UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2002
Commission file number 001-13253
THE PEOPLES HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
Mississippi 64-0676974
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
209 Troy Street
Tupelo, Mississippi 38802-0709 (662) 680-1001
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(Address of principal executive Registrant's Telephone Number
offices) (Zip Code)
Securities registered pursuant to
Section 12(b) of the Act:
Common Stock, $5.00 Par Value American Stock Exchange
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(Title of Class) (Name of each exchange on
which registered)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
-------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES X NO
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As of June 28, 2002, the aggregate market value of the registrant's common
stock, $5.00 par value, held by non-affiliates of the registrant was
$229,881,834.
As of February 26, 2003, 5,572,751 shares of the registrant's common stock,
$5.00 par value, were outstanding. The registrant has no other classes of
securities outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 10, 2003, relating to the 2003
annual meeting of shareholders of The Peoples Holding Company, are incorporated
by reference into Part III.
THE PEOPLES HOLDING COMPANY
Form 10-K
For the year ended December 31, 2002
CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
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 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 the Company's 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.
ITEM 1. BUSINESS
General
The Peoples Holding Company (referred to herein as the "Company," we, our, or
us) was incorporated on November 10, 1982 under the laws of the State of
Mississippi in order to acquire all of the common stock of The Peoples Bank &
Trust Company, Tupelo, Mississippi (the "Bank").
Our vision is to be the financial services advisor and provider of choice in
each community we serve. With this vision in mind, management reorganized the
branch banks into community banks using a franchise concept. The franchise
approach empowers Community Bank Presidents to execute their own business plans
in order to achieve our vision. Specific performance measurement tools are
available to assist the presidents in determining the success of their plan
implementation. A few of the ratios used in measuring the success of their
business plan include return on average assets ("ROA"), number and type of
services provided per household, fee income shown as a percent of loans and
deposits, efficiency ratio, loan and deposit growth, net interest margin and
spread, percentage of loans past due in greater than 30, 60 and 90 day
categories, and net charge-offs to average loans.
Our vision is further validated through our core values. These values state that
(1) employees are our greatest asset, (2) quality is not negotiable, and (3)
clients' trust is foremost. Centered around these values were the development of
five different objectives that are the focal point of our strategic plan. Those
objectives include: (1) client satisfaction and development, (2) financial
soundness and profitability, (3) growth, (4) employee satisfaction and
development, and (5) shareholder satisfaction and development.
Approximately 150 short and long-range strategic initiatives have been
identified to accomplish our objectives. A majority of the short-term
initiatives have been completed and significant progress has been made on the
long-term initiatives.
Organization
We commenced business on July 1, 1983, the date we acquired the Bank through a
merger. All of our business activities are conducted through the Bank and the
Bank's wholly owned subsidiary, The Peoples Insurance Agency. The Bank accounts
for substantially all of our assets and revenues.
On December 31, 2002, we had 24 community banks (franchises) with 40 banking
offices located throughout Mississippi, specifically in Aberdeen, Amory,
Batesville, Belden, Booneville, Calhoun City, Coffeeville, Corinth, Grenada,
Guntown, Hernando, Iuka, Louisville, New Albany, Okolona, Olive Branch,
Pontotoc, Saltillo, Sardis, Shannon, Smithville, Southaven, Tupelo, Verona,
Water Valley, West Point, and Winona. In addition, our insurance company offices
are located in Corinth, Louisville, and Tupelo.
All members of our Board of Directors are also members of the Board of Directors
of the Bank. Responsibility for the management of the Bank and its subsidiaries
remains with the Board of Directors and officers of the Bank; however,
management services rendered by us to the Bank are intended to supplement the
internal management of the Bank and expand the scope of banking services
normally offered by them.
1
The Bank was established in February, 1904 as a state-chartered bank. It is
insured by the Federal Deposit Insurance Corporation.
At our core, we are a community bank offering a complete range of banking and
financial services 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, our Internet Banking product
and our call center provide 24-hour banking services. Accounts receivable
financing is also available to qualified businesses.
We offer a wide variety of fiduciary services and administer (as trustee or in
other fiduciary or representative capacities) qualified retirement plans, profit
sharing and other employee benefit plans, personal trusts and estates. In
addition to offering annuities, mutual funds and other investment services
through a third party broker-dealer, the acquisition of insurance agencies has
expanded our product and delivery network to include personal and business
insurance coverage. Neither we, nor the Bank, have any foreign activities.
Business Combinations and Acquisitions
On March 26, 1999, the Company merged with Inter-City Federal Bank for Savings
("Inter-City"). At the merger date, total assets, loans, and deposits for
Inter-City totaled $43,482,000, $33,812,000 and $37,751,000, respectively. The
Company exchanged 347,382 shares of its common stock for all the outstanding
common stock of Inter-City.
On June 24, 1999, the Company purchased Reed-Johnson Insurance Agency, Inc.
("Reed-Johnson") with the issuance of 40,530 shares of the Company's common
stock. Located in Tupelo, Mississippi, Reed-Johnson was an independent insurance
agency representing property and casualty companies and providing personal and
business coverage. Reed-Johnson operated as a wholly owned subsidiary of The
Peoples Bank and Trust Company and was renamed The Peoples Insurance Agency,
Inc. in May, 2001.
Southern Insurance Group, Inc., Southern Insurance of Corinth, Inc., and
Southern Financial Services, P.A. (collectively, "Southern") were acquired on
May 1, 2000 by the Company by issuing 70,500 shares of its common stock for a
total price of approximately $1,692,000. Southern offered property and casualty
insurance products, life and health insurance, and annuities and mutual funds.
The acquired companies were merged into the Bank's insurance subsidiary, The
Peoples Insurance Agency, Inc.
The Bank acquired Dominion Company, Dominion Health and Life P.A. (collectively,
"Dominion") and Alliance Finance Company ("Alliance") on September 1, 2000.
Dominion offered products similar to Southern and used Alliance to finance
insurance premiums. The Bank paid $450,000 in cash for the companies. The
acquired companies were merged into the Bank's insurance subsidiary, The Peoples
Insurance Agency, Inc.
Competition
Vigorous competition exists in all major areas where we conduct business. We
compete through the Bank with state and national banks in our service areas, as
well as 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. There are no dominant competitors in our market area.
For 2002, we maintained approximately 20% of the market share in our area. Our
largest competitor is Bancorp South with a market share of approximately 28%.
Other competitors, each with less than 10% of the market share, include Union
Planters Bank, AmSouth Bank, Merchants and Farmers Bank, National Bank of
Commerce, and Trustmark National Bank. In addition, there are local community
banks that compete with us on an individual market basis.
2
Supervision and Regulation
Under the current regulatory environment, nearly every facet of our operations
is subject to requirements and restrictions imposed from various state and
federal banking laws and regulations. The primary focus of these laws and
regulations is on the protection of depositors, the insurance funds of the
Federal Deposit Insurance Corporation ("FDIC"), and the banking system as a
whole. While the following summary addresses the regulatory environment in which
we operate, it is not intended to be a fully inclusive discussion of the
statutes and regulations affecting our operations. The impact from future
changes in federal or state legislation on our operations cannot be predicted.
We are a bank holding company within the meaning of the Bank Holding Company Act
of 1956, as amended (the "Act"), and are registered as such with the Board of
Governors of the Federal Reserve System (the "Board"). We are 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 us and our Bank pursuant to the
Act. The Board also has the authority (which it has not exercised) to regulate
provisions of certain types of our debt.
The Act requires a 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 that is not already majority-owned by such bank
holding company.
The Act provides that the Board shall not approve any acquisition, merger or
consolidation, which would result in a monopoly or which would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking. Neither will the Board approve any other transactions in
which the effect 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. We and our Bank are subject to certain restrictions
imposed by the Federal Reserve Act and the Federal Deposit Insurance Act on any
extensions of credit to the Company or the Bank, on investments in the stock or
other securities of the Company or the Bank, and on taking such stock or other
securities as collateral for loans of any borrower.
The Bank Holding Company Act of 1956 was recently amended to permit "financial
holding companies" to engage in a broader range of nonbanking financial
activities, such as underwriting and selling insurance, providing financial or
investment advice, and dealing and making markets in securities and merchant
banking. The new legislation, the Gramm-Leach-Bliley Act, was enacted on
November 12, 1999, and became effective on March 11, 2000. In order to qualify
as a financial holding company, we must declare to the Federal Reserve our
intention to become a financial holding company and certify that our depository
subsidiary meets the capitalization management requirements and that it has at
least a satisfactory rating under the Community Reinvestment Act. As of December
31, 2002, we had not elected to become a financial holding company.
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.
3
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.
Bank holding companies are allowed to acquire savings associations under The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA").
Deposit insurance premiums for banks and savings associations were increased as
a result of FIRREA, and losses incurred by the FDIC in connection with the
default or assistance of troubled federally insured financial institutions are
required to be reimbursed by other federally insured financial institutions.
Certain restrictions exist regarding the ability of the Bank to transfer funds
to us 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, 2002, the maximum amount available for transfer from the Bank in
the form of cash dividends and loans was 19.65% of the Bank's consolidated net
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
provides for increased funding for the FDIC's deposit insurance fund through
risk based assessments and expands the regulatory powers of federal banking
agencies to permit prompt corrective actions to resolve problems of insured
depository institutions. While most of the Company's deposits are in the Bank
Insurance Fund ("BIF"), a small portion of the Company's deposits that were
acquired from savings associations over the years remain in the Savings
Association Insurance Fund ("SAIF").
The Community Reinvestment Act of 1997 ("CRA") requires the assessment by the
appropriate regulatory authority of a financial institution's record in meeting
the credit needs of their local communities, including low and moderate-income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act") requires
financial institutions to establish anti-money laundering programs and due
diligence policies, procedures and controls with respect to bank accounts
involving foreign individuals and certain foreign banks, and to avoid
establishing and maintaining accounts in the United States for, or on the behalf
of, foreign banks that do not have a physical presence in any country.
The Sarbanes-Oxley Act of 2002 (the "Act") requires publicly traded companies
subject to the Securities Exchange Act of 1933 or 1934 to adhere to several
directives designed to prevent corporate misconduct. Additional duties have been
placed on officers, directors, auditors and attorneys of public companies. The
Act requires certifications regarding financial statement accuracy and internal
control adequacy by chief executive officers and chief financial officers with
periodic reports filed with the Securities and Exchange Commission ("SEC"). The
Act also accelerates Section 16 insider reporting obligations, restricts certain
executive officer and director transactions, imposes new obligations on
corporate audit committees, and provides for enhanced review by the SEC.
Monetary Policy and Economic Controls
The earnings and growth of the banking industry, the Bank and, to a larger
extent, the Company 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.
4
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 our
and our Bank's future business and earnings cannot be predicted with accuracy.
Sources and Availability of Funds
The funds essential to our and our Bank's business consist primarily of funds
derived from customer deposits and borrowings from the Federal Home Loan Bank
and correspondent banks by the banking subsidiary. 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
At December 31, 2002, we employed 587 people at the Bank and the insurance
company on a full-time equivalent basis. The Company has no additional
employees; however, at December 31, 2002, four Bank employees served as officers
of the Company in addition to their bank positions. Two additional Bank
employees were appointed to serve as officers of the Company in February 2003.
Dependence Upon a Single Customer
Neither we nor our Bank is dependent upon a single customer or upon a limited
number of customers.
Available Information
Our Internet address is www.thepeoplesbankandtrust.com. We make available at
this address, free of charge, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practical after we electronically file such material with or
furnish it to, the Securities and Exchange Commission.
5
Table 1 - Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential (In Thousands)
The following tables set forth average balance sheet data, including all major
categories of interest-earning assets and interest-bearing liabilities, together
with the interest earned or interest paid and the average yield or average rate
paid on each such category for the fiscal years ended December 31, 2002, 2001,
and 2000:
2002
-------------------------------------------------
Tax Equivalent Average Balance Yields/
Income or Expense Sheet Amount Rates
----------------- ----------------- -----------
Interest-earning assets
Loans, net of unearned income
Commercial .......................................... $ 33,817 $ 479,515 7.05%
Consumer ............................................ 15,375 186,675 8.24%
Other loans ......................................... 12,673 170,916 7.41%
----------------- -----------------
Total loans, net .............................. 61,865 837,106 7.39%
Other .................................................. 332 19,944 1.66%
Taxable securities
U. S. Government securities*......................... 380 6,229 6.10%
U. S. Government agencies*........................... 3,143 60,275 5.21%
Mortgage-backed securities .......................... 8,418 156,129 5.39%
Trust preferred securities .......................... 428 9,433 4.54%
----------------- -----------------
Total taxable securities ...................... 12,369 232,066 5.33%
Tax-exempt securities
Obligations of states and political subdivisions .... 6,667 87,920 7.58%
Other equity securities ............................. 313 4,267 7.34%
----------------- -----------------
Total tax-exempt securities ................... 6,980 92,187 7.57%
----------------- -----------------
Total securities .............................. 19,349 324,253 5.97%
----------------- -----------------
Total interest-earning assets ......... 81,546 1,181,303 6.90%
Cash and due from banks ................................... 43,439
Other assets, less allowance for loan losses .............. 81,892
-----------------
Total assets ...................... $ 1,306,634
=================
Interest-bearing liabilities
Interest-bearing demand deposit accounts ............... 1,722 $ 99,830 1.72%
Savings and money market accounts ...................... 4,357 290,132 1.50%
Time deposits .......................................... 17,955 559,665 3.21%
----------------- -----------------
Total interest-bearing deposits ................... 24,034 949,627 2.53%
Total other interest-bearing liabilities .......... 2,491 59,563 4.18%
----------------- -----------------
Total interest-bearing liabilities ...... 26,525 1,009,190 2.63%
Noninterest-bearing sources
Noninterest-bearing deposits ........................... 153,346
Other liabilities ...................................... 16,710
Shareholders' equity ................................... 127,388
-----------------
Total liabilities and shareholders' equity .... $ 1,306,634
=================
Net interest income/net interest margin ................... $ 55,021 4.66%
=================
The average balances of non-accruing loans are included in this table. Weighted
average yields on tax-exempt loans and securities 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.
*U. S. Government and some U. S. Government Agency Securities are tax-free in
the state of Mississippi.
6
Table 1 - Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential (continued)
2001
-------------------------------------------------
Tax Equivalent Average Balance Yields/
Income or Expense Sheet Amount Rates
----------------- ----------------- -----------
Interest-earning assets
Loans, net of unearned income
Commercial .......................................... $ 38,336 $ 442,732 8.66%
Consumer ............................................ 18,089 196,378 9.21%
Other loans ......................................... 14,731 177,548 8.30%
----------------- -----------------
Total loans, net .............................. 71,156 816,658 8.71%
Other .................................................. 873 23,429 3.73%
Taxable securities
U. S. Government securities*......................... 2,035 33,864 6.01%
U. S. Government agencies*........................... 2,938 49,346 5.95%
Mortgage-backed securities .......................... 6,568 103,486 6.35%
Trust preferred securities .......................... 200 4,026 4.97%
----------------- -----------------
Total taxable securities ...................... 11,741 190,722 6.16%
Tax-exempt securities
Obligations of states and political subdivisions .... 6,674 84,482 7.90%
Other equity securities ............................. 636 7,822 8.13%
----------------- -----------------
Total tax-exempt securities ................... 7,310 92,304 7.92%
----------------- -----------------
Total securities .............................. 19,051 283,026 6.73%
----------------- -----------------
Total interest-earning assets ......... 91,080 1,123,113 8.11%
Cash and due from banks ................................... 40,146
Other assets, less allowance for loan losses .............. 74,036
-----------------
Total assets ...................... $ 1,237,295
=================
Interest-bearing liabilities
Interest-bearing demand deposit accounts ............... 2,083 $ 77,113 2.70%
Savings and money market accounts ...................... 6,701 263,581 2.54%
Time deposits .......................................... 30,542 580,247 5.26%
----------------- -----------------
Total interest-bearing deposits ................... 39,326 920,941 4.27%
Total other interest-bearing liabilities .......... 1,596 29,347 5.44%
----------------- -----------------
Total interest-bearing liabilities ...... 40,922 950,288 4.31%
Noninterest-bearing sources
Noninterest-bearing deposits ........................... 144,073
Other liabilities ...................................... 18,306
Shareholders' equity ................................... 124,628
-----------------
Total liabilities and shareholders' equity .... $ 1,237,295
=================
Net interest income/net interest margin ................... $ 50,158 4.47%
=================
The average balances of non-accruing loans are included in this table. Weighted
average yields on tax-exempt loans and securities 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.
*U. S. Government and some U. S. Government Agency Securities are tax-free in
the state of Mississippi.
7
Table 1 - Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential (continued)
2000
-------------------------------------------------
Tax Equivalent Average Balance Yields/
Income or Expense Sheet Amount Rates
----------------- ----------------- -----------
Interest-earning assets
Loans, net of unearned income
Commercial .......................................... $ 38,014 $ 418,969 9.07%
Consumer ............................................ 19,196 209,969 9.14%
Other loans ......................................... 16,314 187,650 8.69%
----------------- -----------------
Total loans, net .............................. 73,524 816,588 9.00%
Other .................................................. 459 7,546 6.08%
Taxable securities
U. S. Government securities*......................... 2,832 49,530 5.72%
U. S. Government agencies*........................... 3,046 48,817 6.24%
Mortgage-backed securities .......................... 5,693 89,987 6.33%
Trust preferred securities .......................... 290 3,777 7.68%
----------------- -----------------
Total taxable securities ...................... 11,861 192,111 6.17%
Tax-exempt securities
Obligations of states and political subdivisions .... 6,719 85,048 7.90%
Other equity securities ............................. 324 3,256 9.95%
----------------- -----------------
Total tax-exempt securities ................... 7,043 88,304 7.98%
----------------- -----------------
Total securities .............................. 18,904 280,415 6.74%
----------------- -----------------
Total interest-earning assets ......... 92,887 1,104,549 8.41%
Cash and due from banks ................................... 39,299
Other assets, less allowance for loan losses .............. 53,409
-----------------
Total assets ...................... $ 1,197,257
=================
Interest-bearing liabilities
Interest-bearing demand deposit accounts ............... 2,475 $ 71,373 3.47%
Savings and money market accounts ...................... 9,078 273,217 3.32%
Time deposits .......................................... 30,616 545,583 5.61%
----------------- -----------------
Total interest-bearing deposits ................... 42,169 890,173 4.74%
Total other interest-bearing liabilities .......... 1,963 43,396 4.52%
----------------- -----------------
Total interest-bearing liabilities ...... 44,132 933,569 4.73%
Noninterest-bearing sources
Noninterest-bearing deposits ........................... 141,094
Other liabilities ...................................... 4,690
Shareholders' equity ................................... 117,904
-----------------
Total liabilities and shareholders' equity .... $ 1,197,257
=================
Net interest income/net interest margin ................... $ 48,755 4.41%
=================
The average balances of non-accruing loans are included in this table. Weighted
average yields on tax-exempt loans and securities 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.
