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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report under Section 13 or 15(d)
of THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended March 31, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-13253
THE PEOPLES HOLDING COMPANY
-------------------------------------------------------
(Exact name of the registrant as specified in its charter)
MISSISSIPPI
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
64-0676974
---------------------------------------
(I.R.S. Employer Identification Number)
209 Troy Street, P. O. Box 709, Tupelo, Mississippi 38802-0709
------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code 662-680-1001
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES__X__NO_____
Indicate by check whether the registrant is an accellerated filer (as defined in
Rule 121-2 of the Exchange Act). Yes__X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as to the latest practicable date.
Common stock, $5 Par Value, 5,561,190 shares outstanding as of May 15, 2003
1
THE PEOPLES HOLDING COMPANY
INDEX
PART 1. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002................ 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2003 and 2002.......... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002.......... 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk................................... 13
Item 4.
Controls and Procedures ................................. 13
PART II. OTHER INFORMATION
Item 5
Other Information ...................................... 14
Item 6.
Exhibits and Reports on Form 8-K........................ 14
SIGNATURES........................................................... 15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER............................. 16
CERTIFICATION OF CHIEF FINANCIAL OFFICER............................. 17
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31 DECEMBER 31
2003 2002
------------ -----------
(Unaudited) (Note 1)
Assets
Cash and due from banks .................. $ 51,017 $ 46,422
Interest-bearing balances with banks ..... 30,301 12,319
---------- ---------
Cash and cash equivalents ... 81,318 58,741
Securities available-for-sale ............ 375,812 344,781
Loans, net of unearned income ............ 857,004 863,308
Allowance for loan losses ............. (12,666) (12,203)
---------- ---------
Net loans ................... 844,338 851,105
Premises and equipment, net .............. 29,576 29,289
Other assets ............................. 61,843 60,596
---------- ---------
Total assets .................... $ 1,392,887 $ 1,344,512
========== =========
Liabilities
Deposits:
Noninterest-bearing ................... $ 168,871 $ 147,565
Interest-bearing ...................... 989,688 951,483
---------- ---------
Total deposits .............. 1,158,559 1,099,048
Treasury tax and loan note account ....... 2,194 5,498
Advances from the Federal Home Loan Bank . 81,787 86,308
Other liabilities ........................ 15,294 20,880
---------- ---------
Total liabilities ........... 1,257,834 1,211,734
Shareholders' equity
Common Stock, $5 par value - 15,000,000
shares authorized, 6,212,284 shares
issued; 5,572,751 and 5,574,733 shares
outstanding at March 31, 2003 and
December 31, 2002, respectively ........ 31,061 31,061
Treasury stock, at cost .................. (17,636) (17,556)
Additional paid-in capital ............... 39,930 39,930
Retained earnings ........................ 76,982 73,935
Accumulated other comprehensive income ... 4,716 5,408
---------- ---------
Total shareholders' equity .. 135,053 132,778
---------- ---------
Total liabilities and
shareholders' equity ......... $ 1,392,887 $ 1,344,512
========== =========
See Notes to Condensed Consolidated Financial Statements
3
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
THREE MONTHS ENDED MARCH 31
2003 2002
---- ----
(Unaudited)
Interest income
Loans ................................... $ 14,614 $ 15,317
Securities:
Taxable ............................ 2,515 3,053
Tax-exempt ......................... 1,035 981
Other ................................... 200 178
------- -------
Total interest income .............. 18,364 19,529
Interest expense
Deposits ................................ 5,090 6,504
Borrowings ............................. 793 586
------- -------
Total interest expense ............. 5,883 7,090
------- -------
Net interest income ................ 12,481 12,439
Provision for loan losses ..................... 767 1,125
------- -------
Net interest income after
provision for loan losses ...... 11,714 11,314
