Shareholders' equity ...........................  105,059      98,151
                                                    -------     -------
     Total Liabilities and Shareholders' Equity .. $106,285    $ 99,161
                                                   ========    ========

                                  36

Statements of Income
                                            Year Ended December 31
                                          ------------------------- 
                                            1998     1997     1996
                                          -------  -------  ------- 
Income
  Dividends from bank subsidiary* ....... $ 4,863  $ 3,360  $ 3,050
  Other dividends .......................      51       46       41
  Other income ..........................                1
  Interest income from bank subsidiary* .                2        2
                                           ------   ------   ------
                                            4,914    3,409    3,093
Expenses
  Other .................................     256      251      177
                                           ------   ------   ------
Income before income tax credits and
  equity in undistributed net income of
  bank subsidiary .......................   4,658    3,158    2,916
Income tax credits ......................     (84)     (86)     (61)
                                           ------   ------   ------ 
                                            4,742    3,244    2,977
Equity in undistributed net
  income of bank subsidiary* ............   6,626    7,396    6,539
                                           ------   ------   ------
                           Net Income     $11,368  $10,640  $ 9,516
                                          =======  =======  ======= 

Statements of Cash Flows

                                                               Year Ended December 31
                                                            ----------------------------
                                                              1998      1997      1996
                                                            --------  --------  --------
                                                                        
Operating Activities
   Net income ............................................. $ 11,368  $ 10,640  $  9,516
   Adjustments to reconcile net income to net cash
    provided by operating activities:
      Equity in undistributed net income
        of bank subsidiary ................................   (6,626)   (7,396)   (6,539)

      Increase in dividends receivable ....................     (251)      (78)      (98)
      Increase in other liabilities .......................      216       159       105
                                                             -------   -------   -------  
      Net Cash Provided By Operating Activities ...........    4,707     3,325     2,984

Investing Activities
   Maturities (purchases) of certificates of deposit ......                 86        (5)
                                                             -------   -------   -------
      Net Cash Provided By (Used In) Investing Activities .                 86        (5)

Financing Activities
   Cash dividends .........................................   (4,184)   (3,360)   (2,950)
   Payment of fractional shares on stock dividend .........                (29)      (24)
   Purchase of treasury stock .............................     (540)
                                                             -------   -------   -------
      Net Cash Used In Financing Activities ...............   (4,724)   (3,389)   (2,974)
                                                             -------   -------   ------- 
      Increase In Cash ....................................      (17)       22         5
   Cash At Beginning Of Year ..............................       59        37        32
                                                             -------   -------   -------
      Cash At End Of Year ................................. $     42  $     59  $     37
                                                            ========  ========  ======== 

*Eliminated in consolidation.
                                       37

Note T - Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years ended December 31, 1998 and 1997:

                                                 Three Months Ended
                                       --------------------------------------
                                        Mar 31   June 30    Sept 30   Dec 31
                                       --------  --------  --------  --------
1998
                                                                  
Interest income ...................... $ 18,882  $ 19,349  $ 19,733  $ 19,949
Interest expense .....................    8,528     8,823     9,133     9,159
Net interest income ..................   10,354    10,526    10,600    10,790
Provision for loan losses ............      641       641       640       641
Noninterest income ...................    3,391     3,353     3,595     3,959
Noninterest expense ..................    9,085     9,488     9,451    10,102
Income before income taxes ...........    4,019     3,750     4,104     4,006
Income taxes .........................    1,165     1,035     1,170     1,141
Net income ...........................    2,854     2,715     2,934     2,865

Basic and diluted earnings per share . $    .49  $    .46  $    .50  $    .49

1997
                                                                  
Interest income ...................... $ 17,259  $ 17,908  $ 18,370  $ 18,664
Interest expense .....................    7,433     7,869     8,156     8,346
Net interest income ..................    9,826    10,039    10,214    10,318
Provision for loan losses ............      570       570       570       570
Noninterest income ...................    2,850     2,858     3,059     3,253
Noninterest expense ..................    8,352     8,626     9,099     8,932
Income before income taxes ...........    3,754     3,701     3,604     4,069
Income taxes .........................    1,153     1,071     1,057     1,207
Net income ...........................    2,601     2,630     2,547     2,862

Basic and diluted earnings per share . $    .44  $    .45  $    .44  $    .49

Note U - Contingent Liabilities

Various claims and lawsuits,  incidental to the ordinary course of business, are
pending  against the Company and the Bank. In the opinion of  management,  after
consultation with legal counsel,  resolution of these matters is not expected to
have a material effect on the consolidated financial statements.

                                       38

Report of Independent Auditors

Board of Directors and Shareholders
The Peoples Holding Company
Tupelo, Mississippi

We have  audited the  accompanying  consolidated  balance  sheets of The Peoples
Holding Company and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of The Peoples
Holding  Company  and  subsidiary  at  December  31,  1998  and  1997,  and  the
consolidated  results of their  operations  and cash flows for each of the three
years in the period ended  December  31,  1998,  in  conformity  with  generally
accepted accounting principles.

Memphis, Tennessee
January 22, 1999

                                     /s/ Ernst & Young LLP

                                       39

Selected Financial Information
(Not covered by Report of Independent Auditors)

                                            (In Thousands, Except Share Data)
                                   1998        1997        1996        1995        1994   
                                ----------  ----------  ----------  ----------  ----------   
For the year ended December 31

  Interest Income .............$   77,913   $  72,201   $  66,425   $  63,009   $  53,069
  Interest Expense ............    35,643      31,804      28,244      25,621      18,890
  Provision for Loan Losses ...     2,563       2,280       2,813       2,827       2,001
  Noninterest Income ..........    14,298      12,020      11,030      10,740       9,829
  Noninterest Expense .........    38,126      35,009      32,830      32,166      31,177 
  Income Before Taxes .........    15,879      15,128      13,568      13,135      10,830
  Income Taxes ................     4,511       4,488       4,052       3,931       2,621
  Net Income ..................    11,368      10,640       9,516       9,204       8,209

Per Common Share
  Net Income ..................$     1.94   $    1.82   $    1.62   $    1.57   $    1.40
  Book Value at December 31 ...     17.98       16.75       15.46       14.50       12.58       
  Market Value at December 31 .     32.25       35.67       24.50       19.55       15.55  
  Cash Dividends Declared
    and Paid ..................       .72         .57         .50         .46         .40 

Total at Year-End
  Loans, Net of
    Unearned Income ...........$  694,283   $ 627,946   $ 562,753   $ 522,314   $ 502,048
  Allowance for Loan Losses ...     9,620       9,104       9,309       8,815       8,183
  Securities ..................   291,067     248,631     246,110     214,219     210,148
  Assets ...................... 1,063,365     971,055     893,089     841,699     787,066
  Deposits ....................   921,686     834,914     772,842     739,545     696,280
  Borrowings ..................    19,567      18,454      11,175       4,313       4,650
  Shareholders' Equity ........   105,059      98,151      90,561      84,960      73,734

Selected Ratios
  Return on Average
    Total Assets ..............     1.11%       1.14%       1.10%       1.13%       1.05%
    Shareholders' Equity ......    11.08%      11.25%      10.88%      11.45%      11.24%    
  Average Shareholders' Equity  
    to Average Assets .........    10.00%      10.15%      10.07%       9.83%       9.34%  

