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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
Commission File Number 1-13253
THE PEOPLES HOLDING COMPANY
-------------------------------------------------------
(Exact name of the registrant as specified in its charter)
MISSISSIPPI
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
64-0676974
---------------------------------------
(I.R.S. Employer Identification Number)
209 Troy Street, P. O. Box 709, Tupelo, Mississippi 38802-0709
------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code 662-680-1001
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period 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_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as to the latest practicable date.
Common stock, $5 Par Value, 5,574,733 shares outstanding
as of November 14, 2002
1
THE PEOPLES HOLDING COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001............. 3
Condensed Consolidated Statements of Income - Three Months
and Nine Months Ended September 30, 2002 and 2001.... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001........ 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk.................................... 16
Item 4.
Controls and Procedures .................................. 16
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings........................................ 17
Item 6.
Exhibits and Reports on Form 8-K......................... 17
Signatures................................................... 18
Certification of Chief Executive Officer .................... 19
Certification of Chief Financial Officer .................... 20
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ ------------
(Unaudited) (Note 1)
Assets
Cash and due from banks .................. $ 49,570 $ 41,475
Federal funds sold ....................... 7,000
Interest-bearing balances with banks ..... 392 22,937
---------- ----------
Cash and cash equivalents ... 49,962 71,412
Securities available-for-sale ............ 326,344 277,293
Loans, net of unearned income ............ 855,415 827,696
Allowance for loan losses ............. (12,299) (11,354)
---------- ----------
Net loans ................... 843,116 816,342
Premises and equipment, net .............. 29,124 28,346
Other assets ............................. 58,094 61,334
---------- ----------
Total assets .................... $ 1,306,640 $ 1,254,727
========== ==========
Liabilities
Deposits:
Noninterest-bearing ................... $ 164,848 $ 145,690
Interest-bearing ...................... 925,548 917,365
---------- ----------
Total deposits .............. 1,090,396 1,063,055
Treasury tax and loan note account ....... 9,459 6,181
Advances from the Federal Home Loan Bank . 58,136 41,145
Other liabilities ........................ 18,090 20,764
---------- ----------
Total liabilities ........... 1,176,081 1,131,145
Shareholders' equity
Common Stock, $5 par value - 15,000,000
shares authorized, 6,212,284 shares
issued; 5,575,433 and 5,704,680 shares
outstanding at September 30, 2002 and
December 31, 2001, respectively ........ 31,061 31,061
Treasury stock, at cost .................. (17,529) (12,856)
Additional paid-in capital ............... 39,864 39,850
Retained earnings ........................ 70,869 63,391
Accumulated other comprehensive income ... 6,294 2,136
---------- ----------
Total shareholders' equity .. 130,559 123,582
---------- ----------
Total liabilities and
shareholders' equity ......... $ 1,306,640 $ 1,254,727
========== ==========
See Notes to Condensed Consolidated Financial Statements
3
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
2002 2001 2002 2001
(Unaudited) (Unaudited)
Interest income
Loans ................................... $ 46,027 $ 53,919 $ 15,363 $ 17,773
Securities:
Taxable ............................ 9,892 9,380 3,251 3,030
Tax-exempt ......................... 3,011 3,004 1,019 991
Other ................................... 277 669 74 83
--------- --------- --------- ---------
Total interest income .............. 59,207 66,972 19,707 21,877
Interest expense
Deposits ................................ 18,567 31,276 5,940 9,548
Borrowings ............................. 1,797 1,090 614 359
--------- --------- --------- ---------
Total interest expense ............. 20,364 32,366 6,554 9,907
--------- --------- --------- ---------
Net interest income ................ 38,843 34,606 13,153 11,970
Provision for loan losses ..................... 3,325 3,475 1,125 1,225
--------- --------- --------- ---------
Net interest income after
provision for loan losses ...... 35,518 31,131 12,028 10,745
Noninterest income
Service charges on deposit accounts ..... 9,220 8,569 3,220 2,961
Fees and commissions .................... 6,731 5,406 2,456 1,905