Noninterest income
Service charges on deposit accounts ..... 3,424 2,936
Fees and commissions .................... 2,415 2,049
Trust revenue ........................... 297 231
Securities gains ........................ 79 -
BOLI income ............................. 305 302
Merchant discounts ...................... 294 299
Other ................................... 761 792
------- -------
Total noninterest income ........... 7,575 6,609
Noninterest expense
Salaries and employee benefits .......... 7,221 6,929
Data processing ......................... 950 922
Net occupancy ........................... 805 807
Equipment ............................... 798 804
Other ................................... 3,056 2,836
------- -------
Total noninterest expense .......... 12,830 12,298
------- -------
Income before taxes and cumulative effect
of accounting change ...................... 6,459 5,625
Income taxes .................................. 1,907 1,560
------- -------
Income before cumulative
effect of accounting change .... 4,552 4,065
Cumulative effect of accounting change ........ - (1,300)
------- -------
Net income after cumulative
effect of accounting change .... $ 4,552 $ 2,765
======= =======
Basic and diluted earnings per share:
Income before cumulative effect of
accounting change .................... $ 0.82 $ 0.72
Cumulative effect of accounting change ... - (0.23)
------- -------
Net Income ............................... $ 0.82 $ 0.49
======= =======
Weighted average shares outstanding .......... 5,573,528 5,657,726
Weighted average shares outstanding - diluted . 5,579,515 5,660,727
See Notes to Condensed Consolidated Financial Statements
4
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
THREE MONTHS ENDED MARCH 31
2003 2002
---- ----
(Unaudited)
Operating activities
Net cash provided (used) by
operating activities .......... $ 1,063 $ (1,100)
Investing activities
Purchases of securities
available-for-sale ................. (90,685) (98,129)
Proceeds from sales of securities
available-for-sale ................. 19,365 3,097
Proceeds from calls/maturities of
securities available-for-sale ...... 38,358 19,284
Net decrease in loans ................... 5,367 6,834
Proceeds from sales of premises
and equipment ...................... 1 119
Purchases of premises and equipment ..... (993) (473)
---------- ----------
Net cash used in investing
activities .................... (28,587) (69,268)
Financing activities
Net increase in
noninterest-bearing deposits ........ 21,306 9,277
Net increase in
interest-bearing deposits ........... 38,205 41,082
Net (decrease) in
short-term borrowings ............... (3,304) (3,741)
Proceeds from other borrowings .......... - 13,748
Repayments of other borrowings .......... (4,521) (4,618)
Acquisition of treasury stock ........... (80) (2,897)
Cash dividends paid ..................... (1,505) (1,415)
---------- ----------
Net cash provided by financing
activities ................... 50,101 51,436
---------- ----------
Increase (decrease) in cash
and cash equivalents ......... 22,577 (18,932)
Cash and cash equivalents at
beginning of period ............... 58,741 71,412
---------- ----------
Cash and cash equivalents at
end of period ..................... $ 81,318 $ 52,480
============ ============
Supplemental disclosures:
Non-cash transactions:
Transfer of loans to other real
estate ............................... $ 632 $ 787
============ ============
See Notes to Condensed Consolidated Financial Statements
5
THE PEOPLES HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(in thousands, except share data)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003.
For further information, refer to the consolidated financial statements and
footnotes thereto included in The Peoples Holding Company and Subsidiary's
annual report on Form 10-K for the year ended December 31, 2002. For purposes of
this quarterly report on Form 10-Q, the term "Company" refers to The Peoples
Holding Company and the term "Bank" refers to The Peoples Bank and Trust
Company.
Note 2 Other Accounting Pronouncements
In the first quarter of 2002, we 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, we recorded a
goodwill impairment charge of $1,300 as a cumulative effect of a change in
accounting principles. The impairment was specific to the insurance subsidiary
of the Company. The fair value of the insurance subsidiary was estimated using
the expected present value of future cash flows. The insurance subsidiary
acquisition was a tax-free exchange; therefore, there was no tax offset to the
impairment cost booked.