    At December 31
    Shareholders' Equity
      to Assets ...............     9.88%      10.11%      10.14%      10.09%       9.37%  
    Tier 1 Leverage ...........     9.33%       9.86%       9.91%       9.67%       9.22%  
    Risk-Based Capital Ratios
      Tier 1 ..................    13.82%      14.46%      15.10%      14.87%      14.86%
      Total (8.00% Required) ..    15.07%      15.71%      16.35%      16.14%      16.12% 
    Allowance for Loan Losses
      to Total Loans ..........     1.39%       1.45%       1.65%       1.69%       1.63%  
    Allowance for Loan Losses
      to Nonperforming Loans ..   278.60%     200.71%     211.47%     257.00%     394.55%  
    Nonperforming Loans to
      Total Loans .............      .50%        .72%        .78%        .66%        .41%  
    Dividend Payout ...........    36.81%      31.58%      31.00%      29.07%      28.54%  

                                       40

Market Value of Stock by Quarters

The public  market for The  Peoples  Holding  Company  common  stock is limited.
Effective  August  18,  1997,  the stock  began  trading on the  American  Stock
Exchange  under the ticker symbol PHC.  Previously,  the stock was listed on the
National  Association of Securities Dealers Automated Quotations system (NASDAQ)
and was traded in the local over-the-counter market. High and low prices for the
first and second  quarter of 1997 are reflective of actual trades as reported in
the NASDAQ Stock Bulletin. High and low prices for the third and fourth quarters
of 1997 and all of 1998 are  reflective  of  actual  trades as  reported  by the
American  Stock  Exchange.  Dividends  per share  and  market  prices  have been
adjusted to reflect the fifty percent stock dividend issued in 1998. At December
31, 1998, there were approximately 2,635 shareholders of record.

                          DIVIDENDS        PRICES
         PERIOD           PER SHARE    LOW       HIGH
         ---------------- ---------  -------   -------
         1998
         1st Quarter .... $ .175     $ 36.00   $ 38.00
         2nd Quarter ....   .175       36.25     41.88
         3rd Quarter ....   .175       32.25     32.25
         4th Quarter ....   .190       32.00     32.31

         1997
         1st Quarter .... $ .133     $ 23.66   $ 26.00
         2nd Quarter ....   .147       23.83     26.67
         3rd Quarter ....   .147       25.67     28.67
         4th Quarter ....   .147       27.50     37.00

Management's Discussion and Analysis of
Financial Condition and Results of Operations
(In Thousands, Except Share Data)

Overview

The  Peoples  Holding  Company  (the  Company)  is a  one-bank  holding  company
incorporated  under the laws of the state of  Mississippi.  The  Peoples  Bank &
Trust  Company  (the  Bank)  was  incorporated  in  February  1904 and  became a
subsidiary  of the Company in 1983.  The Bank  operates  41 branches  located in
North and North Central Mississippi and is the sixth largest bank located in the
state.

The Company's banking subsidiary  provides a wide range of banking and financial
services to its  customers.  Those  include  lending  services  for  commercial,
consumer,  and real estate loans;  depository  services for  checking,  savings,
money market, IRA, and certificate of deposit accounts;  and fiduciary services.
The Bank  maintains  credit card  services and is the issuer of the  Mississippi
State  University,  the Delta  State  University,  and the State of  Mississippi
Department of Wildlife,  Fisheries & Parks affinity cards. In addition, the Bank
has a number of automated  teller  machines  located  throughout its market area
that provide  24-hour  banking  services  along with 24-hour  access to customer
account  information  through a voice response  system.  The Company also offers
annuities and mutual funds.

The purpose of this  discussion is to focus on important  factors  affecting the
Company's  financial  condition and results of operations.  Reference  should be
made to the consolidated  financial statements (including the notes thereto) and
the selected financial data in this report for an understanding of the following
discussion  and analysis.  All  per-share  data is restated to reflect all stock
dividends declared through December 31, 1997.

                                       41

The Company ended 1998 with assets totaling  $1,063,365,  up from the prior year
total of $971,055.  This  represented  a 9.5% growth  compared to 8.7% for 1997.
Earnings were up 6.8% from the previous year with net income surpassing $11,300.

On December  14,  1998,  the Company  entered  into an  agreement  to merge with
Inter-City  Federal  Bank  for  Savings   (Inter-City)  located  in  Louisville,
Mississippi.  On December  31,  1998,  total  assets,  loans,  and  deposits for
Inter-City totaled $44,368, $34,890, and $38,530,  respectively. The transaction
is expected to be accounted  for as a pooling of interests.  The exchange  ratio
will be 2.78 shares of the Company for each share of  Inter-City  (approximately
347,405 shares). The transaction is expected to be consummated in March 1999.

Effective  October 1997, the Company purchased  approximately  $11,036 of assets
and assumed  approximately $15,232 of deposit liabilities from one branch office
of Magnolia Federal Bank for Savings located in Grenada,  Mississippi.  Goodwill
of approximately $2,123 was recorded regarding the acquisition.

This Annual  Report To  Shareholders  may contain or  incorporate  by  reference
statements which may constitute "forward-looking  statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended,  and Section 21 of the
Securities Exchange Act of 1934, as amended. Prospective investors are cautioned
that  any  such  forward-looking   statements  are  not  guarantees  for  future
performance  and involve risks and  uncertainties,  and that actual  results may
differ materially from those  contemplated by such  forward-looking  statements.
Important  factors currently known to management that could cause actual results
to  differ  materially  from  those  in   forward-looking   statements   include
significant  fluctuations  in interest  rates,  inflation,  economic  recession,
significant  changes in the federal and state legal and regulatory  environment,
significant  underperformance  in the Company's  portfolio of outstanding loans,
and competition in the Company's  markets.  The Company undertakes no obligation
to update or revise  forward-looking  statements to reflect changed assumptions,
the occurrence of unanticipated  events or changes to future  operating  results
over time.

Financial Condition Review

The Company  emphasizes  the  importance  of employing a high  percentage of its
assets in an earning capacity.  Utilization of the Company's earning assets is a
major factor in generating profitability.

The Company employs the largest  portion of its earning assets in loans.  Loans,
net of  unearned  income,  comprised  65.3%  and  64.7% of the  total  assets at
December 31, 1998 and 1997, respectively. Overall loan growth in 1998 was 10.6%,
with the most  significant  percentage  growth  in real  estate-mortgage  loans,
commercial,  and  consumer.  The increase in real estate loans was mainly due to
the growth in the  residential  market and the favorable  rates being offered on
mortgages.  Total loans increased  11.6% during 1997, with the most  significant
growth in real estate-construction and real estate-mortgage loans.

                                       42

The table  below sets  forth  loans  outstanding,  according  to loan  type,  at
December 31:

                                  1998        1997        1996        1995        1994  
                               ---------   ---------   ---------   ---------   ---------
                                                                 
  Commercial, financial, and
     agricultural ............ $ 137,272   $ 120,412   $ 111,687   $ 107,558   $  98,767
  Real estate - construction .    25,562      24,365      20,651      16,851      18,189
  Real estate - mortgage .....   382,179     344,212     301,078     259,918     253,154
  Consumer ...................   158,096     148,472     137,704     149,218     143,948
  Unearned income ............    (8,826)     (9,515)     (8,367)    (11,231)    (12,010)
                                --------    --------    --------    --------    --------
     Total loans, net of
       unearned income ....... $ 694,283   $ 627,946   $ 562,753   $ 522,314   $ 502,048
                               =========   =========   =========   =========   =========

The  securities  portfolio  is used to provide  term  investments,  to provide a
source  of  meeting  liquidity  needs,  and to supply  securities  to be used in
collateralizing public funds. The types of securities purchased and the terms of
those   securities   depend  on  management's   assessment  of  future  economic
conditions.