*U. S. Government and some U. S. Government Agency Securities are tax-free in
the state of Mississippi.
8
Table 2 - Volume/Rate Analysis
(In Thousands)
The following table sets forth for The Peoples Holding Company, for the years
ended December 31 as indicated, a summary of the changes in interest earned and
interest paid resulting from changes in volume and rates.
2002 Compared To 2001
----------------------------------------
Increase (Decrease) Due To Changes In
----------------------------------------
Volume Rate Net (1)
------------ ------------- -----------
Interest income:
Loans, net of unearned income .................................... $ 1,746 $ (10,954) $ (9,208)
Securities
U. S. Government and agency securities ........................ (977) (420) (1,397)
Obligations of states and political subdivisions .............. 173 (219) (46)
Mortgage-backed securities .................................... 3,341 (1,491) 1,850
Trust preferred and Federal Home Loan Bank securities ......... 269 (41) 228
Other equity securities ....................................... (210) (24) (234)
Other ............................................................ (130) (411) (541)
------------ ------------- -----------
Total interest-earning assets .................................... 4,212 (13,560) (9,348)
Interest expense:
Interest-bearing demand deposit accounts ......................... 613 (974) (361)
Savings and money market accounts ................................ 675 (3,019) (2,344)
Time deposits .................................................... (1,083) (11,504) (12,587)
Borrowed funds ................................................... 1,643 (748) 895
------------ ------------- -----------
Total interest-bearing liabilities ............................... 1,848 (16,245) (14,397)
------------ ------------- -----------
Change in net interest income .................................... $ 2,364 $ 2,685 $ 5,049
============ ============= ===========
(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.
9
Table 2 - Volume/Rate Analysis (continued)
2001 Compared To 2000
----------------------------------------
Increase (Decrease) Due To Changes In
----------------------------------------
Volume Rate Net (1)
------------ ------------- -----------
Interest income:
Loans, net of unearned income .................................... $ 51 $ (2,383) $ (2,332)
Securities
U. S. Government and agency securities ........................ (835) (38) (873)
Obligations of states and political subdivisions .............. (28) 140 112
Mortgage-backed securities .................................... 854 20 874
Trust preferred and Federal Home Loan Bank securities ......... 19 (109) (90)
Other equity securities ....................................... 330 (103) 227
Other ............................................................ 966 (552) 414
------------ ------------- -----------
Total interest-earning assets .................................... 1,357 (3,025) (1,668)
Interest expense:
Interest-bearing demand deposit accounts ......................... 199 (591) (392)
Savings and money market accounts ................................ (320) (2,057) (2,377)
Time deposits .................................................... 1,945 (2,019) (74)
Borrowed funds ................................................... (636) 269 (367)
------------ ------------- -----------
Total interest-bearing liabilities ............................... 1,188 (4,398) (3,210)
------------ ------------- -----------
Change in net interest income .................................... $ 169 $ 1,373 $ 1,542
============ ============= ===========
(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.
10
Table 3 - Investment Portfolio
(In Thousands)
The following table sets forth the amortized cost of investments in (1) U. S.
Treasury and other U. S. agencies and corporations, (2) obligations of states of
the U. S. and political subdivisions, and (3) other securities as of
December 31, 2002, 2001, and 2000:
2002 2001 2000
----------- ----------- -----------
Held to maturity:
U. S. Treasury and other U. S. agencies .......... $ -- $ -- $ --
Obligations of state and political subdivisions*.. -- -- 85,658
Other securities ................................. -- -- --
----------- ----------- -----------
Total ......................................... $ -- $ -- $ 85,658
=========== =========== ===========
2002 2001 2000
----------- ----------- -----------
Available for sale:
U. S. Treasury and other U. S. agencies .......... $ 50,931 $ 66,029 $ 98,998
Obligations of state and political subdivisions*.. 92,464 84,709 --
Other securities ................................. 192,204 123,097 94,023
----------- ----------- -----------
Total ......................................... $ 335,599 $ 273,835 $ 193,021
=========== =========== ===========
*The Company classified all obligations of state and political subdivisions as
held to maturity prior to 2001. As allowed upon adoption of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," the Company transferred all securities from held to maturity to
available for sale.
The following table sets forth the maturity distribution in thousands and
weighted average yield by maturity of securities at December 31, 2002:
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
--------------------- --------------------- --------------------- ---------------------
Available for Sale:
U. S. Treasury
and agency
securities ........... $ 12,024 4.71% $ 30,853 5.86% $ 8,054 3.26% $ -- --
Obligations of
state and political
subdivisions ......... 4,196 7.45% 25,280 7.26% 45,550 6.71% 17,438 6.86%
Mortgage-backed
securities ........... 35,666 5.49% 135,683 5.48% 4,655 6.62% 4,315 2.75%
Trust preferred
securities ........... -- -- 6,792 5.36% -- -- -- --
Other equity
securities ........... 3,893 7.70% 1,200 6.78% -- -- -- --
---------- ---------- ---------- ----------
Total ... $ 55,779 $199,808 $ 58,259 $ 21,753
========== ========== ========== ==========
The maturity of mortgage-backed securities, included as other securities,
reflects scheduled repayments based upon the anticipated average life of the
securities.
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.
Yields on available for sale securities are based on amortized cost.
11
Table 4 - Loan Portfolio
(In Thousands)
The following table sets forth loans, net of unearned income, outstanding as of
December 31, 2002, which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
Loan Maturities
-------------------------------------------------------------------
After One After
Within But Within Five
One Year Five Years Years Total
--------------- --------------- --------------- ----------------
Commercial, financial and
agricultural ............... $ 93,077 $ 42,433 $ 3,947 $ 139,457
Lease financing ............... 7,061 8,277 -- 15,338
Real estate - construction .... 30,664 6,163 314 37,141
Real estate - mortgage ........ 224,830 253,175 96,465 574,470
Installment loans to
individuals ................ 28,418 65,937 2,547 96,902
--------------- --------------- --------------- ----------------
$ 384,050 $ 375,985 $ 103,273 $ 863,308
=============== =============== =============== ================
The following table sets forth the fixed and variable rate loans maturing after
one year for all loans as of December 31, 2002:
Interest Sensitivity
---------------------------
Fixed Variable
Rate Rate
------------ -------------
Due after 1 but within 5 years ................. $ 365,009 $ 10,975
Due after 5 years .............................. 102,747 527
------------ -------------
$ 467,756 $ 11,502
============ =============
Table 5 - Deposits
(In Thousands)
The following table shows the maturity of time certificates of deposits and
other time deposits over $100 at December 31, 2002:
Less than 3 Months .............. $ 45,396
3 Months-6 Months ............... 55,361
6 Months-12 Months .............. 26,852
Over 12 Months .................. 58,311
-----------
$ 185,920
===========
The following table shows the average balances and average rates of deposits at
December 31:
2002 2001 2000
--------------------- --------------------- ---------------------
Average Rate Average Rate Average Rate
------------ -------- ------------ -------- ------------ --------
Noninterest-bearing demand deposits ....... $ 153,346 -- % $ 144,073 -- % $ 141,094 -- %
Interest-bearing demand deposits .......... 99,830 1.72 77,113 2.70 71,373 3.47
Savings and money market deposits ......... 290,132 1.50 263,581 2.54 273,217 3.32
Time deposits ............................. 559,665 3.21 580,247 5.26 545,583 5.61
------------ ------------ ------------
Total ..................................... $ 1,102,973 2.18% $ 1,065,014 3.69% $ 1,031,267 4.09%
============ ============ ============
12
Short-term Borrowings
(In Thousands)
The average balances of short-term borrowings for 2002, 2001, and 2000 were
$4,093, $4,775, and $11,259 at weighted average rates of 1.26%, 3.33%, and 6.15%
respectively.
ITEM 2. PROPERTIES
(In Thousands)
The main offices of the Company and the Bank are located at 209 Troy Street,
Tupelo, Mississippi. Various departments of the Bank occupy each floor of the
five-story building. The Technology Center, also located in Tupelo, houses
electronic data processing, document preparation, document imaging, loan
servicing, and deposit operations. In addition, the Bank operates forty (40)
branches throughout north and north central Mississippi. The Bank has seven (7)
branches in Tupelo; three (3) branches in Booneville; two (2) branches each in
Amory, Corinth, Louisville, Pontotoc, and West Point; one (1) branch each in
Aberdeen, Batesville, Belden, Calhoun City, Coffeeville, Grenada, Guntown,
Hernando, Iuka, New Albany, Okolona, Olive Branch, Saltillo, Sardis, Shannon,
Smithville, Southaven, Verona, Water Valley, and Winona. The Insurance divisions
have one (1) office each in Corinth, Louisville, and Tupelo.
The Bank owns the main offices located at 209 Troy Street, Tupelo, Mississippi
as well as thirty-seven (37) of the branch office sites. The Bank leases three
locations for use in conducting banking activities as well as various storage
facilities. The Peoples Insurance Agency leases one location for conducting its
business. The aggregate annual rental for all leased premises during the year
ending December 31, 2002 was $111.
It is anticipated that by May, 2003, construction will be complete and a new
branch will be operational in Pontotoc, Mississippi. The new branch will be
located on Highway 15, a major thoroughfare in Pontotoc County and will replace
the existing drive-through office. Also, construction on a new branch facility
in Horn Lake, Mississippi, which is in our DeSoto County market, should be
complete by November, 2003. Both new facilities and the land on which they are
constructed will be owned by the Bank. Renovations to our existing Veterans
branch located in Tupelo should be completed during the fourth quarter of 2003.
Plans are also underway to lease a facility in the newly developed Fair Park in
Tupelo to house our Financial Services division. The facilities currently owned
or occupied under lease by the Company or the Bank are considered by management
to be suitable and adequate for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Company or the Bank or any of their
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 2002.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Dividends
The public market for the Company's common stock is limited. The Company's
common stock trades on the American Stock Exchange under the ticker symbol PHC.
On February 26, 2003, the Company had approximately 2,600 shareholders of
record.
The following table sets forth (i) the high and low sales price reported on the
American Stock Exchange for the Company's common stock for each quarterly period
for the fiscal years ended December 31, 2002 and 2001, and (ii) the amount of
cash dividends declared during each quarterly period during such fiscal years:
Prices
Dividends ----------------------------
Per Share Low High
----------- ------------ -------------
2002
1st Quarter .............. $ .25 $ 31.38 $ 38.71
2nd Quarter .............. .26 33.81 40.47
3rd Quarter .............. .26 37.81 41.95
4th Quarter .............. .27 39.40 43.97
2001
1st Quarter .............. $ .23 $ 15.81 $ 19.31
2nd Quarter .............. .24 17.60 32.77
3rd Quarter .............. .24 30.05 34.51
4th Quarter .............. .25 32.27 37.75
The Company declares dividends on a quarterly basis. Funds for the payment of
cash dividends are obtained from dividends received by the Company from the
Bank. Accordingly, the declaration and payment of cash dividends by the Company
depend upon the Bank's earnings and financial condition, general economic
conditions, compliance with regulatory requirements, and other factors.
14
ITEM 6. SELECTED FINANCIAL DATA
(Unaudited)
(In Thousands, Except Share Data)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Year ended December 31:
Interest income ....................... $ 78,418 $ 87,766 $ 89,434 $ 83,500 $ 81,280
Interest expense ...................... 26,525 40,922 44,132 37,342 37,434
Provision for loan losses ............. 4,350 4,790 6,373 3,192 2,591
Noninterest income .................... 27,442 24,389 18,529 19,476 14,461
Noninterest expense ................... 50,496 46,747 42,474 41,480 39,338
------------ ------------ ------------ ------------ ------------
Income before income taxes ............ 24,489 19,696 14,984 20,962 16,378
Income taxes .......................... 6,819 5,109 3,800 6,182 4,697
------------ ------------ ------------ ------------ ------------
Income before cumulative effect
of accounting change ............... 17,670 14,587 11,184 14,780 11,681
Cumulative effect of accounting change. (1,300) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income ............................ $ 16,370 $ 14,587 $ 11,184 $ 14,780 $ 11,681
============ ============ ============ ============ ============
Per Common Share:
Income before cumulative effect
of accounting change ............... $ 3.15 $ 2.48 $ 1.83 $ 2.38 $ 1.88
Cumulative effect of accounting change. (.23) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income ............................ $ 2.92 $ 2.48 $ 1.83 $ 2.38 $ 1.88
============ ============ ============ ============ ============
Book value at December 31 ............. $ 23.82 $ 21.66 $ 20.09 $ 18.71 $ 17.80
Closing price on the AMEX
at December 31 ..................... 40.75 37.00 18.00 28.88 32.31
Cash dividends declared and
paid - the Company ................. 1.04 .96 .88 .84 .72
Cash dividends declared and
paid-Inter-City .................... -- -- -- -- .36
At December 31:
Loans, net of unearned income ......... $ 863,308 $ 827,696 $ 815,854 $ 799,085 $ 729,156
Securities ............................ 344,781 277,293 278,574 266,744 293,639
Assets ................................ 1,344,512 1,254,727 1,211,940 1,162,959 1,107,795
Deposits .............................. 1,099,048 1,063,055 1,046,605 978,958 960,295
Borrowings ............................ 91,806 47,326 24,549 51,269 22,476
Shareholders' equity .................. 132,778 123,582 121,661 116,089 110,209
15
ITEM 6. SELECTED FINANCIAL DATA (continued)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Selected Ratios
Return on average:
Total assets ....................... 1.25% 1.18% .93% 1.29% 1.09%
Shareholders' equity ............... 12.85% 11.70% 9.49% 13.19% 10.85%
Before cumulative effect of
accounting change, return on average:
Total assets ....................... 1.35% 1.18% .93% 1.29% 1.09%
Shareholders' equity ............... 13.87% 11.70% 9.49% 13.19% 10.85%
Average shareholders' equity to
average assets ..................... 9.75% 10.07% 9.85% 9.77% 10.07%
At December 31:
Shareholders' equity
to assets .......................... 9.88% 9.85% 10.04% 9.98% 9.95%
Allowance for loan losses to total
loans, net of unearned income ...... 1.41% 1.37% 1.29% 1.26% 1.34%
Allowance for loan losses
to nonperforming loans ............. 338.22% 178.63% 147.89% 126.47% 261.95%
Nonperforming loans to total
loans, net of unearned income ...... .42% .77% .87% 1.00% .51%
Dividend payout ....................... 35.59% 38.52% 47.76% 35.24% 36.89%
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Overview
Economy
The year 2002 faced its own challenges as the economy began its slow recovery.
The threat of war with Iraq kept consumers spending more conservatively,
corporations holding back on expansion, and Americans watching as fuel prices
increased. At its November meeting, the Federal Reserve Bank, concerned with the
slow recovery and the need for a stimulus, dropped the discount rate 50 basis
points to .75%. This was the only change in rates for the year. The federal
funds rate followed the 50 basis point decline, falling to 1.25% with the prime
interest rate changing from 4.75% to 4.25%.
On the national front, growth in Gross Domestic Product ("GDP") ranged from 5%
in the first quarter to .7% for the fourth quarter. Consumer sentiment was down
from earlier months in the year as it dropped from a high of 96.9 in May to a
low of 80.6 in October. The index ended the year at 86.7. The unemployment rate,
fluctuating between 5.6% and 6%, ended the year at 6% as major corporations
continued to lay off workers.
A positive sign of the recovery was the industrial production growth. While the
nation experienced negative growth during the first half of the year, production
rebounded to 2.1% by the end of 2002. In addition, the Institute for Supply
Management ("ISM") index improved to 54.7, up from prior months of approximately
49. This factor's importance lies in its measurement of whether the economy is
growing or contracting. A ratio of 50 or greater is indicative of a growing
economy. Still lagging, however, was the capital utilization that hovered around
75.5%. This is indicative of slow corporate spending on plant and equipment
until the economy improves and sales volumes rise.
While the economy of north Mississippi is diversified, furniture manufacturing
is an important element. By the end of 2002, housing starts, permits, and new
home sales were up. Normally, furniture orders follow the housing market. The
major housing growth areas for the Company are located in Lee and DeSoto
Counties.
Unemployment rates within our market ranged from 3.8% to approximately 12% at
year-end. The unemployment rates, where we have our largest presence, are
currently below the national average. Lee County, the corporate headquarters for
the Company, as well as surrounding counties, saw a 5% increase in both
manufacturing and non-manufacturing jobs during 2002.
In addition, we are located in two of the top five retail markets in
Mississippi, with 2002 sales up .8% and 14.7% in Lee and DeSoto Counties,
respectively. It is expected that growth for 2003 will be 3.4% and 26.5%,
respectively, for those counties.
Critical Accounting Policies
Our financial statements are prepared using accounting estimates for various
accounts. Wherever feasible, we utilize third-party information to provide
management with estimates. Although independent third parties are utilized to
assist us in the estimation process, management evaluates the results, and
challenges assumptions used and other factors which could impact the estimation.
Following are some of the more significant estimates used in preparing our
financial statements.
The critical accounting policy that is most important to the presentation of our
financial statements relates to the allowance for loan loss and related
provision. See our discussion in the Credit Risk section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Other real estate is carried at lower of cost or fair market value based on
appraisals by certified appraisers. Property values are assessed periodically
for impairment.
17
Our health insurance administrator is Blue Cross-Blue Shield. Coverage is
self-funded up to a set stop loss per employee. We maintain an accrued liability
that includes estimated claims to be paid. The accrued liability account is
evaluated at year-end for adequacy using a lag analysis provided by the
administrator. This data is used to calculate an estimated amount to be paid for
2002 during 2003.
William M. Mercer, Inc. prepares actuarial valuations of our pension cost under
FASB Statement No. 87, as modified by FASB Statement No. 132, and our post
retirement health cost under FASB Statement No. 106. The discount rate used in
the 2002 valuation was 6.75%, down from 7.50% in 2001. Actual plan assets as of
December 31, 2002 were used in the calculation and the expected long-term return
on plan assets assumed for this valuation was 8.00%. The pension plan covered
under FASB Statement No. 87 was curtailed as of December 31, 1996.
We currently have a defined contribution pension plan, which requires the
Company to contribute 5.00% of each qualified employee's salary to the plan. The
accrual for that plan is based on actual qualified salaries for 2002. The 401(k)
expense was calculated in the same manner.
We believe we employ appropriate methods for these calculations that should
closely approximate the actual cost. We review the calculated results for
reasonableness, and compare those calculations to prior period costs. We also
consider the effect of current economic conditions on the calculations.