Trust revenue ........................... 680 660 218 130
Securities gains ........................ 30 87 22 42
Other ................................... 3,583 3,026 1,069 1,134
--------- --------- --------- ---------
Total noninterest income ........... 20,244 17,748 6,985 6,172
Noninterest expense
Salaries and employee benefits .......... 21,609 19,285 7,290 6,862
Data processing ......................... 2,838 2,629 957 902
Net occupancy ........................... 2,368 2,402 784 797
Equipment ............................... 2,386 2,195 792 733
Other ................................... 8,265 7,792 2,819 2,579
--------- --------- --------- ---------
Total noninterest expense .......... 37,466 34,303 12,642 11,873
--------- --------- --------- ---------
Income before taxes and cumulative effect
of accounting change ...................... 18,296 14,576 6,371 5,044
Income taxes .................................. 5,198 3,845 1,827 1,202
--------- --------- --------- ---------
Income before cumulative
effect of accounting change .... 13,098 10,731 4,544 3,842
Cumulative effect of accounting change ........ (1,300)
--------- --------- --------- ---------
Net income ......................... $ 11,798 $ 10,731 $ 4,544 $ 3,842
========= ========= ========= =========
Basic and diluted earnings per share:
Income before cumulative effect of
accounting change .................... $ 2.33 $ 1.81 $ 0.81 $ 0.66
Cumulative effect of accounting change ... (0.23)
--------- --------- --------- ---------
Net income ............................... $ 2.10 $ 1.81 $ 0.81 $ 0.66
========= ========= ========= =========
Weighted average shares outstanding .......... 5,620,891 5,925,326 5,591,462 5,793,822
Weighted average shares outstanding - diluted . 5,625,348 5,925,326 5,597,362 5,793,822
See Notes to Condensed Consolidated Financial Statements
4
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
NINE MONTHS ENDED SEPTEMBER 30
2002 2001
---- ----
(Unaudited)
Operating activities
Net cash provided (used) by
operating activities .......... $ 18,999 $ (1,572)
Investing activities
Purchases of securities
available-for-sale ................. (160,133) (71,398)
Proceeds from sales of securities
available-for-sale ................. 43,770 13,208
Proceeds from calls/maturities of
securities available-for-sale ...... 73,369 58,214
Net increase in loans ................... (33,178) (16,136)
Proceeds from sales of premises
and equipment ...................... 324 33
Purchases of premises and equipment ..... (3,217) (1,023)
---------- ----------
Net cash used in investing
activities .................... (79,065) (17,102)
Financing activities
Net increase in
noninterest-bearing deposits ........ 19,158 28,969
Net increase in
interest-bearing deposits ........... 8,183 12,025
Net increase in
short-term borrowings ............... 3,278 2,128
Proceeds from other borrowings .......... 24,248 6,000
Repayments of other borrowings .......... (7,257) (1,522)
Acquisition of treasury stock ........... (4,673) (7,471)
Cash dividends paid ..................... (4,321) (4,193)
---------- ----------
Net cash provided by financing
activities ................... 38,616 35,936
---------- ----------
(Decrease) increase in cash
and cash equivalents ......... (21,450) 17,262
Cash and cash equivalents at
beginning of period ............... 71,412 56,817
---------- ----------
Cash and cash equivalents at
end of period ..................... $ 49,962 $ 74,079
============ ============
Supplemental disclosures:
Non-cash transactions:
Transfer of loans to other real estate .. $ 3,079 $ 2,104
Transfer of premises and equipment to
other assets ......................... 181
============ ============
See Notes to Condensed Consolidated Financial Statements
5
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
(in thousands, except share data)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
2002 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
For further information, refer to the consolidated financial statements and
footnotes thereto included in The Peoples Holding Company and Subsidiary's
annual report on Form 10-K for the year ended December 31, 2001. For purposes of
this quarterly report on Form 10-Q, the term "Company" refers to The Peoples
Holding Company and the term "Bank" refers to The Peoples Bank and Trust
Company.
Note 2 Other Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. No. 147, "Acquisitions of Certain Financial Institutions." The
statement addresses the financial accounting and reporting for the acquisition
of all or part of a financial institution, and is effective for any such
activities initiated after October 1, 2002. The adoption of this statement is
not anticipated to have a material effect on our financial position or results
of operations.