The  securities  portfolio  increased  $42,436 or 17.1%,  at December  31, 1998,
compared to December 31,  1997.  The most  significant  increase was in mortgage
backed securities,  which increased 40.9%.  Investments in obligations of states
and political  subdivisions  accounted for the second  largest  change,  growing
$17,000 or 28.4%.  U. S. Treasury  securities  decreased  $16,146 or 22.8%.  The
change in the  composition  of the  portfolio  was largely  attributable  to the
widening of the spreads between U. S. Treasury  securities and other  investment
alternatives.

The securities portfolio was up $2,521 or 1.0% at December 31, 1997, compared to
December 31, 1996.  The most  significant  increase was in  obligations of other
U.S.  Government  agencies and  corporations,  which increased  59.4%. All other
investment  categories increased slightly with the exception of preferred stock,
which decreased 68.20%. The securities portfolio  represented 27.3% and 25.6% of
assets at December 31, 1998 and 1997, respectively.

Management continues to evaluate the Company's tax position in order to maximize
earnings  from  securities.  The Company was not in an  alternative  minimum tax
position during 1998 or 1997. Note E of the Notes to the Consolidated  Financial
Statements provides details of the securities portfolio.

Federal  funds  sold  and   interest-bearing   balances  with  banks  provide  a
significant  source of liquidity.  These funds  consist of  day-to-day  loans to
correspondent banks. Federal funds sold and interest-bearing balances with banks
totaled  $433 and  $20,973 at  December  31,  1998 and 1997,  respectively.  The
changes in these balances  between  periods are typical of  fluctuations  in the
availability of funds caused by changes in deposits, loans, and securities.

Nonearning assets include cash and due from banks,  premises and equipment,  and
other assets.  Cash and due from banks represented 3.0% and 3.4% of total assets
at December  31, 1998 and 1997,  respectively.  These  funds are  available  for
meeting  day-to-day cash requirements  inclusive of reserves required to be held
by the Federal Reserve Bank. The Company has been working toward  minimizing the
amount  of cash on hand by both  implementing  changes  allowed  by The  Federal
Reserve Bank regarding reserve requirements and the monitoring of cash needs for
the  branch  network.  The  balance  of cash and due from  banks  may  fluctuate
significantly based on bank activity.

                                       43

Net  premises  and  equipment  were $26,356 and $23,493 at December 31, 1998 and
1997,  respectively.  In a  continued  effort to upgrade  and improve the branch
facilities and technology, the Company invested $5,274 in building expansion and
equipment  during 1998.  Additionally in 1998, two new branches were constructed
in Tupelo in  strategic  locations  that  would  provide  better  service  to an
expanding  marketplace.  One of the  facilities  replaced a branch  located in a
grocery store.  Construction is in process on a new branch  facility  located in
Hernando.

In 1997,  the  Company  consolidated  two aging  branches  in  Grenada  to a new
facility,   consolidated  the  Water  Valley  branches  into  one  branch,   and
constructed a new branch in Aberdeen.  The consolidation and construction of new
branches were completed to improve services to the respective communities.

Other   assets  were  $28,902  and  $26,184  at  December  31,  1998  and  1997,
respectively.  The major  accounts  in this  category  are  interest  earned not
collected,  prepaid expenses,  intangible assets, deferred taxes, cash surrender
value of insurance,  and other real estate owned.  Interest earned not collected
at  December  31,  1998,  totaled  $10,061,  up from  $8,990 at the end of 1997.
Prepaid  expenses  were  $2,163  and  $1,833  at  December  31,  1998 and  1997,
respectively.

Intangible assets, resulting from bank acquisitions totaled $5,357 and $5,886 at
December 31, 1998 and 1997, respectively.  These intangibles are being amortized
over a period of 13 to 15 years.

Capitalized mortgage servicing rights totaled $877 and $462 at December 31, 1998
and 1997, respectively.  The increase corresponds to the increase in residential
mortgage loans.  Mortgage  servicing  rights are amortized in proportion to, and
over the period of, estimated net servicing income.

Cash surrender value of insurance equaled $5,411 and $4,593 at December 31, 1998
and 1997,  respectively.  The Company  maintains life insurance  policies on key
members of management and records the resulting cash surrender value.

The Company relies on deposits as its major source of funds. Noninterest-bearing
deposits were $149,433 and $120,829 at December 31, 1998 and 1997, respectively.
This represented  14.1% and 12.4% of total assets at December 31, 1998 and 1997,
respectively.  The  increase  of 23.7% for 1998 was the  result  of the  Company
implementing a more aggressive marketing and personal sales effort. During 1997,
the low growth of 1.9% was due to the depositors utilizing more interest-bearing
products.

Interest-bearing  deposits  were  $772,253 and $714,085 at December 31, 1998 and
1997,  respectively,   or  an  8.2%  increase  over  1997.  The  largest  growth
contributing to this increase came from  interest-bearing  transaction  accounts
and money market accounts. Those accounts accounted for approximately $38,000 of
the growth.  Interest-bearing  public funds increased from $23,911 to $43,368 or
81.4%.

Interest-bearing  deposits at December 31, 1997,  increased  9.2% over 1996. The
largest growth came from  interest-bearing  demand deposits and  certificates of
deposit exceeding $100,000.  In addition,  the Magnolia Federal Bank for Savings
branch office acquisition  accounted for an increase of approximately $15,232 in
1997.  The  remaining  growth in  interest-bearing  deposits was due to internal
growth.

The Company maintains a note account with the Federal Reserve Bank for which tax
deposits are accepted. The account is secured through pledging of securities. On
December  31,  1998,  the balance in the  treasury tax and loan note account was
$2,455,  down from $6,101 at the end of 1997. This account  fluctuates  based on
the amount of securities  pledged to secure the account and the  frequency  with
which the Federal Reserve Bank draws on those funds.

                                       44

During  1998,  the Company  received  advances  from the Federal  Home Loan Bank
(FHLB)  totaling  $1,000.  The balance due to the FHLB at December  31, 1998 and
1997 was $17,067 and  $18,452,  respectively.  These  advances are the result of
asset/liability  management  decisions  matching  certain  earning assets (first
mortgages and consumer  loans)  against these advances at positive rate spreads.
Note G of the Notes To Consolidated Financial Statements provides details of the
borrowings from the FHLB.

Other  liabilities  totaling  $14,598 and $13,435 at December 31, 1998 and 1997,
respectively,  include accrued interest payable, accrued expenses, current taxes
payable,  and dividends  payable.  Accrued  interest  payable totaled $4,810 and
$4,902 at December  31, 1998 and 1997,  respectively.  Accrued  retirement  plan
costs totaled $1,431 and $1,075 at December 31, 1998 and 1997, respectively.

Risk Management

The management of risk is an on-going  process.  Risks that are associated  with
the  Company  include,  but are not  limited  to,  credit,  interest  rate,  and
liquidity risks.

Credit Risk

Inherent  in any  lending  activity  is credit  risk,  that is, the risk of loss
should a borrower or trading counterparty  default. The Company's credit risk is
monitored  and  managed by a Loan  Committee  and a Loss  Management  Committee.
Credit quality and policies are major concerns of these committees.  The Company
tries to maintain diversification within its loan portfolio in order to minimize
the effect of economic conditions within a particular industry.

The allowance for loan losses is available to absorb  inherent  credit losses in
the entire loan portfolio.  The appropriate level of the allowance is based on a
quarterly  analysis  of  the  loan  portfolio  and  represents  an  amount  that
management  deems adequate to provide for inherent  losses,  including losses on
loans  assessed as impaired  under SFAS No. 114,  "Accounting  by Creditors  for
Impairment  of a Loan." The balance of these loans  determined  as impaired  and
their related  allowance is included in management's  estimation and analysis of
the allowance for loan losses. If the allowance is deemed inadequate, management
sets aside additional reserves by increasing the charges against income.