Performance Results
Record results were achieved in 2002 as earnings per share increased 17.74% over
2001. Earnings per share before the cumulative effect of an accounting change
improved 27.02% over 2001. The significant factor contributing to the
improvement is the effort dedicated to implementing and monitoring our strategic
plan. Through our strategic plan, the management team laid the foundation for
improving credit quality, raising net interest margin, controlling noninterest
expenses, increasing noninterest income, and capital management. Despite the low
interest rates and generally sluggish economic environment, we employed
strategies to improve net interest income. Those strategies included a proactive
approach to pricing of both assets and liabilities, continued restructuring of
our investment portfolio, and pursuit of loan growth.
In the first quarter of 2002, the Company completed the transitional impairment
test required by FASB Statement No. 142, "Goodwill and Intangible Assets." As a
result of this test, we 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 insurance operations are a wholly owned
subsidiary of the Bank. 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. Because the insurance subsidiary acquisition
was a tax-free exchange, there was no tax offset to the impairment cost
recorded. The annual impairment test updated as of December 31, 2002, indicated
no additional impairment.
Net income before the cumulative effect of the accounting change was
approximately 10% greater than projected in the 2002 strategic plan. In
addition, we increased our net interest and noninterest income 10.78% and
12.52%, respectively, over 2001. While noninterest expense increased 8.02%,
largely attributable to normal salary increases, incentive bonuses, health
insurance, pension costs, professional fees, and depreciation costs associated
with technology, the net overhead ratio (noninterest expense less noninterest
income, all divided by average assets) declined from 1.82% in 2001 to 1.77% in
2002.
18
A historical look at key performance indicators is presented below.
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
EPS* ................. $ 3.15 $ 2.48 $ 1.83 $ 2.38 $ 1.88
EPS GROWTH* .......... 27.02% 35.52% (23.11%) 26.60% 6.21%
ROA* ................. 1.35% 1.18% .93% 1.29% 1.09%
ROE* ................. 13.87% 11.70% 9.49% 13.19% 10.85%
*Amounts above exclude Cumulative Effect of Accounting Change. Including this
effect, EPS, ROA & ROE were $2.92, 1.25%, and 12.85%, respectively. EPS growth
reflects changes from the immediately preceding year.
Total assets increased to $1,344,512 at December 31, 2002, up 7.16% over the
prior year, primarily from loans and securities. Moderate growth in deposits and
capital, along with a higher volume of debt, funded this growth.
The Company has an ongoing stock repurchase program under which 129,947 shares
were purchased during 2002 at an average price of $36.09 per share. The closing
price of a single share of common stock on the American Stock Exchange was
$40.75 on December 31, 2002, an increase of 10.14% over the price at December
31, 2001 and an increase of 126.39% over the closing price at December 31, 2000.
Results of Operations
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, comprising 49.02% of total revenue. The primary concerns in managing net
interest income are the mix and the repricing of rate-sensitive assets and
liabilities. We have experienced marked improvement in this area over the course
of the last two years for several reasons. First and foremost was the asset
liability management committee's assertiveness in making pricing decisions to
enhance net interest income. Further enhancing net interest margin was the
effect of changing the mix in our investment portfolio that began in 2001 and
continued in 2002. Finally, we increased our emphasis on loan growth as a result
of recognizing that we must improve our loan to deposit ratio in order to become
a high performing bank. We added two seasoned lenders to our team in the DeSoto
County market, located in the Memphis MSA, and two in the Lee County (Tupelo)
market. One of the new employees in the DeSoto County market will be working in
the capacity as an advisor to all our lenders in that area to improve our market
share.
Net interest income on a tax equivalent basis increased $4,863 or 9.70%, from
$50,158 in 2001 to $55,021 in 2002. Of the tax equivalent increase, $2,346 was
due to the favorable growth in net earning assets with an increase of $2,517 due
to changes in interest rates. The tax equivalent yield on earnings decreased
from 8.11% to 6.90%, or 121 basis points. The cost of interest-bearing
liabilities decreased from 4.31% in 2001 to 2.63% in 2002, or 168 basis points.
The improvement in net interest income was directly attributable to both the
asset-liability committee's approach to proactively pricing its earning assets
and interest-bearing liabilities and the negative gap position of those assets
and liabilities. As interest bearing deposits and loans were repriced, the
asset-liability committee carefully monitored the effect of that repricing.
During 2002, we had more rate sensitive liabilities being repriced than assets
which enhanced margin in the falling rate environment. Growth in public fund
transaction accounts, coupled with Federal Home Loan Bank borrowings, provided
the majority of growth in funding for 2002. Throughout the last two years, as
time deposits matured, many clients have chosen to move their funds to more
liquid deposit accounts as rates have fallen to a 50-year low. This resulted in
a decrease of $10 million in time deposits from December 31, 2001 to December
31, 2002, and a more dramatic $20 million decrease in the average balance of
time deposits for 2002 compared to 2001.
Net interest income on a tax equivalent basis increased $1,403 or 2.88%, from
$48,755 in 2000 to $50,158 in 2001. Of the tax equivalent change, $232 was due
to the favorable growth in net earning assets with an increase of $1,171 due to
changes in interest rates. The tax equivalent yield on earning assets was down
from 8.41% to 8.11%, or 30 basis points. The cost of interest-bearing
liabilities dropped from 4.73% in 2000 to 4.31% in 2001, or 42 basis points. The
decline in rates was directly attributable to the Fed's moves, and the
asset-liability committee's approach to proactively pricing its earning assets
and interest-bearing liabilities. In contrast to 2000, growth in transaction and
money market accounts, coupled with Federal Home Loan Bank borrowings, provided
the majority of growth in funding.
19
Average Earning Assets to Total Average Assets
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
90.41% 90.77% 92.26% 92.41% 92.57%
Average earning assets as a percentage of total average assets are shown above
for a five-year period. The decrease in 2001 was attributable to the purchase of
$20,000 of bank owned life insurance (BOLI) mid-year of 2001. BOLI is classified
as nonearning and included in other assets on the consolidated balance sheet. If
the BOLI had been purchased at the beginning of 2001, the earning asset ratio
for 2001 would have been approximately 90.12%. The improvement for 2002 over the
adjusted 2001 ratio of 90.12% is attributable in part to cash management. The
tax equivalent yields on earning assets were 6.90%, 8.11%, and 8.41%, for 2002,
2001, and 2000, respectively.
Net Interest Margin - Tax Equivalent
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
4.66% 4.47% 4.41% 4.65% 4.70%
Net interest margin, the tax equivalent net yield on earning assets, increased
19 basis points during 2002 over the comparable period in the prior year. The
increase was due in part to many changes made in 2001 such as an improvement in
risk-based pricing on loans and changing the mix of the investment portfolio.
The asset-liability management committee continued to be assertive in setting
rates. In addition, the percent of average time deposits to average total
deposits decreased from 54.48% in 2001 to 50.74% in 2002 of the portfolio,
reducing interest expense that would have offset interest income by shifting
funds to less costly accounts. Further enhancing net interest margin was the
growth in loans, the Company's highest yielding asset.
Net interest margin, the tax equivalent net yield on earning assets, increased 6
basis points during 2001 over the comparable period in the prior year. An
improvement in risk-based pricing on loans, a change in the mix of the
investment portfolio, and an assertive approach to pricing funding sources
resulted in the increase.
Net interest margin was down 24 basis points for 2000 from the comparable period
in the prior year. During the last decade, the Company's net interest margin had
generally been above peer banks; however, during 2000 as deposit costs rose, the
margin declined to the peer average. The trend of a falling margin was due to
interest rate changes and intense competition from other banks and non-banks.
Loans and Loan Interest Income
Loans are the most significant earning asset comprising 64.21%, 65.97% and
67.32% of total assets at December 31, 2002, 2001, and 2000, respectively. The
table below sets forth loans outstanding, according to loan type, net of
unearned income, at December 31:
Loan Portfolio
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Commercial, financial, agricultural ..... $139,457 $138,420 $144,130 $138,329 $123,886
Lease financing ......................... 15,338 16,483 18,531 17,456 12,363
Real estate-construction ................ 37,141 30,564 25,706 37,437 26,410
Real estate-mortgage .................... 574,470 533,232 501,454 460,348 405,352
Installment loans to individuals ........ 96,902 108,997 126,033 145,515 161,145
---------- ---------- ---------- ---------- ----------
Total loans net of unearned income ...... $863,308 $827,696 $815,854 $799,085 $729,156
========== ========== ========== ========== ==========
20
Despite the sluggish economy, total loans increased from $827,696 to $863,308,
or 4.30% during 2002. The most significant increase occurred in the second half
of 2002, due in part to the hiring of lending staff in the DeSoto and Lee county
markets. Consumer loans decreased approximately $12,000 during 2002, largely
attributable to the curtailment of the sales finance division that occurred in
2000. This was approximately $8,143 for 2002 and $13,030 for 2001. The average
loan to deposit ratio was 75.90% for 2002 as shown below. In order to improve
net interest margin and net interest income, our strategic plan includes raising
our loan to deposit ratio to 85.00% by December 2004. Progress toward this goal
is noted in the actual loan to deposit ratio at December 31, 2002 of 78.55%. New
loans recorded in 2002 totaled $246,032, of which 61.23% were secured by real
estate.
Average Loan to Deposit Ratio
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
75.90% 76.68% 79.18% 77.43% 73.86%
Loans increased from $815,854 in 2000 to $827,696 in 2001, or 1.45%. Commercial
loans, specifically first mortgage commercial real estate, provided the majority
of the growth, up 19.56%. First mortgage residential loans experienced growth as
well, but on a more moderate basis.
During 2000, we sold approximately $7,951 in student loans, and curtailed the
sales finance division (indirect lending), reducing the loan growth to 2.10%.
Mortgage loans grew 8.93% over 1999 and were the major growth sector.
Despite interest rate increases and the sale of approximately $18,000 in credit
card loans, loan growth in 1999 was 9.59% over 1998. The most significant
percentage increase loans occurred in real estate construction and mortgages.
Managing the interest rate risk of the loan portfolio has been a challenge
during the last two years with rates dropping to unprecedented lows. Prime was
reduced eleven times during 2001 and once more in November 2002, falling from
9.50% at December 31, 2000 to 4.25% at December 31, 2002. As in 2001, clients
continued to request financing with extended terms in the low interest rate
environment. We employed the use of Federal Home Loan Bank borrowings to
match-fund loans where terms were extended for clients, primarily larger
commercial and real estate loans.
Average yields on loans decreased from 9.00% in 2000 to 8.71% in 2001, and then
to 7.39% in 2002. The most significant changes occurred in commercial loans as
the average yield dropped from 9.07% in 2000 to 8.66% in 2001, and to 7.05% in
2002. Consumer loan yields actually increased from 9.14% in 2000 to 9.21% in
2001, then declined to 8.24% in 2002. The increase in our consumer loan yield
for 2001 was attributable to improvements made in risk-based pricing of our
loans.
The tax equivalent loan interest income was $61,865, $71,156, and $73,524 for
the years ended December 31, 2002, 2001, and 2000, respectively. The tax
equivalent loan interest income decreased $9,291, or 13.06% in 2002 from 2001
fostered by the low interest rate environment. Coupled with this low interest
rate environment was the slight change in the mix of the loan portfolio. In
2002, we experienced a decrease in higher-yielding consumer loans of $12,095,
with approximately $8,143 due to the decrease in the sales finance division.
Tax equivalent loan interest income decreased $2,368, or 3.22% in 2001 from
2000, again, primarily due to rate decreases. For 2000, loan volume and pricing
accounted for increases in income of $4,466 and $1,850, respectively. The tax
equivalent yield on those loans was up 22 basis points to 9.00%.
Investments and Investment Interest Income
Investment income is the second largest component of interest income. The
securities portfolio is used to provide term investments, to provide a source
for meeting liquidity needs, and to supply securities to be used in
collateralizing public funds.
21
Securities by Sector Allocation (at Fair Value)
Sector 2002 2001 2000
------ ------- ------- -------
U. S. Treasury securities ........................ -- % 5% 18%
U. S. Government agencies ........................ 15% 19% 18%
Mortgage-backed securities ....................... 52% 42% 30%
Obligations of states and political subdivisions . 28% 30% 31%
FHLB and other preferred stock ................... 5% 4% 3%
------- ------- -------
100% 100% 100%
======= ======= =======
In 2002, securities income on a tax equivalent basis increased $298 over
securities income on a tax equivalent basis in 2001. The average balance in the
investment portfolio was up $41,227, or 14.57%. The tax equivalent yield on the
portfolio was 5.97%, down 76 basis points from 2001. During 2002, and 2001 as
well, we made a number of changes in our investment portfolio. As Treasury
securities matured, the funds from the maturities were invested in
mortgage-backed and agency securities. At December 31, 2002 the Company had no
Treasury securities.
In 2002, we changed our investment policy to allow us to increase our position
in mortgage-backed securities and collateralized mortgage obligations ("CMOs").
Mortgage-backed securities and CMOs were the primary investments purchased in
2002 with 72.23% of investments coming from this sector. Of the growth in this
sector, approximately $30,000 of GNMA securities was funded by Federal Home Loan
Bank funds, providing a spread on the arbitrage of 2.127%. The use of this
sector of securities has allowed us to increase our cash flow going forward
providing funds for loan growth as well as opportunities for repricing as rates
begin to rise. In addition, mortgage-backed securities have a higher yield than
Treasury and Agency securities.
Other growth for 2002 has come from U. S. Obligations of Government Agencies,
and Obligations of States and Political Subdivisions that provide both
securities for meeting pledging requirements of municipalities and favorable tax
treatment. In addition, we purchased both fixed and variable trust preferred
securities to enhance our yield.
For 2001, securities interest income on a tax equivalent basis increased $147
over securities income over a tax equivalent basis in 2000. The average balance
in the investment portfolio was up $2,611, or .93%. The tax equivalent yield on
the portfolio was 6.73%, down one basis point from the prior year.
In the first quarter of 2001, we changed policy criteria for holding certain
types of securities. Not deviating from soundness, in 2001, we reinvested the
majority of maturing government securities into mortgage-backed securities to
enhance both yield and cash flow. In addition, at the beginning of 2001, we
adopted FASB No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and made the decision under the opinion to reclassify all
securities held to maturity to available for sale. This reclassification
provided more flexibility in managing the investment portfolio, particularly in
this low interest rate environment.
Deposits and Deposit Interest Expense
The Company relies on deposits as its major source of funds. Deposits funded
81.74%, 84.72% and 86.36% of total assets at December 31, 2002, 2001 and 2000,
respectively. Total deposits were $1,099,048, $1,063,055 and $1,046,605 as of
December 31, 2002, 2001 and 2000, respectively. Deposit growth for 2002 was
3.39%, an improvement over the 2001 growth of 1.57%.
Noninterest-bearing deposits were $147,565, $145,690 and $131,718 at December
31, 2002, 2001 and 2000, respectively, and funded 10.98%, 11.61% and 10.87% of
total assets at those dates. The average balance for 2002 was up $9,273 over
2001 while the average balance for 2001 was up 2.11% over that of 2000.
Noninterest-bearing accounts grew most significantly in the free checking,
personal, and over 65 accounts in both 2002 and 2001. In 2002, we also saw
significant increases in Prime Time accounts and Small Business accounts, both
which were targeted in various promotions. In recognition of our shareholders'
on-going support, we made a special offer of free checking for life with their
participation in our dividend reinvestment plan in 2001.
22
Average Interest-Bearing Deposits to Total Average Deposits
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
86.10% 86.47% 86.32% 85.38% 85.83%
Interest-bearing deposits at December 31, 2002, 2001, and 2000 were $951,483,
$917,365 and $914,887, respectively. Growth for 2002 was 3.72%, primarily due to
public funds. Time deposits were down at December 31, 2002 approximately $10,000
to $550,457 compared to December 31, 2001. The balances in the "You Can't Lose"
time deposits were up $75,226 over balances at December 31, 2001. The "You Can't
Lose" deposit type, which allows the client one rate increase during the term of
the deposit, has been a popular product during last the two years.
In 2001, growth remained flat as clients looked for higher yielding
alternatives. As the federal funds rate dropped during the year, rates paid on
all types of interest-bearing transaction accounts and time deposits followed.
By the end of 2001, market rates paid on these accounts ranged from 1.00% to
2.00% while time deposit rates ranged from 1.85% to 4.00%. Offsetting the low
growth in deposits was a record year in annuity sales in 2001 of approximately
$14,600, up from approximately $7,700 in 2000. This product proved to be the
right alternative for many of our clients since the stock market was in a
downturn and interest rates on deposit accounts had fallen significantly.
Interest-bearing deposits increased 9.05% during 2000, principally from
certificates of deposit. During 2000, we offered a number of deposit specials
that were attractive to our client base, particularly in certificates of
deposit. This offering was the result from the highly competitive market for
deposits. Loan demand was high early in 2000, fueling the need for banks to
raise deposits to support loan growth.
Our average time deposit balance as a percent of average total deposits moved
from 52.90% in 2000 to 54.48% in 2001. While 2001 showed improvement in net
interest income; only a portion of the time deposits had been repriced. Many of
those higher rate specials offered in 2000 had one-year terms or greater so,
while we began to get some relief in 2001, there were still many time deposits
that did not reprice until late 2001 and early 2002. The ratio of average time
deposits to average total deposits was 50.74% in 2002, comparable to the 1999
level.
Interest expense for deposits was $24,034, $39,326, and $42,169, for 2002, 2001,
and 2000, respectively. The cost of interest-bearing deposits was 2.53%, 4.27%,
and 4.74% for the same periods.
Borrowed Funds and Interest Expense on Borrowings
Advances from the Federal Home Loan Bank ("FHLB") were $86,308, $41,145 and
$19,946 for the years ended December 31, 2002, 2001 and 2000, respectively.
Advances from the FHLB were up 109.77% and 106.28% over the prior year balances
in 2002 and 2001, respectively. As rates fell to 50 year lows in 2001 and
remained at those levels until falling another 50 basis points in November,
2002, both consumer and commercial loan clients were refinancing at lower rates
with extended maturities. In order to offset this interest rate risk, funds were
borrowed from the Federal Home Loan Bank to match-fund those loans, negating
interest rate exposure when rates rise. Such match-funded loans are usually
large commercial or real estate loans. As discussed earlier, the Company set up
an arbitrage, funding the purchase of mortgage-backed securities with FHLB
funds. The total borrowed for the arbitrage was $30,000 with a weighted average
interest rate of 2.51%. The weighted average maturity and rate of total funds
borrowed from the Federal Home Loan Bank in 2002, 2001, and 2000 was 52 months
with an average cost of 3.09%, 63 months with an average cost of 3.88%, and 216
months with an average cost of 7.64%, respectively.
The treasury tax and loan account balances for 2002, 2001, and 2000 were $5,498,
$6,181, and $4,603, respectively. The balance in this account is contingent on
the amount of funds we pledge as collateral as well as the Federal Reserve's
need for funds. Interest expense on total borrowings (inclusive of advances from
the Federal Home Loan Bank and treasury tax and loan) was $2,491 in 2002, up
from $1,596 in 2001 due to increased borrowing which more than offset the
decline in interest rates. Interest expense in 2001 was $1,596, $367 less than
the expense for 2000 due to both lower rates and a 32.37% decrease in average
borrowed funds.