In the first quarter of 2002, the Company completed the transitional impairment
test required by Financial Accounting Standards Board (FASB) Statement No. 142,
"Goodwill and Intangible Assets." As a result of this test, the Company recorded
a goodwill impairment charge of $1,300 as a cumulative effect of a change in
accounting principle. The Company identified its reporting units as banking
operations and insurance operations for purposes of measuring impairment of
goodwill. The impairment was specific to the insurance subsidiary. The fair
value of the insurance reporting unit was estimated using the expected present
value of future cash flows. The insurance subsidiary acquisition was a tax-free
exchange; therefore, there was no tax offset to the impairment cost booked.
As of September 30, 2002
--------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- --------------
Amortized intangible assets:
Core deposit intangible assets .. $ 507 $ (365)
Other intangible assets ......... 3,282 (1,986)
---------- ----------
Total ........................... $ 3,789 $ (2,351)
========== ==========
Unamortized goodwill $ 7,190 $ (2,142)
========== ==========
6
Note 2 Other Accounting Pronouncements (continued)
Aggregate amortization expense:
For the period ended September 30, 2002 .. $ 370
Estimated amortization expense in future years:
For the year ended December 31, 2002 ..... $ 493
For the year ended December 31, 2003 ..... 493
For the year ended December 31, 2004 ..... 423
For the year ended December 31, 2005 ..... 399
For the year ended December 31, 2006 ..... 0
The changes in the carrying amount of intangible assets for the nine months
ended September 30, 2002, are as follows:
Other
Goodwill Intangibles
----------- -----------
Balance as of January 1, 2002 .............. $ 6,348 $ 1,808
Impairment losses ........................ (1,300)
Amortization expense ..................... (370)
----------- -----------
Balance as of September 30, 2002 ........... $ 5,048 $ 1,438
=========== ===========
The table below presents net income for the prior periods as reported as well as
adjusted for the exclusion of goodwill amortization and the cumulative effect of
the transitional impairment.
Nine Months Three Months Nine Months Three Months
Ended Ended Year Ended Ended Ended
September 30, September 30, December 31, September 30, September 30,
2002 2002 2001 2001 2001
------------- ------------- ------------ ------------- -------------
Reported net income ................. $ 11,798 $ 4,544 $ 14,587 $ 10,731 $ 3,842
Goodwill amortization, net of tax ... 407 306 102
Transitional impairment ............. 1,300
---------- ---------- ----------- ---------- ----------
Core net income ..................... $ 13,098 $ 4,544 $ 14,994 $ 11,037 $ 3,944
========== ========== =========== ========== ==========
Basic and diluted earnings per share:
Reported net income ................. $ 2.10 $ 0.81 $ 2.48 $ 1.81 $ 0.66
Goodwill amortization, net of tax ... 0.07 0.05 0.02
Transitional impairment ............. 0.23
---------- ---------- ----------- ---------- ----------
Core net income ..................... $ 2.33 $ 0.81 $ 2.55 $ 1.86 $ 0.68
========== ========== =========== ========== ==========
Note 3 Comprehensive Income
For the nine month periods ended September 30, 2002 and 2001, total
comprehensive income was $15,956 and $15,301, respectively. For the quarters
ended September 30, 2002 and 2001, total comprehensive income amounted to $6,543
and $5,613, respectively. Total comprehensive income consists of net income and
the change in the unrealized gain (loss) on securities available for sale.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in thousands, except share data)
This Form 10-Q may contain, or incorporate by reference, statements which may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Prospective investors are cautioned that any such
forward-looking statements are not guarantees for future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements include significant
fluctuations in interest rates, inflation, economic recession, significant
changes in the federal and state legal and regulatory environment, significant
underperformance in our portfolio of outstanding loans, and competition in our
markets. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Financial Condition
Total assets of The Peoples Holding Company increased from $1,254,727 on
December 31, 2001, to $1,306,640 on September 30, 2002, or 4.14% for the nine
month period. As a result of weak loan demand and continued payoffs in our sales
finance portfolio, most of the growth in assets occurred in the investment
portfolio, which increased from $277,293 on December 31, 2001, to $326,344 on
September 30, 2002. Federal funds sold and interest bearing bank balances
decreased $29,545 from the beginning of the year as funds were shifted to the
investment portfolio. We invested $35,417 in various securities this quarter.