As of March 31, 2003
--------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- --------------
Amortized intangible assets:
Core deposit intangible assets .. $ 507 $ (413)
Other intangible assets ......... 3,282 (2,184)
---------- ----------
Total intangible assets ......... $ 3,789 $ (2,597)
========== ==========
Goodwill ........................ $ 7,190 $ (2,142)
========== ==========
Aggregate amortization expense:
For the period ended March 31, 2003 ...... $ 123
Estimated amortization expense in future years:
For the year ended December 31, 2003 ..... 493
For the year ended December 31, 2004 ..... 422
For the year ended December 31, 2005 ..... 399
For the year ended December 31, 2006 ..... 0
6
Note 2 Other Accounting Pronouncements (continued)
The changes in the carrying amount of goodwill and other intangible assets for
the quarter ended March 31, 2003 and 2002, are as follows:
2003 2002
----------------------- -----------------------
Other Other
Goodwill Intangibles Goodwill Intangibles
---------- ----------- ---------- -----------
Balance as of January 1, .... $ 5,048 $ 1,315 $ 6,348 $ 1,808
Impairment losses ......... - - (1,300) -
Amortization expense ...... - (123) - (123)
---------- ----------- ---------- -----------
Balance as of March 31, ..... $ 5,048 $ 1,192 $ 5,048 $ 1,685
========== =========== ========== ===========
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 were to be applied 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 are to be applied in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company has evaluated the
provisions of the Interpretation, and its adoption did not have a material
impact on its financial statements.
Effective January 1, 2003, we adopted the disclosure provisions of SFAS 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure." This
statment amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
for alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure provisions of SFAS 123 and Account
Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. We adopted the fair value method of accounting for stock
based compensation effective December 31, 2002. We recorded $128 in compensation
expense relating to stock based compensation in the first quarter of 2003.
Note 3 Comprehensive Income
For the three month periods ended March 31, 2003 and 2002, total comprehensive
income was $3,860 and $1,712, respectively. Total comprehensive income consists
of net income and the change in the unrealized gain (loss) on securities
available for sale.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (dollar amounts in thousands, except per
share data)
This Form 10-Q may contain, or incorporate by reference, statements which may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Prospective investors are cautioned that any such
forward-looking statements are not guarantees for future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements include significant
fluctuations in interest rates, inflation, economic recession, significant
changes in the federal and state legal and regulatory environment, significant
underperformance in our portfolio of outstanding loans, and competition in our
markets. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Financial Condition
Total assets of The Peoples Holding Company increased from $1,344,512 on
December 31, 2002, to $1,392,887 on March 31, 2003, or 3.60%. Of the $48,375
increase in total assets, $17,982 and $31,031 were employed in interest bearing
bank balances and the investment portfolio, respectively, as a result of soft
loan demand. Security purchases during the quarter totaled $90,685, the majority
(92%) being in the mortgage-back sector because of the cash flow provided by the
principal and interest payback each month. We believe that the cash flow from
these securities will be useful in meeting loan demand as the economy improves.
Loan demand for the first quarter of 2003 remained slow. Average loan balances
for the first quarter of 2003 were comparable to average loan balances for the
fourth quarter of 2002. However, the loan balance at March 31, 2003, was
$857,004, representing a decrease of $6,304 from $863,308 at December 31, 2002.
Loan volume continues to be impacted by the strategic decision made in 2000 to
curtail our sales finance division in order to reduce risk and to enhance yield.
The sales finance balance decreased $1,403, from $6,793 on December 31, 2002, to
$5,390 on March 31, 2003. The increase in real estate construction loans was
offset by decreases in real estate mortgage and consumer loans, lowering the
loan to deposit ratio at March 31, 2003, to 73.97%. The average loan to deposit
ratio improved from 75.90% at December 31, 2002, to 76.77% at March 31, 2003.
Total deposits increased from $1,099,048 on December 31, 2002, to $1,158,559 on
March 31, 2003, or 5.41%. The majority of our growth has been in non-interest
demand deposit accounts, public fund interest bearing demand deposit accounts,
and savings deposit accounts. Traditionally, we see an increase in public funds
checking the first quarter of each year. Our average interest bearing deposits
as a percentage of total average deposits have decreased from 86.10% at December
31, 2002, to 85.92% at March 31, 2003.