Toward the end of 2002, more reliance was placed on borrowed funds. The balance
in borrowed funds for 2002, including the treasury tax and loan account and
loans from the Federal Home Loan Bank, was up $44,480 or 93.99%. The average
balances of borrowed funds were $59,563, $29,347 and $43,396 for 2002, 2001, and
2000, respectively. Interest expense was up from $1,596 in 2001 to $2,491 in
2002. The cost of those funds in 2002 was 4.18%, down from 5.44% in 2001.
23
Provision for Loan Losses to Average Loans
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
.52% .59% .78% .42% .38%
The provision for loan losses was $4,350, $4,790, and $6,373 for 2002, 2001, and
2000, respectively. Despite a recession during the year 2001 and a notable lack
of recovery in 2002, loan quality improved as both net charge-offs and
non-performing loans decreased first during 2001, and again during 2002. During
2002 and 2001, the most significant charge-offs were from real estate mortgage
loans, which comprise approximately 67% of our loan portfolio. Consumer loan
charge-offs improved from the prior year for both 2002 and 2001 due to the
curtailment of the Sales Finance Division.
During 2000, we experienced deterioration in credit quality for both commercial
and mortgage loans. However, the largest growth in net charge-offs was from
consumer loans, particularly in the sales finance loans.
Noninterest Income (Less Securities Gains/Losses) to Average Assets
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
2.09% 1.96% 1.55% 1.37%* 1.35%
* Ratio does not include the gain on the sale of the credit card portfolio.
In 2002, there was much emphasis placed on our existing client base. While we
did not expand our market territory, we made changes aimed at increasing our
share of our current market. Rather than introduce new product lines, we
developed plans directed at selling our existing products, with emphasis on our
seniors and Prime Time Gold programs aimed at attracting the more affluent
market. We conducted over fifty events throughout our market area for this group
in 2002. The events included health fairs as well as programs on topics such as
fraud, "street smarts", identity theft, estate planning, long-term care,
Medicare supplements, wealth management, and retirement fundamentals. In
addition, we published and mailed a quarterly newsletter for both clients and
non-clients in this segment of our market. We have noted an increase in services
provided and in new clients as a result of these programs. We expect future
growth from these programs over the next two to five years.
Total noninterest income includes fees generated from deposit services, loan
services, insurance products, trust and other wealth management products and
services, security gains, and all other non-interest income. We made significant
improvement in enhancing our noninterest income during both 2002 and 2001.
Noninterest income for 2002 was $27,442, up $3,053 over 2001 for a growth rate
of 12.52%. Noninterest income for 2001 outpaced 2000 by $5,860, or 31.63%.
Noninterest income represented 25.92%, 21.75% and 17.16% of total revenue for
2002, 2001, and 2000, respectively. During both 2002 and 2001, management
continued to work at the implementation of our strategic plan, particularly in
the services offered and fees assessed. The successful completion of theses
initiatives has resulted in substantial growth for both years.
As an extension of our strategic plan, our franchises developed their own vision
and mission statements, and business plans for achieving their goals. Those
plans include specific programs for fostering additional client relationships.
The execution of this program has resulted in greater sales not only in service
charge revenue, but also other fees as well.
24
In 2002, fees generated from deposit services increased $1,299, or 8.74% over
2001. The additional income generated was derived primarily from service charges
on deposit accounts (including overdraft fees), fees earned from use of our
debit cards inclusive of interchange fees, and fees generated through our
merchant business. Only minor changes were made to the fee structure on deposit
account products during 2002.
For 2001, fees generated from deposit services increased $2,252, or 17.86% over
2000. The restructuring of fees on selected transaction accounts and account
activity provided the growth. Some administrative fees were assessed to cover
the cost of handling client accounts such as returned bank statements and return
items.
Fees earned from loan services in 2002 were $700, or 20.45% greater than fees
earned in 2001. Fees associated with originating loans were restructured at the
end of the first quarter of 2002 in order to help offset operating costs
associated with offering loan products. The new fee structure is tiered both on
commercial and consumer loans and based on loan size.
In 2002, we added origination and closing fees on both commercial and consumer
loans. This fee is tiered, and the charge depends on the size of the credit. The
increase in fees attributable to the restructured fees and additional loan
volume was approximately $916. In addition, the income in 2002 includes $139 in
a prepayment penalty on a loan that was funded through the Federal Home Loan
Bank. Finally, income on the sale of mortgage loans remained strong in 2002 due
to both the originating and refinancing of approximately $77,000 in mortgage
loans. While the gains on mortgage loans were up moderately over 2001, the
amortization of mortgage servicing rights was up $173, or 671.30% over 2001. We
recorded additional impairment of $159 during the fourth quarter of 2002 related
to prepayments on the mortgage loans being serviced by the Company. In contrast
to the past, most mortgage loans originated are sold with servicing released.
The Company, however, still services approximately $80,000 in loans originated
prior to 2002.
Fees earned from loan services for 2001 were $1,172, or 52.04%, greater than
2000. Document preparation fees, mortgage loan fees and gains on sales of
mortgage loans were the main contributors to the increase. The mortgage loan
business gained momentum during 2001 as rates fell to unprecedented lows. In
2000, we experienced a decrease in fees generated from mortgage originations of
approximately $198, primarily due to interest rates.
Income earned on insurance products increased $458 or 13.46%, $1,406 or 70.45%,
and $1,651 or 478.01% in 2002, 2001, and 2000, respectively. We implemented an
insurance integration plan in 2001 aimed at improving our cross-selling
performance between the Bank and the insurance company and continue to use and
refine that plan. A secondary benefit resulting from increased sales is the
opportunity to improve contingency income. Contingency income is a bonus
received from the insurance underwriters and is based both on commission income
and claims experience on our clients during the previous year. The change in
income for insurance products in 2002 includes an increase of $91 for
contingency income.
Our Financial Services division encompasses trust services, annuities and mutual
funds, and specialized insurance products for business and estate secession. A
manager was placed over this division in 2001 with the responsibility of
fostering growth through building client relationships. The team was assembled
at the end of 2002. In 2002, the revenue generated by this division decreased
$96, or 6.14%. Revenue from mutual fund and annuity sales decreased $234. Trust
revenue was up $118 in 2002 over 2001, offsetting some of the decrease from
other products. The increase in trust revenue was attributable to new accounts
as well as an additional 7.5 basis points received on accounts from our money
manager. The renegotiation of the rate received from our money manager occurred
mid-year. Income for this division for 2001 was $95, or 6.47%, greater than the
prior year due to mutual fund and annuity sales. Trust revenue in 2001 declined
$161, or 15.73% from the previous year. The reduction was due to the loss in
value of the trust assets under management. As the stock market declined, the
value of the trust accounts decreased. Fees charged by the Trust division are
based, in part, on the value of the assets in the trust accounts.
Cash surrender value earned on bank owned life insurance ("BOLI") in 2002 was
$517 greater than that earned in 2001 due to the period that BOLI was held by
the Company. We purchased $20,000 in BOLI in late May 2001 for the purpose of
offsetting the rising cost of health insurance. BOLI income earned in 2001 was
$707.
A death benefit of approximately $200 was received during 2002 on a participant
in the Company's deferred compensation plan. Also, cash surrender value earned
on life insurance purchased through the Bank's deferred compensation plan in
2002 was approximately $40 less than 2001; the income recorded in 2001 was
approximately $53 greater than that recorded in 2000. Both items discussed above
were classified as other income.
25
Securities gains of $93 for 2002 resulted from $46,870 in security sales. These
were primarily mortgage-backed securities that were sold to eliminate those
securities with maturity concentrations or accelerated prepayments. Sales also
included securities in the agency, obligation of state and political
subdivision, and other preferred stock sectors.
Securities gains of $94 for 2001 resulted from $18,620 in security sales. These
securities included odd lot mortgage-backed securities, preferred stock, and
collateralized mortgage obligations. The proceeds from these funds were used to
reinvest in other mortgage-backed securities and to fund bank owned life
insurance.
Noninterest Expense to Average Assets
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
3.86% 3.78% 3.55% 3.62% 3.68%
Total noninterest expense includes salaries and employee benefits, data
processing, net occupancy, equipment, and other noninterest expense. Noninterest
expense was $50,496, $46,747, and $42,474 for 2002, 2001, and 2000,
respectively. Noninterest expense increased 8.02%, 10.06%, and 2.40% for 2002,
2001, and 2000, respectively.
Salaries and employee benefits represent 58.22%, 56.62% and 53.37% of total
noninterest expenses at December 31, 2002, 2001, and 2000, respectively. As a
percent of net interest-and noninterest income, salaries and employee benefits
were 37.06%, 37.16% and 35.51% for the years 2002, 2001, and 2000, respectively.
Salaries and employee benefits cost for 2002 increased $2,933 over 2001.
Salaries for 2002 increased $922, or 5.05%, over 2001 due to normal annual
salary increases and staff additions. The additions occurred in the two fastest
growing markets of the Company, Desoto and Lee Counties, and were primarily
lending staff to enhance the Company's loan growth. Incentive cost in 2002
increased $859, or 48.76%, over 2001 as a result of the improvement in the
Company's performance. Commission expense in 2002 was $234, or 37.50%, greater
than 2001 due to the additional revenue generated through insurance, mortgage
and merchant sales. Our insurance producers, mortgage originators and merchant
representatives are paid primarily on a commission basis. In addition, health
and life insurance cost was $701, or 36.95%, greater than 2001. The increase in
health and life insurance is due to the rising cost of insurance as well as
increased claims filed for 2002. Retirement plan cost in 2002 was $201 greater
than 2001 due to the increase in the Company's match for the 401(k) plan as well
as cost associated with the defined contribution plan.
For 2001, salaries and employee benefits were up $3,799, or 16.76% over 2000.
Regular salaries and insurance commissions were up 6.12% and 119.70%,
respectively in 2001. The size of both increases is due primarily to normal
salary increases, the timing of adding insurance agencies and the opening of new
banking facilities during 2000. Employee overtime continued to drop from prior
year levels, offsetting a part of the increase. The most significant change in
salaries and benefits came from the incentive plan, up $1,764, and related
employment taxes. There was no incentive expense for 2000. Increases in other
costs including health insurance, pension, post retirement benefits, and ESOP
funding contributed to the growth.
Data processing cost for 2002 was up $263, or 7.52%, over 2001. The increase is
attributable to volume for our merchant business as well as services with our
core service provider. The upgrade of our deposit platform system increased
cost, as did the implementation of a new consumer internet banking platform. In
addition, a new loan platform system will be installed in the first quarter of
2003.
In 2001, data processing expenses increased 9.97%, or $317, over 2000. During
2001, we installed a teller platform system purchased from our core service
provider, Metavante. While costs related to the use of this system increased,
other costs decreased such as other losses and charge-offs as cash and fraud
losses dissipated.
Occupancy expense in 2002 was down $62 from 2001 due largely to the sale of a
building in January, 2002. Occupancy expense in 2001 was up a modest 1.77%, or
$55, over 2000. This change was due to an increase in depreciation for buildings
and furniture, janitorial costs, and utilities. These costs were partially
offset by decreases in rent expense and building supplies, and the recognition
of a loss on the sale of a building during 2001.
26
Computer and equipment expenses have increased $146, $151, and $765 over the
prior year expense for the years 2002, 2001, and 2000, respectively. These
increases resulted from computer and software depreciation, maintenance and
support fees. We have made several technological enhancements during 2002 and
2001 including the installation of a teller platform system, and upgrading both
our deposit platform system and the credit-scoring module. We also upgraded data
storage to a robotic DVD device, providing near on-line access to data (check
images), and purchased software to enhance read rates in item processing. These
upgrades have enhanced productivity, reduced losses, and provided better service
for our clients. We have noted improvement in both cash short and losses and
charge-offs as a result of the teller platform and deposit platform systems.
We are in the process of implementing a new loan platform system, which will be
operational in the first quarter of 2003. Additionally, 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, to evaluate the benefits, and to progress with
implementation of systems that are deemed beneficial for our clients and
shareholders. This practice is directly influenced by our vision to be the
financial services advisor and provider of choice in the communities we serve.
As noted, the increase in computer and equipment expense for 2002 and 2001 is
less than the increase for 2000. In 2000, we experienced an increase in
depreciation largely attributable to assets purchased in December 1999. The
largest additions included the wide area network, document imaging software, and
credit scoring software. Due to the specifications of the software, a
significant investment was also made in microcomputers.
Other noninterest expense in 2002 was $469, up 4.43%, over 2001. Increases were
noted in public relations due largely to sponsorship of a hospice house,
contribution to Future Focus, and the publication of a newsletter for senior
citizens. Telephone and data line cost increased due to enhancements made in our
call center and upgrades to either 256K data lines or T1 data lines at most
locations for enhanced efficiency. Other fees also increased due to fees paid to
consultants based on revenue enhancements generated from implementing their
recommendations and fees paid to information technology consultants
specificially to address our strategic technology plan, infrastructure
(including network) assessment, and security. Other insurance expense, other
than building and auto, increased 28.79% over 2001. Decreases in 2002 include
OREO expense, down $195 due to impairment recorded in 2001 of $280, other losses
and charge offs down $96 from 2001, and intangible amortization down $325 from
2001 as a result of compliance with FASB Statement No. 142. The Company will
continue to amortize an intangible originating from a purchase in compliance
with FASB Statement No. 147. All other intangible assets will be evaluated
periodically for impairment based on the present value of future cash flows.
Remaining relatively flat for 2001, other noninterest expense in 2001 decreased
..46%, or $49, over 2000. Increases recorded included the recognition of
impairment on other real estate owned, mortgage fees, intangible amortization,
postage expense, and title insurance cost. These increases were offset by
reductions in travel, dues, fees, marketing, telephone, stationery and supplies.
Efficiency Ratio
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
61.24% 62.71% 63.13% 63.82% 64.56%
Our efficiency ratio continues to improve from prior year levels. This ratio is
a standard performance measurement tool which encompasses tax-equivalent net
interest income, noninterest income (excluding security gains) and noninterest
expense. The increase in tax-equivalent net interest income and noninterest
income, less security gains continue to provide the catalyst for the
improvement. Tax-equivalent net interest income has improved as the result of
proactive pricing decisions made by our Asset Liability Committee as well as
strategic structuring of cash flow from investments and borrowed funds. We have
also benefited from being in the position of repricing liabilities faster than
assets in the rate environment we have been operating under. Noninterest income
has improved due to our offering of new products as well as acquiring new
clients. As evidenced in our slogan "more than a bank", we have expanded our
product line from traditional banking services to a full line of financial
services including insurance products, financial planning, investments and
fiduciary services. Noninterest expenses in 2002, while up 8.02% over 2001, were
more than offset by the improvement in revenue. While we emphasized operating
expense control, we also recognized that additional cost was necessary in order
to expand our product line and improve our level of service. As the efficiency
ratios above show, the additional cost incurred by the Company over the last
five years was more than offset by the additional revenue generated.
27
Income tax expense for 2002, 2001, and 2000 was $6,819, $5,109, and $3,800,
respectively. The effective tax rates for those years were 27.85%, 25.94%, and
25.36%. During the last three years, we continued to invest in tax-exempt
securities, and tax-free leases and loans. The average tax-exempt securities as
a percentage of the investment portfolio increased from 31.49% in 2000 to 32.61%
in 2001, and then decreased to 28.43% in 2002. In 2002, we recorded a nontaxable
death benefit from life insurance. In 2001, we purchased $20,000 in bank owned
life insurance. This purchase resulted in recording $1,224 and $707 in
tax-exempt income for 2002 and 2001, respectively.
Risk Management
The management of risk is an on-going process. Primary risks that are associated
with the Company include 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 counter-party default. 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. We try to maintain
diversification within our loan portfolio in order to minimize the effect of
economic conditions within a particular industry.
The allowance for loan losses is available to absorb probable credit losses
inherent 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
collective impairment as recognized under FASB Statement No. 5, "Accounting for
Contingencies". The collective impairment is calculated based on loans grouped
by grade. Another component of the allowance is 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 under FASB Statement No. 114
and their related allowance is included in management's estimation and analysis
of the allowance for loan losses. Other considerations in establishing the
allowance for loan losses include economic conditions reflected within industry
segments, unemployment rate in our market, loan segmentation, and historical
losses that are inherent in the loan portfolio. If the allowance is deemed
inadequate, management provides additional reserves through the provision for
loan losses. The allowance for loan losses was $12,203 and $11,354 at December
31, 2002 and 2001, respectively.
Allowance for Loan Losses to Loans
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
1.41% 1.37% 1.29% 1.26% 1.34%
The net charge-offs for 2002 and 2001 were $3,501 and $3,972, respectively.
Below is a chart showing net charge-offs as a percent of total net charge-offs
by each category. Charge-offs and recovery amounts by loan category are
presented on page 30.
Net charge-offs 2002 2001 2000 1999 1998
- --------------- -------- -------- -------- -------- --------
Commercial, financial, agricultural ... 26.96% 22.96% 36.25% 25.17% 14.06%
Lease financing ....................... -- -- -- -- --
Real estate-construction .............. 2.60 1.46 0.56 1.18 1.11
Real estate-mortgage .................. 49.87 42.17 27.92 6.36 8.65
Installment loans to individuals ...... 20.57 33.41 35.27 67.29 76.18
-------- -------- -------- -------- --------
Total net charge-offs .............. 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
28
Higher credit standards resulted in lower net charge-offs for 2002 of $471, or
11.86% from 2001. For 2002, the most significant change in net charge-offs was
in the consumer loan sector, which decreased $607, or 36.17% from 2001. This
improvement was primarily due to the sales finance loans that continued to
decrease; losses in sales finance loans decreased 43.08% from 2001. Net
charge-offs in real estate-mortgage loans in 2002 were up $71, or 1.76%,
primarily due to the increased loan volume in that sector of $41,238, or 7.73%.
Net charge-offs for commercial, financial and agricultural and real estate
construction loans were relatively unchanged from 2001. Loan losses for 2001
were significantly below 2000, dropping 32.62%, or $1,923. Commercial loan and
consumer loan net charge-offs decreased 57.32% and 36.17%, respectively, in
2001. The majority of the consumer loans charged off in both 2001 and 2000 were
in used automobiles and sales finance loans. Net charge-offs for 2001 in real
estate mortgage and real estate-construction loans were in line with net
charge-offs from those categories in 2000. The charge-offs in real estate
mortgage loans for both 2001 and 2000 consisted of older credits comprised of 1
- - 4 family and nonfarm residential properties. These losses resulted from poor
underwriting. During 2001, we enhanced our underwriting criteria by implementing
higher credit standards, by evaluating loan officer credit limits, and by more
closely evaluating real estate appraisals. Management continues to monitor loans
and utilize diligent collection efforts.