Purchases included mortgage-backed securities, U.S. government agency
securities, and municipal securities. The majority (57%) of the purchases during
the third quarter continued to be in the mortgage-backed sector because of the
cash flow provided by the principal and interest payback each month. This cash
flow provides a higher reinvestment opportunity that will be advantageous when
rates begin to rise.
Last year, we changed our investment policy, eliminating the minimum requirement
of 18% of the portfolio being invested in Treasury securities. We have steadily
replaced investments in Treasury securities since that time with investments in
other sectors in order to enhance yield. All Treasury securities had matured at
September 30, 2002. This represented a decrease of approximately $15,000 since
December 31, 2001, and approximately $23,000 since September 30, 2001.
Loan balances have increased $27,719, from $827,696 at December 31, 2001, to
$855,415 at September 30, 2002. Loans increased $19,626 during the third
quarter. Most of this growth began in late August and continued during
September. We made a strategic decision to curtail our sales finance division in
July 2000. At the time of the curtailment, this portfolio was approximately $32
million and has since decreased to approximately $8.5 million. The purpose of
the decision was twofold - to reduce risk and to enhance yield. The sales
finance portfolio decreased approximately $6,500 since December 31, 2001.
8
The majority of our loan growth in the third quarter was in real estate loans,
particularly in commercial and residential loans. Approximately 71% of the
portfolio is comprised of loans secured by real estate. We have experienced
declines in retail consumer loans and in commercial, financial and agricultural
loans. With 0% financing being offered by automobile makers, we have experienced
a decline in our new automobile financing. Used automobile financing is also
down primarily because of the implementation of tighter credit standards.
The average loan to deposit ratios were 75.21% and 76.68% at September 30, 2002,
and December 31, 2001, respectively. The actual loan to deposit ratios were
78.45% and 77.86% at September 30, 2002, and December 31, 2001, respectively.
We are committed to increasing loan volume and recognize that doing so is
imperative for maintaining net interest margin. We have also recognized that the
sluggish economy has impacted our ability to expand loan volume; however, we
have taken action to improve loan volume by adding several seasoned commercial
lenders to assist in attracting and pricing commercial business.
Total deposits for the first nine months of 2002 increased from $1,063,055 on
December 31, 2001, to $1,090,396 on September 30, 2002, or an increase of 2.57%.
The majority of our growth has been in noninterest bearing demand accounts and
public fund interest bearing demand deposits. Our average noninterest bearing
demand deposit accounts as a percent of total average deposits have increased
from 13.53% at December 31, 2001 to 13.84% at September 30, 2002. With the
growth in transaction and money market accounts, the Bank is benefitting from a
lower percentage of time deposits to total deposits (on average) this year.
Those ratios were 51.21% and 54.48% for September 30, 2002 and December 31,
2001, respectively.
Other borrowed funds have increased $20,269 from year end. Of the increase,
$16,991 was due to additional funds borrowed from the Federal Home Loan Bank
(FHLB). We minimize rate risk by funding loans with FHLB borrowings having
similar terms, locking in fixed rates based on a spread over the FHLB note
rates.
The equity capital to total assets ratios were 9.99% and 9.85% at September 30,
2002, and December 31, 2001, respectively. Capital increased $6,977, or 5.65%,
from December 31, 2001, to September 30, 2002. There were a number of factors
contributing to the increase in capital. Normal transactions such as net income
and unrealized portfolio gains contributed to the increase in capital, offset by
dividends and the purchase of treasury stock. The increase in the unrealized
gains on the investment portfolio was due primarily to market conditions. Cash
dividends declared were $.25 per share in the first quarter and $.26 per share
in the second and third quarters of 2002. We have continued to purchase treasury
stock, purchasing 129,247 shares at an average cost of $36.07 per share over the
nine month period ending September 30, 2002. We purchased 31,441 shares during
the third quarter of 2002.