The treasury tax and loan note account decreased from $5,498 at December 31,
2002, to $2,194 at March 31, 2003. This balance is contingent on the amount of
funds we pledge as collateral as well as the Federal Reserve's need for funds.
We also continue to utilize advances from the Federal Home Loan Bank (FHLB) to
minimize interest rate risk. We have funded various loans with FHLB borrowings
having similar terms, locking in fixed rates based on a spread over the FHLB
note rates. In addition, we have funded an arbitrage of mortgage-backed
securities with advances from the FHLB. Advances from the FHLB decreased from
$86,308 at December 31, 2002, to $81,787 at March 31, 2003.
8
The equity capital to total assets ratios were 9.70% and 9.88% at March 31,
2003, and December 31, 2002, respectively. Capital increased $2,275, or 1.71%,
from December 31, 2002, to March 31, 2003. Several factors contributed to the
change in capital. Offsetting the increase in capital from earnings were a
decrease in unrealized security portfolio gains, cash dividends declared for the
first quarter, and treasury stock purchases. Unrealized portfolio gains
decreased as a result of declining portfolio yields. As noted earlier, we
purchased approximately $90,000 of securities this quarter, or approximately 24%
of the portfolio. Cash dividends declared in the first quarter of 2003 remained
unchanged from dividends declared in the fourth quarter of 2002 at $.27 per
share. In addition, we purchased 1,982 shares of treasury stock during the first
quarter of 2003 at an average price of $40.33 per share.
Results of Operations
Net income for the three month period ended March 31, 2003, was $4,552. This
represented an increase of $1,787, or 64.63%, from net income of $2,765 for the
three month period ended March 31, 2002, and an increase of $487, or 11.98%,
from net income before the cumulative effect of accounting change recognized in
the first quarter of 2002. Income before the cumulative effect of accounting
change for the three month period ended March 31, 2002 was $4,065. In the first
quarter of 2002, we 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, we recorded a goodwill impairment
charge of $1,300 as a cumulative effect of a change in accounting principles.
The impairment was specific to the insurance subsidiary of the Company.
Earnings per share for the first quarter of 2003 were $0.82. This represented an
increase of 67.35% from earnings per share of $0.49 for the comparable period a
year ago, and an increase of 13.89% from earnings per share before the
cumulative effect of accounting change of $0.72 for the comparable period a year
ago.
The increase in net income before cumulative effect of accounting change for the
three month period ended March 31, 2003, compared to the same period for 2002
was a result of usual and customary deposit gathering and lending operations and
an emphasis on effective and efficient delivery of specialized products. The
annualized return on average assets for the three month periods ending March 31,
2003 and 2002, was 1.29% and 1.09%, respectively. The annualized return on
average assets before the cumulative effect of accounting change was 1.19% for
the first quarter of 2002. The annualized return on average equity for the three
month periods ending March 31, 2003 and 2002, was 13.15% and 11.37%,
respectively. The annualized return on average equity before the cumulative
effect of accounting change was 12.29% for the first quarter of 2002.
Net Interest Income
Net interest income, the difference between interest earned on earning assets
and the cost of interest-bearing liabilities, is the largest component of our
net income. The primary concerns in managing net interest income are the mix and
the repricing of rate-sensitive assets and liabilities. Net interest income has
slightly improved due to increases in earning asset volume, risk based pricing
of loans, and a shift in the deposit mix from time deposits to transaction and
money market accounts.
Net interest income for the three month periods ending March 31, 2003 and 2002
was $12,481 and $12,439, respectively, while earning assets for the same periods
averaged $1,222,027 and $1,162,968, respectively. Our net interest margin on a
tax equivalent basis for the first quarter of 2003 has declined to 4.39% from
4.59% for the comparable period in 2002 due to repricing at record low interest
rates.