The  allowance  for loan losses was $9,620 and $9,104 at  December  31, 1998 and
1997,  respectively.  This  represents a ratio of allowance to year-end loans of
1.4% and 1.5%,  respectively.  Management  deems  this  allowance  adequate  for
inherent loan losses.

The  Company's  net  charge-offs  for 1998  and 1997  were  $2,047  and  $2,485,
respectively.  This  represented a net charge-offs to average loans ratio of .3%
and  .4% for  the  years  ending  December  31,  1998  and  1997,  respectively.
Management continues to monitor loans and utilize diligent collection efforts.

Nonperforming  loans are those on which the accrual of  interest  has stopped or
the loan is contractually past due 90 days. Generally,  the accrual of income is
discontinued  when the full  collection of principal or interest is in doubt, or
when the payment of principal or interest  has been  contractually  90 days past
due,  unless  the  obligation  is  both  well  secured  and  in the  process  of
collection.

                                       45

The table below  reflects the activity in the  allowance for loan losses for the
years ended December 31:

Allowance for Loan Losses

                                     1998        1997        1996        1995        1994  
                                  ---------   ---------   ---------   ---------   --------- 
                                                                             
Balance at Beginning of Year .... $   9,104   $   9,309   $   8,815   $   8,183   $   6,388

   Provision for Loan Losses ....     2,563       2,280       2,813       2,827       2,001

   Charge-Offs
     Commercial, Financial,
      and Agricultural ..........       433         248         273       1,286         174
     Real Estate - Construction .        34         228
     Real Estate - Mortgage .....       267         667         247          93         237
     Consumer ...................     1,780       1,900       2,073       1,059         684
                                    -------     -------     -------     -------     -------
   Total Charge-Offs ............     2,514       3,043       2,593       2,438       1,095

   Recoveries
     Commercial, Financial,
      and Agricultural ..........       142          73          54         101         562
     Real Estate - Construction .        11          68
     Real Estate - Mortgage .....        88         197          49           6         149
     Consumer ...................       226         220         171         136         178
                                    -------     -------     -------     -------     -------
   Total Recoveries .............       467         558         274         243         889
                                    -------     -------     -------     -------     -------
   Net Charge-Offs ..............     2,047       2,485       2,319       2,195         206
                                    -------     -------     -------     -------     ------- 
Balance at End of Year .......... $   9,620   $   9,104   $   9,309   $   8,815   $   8,183
                                  =========   =========   =========   =========   =========
Loan Loss Analysis
   Loans - Average .............. $ 646,709   $ 589,557   $ 533,548   $ 516,784   $ 466,137
   Loans - Year End .............   694,283     627,946     562,753     522,314     502,048
   Net Charge-offs ..............     2,047       2,485       2,319       2,195         206
   Allowance for Loan Losses ....     9,620       9,104       9,309       8,815       8,183

Ratios
   Net Charge-offs to
     Loans - Average ............      .32%        .42%        .43%        .42%        .04%  
     Allowance for Loan Losses ..    21.28%      27.30%      24.91%      24.89%       2.52% 

   Allowance for Loan Losses to
     Loans - Year End ...........     1.39%       1.45%       1.65%       1.69%       1.63%  
     Nonperforming Loans ........   278.60%     200.71%     211.47%     257.00%     394.55% 

   Nonperforming Loans to
     Loans - Year End ...........      .50%        .72%        .78%        .66%        .41%  
     Loans - Average ............      .53%        .77%        .83%        .66%        .44%  

                                       46

The following table shows the principal  amounts of nonaccrual and  restructured
loans at December 31:

                                     1998        1997        1996        1995        1994  
                                  ---------   ---------   ---------   ---------   ---------  
                                                                     
Nonperforming Loans
   Nonaccruing .................. $     204   $   1,070   $   1,655   $     803   $     877
   Accruing Loans Past Due
     90 Days Or More ............     3,249       3,466       2,747       2,627       1,197
                                    -------     -------     -------     -------     -------
   Total Nonperforming
     Loans ......................     3,453       4,536       4,402       3,430       2,074

   Restructured Loans
     Balance Outstanding ........       178         203         224         243         260
                                    -------     -------     -------     -------     -------
Total Nonperforming Loans
   Including Restructured ....... $   3,631   $   4,739   $   4,626   $   3,673   $   2,334
                                  =========   =========   =========   =========   ========= 

The following table presents the interest income on restructured loans, if these
loans had been current in accordance with their original  terms,  and the amount
of interest  income on these  loans that was  included in income for the periods
indicated:

                                     1998        1997        1996        1995        1994
                                  ---------   ---------   ---------   ---------   ---------  
                                                                    
 Gross Amount Of Interest That
    Would Have Been Recorded
    At The Original Rate ........ $           $           $           $           $       4
 Interest That Was Recognized
    In Income ................... $      15   $      15   $      16   $      16   $      21
                                    -------     -------     -------     -------     -------
 Favorable Impact On
    Gross Income ................ $      15   $      15   $      16   $      16   $      17
                                  =========   =========   =========   =========   ========= 

Nonperforming  loans  totaled  $3,453 and $4,536 at December  31, 1998 and 1997,
respectively.  These loans represented .5% and .8% of average loans for 1998 and
1997,  respectively.  The allowance for loan losses to  nonperforming  loans was
278.6% and 200.7% at December  31, 1998 and 1997,  respectively.  Loans that are
considered to be nonperforming  are closely monitored by management and the Loss
Management Committee.

Real estate acquired through the  satisfaction of loan  indebtedness is recorded
at the lower of cost or fair market value,  less estimated  selling  costs.  Any
deficiency  between the loan balance and the  purchase  price of the property is
charged to the allowance for loan losses.  Subsequent  property sales may result
in gains or losses to the Company.

Restructured  loans are those for which  concessions  have been  granted  to the
borrower due to a  deterioration  of the borrower's  financial  condition.  Such
concessions may include a reduction in interest rates, or a deferral of interest
or principal payments.

Loans that have been restructured due to cash flow requirements totaled $178 and
$203 at December  31, 1998 and 1997,  respectively.  The  Company's  loan review
staff monitors the performance of these loans.

                                       47

Interest Rate Risk

The Company has an Asset/Liability  Committee (ALCO) which is duly authorized by
the Board of  Directors  to monitor  the  position  of the  Company  and to make
decisions relating to that process.  The ALCO's goal is to maximize net interest
income while  providing the Company with an acceptable  level of market risk due
to changes  in  interest  rates.  Market  risk is the risk of loss from  adverse
changes in market prices and rates.  The Company's  market risk arises primarily
from interest rate risk inherent in its lending and deposit  taking  activities.
To that end,  management  actively  monitors and manages its interest  rate risk
exposure.