9
Results of Operations
Our core net income for the nine month period ended September 30, 2002, was
$13,098. This represented an increase of $2,061, or 18.67% over comparable core
net income for the nine month period ended September 30, 2001. Core net income
for the nine month period ending September 30, 2001 was $11,037. For the three
month periods ended September 30, 2002 and 2001, core net income was $4,544 and
$3,944, respectively. Core earnings per share for the nine month period ended
September 30, 2002 were $2.33, an increase of 25.27% from $1.86 for the
comparable period a year ago. The increase in core net income for the three and
nine month periods ended September 30, 2002, compared to the same periods of
2001 resulted from usual and customary deposit gathering and lending operations
and increases in noninterest income for sales of other products such as
insurance. The annualized core return on average assets on the same basis for
the three month periods ending September 30, 2002 and 2001, was 1.38% and 1.28%,
respectively, and for the nine month periods ending September 30, 2002 and 2001
was 1.33% and 1.18%, respectively. Core net income is defined as income before
the effect of the change in accounting principle and excluding goodwill
amortization for all periods.
Net Interest Income
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of our net
income. The primary concerns in managing net interest income are the mix and the
repricing of rate-sensitive assets and liabilities. Net interest income has
improved due to loan growth, risk based pricing of loans, and a shift in the
deposit mix from time deposits to transaction and money market accounts.
Net interest income for the nine month periods ending September 30, 2002 and
2001 was $38,843 and $34,606, respectively, while earning assets for the same
periods averaged $1,176,926 and $1,116,677, respectively.Net interest income for
the three month periods ending September 30, 2002 and 2001 was $13,153 and
$11,970, respectively, while earning assets for the same periods averaged
$1,184,723 and $1,110,881, respectively. The bank's repricing position was
favorable under the falling interest rate environment in which we have been
operating recently. This, combined with our repricing strategy and mix change in
both assets and liabilities, increased net interest margin.
Three Months ending Nine Months ending Three Months ending
September 30, September 30, December 31,
2002 2001 2002 2001 2001
-------- -------- ------- ------- ------------
Net interest margin .. 4.68% 4.58% 4.67% 4,44% 4.54%
10
Provision for Loan Losses
The provision for loan losses charged to operating expense is an amount which,
in the judgment of management, is necessary to maintain the allowance for loan
losses at a level that is adequate to meet the inherent risks of losses on our
current portfolio of loans. The appropriate level of the allowance is based on a
quarterly analysis of the loan portfolio including consideration of such factors
as the risk rating of individual credits, size and diversity of the portfolio,
economic conditions, prior loss experience, and the results of periodic credit
reviews by internal loan review and regulators. The loan loss provision totaled
$3,325 and $3,475, respectively for the nine month periods ending September 30,
2002 and 2001. The tables below present pertinent data and ratios.
Loans and Credit Quality
Nonperforming Net Charge-offs
Loans* Loans Nine Months Ended
September 30 September 30 September 30
------------------ ------------------ ------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Commercial, financial, agricultural ... $148,791 $152,621 $ 1,707 $ 535 $ 528 $ 749
Real estate - construction ............ 36,480 33,067 103 96 25
Real estate - mortgage ................ 572,283 528,718 1,990 3,957 1,200 1,086
Consumer .............................. 97,861 112,635 271 522 556 985
-------- -------- -------- -------- -------- --------
$855,415 $827,041 $ 3,968 $ 5,117 $ 2,380 $ 2,845
======== ======== ======== ======== ======== ========
* Net of unearned income.