Net Charge-offs to Average Loans
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
.42% .49% .72% .38% .30%
Nonperforming loans are those on which the accrual of interest has stopped or
the loans are 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.
During 2002, we continued to refine the credit scoring process that was
implemented in 1999. Toward the end of the year, formalized underwriting
standards for small business loans were implemented. The credit scoring is used
as a tool for evaluating credit risk and is proving itself as an effective tool.
Management has recognized the improvement in loan quality as loans are being
scored.
We have a number of documented loan policies and procedures that set forth the
approval and monitoring process of the lending function. Adherence to these
policies and procedures is mandated by management and the Board of Directors.
The Company operates a number of committees and an underwriting staff that
oversee the lending operation. Those include in-house loan and loss management
committees, and a Board of Directors loan committee. In addition, we maintain a
loan review staff.
The underwriters review and score loan requests that are made by our lending
staff. In compliance with policy, the lending staff is given lending limits
based on their knowledge and experience. In addition, each lending officer's
prior performance is evaluated for credit quality and compliance as a tool for
establishing and enhancing lending limits.
Before funds are advanced, loans are scored by the underwriters. Grades are
assigned based on the scoring of the loans that are funded. This information is
used to assist management in monitoring the credit quality. Loan requests of
amounts greater than the officers' lending limits are reviewed by an in-house
loan committee. This committee is comprised of executive management. Decisions
on funding loan requests are made or declined at this level provided they are
within approved lending limits. Loan requests that exceed this group's lending
authority are submitted to a loan committee comprised of members of the Board of
Directors.
The allowance for loan losses is established after input from management, loan
review, and the Loss Management Committee. An evaluation of the adequacy of the
allowance is based on the types of loans, the credit risk in the portfolio,
economic conditions and trends within each of these factors. The Loss Management
Committee monitors loans that are past due or those that have been downgraded
due to a decline in the collateral value or cash flow of the debtor.
29
Foreclosure proceedings are initiated after all collection efforts have failed
and the sale of the collateral has resulted in a deficiency balance. Loans that
have a deficiency balance are sent to the loan committee comprised of the Board
of Directors for charge-off approval. These charge-offs reduce the allowance for
loan losses.
All loans are classified into grades by lending personnel. These grades are used
in the calculation for the adequacy of the allowance for loan losses. Loan
grades range between 1 and 9, with 1 being loans with the least credit risk.
Allowance factors established by management are applied to each grade to
determine the amount needed in the allowance for loan losses. Loan review
personnel monitor the grades assigned to loans through periodic examination. The
allowance factors are established based on our loss experience, adjusted for
trends and expectations about losses inherent in our existing portfolios, as
well as regulatory guidelines for criticized loans. For impaired loans, a
specific reserve is established to adjust the carrying value of the loan to its
fair value.
The adequacy of the allowance for loan losses is calculated quarterly. These
calculations are reviewed by management and the internal loan review staff. If
the allowance is deemed inadequate, management increases the allowance by a
charge to the provision for loan losses.
On a monthly basis, management and the Board of Directors review loan ratios.
These ratios include the loan to deposit ratio, the allowance for loan losses as
a percentage of total loans, net charge-offs as a percentage of average loans,
the provision for loan losses as a percentage of average loans, nonperforming
loans as a percentage of total loans, and the allowance coverage on
nonperforming loans. In addition, management reviews past due ratios by officer,
community bank, and Company.
Non-Accrual, Past Due and Restructured Loans to Loans
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
.42% .77% .87% 1.01% .53%
Summary of Loan Loss Experience
(In Thousands)
The table below reflects the activity in the allowance for loan losses for the
years ended December 31:
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Balance at beginning of year ......... $ 11,354 $ 10,536 $ 10,058 $ 9,742 $ 9,221
Provision for loan losses ............ 4,350 4,790 6,373 3,192 2,591
Charge-offs
Commercial, financial,
agricultural ............... 1,025 951 2,237 882 433
Lease financing ................. -- -- -- -- --
Real estate-construction ........ 142 59 37 41 34
Real estate-mortgage ............ 1,972 1,719 1,746 223 267
Installment loans to individuals. 1,028 1,574 2,338 2,288 1,803
------------ ------------ ------------ ------------ ------------
Total charge-offs .................... 4,167 4,303 6,358 3,434 2,537
Recoveries
Commercial, financial,
agricultural .............. 81 39 100 158 142
Lease financing ................. -- -- -- -- --
Real estate-construction ........ 51 1 4 7 11
Real estate-mortgage ............ 226 44 100 40 88
Installment loans to individuals. 308 247 259 353 226
------------ ------------ ------------ ------------ ------------
Total recoveries ..................... 666 331 463 558 467
------------ ------------ ------------ ------------ ------------
Net charge-offs ................. 3,501 3,972 5,895 2,876 2,070
------------ ------------ ------------ ------------ ------------
Balance at end of year ............... $ 12,203 $ 11,354 $ 10,536 $ 10,058 $ 9,742
============ ============ ============ ============ ============
30
The following table presents in thousands the allocation of the allowance for
loan losses by loan category at December 31 for each of the years presented.
There is a significant difference in the reserve allocated for commercial,
financial, agricultural and for real estate-mortgage for 2002 compared to prior
years. In prior years, the reserve was allocated based on our internal "watch
list" and was classified based on the business purpose of the loan. In 2002, the
reserve was allocated based on FDIC Call Report classifications, consistent with
the grouping of loans presented in this report.
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Commercial, financial, agricultural ... $ 2,724 $ 6,838 $ 6,470 $ 7,170 $ 6,852
Lease financing ....................... 279 330 371 349 247
Real estate - construction ............ 343 -- -- -- --
Real estate - mortgage ................ 7,603 1,704 1,246 195 283
Installment loans to individuals ...... 1,055 2,346 2,238 1,982 1,933
Unallocated ........................... 199 136 211 362 427
--------- --------- --------- --------- ---------
Total ................................. $12,203 $11,354 $10,536 $10,058 $ 9,742
========= ========= ========= ========= =========
Loans by Category to Total Loans
The following table presents the percentage of loans, by category, to total
loans at December 31 for each of the years presented:
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Commercial, financial, agricultural ... 16.15% 16.73% 17.67% 17.31% 16.99%
Lease financing ....................... 1.78 1.99 2.27 2.19 1.70
Real estate - construction ............ 4.30 3.69 3.15 4.68 3.62
Real estate - mortgage ................ 66.54 64.42 61.46 57.61 55.59
Installment loans to individuals ...... 11.23 13.17 15.45 18.21 22.10
----------- ----------- ----------- ----------- -----------
Total ................................. 100.00% 100.00% 100.00% 100.00% 100.00%
=========== =========== =========== =========== ===========
Loan Loss Analysis
(In Thousands) 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Loans-average ......................... $ 837,106 $ 816,658 $ 816,588 $ 765,199 $ 681,563
Loans-year end ........................ 863,308 827,696 815,854 799,085 729,156
Net charge-offs ....................... 3,501 3,972 5,895 2,876 2,070
Allowance for loan losses ............. 12,203 11,354 10,536 10,058 9,742
Loan Ratios
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Net Charge-offs to:
Loans-average ....................... .42% .49% .72% .38% .30%
Allowance for loan losses ........... 28.69% 34.98% 55.95% 28.59% 21.25%
Allowance for loan losses to:
Loans-year end ...................... 1.41% 1.37% 1.29% 1.26% 1.34%
Non-performing loans ................ 338.22% 178.63% 147.89% 126.47% 261.95%
Non-performing loans to:
Loans-year end ...................... .42% .77% .87% 1.00% .51%
Loans-average ....................... .43% .78% .87% 1.04% .55%
31
The following table shows the principal amounts of non-accrual and restructured
loans at December 31:
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Nonperforming loans:
Nonaccruing ........................ $ 1,417 $ 614 $ 1,209 $ 136 $ 204
Accruing loans past due 90 days or
more ............................. 2,191 5,742 5,915 7,817 3,515
----------- ----------- ----------- ----------- -----------
Total nonperforming loans ............ 3,608 6,356 7,124 7,953 3,719
Restructured loans ................... -- -- -- 146 178
----------- ----------- ----------- ----------- -----------
Total ................................ $ 3,608 $ 6,356 $ 7,124 $ 8,099 $ 3,897
=========== =========== =========== =========== ===========
Management, the Loss Management Committee, and our loan review staff closely
monitor loans that are considered to be nonperforming. When evaluating
nonaccrual and restructured loans, the interest income foregone and recognized
from 1998 through 2002 was not significant.
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 reduction in interest rates, or deferral of interest or
principal payments.
Real estate acquired through the satisfaction of loan indebtedness ("OREO") is
recorded at the lower of cost or fair market value based on appraised 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 sales of the property may result in gains or losses. OREO increased
to $3,180 at December 31, 2002, up from $2,886 at December 31, 2001. Proceeds
from sales of OREO for 2002 were $3,440, with losses of $36. We acquired $3,796
in OREO during 2002 and sold $2,056 for a turnover rate of 54.16%. We incurred
$16 in losses on the property both purchased and sold in 2002. OREO increased
$610 in 2001 over the 2000 level. Proceeds from sales of OREO for 2001 were
$2,402, with gains of $47. We acquired $3,184 in OREO during 2001 and sold
$1,289, or 40.49%, of the ORE acquired in 2001.
Interest Rate Risk
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
our ability to react to changes in interest rates. Therefore, we are constantly
monitoring our rate sensitivity.
We have an Asset/Liability Committee ("ALCO"), which is duly authorized by the
Board of Directors to monitor our position and to make decisions relating to
that process. The ALCO's goal is to maximize net interest income while providing
us 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.
Our market risk arises primarily from interest rate risk inherent in lending and
deposit-taking activities. To that end, management actively monitors and manages
our interest rate risk exposure.
Profitability is affected by fluctuations in interest rates. A sudden and
substantial change in interest rates may adversely impact our earnings because
the interest rates borne by assets and liabilities do not change at the same
speed, to the same extent, or on the same basis. We monitor the impact of
changes in interest rates on our net interest income using several tools. One
measure of our exposure to differential changes in interest rates between assets
and liabilities is shown in the Maturity and Rate Sensitivity Analysis ("GAP
Analysis"). Another test measures the impact on net interest income and net
portfolio value ("NPV") of an immediate change in interest rates in 100 basis
point increments. NPV is defined as the net present value of assets,
liabilities, and off-balance sheet contracts.
32
Following is the estimated impact of immediate changes in interest rates at the
specified levels at December 31:
Percentage Change In:
-------------------------------------------------
Change in Interest Rates Net Interest Income (1) Net Portfolio Value(2)
(In Basis Points) 2002 2001 2002 2001
- --------------------------- -------- -------- -------- --------
+200 ........... .2% 2.3% (8.4%) 2.0%
+100 ........... .2% 1.2% (4.3%) 1.3%
-100 ........... (.4%) (1.9%) 4.3% (2.8%)
-200 ........... (5.5%) (6.7%) 5.5% (11.3%)
(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 our NPV in a stable
interest rate environment versus the NPV in the various rate scenarios.
Our primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on net interest income and capital, while
structuring our asset-liability composition to obtain the maximum yield-cost
spread. We rely primarily on our asset-liability strategies to control interest
rate risk. The results of the interest rate shock are within the limits set by
the Board of Directors.
We continually evaluate interest rate risk management opportunities, including
the possible use of derivative financial instruments. At December 31, 2002, we
had not entered into any derivative contracts or hedging instruments.
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 in cases where market conditions vary from assumptions
used in the calculation of net interest income and the NPV.
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 66% of our time deposits
are composed of accounts with balances less than $100. When evaluating the
movement of these funds, even during large interest rate changes, it is apparent
that we continue to attract deposits that can be used to meet cash flow needs.
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 converted to cash if the need arises.
During 2002, the most significant purchase of investment securities was in the
mortgage-backed sector. These securities provide a monthly cash flow of both
principal and interest. We used this structure in order to provide liquidity to
fund future loan growth as the economy improves. In addition, we maintain a
federal funds position that provides day-to-day funds to meet liquidity needs
and may also obtain advances from the Federal Home Loan Bank or the treasury tax
and loan note account in order to meet liquidity needs.
Repayments and maturities of loans provide substantial sources of liquidity.
Approximately 58.69% of our loans mature or reprice within the next twelve
months.
33
Capital Resources
Total shareholders' equity of the Company was $132,778 and $123,582 at December
31, 2002 and 2001, respectively. Shareholders' equity increased 7.44% during
2002, and 1.58% during 2001. The growth in capital for both years was
attributable to earnings and unrealized securities gains, less dividends
declared and treasury shares purchased. Approximately 130,000 and 352,000 shares
of stock were purchased during 2002 and 2001, respectively, for a total purchase
price of $4,700 and $9,168, respectively. During 2000, we purchased
approximately 218,000 shares of stock and issued approximately 71,000 shares in
an acquisition. In addition, the change in the net unrealized gain (loss) on
securities available for sale increased capital in 2002 by $3,272 and in 2001 by
$2,202. Shareholders' equity as a percentage of assets was 9.88% and 9.85% at
December 31, 2002 and 2001, 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 classifications:
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
Tier 1 Leverage ratios were 9.28 % and 9.20% at December 31, 2002 and 2001,
respectively, meeting the guidelines for a well-capitalized company. At December
31, 2002, the total Tier 1 and total risk-based capital were $120,719 and
$131,734, respectively. Tier 1 and total risk-based capital at December 31,
2001, were $113,106 and $123,646, respectively.
Cash dividends have increased fifteen consecutive years (see selected financial
data on page 15 for the previous five years). Book value per share was $23.82
and $21.66 at December 31, 2002 and 2001, respectively. The increase in capital
for both years, excluding the effect of the net unrealized gain on securities
available for sale, was internally generated due to a retention of earnings of
64.41% and 61.48% during 2002 and 2001, respectively.
SEC Form 10-K
A COPY OF THIS 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: JAMES W. GRAY, EXECUTIVE VICE PRESIDENT, THE PEOPLES BANK & TRUST
COMPANY, P. O. BOX 709, TUPELO, MS 38802-0709.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under the heading "Interest Rate Risk" in Item 7 of
this Annual Report on Form 10-K is incorporated herein by reference.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements of the Company meeting the requirements of
Regulation S-X are included on the succeeding pages of this Item. All other
schedules have been omitted because they are not required or are not applicable.
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
CONTENTS
Page
----
Report of Independent Auditors ............................... 36
Consolidated Balance Sheets .................................. 37
Consolidated Statements of Income ............................ 38
Consolidated Statements of Changes in Shareholders' Equity ... 39
Consolidated Statements of Cash Flows ........................ 40
Notes to Consolidated Financial Statements ................... 41
35
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, 2002 and 2001, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note Q to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, in 2002.
/s/ Ernst & Young LLP
Memphis, Tennessee
January 21, 2003
36
The Peoples Holding Company
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31
---------------------------
2002 2001
------------ ------------
Assets
Cash and due from banks .................................... $ 46,422 $ 41,475
Federal funds sold ......................................... -- 7,000
Interest-bearing balances with banks ....................... 12,319 22,937
------------ ------------
Cash and cash equivalents 58,741 71,412
Securities available for sale .............................. 344,781 277,293
Loans, net of unearned income .............................. 863,308 827,696
Allowance for loan losses .............................. (12,203) (11,354)
------------ ------------
Net loans 851,105 816,342
Premises and equipment, net ................................ 29,289 28,346
Other assets ............................................... 60,596 61,334
------------ ------------
Total assets $ 1,344,512 $ 1,254,727
============ ============
Liabilities and shareholders' equity
Liabilities
Deposits
Noninterest-bearing .................................... $ 147,565 $ 145,690
Interest-bearing ....................................... 951,483 917,365
------------ ------------
Total deposits 1,099,048 1,063,055
Treasury tax and loan note account .......................... 5,498 6,181
Advances from the Federal Home Loan Bank .................... 86,308 41,145
Other liabilities ........................................... 20,880 20,764
------------ ------------
Total liabilities 1,211,734 1,131,145
Shareholders' equity
Common stock, $5 par value - 15,000,000 shares authorized,
6,212,284 issued; 5,574,733 and 5,704,680 outstanding
at December 31, 2002 and 2001, respectively............. 31,061 31,061
Treasury stock, at cost ..................................... (17,556) (12,856)
Additional paid-in capital .................................. 39,930 39,850
Retained earnings ........................................... 73,935 63,391
Accumulated other comprehensive income ...................... 5,408 2,136
------------ ------------
Total shareholders' equity 132,778 123,582
------------ ------------
Total liabilities and shareholders' equity $ 1,344,512 $ 1,254,727
============ ============
See notes to consolidated financial statements.
37
The Peoples Holding Company
Consolidated Statements of Income
(In Thousands, Except Share Data)
Year ended December 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
Interest income
Loans ..................................... $ 61,379 $ 70,587 $ 72,919
Securities:
Taxable ................................ 12,263 11,582 11,671
Tax-exempt ............................. 4,444 4,724 4,385
Other .................................... 332 873 459
---------- ---------- ----------
Total interest income 78,418 87,766 89,434
Interest expense
Deposits .................................. 24,034 39,326 42,169
Borrowings ................................ 2,491 1,596 1,963
---------- ---------- ----------
Total interest expense 26,525 40,922 44,132
---------- ---------- ----------
Net interest income .......................... 51,893 46,844 45,302
Provision for loan losses .................... 4,350 4,790 6,373
---------- ---------- ----------
Net interest income after
provision for loan losses 47,543 42,054 38,929
Noninterest income
Service charges on deposit accounts ....... 12,578 11,616 9,722
Fees and commissions ...................... 9,070 7,679 5,209
Trust revenue ............................. 981 863 1,024
Securities gains .......................... 93 94 --
BOLI income ............................... 1,224 707 --
Merchant discounts ........................ 1,275 1,183 1,084
Other ..................................... 2,221 2,247 1,490
---------- ---------- ----------
Total noninterest income 27,442 24,389 18,529
---------- ---------- ----------
Noninterest expense
Salaries and employee benefits ............ 29,400 26,467 22,668
Data processing ........................... 3,761 3,498 3,181
Net occupancy ............................. 3,107 3,169 3,114
Equipment ................................. 3,180 3,034 2,883
Other ..................................... 11,048 10,579 10,628
---------- ---------- ----------
Total noninterest expense 50,496 46,747 42,474
---------- ---------- ----------
Income before income taxes ................... 24,489 19,696 14,984
Income taxes ................................. 6,819 5,109 3,800
---------- ---------- ----------
Income before cumulative effect
of accounting change .................. 17,670 14,587 11,184
Cumulative effect of accounting change ....... (1,300) -- --
---------- ---------- ----------
Net income ................................... $ 16,370 $ 14,587 $ 11,184
========== ========== ==========
Basic and diluted earnings per share:
Income before cumulative effect
of accounting change .................. $ 3.15 $ 2.48 $ 1.83
Cumulative effect of accounting change .... (0.23) -- --
---------- ---------- ----------
Net income ................................ $ 2.92 $ 2.48 $ 1.83
========== ========== ==========
Weighted average shares outstanding .......... 5,609,289 5,873,423 6,108,196
Weighted average shares outstanding-diluted .. 5,614,266 5,875,088 6,108,196
See notes to consolidated financial statements.