The Company's  profitability  is affected by  fluctuations  in interest rates. A
sudden  and  substantial  change in  interest  rates may  adversely  impact  the
Company's  earnings  to the extent that the  interest  rates borne by assets and
liabilities do not change at the same speed, to the same extent,  or on the same
basis.  The Company  monitors the impact of changes in interest rates on its net
interest  income using several tools.  One measure of the Company's  exposure to
differential  changes in interest rates between assets and  liabilities is shown
in the Company's Maturity and Rate Sensitivity Analysis (GAP Analysis).  Another
test measures the impact on net interest income and on net portfolio value (NPV)
of an  immediate  change in interest  rates in 100 basis point  increments.  Net
portfolio value is defined as the net present value of assets, liabilities,  and
off-balance  sheet contracts.  Following are the estimated  impacts of immediate
changes in interest rates at the specified levels at December 31, 1998 and 1997:

                                    Percentage Change In:
                            -------------------------------------- 
 Change In Interest Rates      Net Interest       Net Portfolio
   (In Basis Points)            Income (1)          Value (2)
- -------------------------   ------------------  ------------------
                              1998      1997      1998      1997
                            --------  --------  --------  --------
         +400 .............. (15.5%)    (5.4%)    (8.5%)    (7.0%)
         +300 .............. (11.6%)    (2.2%)    (5.8%)    (4.7%)
         +200 ..............  (7.7%)     0.9%     (3.5%)    (2.6%)
         +100 ..............  (3.7%)     0.3%     (1.5%)    (1.3%)
         -100 ..............   6.5%     (1.0%)     0.7%      0.8%
         -200 ..............   1.3%     (2.3%)    (3.1%)    (2.1%)
         -300 ..............  (0.7%)    (4.6%)    (5.6%)    (5.9%)
         -400 ..............  (4.0%)    (5.3%)   (10.1%)   (13.0%)

(1)  The percentage  change in this column represents net interest income for 12
     months in a stable interest rate environment versus the net interest income
     in the various rate scenarios.

(2)  The percentage  change in this column represents net portfolio value of the
     Company in a stable  interest  rate  environment  versus the net  portfolio
     value in the various rate scenarios.

As of  December  31,  1998,  under  the  assumptions  used in the  table  above,
immediate  rate  fluctuations  within plus 200 basis  points and minus 400 basis
points  would have  minimal  effects on pre-tax  earnings.  An adverse  material
impact on pre-tax earnings would not occur unless rates experienced an immediate
increase  of 200 basis  points or more,  or an  immediate  decrease of 400 basis
points or more.

                                       48

As of  December  31,  1997,  under  the  assumptions  used in the  table  above,
immediate  rate  fluctuations  within plus 400 basis  points and minus 400 basis
points  would have  minimal  effects on pre-tax  earnings.  An adverse  material
impact on pre-tax earnings would not occur unless rates experienced an immediate
increase of more than 400 basis points or an immediate decrease of more than 400
basis points.

The Company's  primary  objective in managing  interest rate risk is to minimize
the adverse  impact of changes in interest  rates on the  Company's net interest
income and capital, while structuring the Company's asset-liability structure to
obtain the maximum  yield-cost  spread on that  structure.  The  Company  relies
primarily on its  asset-liability  structure to control  interest rate risk. The
results  of the  interest  rate  shock are within the limits set by the Board of
Directors.

The Company continually  evaluates interest rate risk management  opportunities,
including  the  possible use of  derivative  financial  instruments.  Management
believes that hedging  instruments  currently  available are not cost-effective,
and therefore,  has focused its efforts on increasing  the Company's  yield-cost
spread through retail growth opportunities.

Computation of  prospective  effects of  hypothetical  interest rate changes are
based on numerous  assumptions,  including  relative  levels of market  interest
rates,  loan  prepayments and deposits  decay,  and should not be relied upon as
indicative of actual results.  Further,  the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.

Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation of net interest  income and NPV. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of net interest income and the net portfolio value.

Liquidity Risk

Liquidity  management  is the  ability  to meet the cash  flow  requirements  of
customers who may be either  depositors  wishing to withdraw  funds or borrowers
needing  assurance that sufficient  funds will be available to meet their credit
needs.

Core  deposits  are a major  source  of  funds  used to meet  cash  flow  needs.
Maintaining  the ability to acquire  these funds as needed in a variety of money
markets is the key to assuring  liquidity.  Approximately  67% of the  Company's
deposits  are  composed of  accounts  with  balances  less than  $100,000.  When
evaluating the movement of these funds, even during large interest rate changes,
it is apparent that the Company  continues to attract  deposits that can be used
to meet cash flow needs.  Other  sources  available  for  meeting the  Company's
liquidity needs include  available-for-sale  securities.  The available-for-sale
portfolio is composed of securities with a readily  available market that can be
used to convert to cash if the need arises. In addition, the Company maintains a
federal  funds  position  and  treasury  tax and loan note  account that provide
day-to-day  funds to meet liquidity  needs and may also obtain advances from the
Federal Home Loan Bank in order to meet liquidity needs.

Repayments  and  maturities of loans provide a substantial  source of liquidity.
The Company has  approximately  63.5% of loans  maturing  within the next twelve
months.

                                       49

Capital Resources

Total  shareholders'  equity of the Company was $105,059 and $98,151 at December
31, 1998 and 1997, respectively.  Shareholders' equity grew 7.0% during 1998 and
8.4%  during  1997.  The growth in capital  for both years was  attributable  to
earnings less dividends  declared.  In 1998, the Company raised dividends in the
second  quarter.  In addition,  the effect of SFAS No. 115 increased  capital in
1998  and  1997  by $830  and  $566,  respectively.  Shareholders'  equity  as a
percentage  of  assets  was  9.9% and  10.1%  at  December  31,  1998 and  1997,
respectively.

The Federal  Reserve  Board,  the FDIC,  and the OCC have issued  guidelines for
governing  the levels of capital  that banks are to maintain.  Those  guidelines
specify capital tiers which include the following classification:

                                    Tier 1 Risk-    Total Risk-      Leverage
 Capital Tiers                      Based Capital  Based Capital      Ratio
 ---------------------------------- -------------  -------------   ------------
 Well capitalized .................  6% or above    10% or above    5% or above
 Adequately capitalized ...........  4% or above     8% or above    4% or above
 Undercapitalized .................  Less than 4%   Less than 8%   Less than 4%
 Significantly undercapitalized ...  Less than 3%   Less than 6%   Less than 3%
 Critically undercapitalized ......   2% or less

The Company met the  guidelines  for a well  capitalized  bank for both 1998 and
1997. At December 31, 1998,  the total Tier 1 and total  risk-based  capital was
$98.4 and $107.3,  respectively.  Risk-weighted assets less excess allowance for
loan  losses  were  $712,302  and  $631,400  at  December  31,  1998  and  1997,
respectively.  Tier 1 and total  risk-based  capital at December 31, 1997,  were
$91.3  and  $99.2,  respectively.  See  Note  R of  the  Consolidated  Financial
Statements for capital ratios.

During 1998,  the Company raised cash dividends in the first quarter to $.17 per
share on a quarterly  basis and again in the fourth quarter to $.19 per share on
a quarterly basis. This is the Company's twelfth  consecutive year to raise cash
dividends.  The  Company  returned  approximately  37%  of its  earnings  to its
shareholders in the form of dividends.

In  December  1997,  the  Company  declared a fifty  percent  stock  dividend to
shareholders of record on January 1, 1998.  Applicable  per-share and book-value
information  have been  restated for the stock  dividend.  Cash  dividends  were
raised in the second  quarter to $.1467 per share on a  quarterly  basis up from
$.133 per share. Book value per share was $17.98 and $16.75 at December 31, 1998
and 1997,  respectively.  Management  places  significant  emphasis  on internal
growth of capital. The increase in capital for both years, excluding the effects
of SFAS No. 115,  was  internally  generated  due to a retention  of earnings of
63.2% and 68.0% during 1998 and 1997, respectively.

Results of Operations

Net income for the Company was $11,368,  $10,640, and $9,516 for 1998, 1997, and
1996,  respectively.  In 1998, net income increased $728, or 6.8%, over 1997. In
1997, net income increased $1,124, or 11.8%, over 1996.  Earnings per share were
$1.94, $1.82, and $1.62, for the years ending December 31, 1998, 1997, and 1996,
respectively.