Allowance for Loan Losses
2002 2001
------------------------------- ------------------------------------------
3rd 2nd 1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- ---------
Balance at beginning of period ............. $ 11,658 $ 11,811 $ 11,354 $ 11,166 $ 11,403 $ 11,067 $ 10,536
Loans charged off .......................... 573 1,310 985 1,196 1,534 870 702
Recoveries of loans previously charged off . 89 82 317 69 72 81 108
--------- --------- --------- --------- --------- --------- ---------
Net Charge-offs ....................... 484 1,228 668 1,127 1,462 789 594
Provision for loan losses .................. 1,125 1,075 1,125 1,315 1,225 1,125 1,125
--------- --------- --------- --------- --------- --------- ---------
Balance at end of year ..................... $ 12,299 $ 11,658 $ 11,811 $ 11,354 $ 11,166 $ 11,403 $ 11,067
========= ========= ========= ========= ========= ========= =========
Allowance for loan losses to total loans ... 1.44% 1.39% 1.44% 1.37% 1.35% 1.39% 1.36%
Reserve coverage ratio ..................... 309.95 317.57 207.25 178.65 218.20 191.62 143.34
Net charge-offs to total loans ............. 0.06 0.15 0.08 0.14 0.18 0.10 0.07
Nonperforming loans to total loans ......... 0.46 0.44 0.70 0.77 0.62 0.73 0.95
11
Noninterest Income
Noninterest income, excluding gains from the sales of securities, was $20,214
for the nine month period ending September 30, 2002, compared to $17,661 for the
same period in 2001, or an increase of 14.46%. Approximately 63% of the increase
in noninterest income was attributable to usual and customary loan and deposit
services. Income derived from the mortgage loan business continued to be strong
for the first nine months of 2002. Another significant portion of the increase
was due to the income booked as the result of Bank Owned Life Insurance (BOLI)
purchased on key management personnel in May 2001. The additional income derived
from BOLI of approximately $511 has been used to offset rising benefits cost,
primarily health and life insurance.
We continued to place emphasis on sales of insurance and alternative financial
instruments. We implemented an insurance integration plan in 2001 aimed at
improving our cross-selling between the bank and the insurance company. As a
result, our insurance commission income increased $351 over the nine month
period reported in 2001, making up 14% of the total increase in noninterest
income. A secondary, yet significant, benefit resulting from the implementation
of the insurance integration plan was an improvement in contingency income of
$90. Contingency income is a bonus received from the insurance underwriters and
is based both on commission income and claims experience on our customers during
the previous year.
For the three month periods ended September 30, 2002 and 2001, noninterest
income, excluding gains from the sales of securities, was $6,963 and $6,130,
respectively. Approximately 72% of this increase was due to customary loan and
deposit services. The increase in noninterest income derived from insurance
commissions is approximately $158, making up 19% of the increase over the third
quarter of 2001. Income generated from alternative financial products (annuities
and mutual funds) was down this quarter, largely attributable to the economy and
uncertainties in the market. We continue to work our business plan, which is
directed toward increasing the number of services per client for our existing
client base as well as increasing our affluent client base.
Noninterest Expense
Noninterest expense was $37,466 for the nine month period ended September 30,
2002, compared to $34,303 for the same period in 2001, an increase of $3,163, or
9.22%. Core noninterest expense was $37,466 for the nine month period ending
September 30, 2002 compared to $33,879 for the same period in 2001, an increase
of $3,587, or 10.59%. Core noninterest expense excludes amortization expense
associated with all intangible assets that are no longer amortized as the result
of adoption of FASB Statement No 142 "Goodwill and Intangible Assets". The
increase in core noninterest expense, excluding increases in health and life
insurance cost and performance based reward (PBR) plan cost was 6.92%. One
significant factor contributing to the increase was health and life insurance
cost which was approximately 17%, or $598, of the change in core noninterest
expense. This increase was due to the rising cost of health care as well as
higher claims experienced this year.
Our Company has a PBR plan which allows for an incentive payment to employees
based on improvement in net income over an established baseline. This cost is
linked to performance and increases as performance improves. The increase for
incentive cost for the nine month period was $645, or 18% of the total increase
in core noninterest expenses. Since a significant amount of the improvement in
earnings for 2001 occurred in the last half of the year, we recorded 73% of the
total incentive cost during the third and fourth quarters.
12
Other factors contributing to the increase in expense include depreciation,
maintenance contract and computer processing costs associated with technological
enhancements made during the last year. We installed a teller platform system in
2001, and upgraded our deposit platform system and portions of our loan system,
particularly the credit scoring module, this year. In addition, we upgraded data
storage to a robotic DVD device which provides near on-line access to data
(check images) and purchased software to enhance read rates in item processing.