38
The Peoples Holding Company
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Share Data)
Accumulated
Common Stock Additional Other
---------------------- Treasury Paid-in Retained Comprehensive
Shares Amount Stock Capital Earnings Income (Loss) Total
----------- ---------- --------- ---------- ---------- ------------- ----------
Balance at December 31, 1999 ................... 6,204,784 $ 31,061 $ (230) $ 39,959 $ 48,580 $ (3,281) $ 116,089
Comprehensive income:
Net income ..................................... 11,184 11,184
Other comprehensive income:
Unrealized holding gains on securities
available for sale (net of tax of $1,985) .. 3,215 3,215
---------- ------------- ----------
Comprehensive income ......................... 11,184 3,215 14,399
Cash dividends ($.88 per share) ................ (5,341) (5,341)
Common stock issued for acquisition ............ 70,500 1,720 (28) 1,692
Treasury stock purchased ....................... (218,385) (5,178) (5,178)
----------- ---------- --------- ---------- ---------- ------------- ----------
Balance at December 31, 2000 ................... 6,056,899 $ 31,061 $ (3,688) $ 39,931 $ 54,423 $ (66) $ 121,661
Comprehensive income:
Net income ..................................... 14,587 14,587
Other comprehensive income:
Unrealized holding gains on securities
available for sale (net of tax of $1,398) .. 2,260 2,260
Less reclassification adjustment for gains
realized in net income (net of tax of ($36)). (58) (58)
---------- ------------- ----------
Comprehensive income ......................... 14,587 2,202 16,789
Cash dividends ($.96 per share) ................ (5,619) (5,619)
Treasury stock purchased ....................... (352,219) (9,168) (81) (9,249)
----------- ---------- --------- ---------- ---------- ------------- ----------
Balance at December 31, 2001 ................... 5,704,680 $ 31,061 $(12,856) $ 39,850 $ 63,391 $ 2,136 $ 123,582
Comprehensive income:
Net income ..................................... 16,370 16,370
Other comprehensive income:
Unrealized holding gains on securities
available for sale (net of tax of $2,062) .. 3,329 3,329
Less reclassification adjustment for gains
realized in net income (net of tax of ($36)). (57) (57)
---------- ------------- ----------
Comprehensive income ......................... 16,370 3,272 19,642
Cash dividends ($1.04 per share) ............... (5,826) (5,826)
Stock option compensation ...................... 80 80
Treasury stock purchased ....................... (129,947) (4,700) (4,700)
----------- ---------- --------- ---------- ---------- ------------- ----------
Balance at December 31, 2002 ................... 5,574,733 $ 31,061 $(17,556) $ 39,930 $ 73,935 $ 5,408 $ 132,778
=========== ========== ========= ========== ========== ============= ==========
See notes to consolidated financial statements.
39
The Peoples Holding Company
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Operating activities
Net income ..................................................... $ 16,370 $ 14,587 $ 11,184
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ................................. 4,350 4,790 6,373
Net amortization of securities ............................ 1,200 202 258
Depreciation and amortization ............................. 3,864 3,979 3,773
Deferred income taxes ..................................... 233 (866) (64)
Funding of loans held for sale ............................ (74,851) (76,208) (28,832)
Proceeds from sales of mortgage loans ..................... 75,605 76,917 29,078
Gain on sales of interest-bearing assets .................. (847) (803) (297)
Loss (gain) on sales of premises and equipment ............ 15 29 (93)
Stock option compensation ................................. 80 -- --
Decrease (increase) in other assets ....................... 757 (18,614) (971)
Increase (decrease) in other liabilities .................. 116 1,640 (1,250)
---------- ---------- ----------
Net cash provided by operating activities 26,892 5,653 19,159
Investing activities ---------- ---------- ----------
Purchases of securities available for sale ..................... (219,319) (90,309) (30,792)
Proceeds from sales of securities available for sale ........... 46,870 18,620 --
Proceeds from call/maturities of securities available for sale . 109,578 76,425 23,826
Purchases of securities held to maturity ....................... -- -- (3,160)
Proceeds from calls/maturities of securities held to maturity .. -- -- 3,317
Net increase in loans .......................................... (42,939) (18,779) (33,350)
Proceeds from sales of loans ................................... -- -- 8,002
Proceeds from sales of premises and equipment .................. 274 35 225
Purchases of premises and equipment ............................ (3,974) (1,409) (4,171)
Net cash paid in business combinations ......................... -- -- (518)
---------- ---------- ----------
Net cash used in investing activities (109,510) (15,417) (36,621)
Financing activities ---------- ---------- ----------
Net increase (decrease) in noninterest-bearing deposits ........ 1,875 13,972 (8,297)
Net increase in interest-bearing deposits ...................... 34,118 2,478 75,944
Net (decrease) increase in short-term borrowings ............... (683) 1,578 (7,397)
Proceeds from other borrowings ................................. 56,248 26,672 2,554
Repayment of other borrowings .................................. (11,085) (5,473) (21,877)
Purchase of treasury stock ..................................... (4,700) (9,249) (5,178)
Cash dividends paid ............................................ (5,826) (5,619) (5,341)
---------- ---------- ----------
Net cash provided by financing activities 69,947 24,359 30,408
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents .... (12,671) 14,595 12,946
Cash and cash equivalents at beginning of year .................. 71,412 56,817 43,871
---------- ---------- ----------
Cash and cash equivalents at end of year $ 58,741 $ 71,412 $ 56,817
Supplemental disclosures: ========== ========== ==========
Cash paid for:
Interest .................................................. $ 29,029 $ 43,457 $ 41,356
Income taxes .............................................. 7,962 4,839 5,291
Transfers of loans to other real estate ...................... 3,826 2,965 2,735
Transfers of premises and equipment to other assets .......... -- 310 --
See notes to consolidated financial statements.
40
Note A - Significant Accounting Policies
(In Thousands)
Nature of Operations: The Peoples Holding Company the (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") and Peoples Insurance Agency,
subsidiary of the bank.
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. The
Company carries its investment in subsidiary at its equity in the underlying net
assets.
Business Combinations: Effective January 1, 2002, we adopted FASB Statement No.
141 which requires all business combinations to be accounted for as purchases.
Business combinations are accounted for using the purchase method of accounting
that reflects the net assets of the companies recorded at their fair value at
the date of acquisition.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
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.
Dividend income is 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.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination and
commitment fees are recognized in the period the loan or commitments are granted
to reflect reimbursement of the related costs associated with originating those
loans and commitments.
Generally, the accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days past due unless the credit is
well-secured and in process of collection. Consumer and other retail loans are
typically charged off no later than 120 days past due. In all cases, loans are
placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued for the current year, but not collected for loans that are
placed on nonaccrual or charged off, is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Mortgage Loans Held for Sale: At December 31, 2002 and 2001, mortgage loans held
for sale represented residential mortgage loans held for sale. Loans held for
sale are carried at the lower of aggregate cost or market value and are
classified as loans on the balance sheet.
Allowance for Loan Losses: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
41
Note A - Significant Accounting Policies (continued)
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio. The
allowance for loan losses 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.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Impairment is measured on a loan-by-loan basis for commercial and
construction loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.
When the ultimate collectibility of an impaired loan's principal is in doubt,
wholly or partially, all cash receipts are applied to principal. Once the
recorded balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent any interest has been foregone, and then they are
recorded as recoveries of any amounts previously charged off. Large groups of
smaller balance homogeneous loans are evaluated collectively for impairment.
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 $3,180 and $2,886 at December 31, 2002
and 2001, 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
value based on appraised value less estimated selling costs. Losses arising from
the acquisition of properties are charged against the allowance for loan losses.
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 reported in other assets and 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. Mortgage servicing rights were $456
and $655 at December 31, 2002 and 2001, respectively. Impairment is recognized
as a reduction of noninterest income.
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.
Derivative Instruments and Hedging Activities: The Company adopted Statement of
Financial Accounting Standards ("FASB") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by FASB No. 137 and FASB No. 138
in 2001. The Company did transfer all securities classified as held to maturity
to available for sale as allowed upon adoption of FASB No. 133. The Company does
not currently engage in any activities that qualify as derivatives.
42
Note A - Significant Accounting Policies (continued)
Treasury Stock: The Company has an active repurchase plan for the acquisition of
its common stock. Treasury stock is recorded at cost. Shares held in treasury
are not retired.
Intangible Assets: Effective January 1, 2002 the Company adopted FASB No. 142.
As of that date, goodwill is no longer amortized but is evaluated annually for
impairment. Intangibles with infinite lives are amortized over their estimated
lives. Prior to adoption of FASB No. 142, intangibles were being amortized over
a fifteen-year life.
Reclassification: Certain prior year amounts have been reclassified to conform
to the current year presentation.
Impact of Recently-Issued Accounting Standards:
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company does not expect the adoption of this
pronouncement to have a material impact on its results of operations or
financial condition.
On January 1, 2002 the Company adopted FASB Statement 144, "Accounting for the
Impairment or Disposal of Long Lived Assets" ("Statement 144"). Statement 144
supersedes FASB Statement No. 121 ("Statement 121") and provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of Statement 121,
the new rules significantly change the criteria that would have to be met to
classify an asset as held-for-sale. Statement 144 also supersedes the provision
of Accounting Principle Board ("APB") Opinion 30 with regard to reporting the
effects of a disposal of a segment of a business and requires expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the period(s) in which the losses are incurred (rather than as of
the measurement date as presently required by APB Opinion 30). In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The adoption of Statement 144 did not have a material impact on the
Company's financial condition or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" ("Statement 145"). Statement 145
rescinds Statement 4, which required all gains and losses from extinguishments
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. In addition, Statement 145 amends Statement 13
on leasing to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-leaseback transactions. Provisions of Statement 145 related to
the rescission of Statement 4 are effective for financial statements issued by
the Company after January 1, 2003. The provisions of the statement related to
sale-leaseback transactions were effective for any transactions occurring after
May 15, 2002. All other provisions of the statement were effective as of the end
of the second quarter of 2002. The changes required by Statement 145 did not
have a material impact of the results of operation, financial position or
liquidity of the Company.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("Statement 146"). Statement 146 requires companies to recognize costs
associated with the exit or disposal of activities as they are incurred rather
than at the date a plan of disposal or commitment to exit is initiated. Types of
costs covered by Statement 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, facility closing, or other exit or disposal activity. Statement 146
will apply to all exit or disposal activities initiated after December 31, 2002.
At this time, the Company does not expect the adoption of the provisions of
Statement 146 to have a material impact on financial results.
43
Note A - Significant Accounting Policies (continued)
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, "Acquisition of Certain Financial Institutions" ("Statement 147").
Statement 147 amends the previous accounting guidance which required for certain
acquisitions of financial institutions, where the fair market value of
liabilities assumed was greater than the fair value of the tangible assets and
identifiable intangible assets acquired, to recognize and account for the excess
as an unidentifiable intangible asset. Under the old guidance this
unidentifiable intangible asset was to be amortized over a period of no greater
than the life of the long-term interest bearing assets acquired. Under Statement
147 this excess, if acquired in a business combination, represents goodwill that
should be accounted for in accordance with Statement 142. In addition, Statement
147 amends Statement 144 to include in its scope long-term customer relationship
intangible assets of financial institutions such as depositor and borrower
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires. The provisions of Statement 147 were
effective October 1, 2002. The adoption of the provisions of Statement 147 did
not have a material impact on the Company's financial results.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("the Interpretation"). The Interpretation will
significantly change current practice in the accounting for, and disclosure of,
guarantees. The Interpretation requires certain guarantees to be recorded at
fair value, which is different from current practice, which is generally to
record a liability only when a loss is probable and reasonably estimable, as
those terms are defined in the FASB Statement No. 5, Accounting for
Contingencies ("Statement 5"). The Interpretation also requires a guarantor to
make significant new disclosures, even when the likelihood of making any
payments under the guarantee is remote, which is another change from current
practice. The Interpretation applies to public and non-public entities, and its
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Interpretation's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The guarantor's previous accounting for
guarantees issued prior to the date of the Interpretation's initial application
should not be revised or restated to reflect the Interpretation's provisions.
The adoption of the provisions of the Interpretation did not have a material
impact on the Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123" (Statement 148). Statement 148 amends
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", ("Statement 123") to provide alternative methods of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The company expenses the cost of stock options as allowed under Statement 123.
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the
provisions of the Interpretation, but believes its adoption will not have a
material impact on its financial statements.
44
Note B - Business Combinations
(In Thousands)
Southern Insurance Group, Inc., Southern Insurance of Corinth, Inc., and
Southern Financial Services, P.A. (collectively, "Southern") were acquired on
May 1, 2000, by the Company by issuing 70,500 shares of its stock valued at
$1,692. The acquired companies were merged into the Bank's insurance subsidiary.
The transaction was accounted for as a purchase. Southern offers property and
casualty insurance products, life and health insurance, and annuity and mutual
funds.
The Bank acquired Dominion Company on September 1, 2000 which offers products
similar to Southern. The Bank paid $450 in a cash transaction for the company
which was merged into the Bank's insurance subsidiary.
Note C - Securities
(In Thousands)
The amortized cost and fair value of securities available for sale at December
31, 2002, are as follows:
Securities Available For Sale
---------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value
--------- ---------------- ---------------- ----------
U. S. Treasury securities ................. $ -- $ -- $ -- $ --
Obligations of other U. S.
Government agencies and corporations ... 50,931 2,284 -- 53,215
Mortgage-backed securities ................ 176,003 3,515 (142) 179,376
Obligations of states and political
subdivisions ........................... 92,464 3,792 (72) 96,184
Trust preferred securities ................ 6,792 49 (2) 6,839
Other equity securities ................... 9,409 -- (242) 9,167
--------- ---------------- ---------------- ----------
$ 335,599 $ 9,640 $ (458) $ 344,781
========= ================ ================ ==========
The amortized cost and fair value of securities available for sale at December
31, 2001, are as follows:
Securities Available For Sale
---------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value
--------- ---------------- ---------------- ----------
U. S. Treasury securities ................. $ 15,019 $ 251 $ -- $ 15,270
Obligations of other U. S.
Government agencies and corporations ... 51,010 1,759 (28) 52,741
Mortgage-backed securities ................ 112,626 1,270 (606) 113,290
Obligations of states and political
subdivisions ........................... 84,709 1,411 (478) 85,642
Trust preferred securities ................ -- -- -- --
Other equity securities ................... 10,471 -- (121) 10,350
--------- ---------------- ---------------- ----------
$ 273,835 $ 4,691 $ (1,233) $ 277,293
========= ================ ================ ==========
45
Note C - Securities (continued)
The amortized cost and fair value of securities available for sale at
December 31, 2002, 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.
Amortized Fair
Securities Available for Sale Cost Value
----------- -----------
Due in one year or less ................. $ 16,220 $ 16,489
Due after one year through five years ... 56,133 59,232
Due after five years through ten years .. 53,604 55,670
Due after ten years ..................... 17,438 18,008
Mortgage-backed securities .............. 176,003 179,376
Preferred stock ......................... 16,201 16,006
----------- -----------
$ 335,599 $ 344,781
=========== ===========
In connection with the Company's adoption of Statement No. 133 on January 1,
2001, all held-to-maturity securities with a total amortized cost of $85,658
were transferred to available-for-sale. The unrealized net gain at the date of
transfer was $323. There were no sales of held-to-maturity securities during
2000.
At December 31, 2002 and 2001, securities with an amortized cost of
approximately $163,500 and $201,188, respectively, were pledged to secure
government, public, and trust deposits.
Note D - Loans and Allowance for Loan Losses
(In Thousands)
Loans are summarized as follows: December 31
-----------------------------
2002 2001
---------- ----------
Commercial, financial, and agricultural ...... $ 139,497 $ 138,436
Lease financing .............................. 16,895 18,455
Real estate - construction ................... 37,141 30,564
Real estate - mortgage ....................... 574,470 533,232
Installment loans to individuals ............. 97,430 110,810
---------- ----------
Gross loans .................................. 865,433 831,497
Unearned income .............................. (2,125) (3,801)
---------- ----------
Loans, net of unearned income ................ 863,308 827,696
Allowance for loan losses .................... (12,203) (11,354)
---------- ----------
Net loans .................................... $ 851,105 $ 816,342
========== ==========
Included in real estate mortgage loans are mortgage loans held for sale of
$3,624 and $9,659 at December 31, 2002 and 2001, respectively.
46
Note D - Loans and Allowance for Loan Losses (continued)
Changes in the allowance for loan losses were as follows:
Year ended December 31
---------------------------------
2002 2001 2000
-------- -------- --------
Balance at beginning of year ............... $ 11,354 $ 10,536 $ 10,058
Provision for loan losses ................ 4,350 4,790 6,373
Loans charged-off ........................ (4,167) (4,303) (6,358)
Recoveries of loans
previously charged-off................. 666 331 463
-------- -------- --------
Balance at end of year ..................... $ 12,203 $ 11,354 $ 10,536
======== ======== ========
Impaired loans recognized in conformity with SFAS No. 114, as amended by SFAS
No. 118, were as follows:
December 31
-----------------------------
2002 2001
---------- ----------
Impaired loans with a related allowance for
loan losses ............................... $ 3,908 $ 3,297
Impaired loans without a specific allowance
for loan losses ........................... -- 1,764
---------- ----------
Total impaired loans ......................... $ 3,908 $ 5,061
========== ==========
Allowance specifically related to
impaired loans ............................ $ 1,806 $ 1,087
Year ended December 31
--------------------------------
2002 2001 2000
-------- -------- --------
Average recorded investment in impaired loans. $ 4,485 $ 4,613 $ 4,138
Interest income recognized using the accrual
basis of income recognition .............. $ 318 $ 531 $ 345
Interest income recognized using the
cash-basis of income recognition .......... $ -- $ -- $ 191
At December 31, 2002 and 2001 nonaccrual loans totaled $1,417 and $614,
respectively.
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 $10,697 and $10,974 at December
31, 2002 and 2001, respectively. During 2002, $5,019 of new loans were made and
payments received totaled $5,296.