Return on average assets for 1998,  1997, and 1996 was 1.11%,  1.14%, and 1.10%,
respectively.  The increase in 1998 earnings  compared to 1997 was the result of
an increase  of $1,873,  or 4.6%,  in net  interest  income,  an increase in the
provision for loan losses of $283, or 12.4%,  an increase in noninterest  income
of $2,278, or 19.0%, coupled with an increase in noninterest expenses of $3,117,
or 8.9%. While much of the year's earnings were the result of customary  banking
services,  the Company increased its noninterest income due to mortgage activity
and the sale of alternative products.

                                       50

During  1998,  the Company  began the most  comprehensive  restructuring  in its
history. Alex Sheshunoff Management Services,  Incorporated was retained to help
re-engineer the Company's delivery system. Changes were made in data processing,
the support and retail functions, and the number of employees.  Displacements of
employees as a result of the engagement were completed on December 31, 1998.

The  increase in net income for 1997  resulted  from an increase in net interest
income of $2,216,  or 5.8%, a decrease in the provision for loan losses of $533,
or 19.0%, and an increase in noninterest  income of $989, or 9.0%,  coupled with
an increase in noninterest expenses of $2,179, or 6.6%.

Net interest income is the largest  component of net income for the Company.  It
is  an  effective   measurement   of  how  well   management  has  balanced  the
interest-sensitive  assets and  liabilities  and is the  difference  between the
interest  earned  on  earning  as sets  and the  cost  paid on  interest-bearing
liabilities.  Net interest  income was $42,270,  $40,397,  and $38,181,  for the
years ending December 31, 1998, 1997, and 1996, respectively. This increase over
the  three-year  period  was the  result of  management's  ability  to  maximize
earnings  through  changes in interest  rates and  increased  volume in earnings
assets.  Net interest  income,  on a tax equivalent  basis,  for the year ending
December 31, 1998, increased approximately $3,825 due to increases in the volume
of earning assets and costing liabilities and decreased approximately $1,952 due
to changes in interest  rates.  The  Company  experienced  the most  significant
volume  increase in loans,  savings,  and money market  accounts.  Rates were up
moderately during 1998 for all categories of deposit accounts.

Loan  interest  income was  $60,054,  $55,650,  and  $50,580 for the years ended
December 31, 1998, 1997, and 1996, respectively. The increase in 1998 was due to
an increase  in average  volume over 1997 of  approximately  $57,152,  while the
decrease  in  tax-equivalent  yield from 9.4% in 1998  compared to 9.5% in 1997,
resulted in a decrease of approximately $4,404 in interest income.

The increase for loan interest income in 1997 over 1996 was due to growth in the
average  loan  balance  of  approximately  $56,009  and a  decrease  in the  tax
equivalent  yield of  approximately 3 basis points,  resulting in an increase in
interest income of approximately $5,070.

Interest income from securities was $17,066,  $16,008, and $14,971 for the years
ending December 31, 1998, 1997, and 1996, respectively. The increase in interest
income in 1998 compared to 1997 was due to an increase in the average balance of
approximately $25,430, while the tax equivalent yield on securities decreased in
1998 to 6.8% from 6.9% in 1997.  The effect of the  increase  in average  volume
resulted in an  increase  in  tax-equivalent  interest  income of  approximately
$1,559  and the  change in yield  decreased  tax-equivalent  interest  income by
approximately $501.

Interest  income  from  securities  for 1997  increased  6.9% due to the average
balance increasing $17,714 from 1996. The tax equivalent yield on securities for
1997 was 3 basis points lower than 1996.

The tax equivalent  yields on average earning assets were 8.5%,  8.6%, and 8.6%,
for 1998, 1997, and 1996, respectively.

The major  source of funds for the  Company is  deposits.  Deposits  represented
86.7% and 86.0% of the total assets at December 31, 1998 and 1997, respectively.
Interest-bearing  accounts  funded  72.6% and 73.5% of the  assets for those two
years. The cost of funds is reflected in interest expense.

Interest expense for deposits and borrowings was $35,643,  $31,804, and $28,244,
for the years  ended  December  31,  1998,  1997,  and 1996,  respectively.  The
increase in interest  expense in 1998 compared to 1997 was due to an increase in
the average balance of interest-bearing deposits of approximately $74,192, which
increased  interest expense by approximately  $3,481.  The change in the average
interest rates by 4 basis points resulted in an increase in interest  expense of
approximately $358.

                                       51

The  increase  in  interest  expenses  for 1997  compared  to 1996 was due to an
increase in the average balance of interest-bearing liabilities of approximately
$77,274 and an increase in the cost of  interest-bearing  liabilities of 4 basis
points.  The change in interest expense from 1997 compared to 1996 of $3,559 was
due to an  increase of  approximately  $2,567 in volume and  approximately  $992
increase in interest expense due to interest rate changes.

The net interest margin reflects the portion of the yield on earning assets that
remains after the accrual of all interest expense.  Net interest margin on a tax
equivalent  basis was 4.7%,  5.0%,  and 5.1% for the years  ending  December 31,
1998,  1997, and 1996,  respectively.  The decrease in net interest margin since
1996 was due to  management's  decision  to  reprice  products  in  response  to
competition  and the interest rate  environment,  while  increasing net interest
income through increased volume.

The provision for loan losses was $2,563, $2,280, and $2,813 for 1998, 1997, and
1996,  respectively.  The  increase in  provision  in 1998 is in response to the
growth of loans.  The  provision for loan losses for 1997 was down slightly from
1996 due to the lowering of the balance of non-performing loans.

Noninterest income totaled $14,298,  $12,020,  and $11,030,  for the years ended
December 31, 1998, 1997, and 1996, respectively.  This represented 33.8%, 29.8%,
and  29.0%  of  net  interest  income  for  the  applicable  year.  Included  in
noninterest   income  are  service  charges  on  deposit   accounts,   fees  and
commissions, trust revenue, securities gains and losses, and other income.

Service charges on deposit accounts increased $419, or 6.2%, in 1998 compared to
1997.  The  increase  was due to the  growth in  transaction  accounts.  Service
charges  were up $203,  or 3.1%,  in 1997  compared to 1996.  This  increase was
mainly due to the acquisition of approximately  $15,232 in deposit accounts from
Magnolia Federal Bank for Savings.

Fees and commissions were $1,891,  $1,447 and $1,397,  for 1998, 1997, and 1996,
respectively.  Fees were up 30.7% for 1998, largely  attributable to an increase
of $378 in income from annuity sales and $192 in mortgage loan fees.

Securities  gains in 1998 totaled $61 compared to  securities  losses of $41 for
1997 and  gains in 1996 of $110.  The gains and  losses in the  portfolio  are a
result  of  strategies  implemented  in the  securities  portfolio  to  maintain
liquidity and enhance future income.

Other  income  was  $4,314,  $3,127,  and  $2,315  for  1998,  1997,  and  1996,
respectively.  Credit  card fees were up  approximately  $351,  and  profits  on
mortgage  sales were up $474. The Company began  offering  enhancements  to loan
products that  resulted in an increase in other income of $146.  The increase in
1997  compared to 1996 was due to an increase  in document  preparation  fees of
approximately  $454,  an increase  of  approximately  $148 in merchant  discount
revenue,  and an  increase in fees of  approximately  $70 related to credit card
services.

Noninterest  expenses  include  salaries and employee  benefits,  net occupancy,
equipment,  income taxes, and other noninterest  expenses.  The totals for these
expenses for the years ending  December 31, 1998,  1997,  and 1996 were $38,126,
$35,009, and $32,830,  respectively.  Noninterest expenses for 1998 were up 8.9%
compared  to 1997.  Noninterest  expenses  increased  7.1% and 2.2% for 1997 and
1996, respectively.