During the fourth quarter of 2002, we will be implementing a new loan platform
system. These upgrades have enhanced productivity, reduced losses for the bank,
and provided better service for our clients. We have noted improvement in both
cash short and fraud/forgery losses as a result of the teller platform and
deposit platform systems. Finally, in recognition of the sophistication of
hackers and the damage that can be done by such individuals, information
security has been enhanced through software, hardware, and retention of services
by experts in that field. It has been, and will continue to be, our practice to
seek technological improvements, evaluate the benefit to us and our clients, and
to progress with implementation of such if a cost/benefit analysis justifies it.
This practice is directly influenced by our vision to be the financial services
advisor and provider of choice in the communities we serve.
For the three month periods ending September 30, 2002 and 2001, noninterest
expense was $12,642 and $11,873, respectively, an increase of $769, or 6.48%.
For the three month periods ending September 30, 2002 and 2001, core noninterest
expense was $12,642 and $11,732, respectively, an increase of $910, or 7.76%.
Health and life insurance expense was $75 less than the third quarter last year
due to the decrease in claims paid during the quarter. Salary cost was $222, or
4.93%, higher than last year. During 2002, employee evaluation reviews were
changed from each employee's anniversary date to March. All employees are now
reviewed in March and merit/cost of living raises are given in April. Insurance
commission expense increased $44 over last year. This cost is directly linked to
the increase in insurance commission income. The cost of the PBR plan increased
$60.
Computer depreciation, maintenance contracts and computer processing cost
increased $84, or approximately 11% of the increase in core noninterest expense,
due to the previously discussed technological enhancements. Offsetting the
higher cost associated with the enhancements are decreases in fraud/forgery
losses of approximately $28. We also incurred additional expense related to
consulting engagements intended to improve efficiency and profitability.
Although expenses increased, we have significantly improved our efficiency
ratio. The growth in noninterest income has been a key factor in the improvement
of our efficiency ratio.
Nine Months Ended Three Months Ended
September 30 September 30
----------------- ------------------
2002 2001 2002 2001
------ ------ ------ ------
Efficiency ratio ..... 60.99% 62.50% 60.44% 62.63%
13
Income tax expense was $5,198 for the nine month period ended September 30,
2002, (with an effective tax rate of 28.41%) compared to $3,845 (with an
effective tax rate of 26.38%) for the same period in 2001. The increase in the
effective tax rate this year was due in part to less tax-free interest income.
Income tax expense was $1,827 and $1,202 for the three month periods ending
September 30, 2002 and 2001 respectively. The effective tax rate for the third
quarters of 2002 and 2001 were 28.68% and 23.83%, respectively.
Liquidity Risk
Liquidity management is the ability to meet the cash flow requirements of
customers who may be either depositors wishing to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs.
Core deposits are a major source of funds used to meet cash flow needs.
Maintaining the ability to acquire these funds as needed in a variety of money
markets is a key to assuring liquidity. When evaluating the movement of these
funds even during times of large interest rate changes, it is apparent that we
continue to attract deposits that can be used to meet cash flow needs.
Management continues to monitor the liquidity and potentially volatile
liabilities ratios to ensure compliance with Asset-Liability Committee targets.
These targets are set to ensure that we meet the liquidity requirements deemed
necessary by management and regulators.
Another source available for meeting our liquidity needs is available-for-sale
securities. The available-for-sale portfolio is composed of securities with a
readily available market that can be used to convert to cash if the need arises.
Other sources available for meeting liquidity needs include federal funds sold
and interest bearing balances with the FHLB. In addition, we may obtain advances
from the FHLB or the Federal Reserve Bank. Funds obtained from the FHLB are used
primarily to match-fund real estate loans in order to minimize interest rate
risk, and may be used to meet day to day liquidity needs.
Capital Resources
We are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. Our
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum balances and ratios. All banks are required to
have core capital (Tier I) of at least 4% of risk-weighted assets (as defined),
4% of average assets (as defined), and total capital of 8% of risk-weighted
assets (as defined). As of September 30, 2002, we met all capital adequacy
requirements to which we are subject.