Three Months ending Three Months ending
March 31, December 31,
------------------- -------------------
2003 2002 2002
-------- -------- --------
Net interest margin ...... 4.39% 4.59% 4.61%
9
Provision for Loan Losses
The provision for loan losses charged to operating expense is an amount which,
in the judgement of management, is necessary to maintain the allowance for loan
losses at a level that is adequate to meet the inherent risks of losses on our
current portfolio of loans. The appropriate level of the allowance is based on a
quarterly analysis of the loan portfolio including consideration of such factors
as the risk rating of individual credits, size and diversity of the portfolio,
economic conditions, prior loss experience, and the results of periodic credit
reviews by internal loan review and regulators. As a result of the continued
improvement in loan quality, the provision for loan losses has been reduced
31.82% from $1,125 in the first quarter of 2002 to $767 in the first quarter of
2003. The tables below present pertinent data and ratios.
Loans and Credit Quality
Nonperforming Net Charge-offs
Loans* Loans Three Months Ended
March 31 March 31 March 31
------------------ ------------------ ------------------
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- --------
Commercial, financial, agricultural ... $153,428 $147,982 $ 417 $ 1,501 $ 83 $ 73
Real estate - construction ............ 41,982 31,269 - 150 - 87
Real estate - mortgage ................ 568,569 536,877 2,145 3,645 180 289
Consumer .............................. 93,025 103,279 220 403 41 219
-------- -------- -------- -------- -------- --------
$857,004 $819,407 $ 2,782 $ 5,699 $ 304 $ 668
======== ======== ======== ======== ======== ========
* Net of unearned income.
Allowance for Loan Losses
2003 2002
--------- ------------------------------------------
1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Balance at beginning of period ............. $ 12,203 $ 12,299 $ 11,658 $ 11,811 $ 11,354
Loans charged off .......................... 483 1,299 573 1,310 985
Recoveries of loans previously charged off . 179 178 89 82 317
--------- --------- --------- --------- ---------
Net Charge-offs ....................... 304 1,121 484 1,228 668
Provision for loan losses .................. 767 1,025 1,125 1,075 1,125
--------- --------- --------- --------- ---------
Balance at end of year ..................... $ 12,666 $ 12,203 $ 12,299 $ 11,658 $ 11,811
========= ========= ========= ========= =========
Allowance for loan losses to total loans ... 1.48% 1.30% 1.44% 1.39% 1.44%
Reserve coverage ratio ..................... 455.28 338.22 309.95 317.57 207.25
Net charge-offs to total loans ............. 0.04 0.13 0.06 0.15 0.08
Nonperforming loans to total loans ......... 0.32 0.42 0.46 0.44 0.70
10
Noninterest Income
Noninterest income, excluding gains from the sales of securities, was $7,496 for
the three month period ending March 31, 2003, compared to $6,609 for the same
period in 2002, or an increase of 13.42%. Approximately 77% of the increase
between 2003 and 2002 was the result of fees generated from usual and customary
loan and deposit services.
Fees generated from deposit services increased $566, or 14.28%,from the first
quarter of 2002, largely attributable to deposit growth. Deposits, excluding
time deposits, increased 12.09%. These deposit services include service charges,
overdraft charges, debit card fees, and deposit box rent. Debit card usage was
up approximately 19% for the first quarter of 2003 compared to the first quarter
of 2002.
Income attributable to loan services increased $126, or 13.27% over the same
period in 2002. The mortgage loan business remained strong during the first
quarter of 2003. And when comparing first quarter 2003 to 2002, loan origination
fees and loan document preparation fees increased $184 and $38, respectively.
This increase was primarily due to changes in our pricing structure implemented
in late March 2002. Loan prepayment penalties decreased $139 over the same
period.
Our continued emphasis on sales of specialized products and services resulted in
an increase of $118 in insurance commissions for the three month period ending
March 31, 2003, compared to the same period in 2002. Contingency income related
to our insurance subsidiary was down $127 from the same time period. Contingency
income is a bonus received from the insurance underwriters and is based on
claims paid on our customers during the previous year. In addition, trust
revenue for the first quarter of 2003 was $66 greater than the first quarter of
2002 due to fees earned on new accounts and changes in the fee structure of
investment managed accounts. And during the first quarter of 2003, we received a
one-time signing bonus of $75 related to our new official check program.