                                       52

Salaries and employee  benefits,  representing  a major portion of the Company's
operating expenses, increased 6.3%, 7.2%, and 0.9%, during 1998, 1997, and 1996,
respectively.  Management  monitors these costs through the  implementation of a
performance evaluation system. Jobs are graded according to levels of difficulty
using a point system which  provides for salary  adjustments  through  specified
ranges. Employee performance, in relation to goal achievement, is a major factor
contributing to the employee's salary increase. Salaries were up 3.0% over 1997.
Other  increases came from health  insurance and ESOP.  During 1998, the Company
employed  Alex  Sheshunoff  Management  Services,   Incorporated  to  assist  in
re-engineering  the delivery system. At the end of 1998, the Company displaced a
number of employees which resulted in additional costs due to severance pay.

The  increase  in 1997  versus 1996 was due to  additional  staffing  related to
acquisitions  and internal growth of the Company.  Also,  employee  benefit plan
costs increased approximately $617 related to implementation of a money purchase
pension plan and a 401(k) plan.

During 1997, the Company adopted a Stakeholder performance  compensation program
wherein rewards reconcile directly with performance  related to profit,  growth,
quality,  and productivity.  During 1996 and 1995, another incentive program was
utilized.  The cash incentive for 1998, 1997, and 1996 was  approximately  $251,
$775,  and $552,  respectively,  which also  increased  salaries and benefits in
1998, 1997, and 1996.

Net occupancy  expense includes charges for repairs,  janitorial,  depreciation,
rental,  and other expenses  related to occupancy.  Expenses for 1998, 1997, and
1996 were $2,683, $2,599, and $2,269, respectively.  In accordance with SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to be  Disposed  Of,"  the  Company  recognized  an  impairment  loss of
approximately  $142 for 1998 in moving a branch  location at Barnes Crossing and
$226 in 1997 related to the consolidation of branch offices in Grenada and Water
Valley and  construction of a new branch in Aberdeen.  The increase for 1998 was
due to depreciation,  janitorial, utility, and insurance expenses. Each of these
costs  increased due to the  construction  of new  facilities  during 1998 or in
1997. The new branches were constructed to improve service in those locations.

Equipment  expenses  include  computer and equipment  repairs and  depreciation.
These expenses  totaled $1,908,  $1,780,  and $1,595,  for 1998, 1997, and 1996,
respectively. The increase in 1998 was attributable to increases in depreciation
expense and repairs and  maintenance.  The increase in 1997 over 1996 was due to
depreciation and expenses  incurred in completing the Technology  Center and new
branches previously mentioned.

Other  expenses for 1998,  1997,  and 1996 were $12,778,  $11,097,  and $10,748,
respectively.  The  increase  in 1998  compared  to 1997  was due to  education,
special community functions  sponsored by the Company,  correspondent bank fees,
other fees (Alex Sheshunoff  Management  Services,  Incorporated),  and computer
processing  charges.  The  increase  in 1997  compared to 1996 was due to normal
increases  in cost due to inflation  and  approximately  $296  increase in other
fees.

                                       53

As the year 2000  approaches,  an issue  impacting  all  companies  has  emerged
regarding how existing  application  software programs and operating systems can
accommodate this date value. The "year 2000" problem is pervasive and complex as
virtually every computer  operation will be affected in some way by the rollover
of the two  digit  value to 00.  The  issue is  whether  computer  systems  will
properly  recognize  date-sensitive  information  when the year changes to 2000.
Management is in the process of working with its software vendors to assure that
the  Company is  prepared  for the year 2000.  While the  Company  believes  its
planning efforts are adequate to address its year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the  Company.  The  Company  has not  incurred  significant  operating
expenses or been required to invest heavily in computer  system  improvements to
be year 2000  compliant.  The  Company  successfully  completed  testing for its
mission  critical  applications  processed by its third party  service  provider
during the fourth quarter of 1998, following the conversion to the expanded code
for year 2000. Future date testing of year 2000 critical dates will be completed
for these  applications  during  the first  quarter of 1999.  Six  non-compliant
systems identified had not been upgraded to year 2000 compliant  applications at
year end but are  projected to be compliant by June 30, 1999.  Eighteen  systems
were in process of being tested to validate their year 2000 compatibility, three
of which were  completed  during  January  and  February,  and  testing  will be
substantially  complete by March 31, 1999. A committee will be commissioned  the
first  quarter  of 1999 to  develop  contingency  plans  for  year  2000.  These
contingency plans will not only address potential business interruptions related
to the year 2000, but also liquidity and cash availability  contingencies as the
millennium approaches.

Income tax expense for 1998,  1997,  and 1996 was  $4,511,  $4,488,  and $4,052,
respectively.  The  increase  in 1998 was due to an increase  in  earnings.  The
Company  increased  its  holding in  tax-exempt  securities  which  lowered  its
effective  tax rate.  The  increase in income taxes for 1997 and 1996 was due to
increased  profits and the Company paying state of Mississippi taxes after a net
operating  loss  carryforward  was  depleted in the first  quarter of 1995.  The
effective tax rate was  approximately  5% for state income taxes.  Effective tax
rates were 28.4%, 29.7%, and 29.9%, for 1998, 1997, and 1996, respectively. Note
L of the Notes To Consolidated  Financial Statements provides further details of
the provision for income taxes.

Impact of Inflation and Changing Prices

The majority of assets and  liabilities of a financial  institution are monetary
in nature and  therefore  differ  greatly from most  commercial  and  industrial
companies that have  significant  investments  in fixed assets and  inventories.
Management  believes the most significant impact on financial results stems from
the  Company's  ability  to react  to  changes  in  interest  rates.  Therefore,
management is constantly monitoring the Company's rate sensitivity.

SEC Form 10-K

A copy of the annual  report on Form  10-K,  as filed  with the  Securities  and
Exchange  Commission,  may be  obtained  without  charge by  directing a written
request to: Stuart Johnson,  Executive Vice President,  The Peoples Bank & Trust
Company, P. O. Box 709, Tupelo, MS 38802-0709.

                                        54

Three-Year Statistical Summary
(In Thousands)

                                                                                  1998
                                                                ---------------------------------------
                                                                 Income       Average
                                                                   Or      Balance Sheet
                                                                 Expense      Amounts      Yields/Rates
                                                                --------   -------------   ------------
                                                                                        
Earning assets
   Loans, net of unearned income
     Commercial ..............................................  $ 28,449    $  314,527          9.10%TE
     Consumer ................................................    17,683       186,796          9.47%
     Other loans .............................................    13,922       145,386          9.72%TE
                                                                 -------       ------- 
                                            Total Loans, Net .    60,054       646,709          9.35%TE
                                                                                       
Other ........................................................       793        14,626          5.42%
                                                                                       
Taxable securities                                                                     
   U.S. Government securities ................................     3,764        62,367          6.24%TE
   U.S. Government agencies ..................................     3,011        48,925          6.32%TE
   Mortgage-backed securities ................................     6,413       101,838          6.30%
   Other securities ..........................................       228         2,994          8.21%TE
                                                                 -------       -------  
                                    Total Taxable Securities .    13,416       216,124          6.31%TE
                                                                                       
Tax-exempt securities                                                                  
   Obligations of states and political subdivisions ..........     3,650        70,396          8.14%TE
                                                                 -------       -------
                                            Total Securities .    17,066       286,520          6.76%TE
                                                                 -------       -------                      
                                        Total Earning Assets .    77,913       947,855          8.50%TE
                                                                                       
Cash and due from banks ......................................                  34,215
                                                                                       
Other assets, less allowance for loan losses .................                  44,041
                                                                               -------        
                                                Total Assets .              $1,026,111
                                                                            ==========
Interest-bearing liabilities                                                           
   Interest-bearing demand deposit accounts ..................     1,855    $   55,963          3.31%
   Savings and money market accounts .........................     7,192       234,606          3.07%
   Time deposits .............................................    25,132       468,277          5.37%
                                                                 -------       -------                   
                             Total Interest-Bearing Deposits .    34,179       758,846          4.50%
                                                                                       
                    Total Other Interest-Bearing Liabilities .     1,464        24,340          6.01%
                                                                 -------       -------                   
                          Total Interest-Bearing Liabilities .    35,643       783,186          4.55%
                                                                                       
Noninterest-bearing sources                                                            
   Noninterest-bearing deposits ..............................                 127,374
   Other liabilities .........................................                  12,953
   Shareholders' equity ......................................                 102,598
                                                                               -------        
                  Total Liabilities and Shareholders' Equity .              $1,026,111
                                                                            ==========         
   Net interest income/net interest margin ...................  $ 42,270                        4.74%TE
                                                                ========                       

TE - Ratios have been calculated on a tax equivalent basis.