47
Note E - Premises and Equipment
(In Thousands)
Bank premises and equipment accounts are summarized as follows:
December 31
------------------------
2002 2001
---------- ----------
Premises .................................. $ 33,095 $ 31,337
Leasehold improvements .................... 147 147
Furniture and equipment ................... 11,204 9,993
Computer equipment ........................ 6,683 6,126
Auto ...................................... 142 153
---------- ----------
Total .................................. $ 51,271 $ 47,756
Accumulated depreciation .................. (21,982) (19,410)
---------- ----------
Net .................................... $ 29,289 $ 28,346
========== ==========
Depreciation expense was $3,165 and $3,131 at December 31, 2002 and 2001,
respectively.
Note F - Deposits
(In Thousands)
At December 31, 2002, the approximate scheduled maturities of time deposits are
as follows:
2003 .......................... $ 345,534
2004 .......................... 90,125
2005 .......................... 58,466
2006 .......................... 31,115
2007 .......................... 25,051
Thereafter .................... 166
----------
Total ......................... $ 550,457
==========
The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2002 and 2001 was $185,920 and $187,452, respectively.
Certain executive officers and directors had amounts on deposit with the Bank of
approximately $4,028 at December 31, 2002.
Note G - Borrowed Funds and Lines of Credit
(In Thousands)
The Company had outstanding advances from the FHLB of $86,308 and $41,145 at
December 31, 2002 and 2001, respectively. The interest rates on these advances
are all at fixed rates which range from 1.62% to 7.93% at December 31, 2002. The
Company had availability on unused lines of credit with the FHLB of $164,474 at
December 31, 2002. These advances are collateralized by a pledge of a blanket
lien on the Company's mortgages.
48
Note G - Borrowed Funds and Lines of Credit (continued)
Future minimum payments, by year and in the aggregate, related to the FHLB
advances with initial or remaining terms of one year or more, consisted of the
following at December 31, 2002:
2003 .......................... $ 21,612
2004 .......................... 16,092
2005 .......................... 15,904
2006 .......................... 13,539
2007 .......................... 5,591
Thereafter .................... 13,570
---------
Total ......................... $ 86,308
=========
The Company maintains lines of credit with correspondent banks totaling $33,000
at December 31, 2002. These are unsecured lines of credit maturing at various
times within the next fourteen months. Interest is charged at the market federal
funds rate on all advances.
In addition, the Company maintains a treasury tax and loan account with the
Federal Reserve Bank. The balance is collateralized by assets of the bank.
Availability of the line of credit depends upon the amount of collateral pledged
as well as the Federal Reserve Bank's need for funds.
Note H - Commitments, Contingent Liabilities and Financial Instruments with
Off-Balance Sheet Risk (In Thousands)
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, 2002, were
approximately $99,665 and $9,293, respectively, compared to December 31, 2001,
which were approximately $95,815 and $9,836, respectively.
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.
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 I - Income Taxes
(In Thousands)
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.
49
Note I - Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2002 and 2001 are as follows:
December 31
-----------------------------
2002 2001
---------- ----------
Deferred tax assets
Allowance for loan losses ................. $ 5,015 $ 4,180
Deferred compensation .................... 2,347 1,952
Other ..................................... 635 810
---------- ----------
Total deferred tax assets .............. 7,997 6,942
Deferred tax liabilities
Pension ................................... 1,041 342
Net unrealized gains on securities
available for sale .................... 3,774 1,322
Depreciation .............................. 934 971
Other ..................................... 1,152 526
---------- ----------
Total deferred tax liabilities ......... 6,901 3,161
---------- ----------
Net deferred tax assets ............... $ 1,096 $ 3,781
========== ==========
Significant components of the provision for income taxes (benefits) are as
follows:
Year ended December 31
--------------------------------
2002 2001 2000
-------- -------- --------
Current
Federal ............................ $ 5,786 $ 5,288 $ 3,555
State .............................. 800 687 309
-------- -------- --------
6,586 5,975 3,864
Deferred
Federal ............................ 204 (753) (55)
State .............................. 29 (113) (9)
-------- -------- --------
233 (866) (64)
-------- -------- --------
$ 6,819 $ 5,109 $ 3,800
======== ======== ========
The reconciliation of income taxes (benefits) computed at the United States
federal statutory tax rates to the provision for income taxes is:
Year ended December 31
--------------------------------
2002 2001 2000
-------- -------- --------
Tax at U.S. statutory rate ............... $ 9,306 $ 6,894 $ 5,244
Tax-exempt interest income ............... (2,312) (1,968) (1,784)
State income tax, net of federal benefit . 505 349 195
Amortization of intangible assets ........ -- 72 62
Dividends received deduction ............. (60) (113) (58)
Other items-net .......................... (620) (125) 141
-------- -------- --------
$ 6,819 $ 5,109 $ 3,800
======== ======== ========
50
Note J - Restrictions on Cash, Bank Dividends, Loans, or Advances
(In Thousands)
The Bank is required to maintain average balances with the Federal Reserve Bank.
The average amount of those balances for the year ended December 31, 2002, was
approximately $21,443.
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, 2002, the unrestricted
surplus was approximately $108,050.
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, 2002, the maximum amount available for transfer from the Bank to
the Company in the form of cash dividends and loans was 19.65% of the Bank's
consolidated net assets. There were no loans outstanding from the Bank to the
Company at December 31, 2002.
Note K - Employee Benefit and Deferred Compensation Plans
(In Thousands)
The Company sponsored a defined benefit noncontributory pension plan which was
curtailed as of December 31, 1996. Accordingly, participant accruals were frozen
as of that date. 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. The Company contributed $3,300, $500, and $0 to the Plan for the years
2002, 2001, and 2000, respectively.
The Company also provides certain health care and/or life insurance to retired
employees. Substantially all of the Company's employees may become eligible for
these benefits if they reach normal or early retirement while working for the
Company. The Company pays one-half of the health insurance premium. Up to age
70, each retired employee receives life insurance coverage paid entirely by the
Company. The Company has accounted for its obligation related to these plans in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions."
The Company has limited its liability for the rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) to the rate of
inflation assumed to be 4% each year. Increasing or decreasing the assumed
health care cost trend rates by one percentage point in each year would not
materially increase or decrease the accumulated postretirement benefit
obligation nor the service and interest cost components of net periodic
postretirement benefit costs as of December 31, 2002, and for the year then
ended.
51
Note K - Employee Benefit and Deferred Compensation Plans (continued)
Pension Benefits represent the defined benefit pension plan previously offered
by the Company and Other Benefits represent the postretirement health and life
plans. There is no additional minimum pension liability required to be
recognized. The following table sets forth the required disclosures as of
December 31:
Pension Benefits Other Benefits
-------------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year .......$ 12,852 $ 12,448 $ 761 $ 727
Service cost .................................. -- -- 44 42
Interest cost ................................. 937 915 54 53
Plan participants' contributions .............. -- -- 40 29
Actuarial gain (loss).......................... 1,259 104 (1) (36)
Benefits paid ................................. (619) (615) (63) (54)
---------- ---------- ---------- ----------
Benefit obligation at end of year ...............$ 14,429 $ 12,852 $ 835 $ 761
========== ========== ========== ==========
Change in plan assets
Fair value of plan assets at beginning of year.$ 12,944 $ 12,829
Actual return (loss) on plan assets ........... (825) 230
Contribution by employer ...................... 3,300 500
Benefits paid ................................. (619) (615)
---------- ----------
Fair value of plan assets at end of year ........$ 14,800 $ 12,944
========== ==========
Prepaid (accrued) benefits cost
Funded status .................................$ 371 $ 92 $ (835) $ (761)
Unrecognized net actuarial gain ............... 5,017 1,982 330 354
Unamortized prior service cost ................ 200 230 20 24
---------- ---------- ---------- ----------
Prepaid (accrued) benefit cost ..................$ 5,588 $ 2,304 $ (485) $ (383)
========== ========== ========== ==========
Weighted-average assumptions as of December 31
Discount rate ................................. 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets ................ 8.00% 8.00% N/A N/A
Year ended December 31 Year ended December 31
------------------------------------- ------------------------------------
Pension Benefits Other Benefits
------------------------------------- ------------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
Components of net periodic
benefit cost(income)
Service cost ................... $ -- $ -- $ -- $ 44 $ 42 $ 38
Interest cost .................. 937 915 881 54 53 53
Expected return on plan assets . (1,009) (1,002) (1,047) -- -- --
Prior service cost recognized .. 30 30 30 27 31 8
Recognized gains ............... 58 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net periodic benefit cost(income). $ 16 $ (57) $ (136) $ 125 $ 126 $ 99
========== ========== ========== ========== ========== ==========
52
Note K - Employee Benefit and Deferred Compensation Plans (continued)
The Company maintains 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. Expenses related to the money purchase pension plan
were $965, $846 and $730 in 2002, 2001, and 2000, 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 4% of compensation for each employee who has attained age 21, completed 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 2002, 2001, and 2000 were $618, $442, and
$408, respectively.
The Company and its subsidiary also sponsored an employee stock ownership plan
covering substantially all full-time employees who were 21 years of age and had
completed one year of employment prior to it's curtailment on January 1, 2002.
The Company match for the 401(k) plan was raised to 4% from 3% upon curtailment
of the ESOP Plan. The ESOP was amended in 2002 to enable employees to elect to
receive dividends in cash. Total contributions to the Plan were $150 and $0 in
2001 and 2000, respectively.
The Company adopted the "Performance Based Reward" incentive compensation plan
January 1, 2001. Incentive benefits are paid to eligible officers and employees
after the end of each calendar year and are determined based on established
criteria relating to profitability. Management sets baselines for all applicable
profit centers to reward employees on improved economic benefit derived from the
profit center. The expense associated with the Plan for 2002, 2001, and 2000 was
$2,620, $1,762 and $0, respectively.
The Company maintains deferred compensation plans available to eligible
directors and officers of the company. Directors may defer up to 100% of their
fees and retainers. Employees may defer up to 10% of their salaries.
Opportunities to increase deferrals, or for new participants to enter these
plans, are offered annually. The interest amount accrued on deferrals is tied to
Moody's Average Corporate Bond Rate for October of the previous year. These
plans are unfunded, and it is anticipated that they will result in no cost of
the Company over the term of these plans because life insurance policies on the
lives of the participants have been purchased in amounts estimated to be
sufficient to pay benefits under the plans. The Company is both the owner and
beneficiary of the life insurance policies. The expense recorded in 2002, 2001,
and 2000 for the Employee Deferred Compensation Plan, inclusive of the salary
deferrals, was $525, $398 and $381, respectively. The expense recorded in 2002,
2001, and 2000 for the Directors Deferred Compensation Plan, inclusive of fee
deferrals, was $168, $149, and $128, respectively. There were no retainer
deferrals for 2002, 2001, or 2000.
At December 31, 2002, 637,551 common shares were reserved for issuance for
employee benefit plans and business combinations.
During 2002, the Company repurchased approximately 129,947 shares. As of
December 31, 2002, the Company had approximately 300,000 shares available for
repurchase. Repurchased shares will be used for various corporate purposes,
including the issuance of shares for business combinations and employee benefit
plans.
The company has an active stock option plan, which was adopted in 2001. Under
this plan options are granted which allow participants in the plan to acquire
shares of the Company's common stock at a fixed price per share over a specified
period of ten years. The options granted become vested and exercisable in equal
installments of 33 1/3% upon completion of one, two, and three years of service
measured from the grant date, respectively. Options that have not been vested
are cancelled upon the termination of the participants' employment. In addition,
granted options that have not been exercised after 10 years are cancelled.
53
Note K - Employee Benefit and Deferred Compensation Plans (continued)
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions for each
option grant:
2002 2001
-------- --------
Dividend yield ....................... 3% 3%
Expected volatility .................. 27% 28%
Risk-free interest rate .............. 4.4% 4.4%
Expected lives ....................... 6 years 6 years
The weighted-average fair value of options granted during the year was $9.67 and
$4.28 for the years ended December 31, 2002, and 2001, respectively. We recorded
compensation expense of $80 in relation to this plan.
The following table summarizes information about our fixed stock option plan for
the years ended December 31:
2002 2001
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- --------
Outstanding at beginning of year ..... 10,000 $ 19.05 $
Granted and assumed .................. 31,000 35.20 10,000 19.05
Exercised ............................ -- -- -- --
Forfeited ............................ -- -- -- --
--------- --------- --------- --------
Outstanding at end of year ..... 41,000 $ 31.26 10,000 $ 19.05
========= ========= ========= ========
Exercisable at end of year ..... 3,333 $ 19.05 -- $ --
========= ========= ========= ========
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
Options Outstanding
----------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ---------------- --------- ----------- ---------
$19.05-$35.20 41,000 8.76 $ 31.26 3,333 $ 19.05
54
Note L - Regulatory Matters
(In Thousands)
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum 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). As of December 31, 2002, the Bank met all
capital adequacy requirements to which it is subject.
As of December 31, 2002, 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.
December 31
-------------------------------------------------
2002 2001
------------------------ ------------------------
Amount Ratio Amount Ratio
------------ ----------- ------------ -----------
The Company
Total Capital ..... $131,734 14.97% $123,646 14.68%
Tier I Capital .... 120,719 13.72% 113,106 13.43%
Tier I Leverage ... 120,719 9.28% 113,106 9.20%
The Bank
Total Capital ..... $127,870 14.53% $122,162 14.50%
Tier I Capital .... 116,856 13.28% 111,622 13.25%
Tier I Leverage ... 116,856 8.99% 111,622 9.08%
Note M - Segment Reporting
FASB No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report certain financial and
descriptive information about their reportable operating segments as defined and
certain enterprise-wide financial information about products and services,
geographic areas, and major customers.
Changes to the Company's internal reporting process during 2001 prompted
management to reorganize into one segment that accounts for the Company's
principal activity, the delivery of financial services through its community
banks. The Company's internal reporting mechanism changed from years past in
order to more closely match expenses with revenues at the community bank level.
Direct and indirect expenses and revenues are allocated to the respective
community banks based on various methods, including percentage of loans,
percentage of deposits, percentage of loans and deposits together, full-time
equivalent employees, number of accounts serviced, and actual sales. The
activities reported outside of community banking do not comprise a separate,
material segment for disclosure. All of the Company's products are offered to
similar classes of customers and markets, are distributed using the same
methods, and operate in similar regulatory environments.
55
Note N - Disclosures About Fair Value of Financial Instruments
(In Thousands)
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.
Interest-bearing balances with banks: The carrying amount reported in the
consolidated balance sheet for interest-bearing balances with banks approximates
fair value.
Federal funds sold: The carrying amount reported in the consolidated balance
sheet for federal funds sold 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.
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 using a discounted cash flow 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.
Advances from Federal Home Loan Bank: The fair value was determined by
discounting the cash flow 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; accordingly, the commitment
amounts approximate fair value.
2002 2001
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ---------- ----------- -----------
Financial assets:
Cash and due from banks ......................... $ 46,422 $ 46,422 $ 41,475 $ 41,475
Interest-bearing balances with banks ............ 12,319 12,319 22,937 22,937
Federal funds sold .............................. -- -- 7,000 7,000
Securities ...................................... 344,781 344,781 277,293 277,293
Loans, net ...................................... 851,105 863,256 816,342 858,345
Financial liabilities:
Deposits ........................................ 1,099,048 1,092,470 1,063,055 1,052,263
Treasury tax and loan note account .............. 5,498 5,498 6,181 6,181
Advances from Federal Home Loan Bank ............ 86,308 87,045 41,145 42,512
56
Note O - The Peoples Holding Company (Parent Company Only) Condensed Financial
Information (In Thousands)
December 31
-------------------------
Balance Sheets 2002 2001
------------ ------------
Assets
Cash* .......................................... $ 1,487 $ 1,204
Stock .......................................... 75 75
Investment in bank subsidiary* ................. 128,915 122,098
Dividends receivable* .......................... 3,677 1,553
Other assets ................................... 129 78
------------ ------------
Total assets ................................. $ 134,283 $ 125,008
============ ============
Liabilities and shareholders' equity
Dividends payable* ............................. $ 1,505 $ 1,426
Shareholders' equity ........................... 132,778 123,582
------------ ------------
Total liabilities and shareholders' equity ... $ 134,283 $ 125,008
============ ============
*Eliminates in consolidation
Year ended December 31
-----------------------------------------
Statements of Income 2002 2001 2000
------------- ------------- -------------
Income
Dividends from bank subsidiary* .............. $ 13,028 $ 15,764 $ 11,067
Other dividends .............................. 28 29 41
------------- ------------- -------------
13,056 15,793 11,108
Expenses ........................................ 366 206 40
------------- ------------- -------------
Income before income tax credits and equity in
undistributed net income of bank subsidiary .. 12,690 15,587 11,068
Income tax credits .............................. (136) (75) (12)
------------- ------------- -------------
12,826 15,662 11,080
Equity in undistributed net income of bank
subsidiary* .................................. 3,544 (1,075) 104
------------- ------------- -------------
Net income ................................... $ 16,370 $ 14,587 $ 11,184
============= ============= =============
*Eliminates in consolidation
57
Note O - The Peoples Holding Company (Parent Company Only) Condensed Financial
Information (continued)
Year ended December 31
-----------------------------------------
Statements of Cash Flows 2002 2001 2000
------------- ------------- -------------
Operating activities
Net income ..................................... $ 16,370 $ 14,587 $ 11,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank
subsidiary ............................... (3,544) 1,075 (104)
Increase in dividends receivable and
other assets ............................. (2,176) (97) (157)
Increase (decrease) in other liabilities ... 79 (50) (56)
Stock option compensation .................. 80 -- --
------------- ------------- -------------
Net cash provided by operating activities .. 10,809 15,515 10,867
Financing activities
Cash dividends ................................. (5,826) (5,619) (5,341)
Purchase of treasury stock ..................... (4,700) (9,249) (5,178)
------------- ------------- -------------
Net cash used in financing activities ...... (10,526) (14,868) (10,519)
------------- ------------- -------------
Increase in cash ........................... 283 647 348
Cash at beginning of year ....................... 1,204 557 209
------------- ------------- -------------
Cash at end of year ........................ $ 1,487 $ 1,204 $ 557
============= ============= =============
58
Note P - Quarterly Results of Operations (Unaudited)
(In Thousands)
The following is a summary of the unaudited quarterly results of operations:
Three Months Ended
-------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------------ ----------- ------------ -----------
Year ended December 31, 2002
Interest income ....................... $ 19,529 $ 19,971 $ 19,707 $ 19,211
Interest expense ...................... 7,090 6,720 6,554 6,161
------------ ----------- ------------ -----------
Net interest income ................... 12,439 13,251 13,153 13,050
Provision for loan losses ............. 1,125 1,075 1,125 1,025
Noninterest income .................... 6,609 6,650 6,985 7,198
Noninterest expense ................... 12,298 12,526 12,642 13,030
------------ ----------- ------------ -----------
Income before income taxes ............ 5,625 6,300 6,371 6,193
Income taxes .......................... 1,560 1,811 1,827 1,621
------------ ----------- ------------ -----------
Income before cumulative effect
of accounting change .............. 4,065 4,489 4,544 4,572
Cumulative effect of accounting change. (1,300) -- -- --
------------ ----------- ------------ -----------
Net income ............................ $ 2,765 $ 4,489 $ 4,544 $ 4,572
============ =========== ============ ===========
Basic and diluted earnings per share:
Income before cumulative effect
of accounting change .............. $ 0.72 $ 0.80 $ 0.81 $ 0.82
Cumulative effect of accounting change. (0.23) -- -- --
------------ ----------- ------------ -----------
Net income ............................ $ 0.49 $ 0.80 $ 0.81 $ 0.82
============ =========== ============ ===========
Three Months Ended
-------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------------ ----------- ------------ -----------
Year ended December 31, 2001
Interest income ....................... $ 22,673 $ 22,422 $ 21,877 $ 20,794
Interest expense ...................... 11,591 10,868 9,907 8,556
------------ ----------- ------------ -----------
Net interest income ................... 11,082 11,554 11,970 12,238
Provision for loan losses ............. 1,125 1,125 1,225 1,315
Noninterest income .................... 5,730 5,846 6,172 6,641
Noninterest expense ................... 11,055 11,375 11,873 12,444
------------ ----------- ------------ -----------
Income before income taxes ............ 4,632 4,900 5,044 5,120
Income taxes .......................... 1,330 1,313 1,202 1,264
------------ ----------- ------------ -----------
Net income ............................ $ 3,302 $ 3,587 $ 3,842 $ 3,856
============ =========== ============ ===========
Basic and diluted earnings per share .. $ 0.55 $ 0.60 $ 0.66 $ 0.67
============ =========== ============ ===========
59
Note Q - Goodwill and Other Intangible Assets
(In Thousands)
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 reason we measured in this manner is that the insurance
operation is a subsidiary of the bank. The impairment was specific to the
insurance subsidiary. The fair value of the insurance reporting unit was
estimated using the expected present value of the future cash flows. The
insurance operation acquisition was a tax-free exchange; therefore, there was no
tax offset to the impairment cost booked.