14
As of September 30, 2002, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized us as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios of 10%, 6%, and 5%, respectively. In the opinion of
management, there are no conditions or events since the last notification that
have changed the institution's category. The Bank's actual capital amounts and
applicable ratios are as follows and do not differ materially from that of the
Company.
Actual
Amount Ratio
------ -----
As of September 30, 2002
Total Capital .................... $ 127,806 14.6%
(to Risk Weighted Assets)
Tier I Capital ................... $ 116,879 13.4%
(to Risk Weighted Assets)
Tier I Capital ................... $ 116,879 9.0%
(to Adjusted Average Assets)
As of December 31, 2001
Total Capital .................... $ 122,162 14.5%
(to Risk Weighted Assets)
Tier I Capital ................... $ 111,622 13.3%
(to Risk Weighted Assets)
Tier I Capital ................... $ 111,622 9.1%
(to Adjusted Average Assets)
Management recognizes the importance of maintaining a strong capital base. As
the above ratios indicate, we continue to exceed the requirements for a well
capitalized bank. Management also recognizes the importance of managing capital
to maximize performance. Our quarterly dividend to shareholders, which is
currently $0.26 per share of common stock, has increased for sixteen consecutive
years. Our dividend payout ratio was 36.80% at September 30, 2002. We continue
to repurchase shares of our common stock in accordance with our strategic plan.
We Purchased 220,556 of our common stock through a tender offer which was
initiated April 16,2001 and expired May 15, 2001. Since then, we have purchased
an additional 247,135 under our stock repurchase plan. On October 15, 2002 our
Board of Directors authorized the repurchase of up to 278,771 additional shares,
or approximately 5%, of our common stock outstanding September 30, 2002. Along
with earnings, unrealized gains on securities available for sale have
contributed to the increase in capital. Under the current rate environment,
unrealized gains on securities available for sale increased from $2,136 on
December 31, 2001, to $6,294 on September 30, 2002, or 294.66% for the nine
month period.
Book value per share was $23.42 and $21.66 at September 30, 2002 and December
31, 2001, respectively. The annualized core return on average equity for the
three month periods ending September 30, 2002 and 2001, was 14.00% and 12.68%,
respectively, and for the nine month periods ending September 30, 2002 and 2001
was 13.80% and 11.68%, respectively.
Our capital policy is to evaluate future needs based on growth, earnings trends
and anticipated acquisitions.
15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our disclosure on quantitative and
qualitative disclosures about market risk since December 31, 2001. For
additional information, see our Form 10-K for the year ended December 31, 2001.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days prior to the filing of
this quarterly report on Form 10-Q, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended) are effective for timely alerting them to material information
required to be included in our periodic SEC reports. Subsequent to the date of
their evaluation, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There have been no material proceedings against us during the quarter ending
September 30, 2002.
Item 6.(a) EXHIBITS
Exhibit No. and Description
3.1 Articles of Incorporation and Articles of Amendment to Articles
of Incoorporation (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed on February 17, 1999, as
amended, and incorporated herin by reference, Commission File No.
333-72507
3.2 By-laws of the Company (as amended March 1, 2001)
10.1 Executive Deferred Compensation Plan A
10.2 Executive Deferred Compensation Plan B
10.3 Directors' Deferred Fee Plan A
10.4 Directors' Deferred Fee Plan B
10.5 Chief Executive Officer Employee Agreement
99.1 Statement of the Chief Executive Officer and the Chief Financial
Officer
(b) REPORTS ON FORM 8-K
On July 18, 2002, we filed on Form 8-K our Second Quarter 2002
Earnings Press Release.
17
SIGNATURES
Pursuant to the requirements 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
---------------------------
Registrant
DATE: November 14, 2002 /s/ E. Robinson McGraw
---------------------------
E. Robinson McGraw
President & Chief Executive Officer
18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, E. Robinson McGraw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Peoples Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: November 14, 2002 /s/ E. Robinson McGraw
---------------------------
E. Robinson McGraw
President & Chief Executive Officer
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stuart R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Peoples Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: November 14, 2002 /s/ Stuart R. Johnson
---------------------------
Stuart R. Johnson
Executive Vice President &
Chief Executive Officer
20