Noninterest Expense
Noninterest expense was $12,830 for the three month period ended March 31, 2003,
compared to $12,298 for the same period in 2002, or an increase of 4.33%.
Salaries and commissions for the first quarter of 2003 increased $497 over the
same period last year. The increase was related to normal hiring practices and
salary increases for employees. Increases in salaries and commissions were
offset by lower incentive expenses for the first quarter of 2003 compared to the
first quarter of 2002. Stock option expenses accounted for $124 of the increase
in noninterest expense over the prior year.
A loss of $56 was recognized on the sale of a building during the first quarter
of 2002. We experienced increases of $110 in computer and equipment expenses
related to technological enhancements. Fees increased $165 over the first
quarter of 2002 due to professional fees paid to a technology consultant, to our
accounting firm, and to our legal firms. Insurance costs were $58 greater than
the prior year because of rate increases in various liability insurance policies
held by the Company.
Noninterest expense as a percentage of average assets improved to 3.79% for the
first quarter of 2003 from 3.82% for the comparable period in 2002. Although
expenses increased, we have improved our efficiency ratio. The fact that the
growth in noninterest income outpaced the growth in noninterest expenses has
been a key factor in the improvement of our efficiency ratio.
11
Three Months Ended
March 31
------------------
2003 2002
------ ------
Efficiency ratio ..... 61.49% 62.03%
Income tax expense was $1,907 for the three month period ended March 31, 2003,
(with an effective tax rate of 29.52%) compared to $1,560 (with an effective tax
rate of 27.73%) for the same period in 2002. The increase in the effective tax
rate over 2002 is due in part to a decrease in the tax credit available on
Qualified Zone Academy Bonds in our investment portfolio. We continue to seek
investing opportunities in assets whose earnings are given favorable tax
treatment.
Liquidity Risk
Liquidity management is the ability to meet the cash flow requirements of
customers who may be either depositors wishing to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs.
Core deposits are a major source of funds used to meet cash flow needs.
Maintaining the ability to acquire these funds as needed in a variety of money
markets is a key to assuring liquidity. When evaluating the movement of these
funds even during times of large interest rate changes, it is apparent that we
continue to attract deposits that can be used to meet cash flow needs.
Management continues to monitor the liquidity and potentially volatile
liabilities ratios to ensure compliance with Asset-Liability Committee targets.
These targets are set to ensure that we meet the liquidity requirements deemed
necessary by management.
Another source available for meeting our liquidity needs is available-for-sale
securities. The available-for-sale portfolio is composed of securities with a
readily available market that can be used to convert to cash if the need arises.
Other sources available for meeting liquidity needs include federal funds sold
and interest bearing balances with the FHLB. In addition, we may obtain advances
from the FHLB or the Federal Reserve Bank. Funds obtained from the FHLB are used
primarily to match-fund real estate loans in order to minimize interest rate
risk, and may be used to meet day to day liquidity needs.
Capital Resources
We are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. Our
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum balances and ratios. All banks are required to
have core capital (Tier I) of at least 4% of risk-weighted assets (as defined),
4% of average assets (as defined), and total capital of 8% of risk-weighted
assets (as defined). As of March 31, 2003, we met all capital adequacy
requirements to which we are subject.
12
As of March 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized us as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios of 10%, 6%, and 5%, respectively. In the opinion of
management, there are no conditions or events since the last notification that
have changed the institution's category. The Bank's actual capital amounts and
applicable ratios are as follows and do not differ materially from that of the
Company.