As of December 31, 2002
-----------------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------------- -------------------
Amortized intangible assets:
Core deposit intangible assets ..... $ 507 $ (389)
Other intangible assets ............ 3,282 (2,085)
-------------------- -------------------
Total intangible assets ............... $ 3,789 $ (2,474)
==================== ===================
Goodwill .............................. $ 7,190 $ (2,142)
==================== ===================
Aggregate amortization expense:
for the year ended December 31, 2002.. $ 493
Estimated amortization expense:
for the year ended December 31, 2003.. 493
for the year ended December 31, 2004.. 422
for the year ended December 31, 2005.. 400
for the year ended December 31, 2006.. --
The changes in the carrying amount of intangible assets for the year ended
December 31, 2002, are as follows:
Other
Goodwill Intangibles
-------------------- -------------------
Balance as of January 1, 2002 ......... $ 6,348 $ 1,808
Impairment losses ............... (1,300) --
Amortization expense ............ -- (493)
-------------------- -------------------
Balance as of December 31, 2002 ....... $ 5,048 $ 1,315
==================== ===================
60
Note Q - Goodwill and Other Intangible Assets (continued)
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.
As of December 31
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported net income ................... $16,370 $14,587 $11,184
Goodwill amortization, net of tax ..... -- 407 335
Transitional impairment ............... 1,300 -- --
----------- ----------- -----------
Adjusted net income ................... $17,670 $14,994 $11,519
=========== =========== ===========
Basic and diluted earnings per share:
Reported net income ................... $ 2.92 $ 2.48 $ 1.83
Goodwill amortization, net of tax ..... -- 0.07 .06
Transitional impairment ............... 0.23 -- --
----------- ----------- -----------
Adjusted net income ................... $ 3.15 $ 2.55 $ 1.89
=========== =========== ===========
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
Executive Officers of the Company
The names, ages and positions of the Company's principal executive officers are
listed below together with their business experience during the past five years:
Name Age Position
- ------------------- ------- -----------------------------------------------------------------------------------
E. Robinson McGraw 56 Director, President, and Chief Executive Officer of the Company since November,
2000; Director, President and Chief Executive Officer of the Bank since November,
2000; Executive Vice President of the Bank from September, 1993 until October,
2000.
James W. Gray 46 Executive Vice President of the Company since February, 2003; Executive Vice
President of the Bank since April, 1996; Strategic Planning Director of the Bank
since November, 2000; Chief Operations Officer of the Bank from November, 1998
until October, 2000.
Stuart R. Johnson 49 Executive Vice President of the Company since February, 2003; Executive Vice
President, Chief Financial Officer, and Cashier of the Bank since April, 1996.
All of our officers are appointed annually by the Board of Directors to serve at
the discretion of the Board.
61
Directors of the Company
The names, ages and terms of office of the Company's directors are listed below
together with their business experience during the past five years.
Class 1 Directors and Nominees (to be elected at the 2003 annual meeting, terms
of office expire in 2006):
- George H. Booth, II is co-owner of Tupelo Hardware Company, a closely
held family business primarily engaged in wholesale and retail
hardware sales. Mr. Booth is currently serving as president of Tupelo
Hardware Company, having served as vice president from 1976 until
2000. Mr. Booth, who is 49 years old, has been a director of the
Company since 1994.
- Frank B. Brooks has been a cotton farmer since 1959 and president of
Yalobusha Gin Company, Inc., a cotton gin located in Yalobusha County,
Mississippi, since 1992. Mr. Brooks, who is 59 years old, has been a
director of the Company since 1989.
- Robert C. Leake has served as chairman of the Company's board and the
Bank's board since 1989. Mr. Leake has also been principal owner of
Leake & Goodlett, Inc., a closely held family business primarily
engaged in full service retail building material and supplies, since
1957. Mr. Leake is currently serving as vice president of Leake &
Goodlett, Inc., having served as president from 1974 until 2002. Mr.
Leake, who is 70 years old, has been a director of the Company since
1973.
- C. Larry Michael has served as president of Transport Trailer Service,
Inc., a company primarily engaged in semi-trailer sales and repair,
Rent-A-Box, Inc., a company primarily engaged in semi-trailer leasing,
and Precision Machine and Metal Fabrication, a company primarily
engaged in customized machining of metal parts, since 1972. Mr.
Michael, who is 57 years old, has been a director of the Company since
1997.
Retiring Class 1 Director (term of office expires at the 2003 annual meeting):
- J. Heywood Washburn has been self-employed as an investor in various
undertakings for the past five years. Mr. Washburn is co-general
partner of Washburn Enterprises, LP, a company engaged in real estate
development and property management and rental. Since October 2002,
Mr. Washburn has also been a partner in Mississippi Alabama Production
Company, LLC, a company engaged in oil and gas equipment leasing. Mr.
Washburn, who is 72 years old, has been a director of the Company
since 1982.
Class 2 Directors (terms of office expire in 2004):
- John M. Creekmore has been engaged in the practice of law since 1987
as the owner of the law firm Creekmore Law Office. Mr. Creekmore, who
is 47 years old, has been a director of the Company since 1997.
- E. Robinson McGraw has served as president and chief executive officer
of both the Company and the Bank since 2000. Mr. McGraw served as
executive vice president of the Bank prior to becoming chief executive
officer. Mr. McGraw, who is 56 years old, has been a director of the
Company since 2000.
- Theodore S. Moll has been with MTD Products, a company primarily
engaged in the production of outdoor power equipment, since 1965. Mr.
Moll presently serves as executive vice president of its worldwide
operations. Mr. Moll, who is 60 years old, has been a director of the
Company since 2002.
- John W. Smith, who is retired, served as president and chief executive
officer of the Company and the Bank from 1993 until 2000. Mr. Smith,
who is 67 years old, has been a director of the Company since 1978.
- Robert H. Weaver, who is retired, engaged in the practice of law as a
partner of Watkins Ludlam Winter & Stennis, P.A. from 1959 until 2000.
Since his retirement, he has been serving as of counsel for that firm.
Mr. Weaver, who is 71 years old, has been a director of the Company
since 1980.
62
- J. Larry Young has been employed as a part-time pharmacist with Fred's
Pharmacy in Pontotoc, Mississippi since 1998. Prior to 1998, Mr. Young
was a pharmacist for and a partner in Ramsey-Young Pharmacy. Mr.
Young, who is 64 years old, has been a director of the Company since
1982.
Class 3 Directors (terms of office expire in 2005):
- William M. Beasley has been engaged in the practice of law as a
partner of the law firm of Phelps Dunbar LLP since 1999. Prior to
1999, Mr. Beasley was a partner of the law firm of Mitchell, Voge,
Beasley and Corban. He has also served as vice chairman of the board
of directors of the Company since 2001. Mr. Beasley, who is 51 years
old, has been a director of the Company since 1989.
- Marshall H. Dickerson has been the owner and manager of Dickerson
Furniture Company, a company primarily engaged in retail home
furnishings, since 1978. Mr. Dickerson, who is 53 years old, has been
a director of the Company since 1996.
- Eugene B. Gifford, Jr. has been engaged in the practice of law since
1960 as a partner in the law firm of Gifford, Allred and Tennison. Mr.
Gifford, who is 68 years old, has been a director of the Company since
1987.
- Richard L. Heyer, Jr. has served as a physician and partner of Tupelo
Anesthesia Group, P.A. since 1989. Dr. Heyer, who is 46 years old, has
been a director of the Company since 2002.
- J. Niles McNeel has been engaged in the practice of law as a partner
of the law firm of McNeel and Ballard since 1983. Mr. McNeel, who is
56 years old, has been a director of the Company since 1999.
- H. Joe Trulove is presently a partner of Landmark Enterprises, a
company primarily engaged in real estate and investments. Mr. Trulove
has been chairman of the board of directors of Rose Hill Manufacturing
Company, a company primarily engaged in the manufacture of upholstered
furniture, since 2002. Prior to 2001, Mr. Trulove was senior vice
president of York Casket Company, a company primarily engaged in the
manufacture of caskets. Mr. Trulove, who is 65 years old, has been a
director of the Company since 1999.
All of the directors and nominees listed above also presently serve on the board
of the Bank. There are no family relationships between any director, executive
officer or person nominated to become a director.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file with the Securities Exchange
Commission and the American Stock Exchange reports of ownership of Company
securities and changes in reported ownership. Officers, directors and greater
than 10% shareholders are required by SEC rules to furnish the Company with
copies of all Section 16(a) reports by file.
Based solely upon a review of the reports furnished to the Company, or written
representations from reporting persons that all reportable transactions were
reported, the Company believes that during 2002 the Company's officers,
directors and greater than 10% owners timely filed all reports they were
required to file under Section 16(a), except that: three reports, each covering
a single transaction, were inadvertently filed late by Mr. Gifford; one report
covering two transactions was inadvertently filed late by Dr. Heyer; one report
covering one transaction was inadvertently filed late by Mr. McGraw; one report
covering one transaction was inadvertently filed late by Mr. Leake; and one
report covering two transactions was inadvertently filed late by Mr. Weaver. In
addition, the following individuals each inadvertently filed one late report for
one or more acquisitions of common stock equivalent units occurring after August
28, 2002, credited under a deferred compensation plan maintained by the Company:
Mr. Beasley, two acquisitions; Mr. Brooks, two acquisitions; Mr. Creekmore, two
acquisitions, Mr. Dickerson, two acquisitions; Mr. Gifford, two acquisitions;
Dr. Heyer, one acquisition; Mr. McGraw, six acquisitions; Mr. Michael, two
acquisitions; Mr. Moll, one acquisition; Mr. Trulove, two acquisitions; Mr.
Waycaster, six acquisitions; Mr. Weaver, two acquisitions; and Mr. Young, two
acquisitions.
63
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "Executive Compensation",
"Compensation Committee Interlocks and Insider Participation" and "Stock
Performance Graph" in the Company's definitive Proxy Statement, dated March 10,
2003, is incorporated herein by reference
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the headings "Security Ownership of Directors,
Nominees and Executive Officers" and "Security Ownership of Certain Beneficial
Owners" in the Company's definitive Proxy Statement, dated March 10, 2003, is
incorporated herein by reference.
The information appearing under the heading "Equity Compensation Plan
Information" in the Company's definitive Proxy Statement, dated March 10, 2003,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the headings "Indebtedness of Related Parties"
and "Interests of the Board of Directors" in the Company's definitive Proxy
Statement, dated March 10, 2003, is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Based upon their evaluation as of a date within 90 days prior to the filing of
this annual report on Form 10-K, 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.
64
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) - (1) Financial Statements
The following consolidated financial statements and supplementary information
for the fiscal years ended December 31, 2002, 2001, and 2000 are included in
Part II, Item 8 herein:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 31, 2002 and 2001
(iii)Consolidated Statements of Income - Years ended December 31, 2002,
2001, and 2000
(iv) Consolidated Statements of Shareholders' Equity - Years ended December
31, 2002, 2001, and 2000
(v) Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001, and 2000
(vi) Notes to Consolidated Financial Statements - December 31, 2002
(a) - (2) Financial Statement Schedules
All schedules have been omitted because they are either not applicable or the
required information has been included in the consolidated financial statements
or notes thereto.
(a) - (3) Exhibits required by Item 601 of Regulation S-K
(3)(i) Articles of Incorporation of the Company(1)
(3)(ii) Bylaws of the Company (as amended March 1, 2001) (2)
(10)(i) The Peoples Holding Company 2001 Long-Term Incentive Plan(3)
(10)(ii) The Peoples Holding Company Deferred Compensation Plan(4)
(10)(iii) Executive Deferred Compensation Plan A(5)
(10)(iv) Executive Deferred Compensation Plan B(6)
(10)(v) Directors' Deferred Fee Plan A(7)
(10)(vi) Directors' Deferred Fee Plan B(8)
(10)(vii) Change in Control Employment Agreement dated January 1, 2001
between the Company and E. Robinson McGraw(9)
(10)(viii) Change in Control Employment Agreement dated February 28,
1998 between the Company and Stuart R. Johnson
(10)(ix) Change in Control Employment Agreement dated February 28,
1998 between the Company and James W. Gray
(21) Subsidiaries of the Company(1)
(23) Consent of Independent Auditors
65
(1) Filed as an exhibit to the Form S-4 Registration Statement of the Company
(File No. 333-72507) filed with the Securities and Exchange Commission on
February 17, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Form 10-Q of the Company filed with the
Securities and Exchange Commission on November 14, 2002 and incorporated
herein by reference.
(3) Filed as exhibits 4.1 and 4.2 to the Form S-8 Registration Statement of the
Company (File No. 333-102152) filed with the Securities and Exchange
Commission on December 23, 2002 and incorporated herein by reference.
(4) Filed as exhibits 4.3 and 4.4 to the Form S-8 Registration Statement of the
Company (File No. 333-102152) filed with the Securities and Exchange
Commission on December 23, 2002 and incorporated herein by reference.
(5) Filed as exhibit 10.1 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2002 and incorporated herein by
reference.
(6) Filed as exhibit 10.2 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2002 and incorporated herein by
reference.
(7) Filed as exhibit 10.3 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2002 and incorporated herein by
reference.
(8) Filed as exhibit 10.4 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2002 and incorporated herein by
reference.
(9) Filed as exhibit 10.5 to the Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2002 and incorporated herein by
reference.
The Company does not have any long-term debt instruments under which securities
are authorized exceeding ten percent of the average assets of the Company and
its subsidiaries on a consolidated basis. The Company will furnish to the
Securities and Exchange Commission, upon their request, a copy of all long-term
debt instruments.
(a) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Annual Report on Form 10-K:
On October 18, 2002, the Company filed on Form 8-K a press release announcing
the financial results of the Company for the quarter ended September 30, 2002.
On October 22, 2002, the Company filed on Form 8-K a press release announcing
that the Board of Directors of the Company authorized the Company to repurchase
up to 278,771 shares of the Company's common stock.
On November 21, 2002, the Company filed on Form 8-K a press release announcing
the declaration of a quarterly cash dividend on the Company's common stock of
$.27 per share.
66
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.
Date: March 10, 2003 By: /s/ E. Robinson McGraw
--------------------------
E. Robinson McGraw
President and Chief Executive Officer
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.
THE PEOPLES HOLDING COMPANY
Date: March 10, 2003 By: /s/ Robert C. Leake
--------------------------
Robert C. Leake
Chairman of the Board and Director
Date: March 10, 2003 By: /s/ William M. Beasley
--------------------------
William M. Beasley
Vice Chairman of the Board and Director
Date: March 10, 2003 By: /s/ George H. Booth, II
--------------------------
George H. Booth, II
Director
Date: March 10, 2003 By: /s/ Frank B. Brooks
--------------------------
Frank B. Brooks
Director
Date: March 10, 2003 By: /s/ John M. Creekmore
--------------------------
John M. Creekmore
Director
Date: March 10, 2003 By: /s/ Marshall H. Dickerson
--------------------------
Marshall H. Dickerson
Director
Date: March 10, 2003 By: /s/ Eugene B. Gifford, Jr.
--------------------------
Eugene B. Gifford, Jr.
Director
Date: March 10, 2003 By: /s/ Richard L. Heyer, Jr.
--------------------------
Richard L. Heyer, Jr.
Director
67
Date: March 10, 2003 By: /s/ Stuart R. Johnson
--------------------------
Stuart R. Johnson
Executive Vice President and
Chief Financial Officer
Date: March 10, 2003 By: /s/ E. Robinson McGraw
--------------------------
E. Robinson McGraw
President and Chief Executive Officer
and Director
Date: March 10, 2003 By: /s/ J. Niles McNeel
--------------------------
J. Niles McNeel
Director
Date: March 10, 2003 By: /s/ C. Larry Michael
--------------------------
C. Larry Michael
Director
Date: March 10, 2003 By: /s/ Theodore S. Moll
--------------------------
Theodore S. Moll
Director
Date: March 10, 2003 By: /s/ John W. Smith
--------------------------
John W. Smith
Director
Date: March 10, 2003 By: /s/ H. Joe Trulove
--------------------------
H. Joe Trulove
Director
Date: March 10, 2003 By: /s/ J. Heywood Washburn
--------------------------
J. Heywood Washburn
Director
Date: March 10, 2003 By: /s/ Robert H. Weaver
--------------------------
Robert H. Weaver
Director
Date: March 10, 2003 By: /s/ J. Larry Young
--------------------------
J. Larry Young
Director
68
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, E. Robinson McGraw, certify that:
1. I have reviewed this annual report on Form 10-K of The Peoples Holding
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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
annual 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: March 10, 2003 By: /s/ E. Robinson McGraw
--------------------------
E. Robinson McGraw
Chief Executive Officer
69
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stuart R. Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of The Peoples Holding
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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
annual 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: March 10, 2003 By: /s/ Stuart R. Johnson
--------------------------
Stuart R. Johnson
Chief Financial Officer
70