                                       55

                                                                                  1997
                                                                ---------------------------------------   
                                                                 Income       Average
                                                                   Or      Balance Sheet
                                                                 Expense      Amounts      Yields/Rates
                                                                --------   -------------   ------------
                                                                                           
Earning assets
   Loans, net of unearned income
     Commercial ..............................................  $ 25,943    $  282,262          9.25%TE
     Consumer ................................................    17,658       183,863          9.60%
     Other loans .............................................    12,049       123,432          9.87%TE
                                                                 -------       -------
                                            Total Loans, Net .    55,650       589,557          9.49%TE

Other ........................................................       543        10,102          5.37%

Taxable securities
   U.S. Government securities ................................     4,522        76,993          6.07%TE
   U.S. Government agencies ..................................     3,074        48,026          6.52%TE
   Mortgage-backed securities ................................     5,250        79,690          6.59%
   Other securities ..........................................       211         2,822          8.06%TE
                                                                 -------       -------   
                                    Total Taxable Securities .    13,057       207,531          6.40%TE

Tax-exempt securities
   Obligations of states and political subdivisions ..........     2,951        53,559          8.61%TE
                                                                 -------       -------
                                            Total Securities .    16,008       261,090          6.85%TE

                                        Total Earning Assets .    72,201       860,749          8.64%TE

Cash and due from banks ......................................                  34,137

Other assets, less allowance for loan losses .................                  37,271
                                                                               -------
                                                Total Assets .              $  932,157
                                                                              ======== 
Interest-bearing liabilities
   Interest-bearing demand deposit accounts ..................     1,855    $   56,379          3.29%
   Savings and money market accounts .........................     5,752       196,011          2.93%
   Time deposits .............................................    22,933       432,264          5.31%
                                                                 -------       ------- 
                             Total Interest-Bearing Deposits .    30,540       684,654          4.46%

                    Total Other Interest-Bearing Liabilities .     1,264        21,258          5.94%
                                                                 -------       -------
                          Total Interest-Bearing Liabilities .    31,804       705,912          4.51%

Noninterest-bearing sources
   Noninterest-bearing deposits ..............................                 119,356
   Other liabilities .........................................                  12,293
   Shareholders' equity ......................................                  94,596
                                                                               -------
                  Total Liabilities and Shareholders' Equity .              $  932,157
                                                                              ========
   Net interest income/net interest margin ...................  $ 40,397                        4.95%TE
                                                                ======== 

TE - Ratios have been calculated on a tax equivalent basis.

                                       56

                                                                                  1996
                                                                --------------------------------------- 
                                                                 Income       Average
                                                                   Or      Balance Sheet
                                                                 Expense      Amounts      Yields/Rates
                                                                --------   -------------   ------------
                                                                                        
Earning assets
   Loans, net of unearned income
     Commercial ..............................................  $ 23,797    $  259,223          9.23%TE
     Consumer ................................................    18,245       187,521          9.73%
     Other loans .............................................     8,538        86,804          9.91%TE
                                                                 -------       -------
                                            Total Loans, Net .    50,580       533,548          9.52%TE

Other ........................................................       874        16,492          5.30%

Taxable securities
   U.S. Government securities ................................     4,844        83,010          6.03%TE
   U.S. Government agencies ..................................     3,013        45,725          6.68%TE
   Mortgage-backed securities ................................     4,123        62,214          6.63%
   Other securities ..........................................       226         3,178          7.87%TE
                                                                 -------       ------- 
                                    Total Taxable Securities .    12,206       194,127          6.41%TE

Tax-exempt securities
   Obligations of states and political subdivisions ..........     2,765        49,250          8.76%TE
                                                                 -------       ------- 
                                            Total Securities .    14,971       243,377          6.88%TE
                                                                 -------       -------
                                        Total Earning Assets .    66,425       793,417          8.62%TE

Cash and due from banks ......................................                  40,845

Other assets, less allowance for loan losses .................                  34,459
                                                                               -------
                                                Total Assets .              $  868,721
                                                                              ========
Interest-bearing liabilities
   Interest-bearing demand deposit accounts ..................     2,865    $   88,601          3.23%
   Savings and money market accounts .........................     4,233       159,557          2.65%
   Time deposits .............................................    20,649       395,827          5.22%
                                                                 -------       -------
                             Total Interest-Bearing Deposits .    27,747       643,985          4.31%

                    Total Other Interest-Bearing Liabilities .       497        10,009          4.96%
                                                                 -------       -------
                          Total Interest-Bearing Liabilities .    28,244       653,994          4.32%

Noninterest-bearing sources
   Noninterest-bearing deposits ..............................                 116,634
   Other liabilities .........................................                  10,598
   Shareholders' equity ......................................                  87,495
                                                                               -------
                  Total Liabilities and Shareholders' Equity .              $  868,721
                                                                              ========
   Net interest income/net interest margin ...................  $ 38,181                        5.06%TE
                                                                ========

TE - Ratios have been calculated on a tax equivalent basis.

                                       57

                                   EXHIBIT 23

                           THE PEOPLES HOLDING COMPANY

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incoporation by reference in this Annual Report (Form 10-K) of
The Peoples  Holding  Company of our report dated January 22, 1999,  included in
the 1998 Annual Report to Shareholders of The Peoples Holding Company.

We also consent to the incorporation by reference in the Registration  Statement
(Form S-3 No.  33-20108) of The Peoples Holding  Company and related  Prospectus
and in the  Registration  Statement  (Form S-4,  No.  333-72507)  of The Peoples
Holding  Company and related  Prospectus,  of our report dated January 22, 1999,
with respect to the  consolidated  financial  statements of The Peoples  Holding
Company incorporated by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1998.

                                              /s/  Ernst & Young LLP

Memphis, Tennessee
March 26, 1999

                                       58

 9
 1,000

                   YEAR
                          DEC-31-1998
                               DEC-31-1998
                                          31,944
                             433
                                     0
                                     0
                    214,174
                          76,893
                            78,585
                                        694,283
                                      9,620
                               1,063,365
                                     921,686
                                     2,455
                             14,598
                                     19,567
                                0
                                          0
                                        29,222
                                      75,837
               1,063,365
                                 60,054
                               17,066
                                   793
                                77,913
                              34,179
                              35,643
                           42,270
                                    2,563
                                  61
                                 38,126
                                 15,879
                      15,879
                                      0
                                            0
                                    11,368
                                     1.94
                                     1.94
                                    4.74
                                        204
                                     3,249
                                   178
                                      0
                                 9,104
                                    2,514
                                       467
                                9,620
                             9,620
                                  0
                            305