Actual
Amount Ratio
------ -----
(000)
As of March 31, 2003
Total Capital .................... $ 130,184 14.7%
(to Risk Weighted Assets)
Tier I Capital ................... $ 119,065 13.4%
(to Risk Weighted Assets)
Tier I Capital ................... $ 119,065 8.8%
(to Adjusted Average Assets)
As of December 31, 2002
Total Capital .................... $ 127,870 14.5%
(to Risk Weighted Assets)
Tier I Capital ................... $ 116,856 13.3%
(to Risk Weighted Assets)
Tier I Capital ................... $ 116,856 9.0%
(to Adjusted Average Assets)
Management recognizes the importance of maintaining a strong capital base. As
the above ratios indicate, we exceed the requirements for a well capitalized
bank.
Book value per share was $24.23 and $23.82 at March 31, 2003 and December 31,
2002, respectively.
Our capital policy is to evaluate future needs based on growth, earnings trends
and anticipated acquisitions.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our disclosure on quantitative and
qualitative disclosures about market risk since December 31, 2002. For
additional information, see our Form 10-K for the year ended December 31, 2002.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days prior to the filing of
this quarterly report on Form 10-Q, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended) are effective for timely alerting them to material information
required to be included in our periodic SEC reports. Subsequent to the date of
their evaluation, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
13
Part II. OTHER INFORMATION
Item 5. OTHER INFORMATION
This disclosure is made pursuant to Rule 104 of Regulation BTR. On February 14,
2003, the plan administrator of The Peoples Bank & Trust Company 401(k) Plan
notified the company of an upcoming administrative blackout period for the plan
from March 18, 2003 through April 11, 2003. On February 20, 2003, the company
notified directors and executive officers of the blackout period and trading
restrictions on company common stock during the blackout period. The blackout
period was necessary to complete the transfer of the plan's administrative
records and account balances to a new recordkeeper, to implement changes in
investment options and to make changes necessary to permit investment changes to
be made on a daily basis. During the blackout period, participants were
restricted from obtaining a plan loan or making investment changes. The blackout
period began on March 18, 2003 and ended on April 11, 2003. For inquiries about
the blackout period and trading restrictions, contact Stuart Johnson, Chief
Financial Officer, The Peoples Bank & Trust Company, 209 Troy Street, Tupelo,
Mississippi 38802, (662) 680-1472.
This disclosure is provided under Item 11 of Form 8-K and is made herein under
Item 5, of Form 10-Q in the first quarterly report filed by the company after
commencement of the blackout period, pursuant to the interim guidance set forth
in the transition period provided for under SEC Release No. 34-47225, Part IIB,
Section 7(d) (Jan. 26, 2003) and SEC Release No. 33-8216 (Mar. 28, 2003).
Item 6.(a) EXHIBITS
Exhibit No. and Description
3.1 Articles of Incorporation and Articles of Amendment to Articles
of Incorporation (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed on February 17, 1999, as
amended, and incorporated herein by reference, Commission File
No. 333-72507)
3.2 By-laws of the Company (filed as Exhibit 3.2 to the Company's
Form 10-Q filed on November 14, 2002, as amended, and
incorporated herein by reference)
10.1 The Peoples Holding Company 2001 Long-Term Incentive Plan, as
amended January 21, 2003 (filed as Appendix B to the Company's
Proxy Statement filed on March 20, 2003, and incorporated herein
by reference)
10.2 The Peoples Holding Company Deferred Compensation Plan and
Amentdment No. 1 (filed as Exhibits 4.3 and 4.4 to the Company's
Registration Statement on Form S-8 filed on December 23, 2002,
and incorporated herein by reference, Commission File No.
333-102152)
10.3 Executive Deferred Compensation Plan A (filed as Exhibit 10.1 to
the Company's Form 10-Q filed on November 14, 2002, and
incorporated herein by reference)
10.4 Executive Deferred Compensation Plan B (filed as Exhibit 10.2 to
the Company's Form 10-Q filed on November 14, 2002, and
incorporated herein by reference)
10.5 Directors' Deferred Fee Plan A (filed as Exhibit 10.3 to the
Company's Form 10-Q filed on November 14, 2002, and incorporated
herein by reference)
14
10.6 Directors' Deferred Fee Plan B (filed as Exhibit 10.4 to the
Company's Form 10-Q filed on November 14, 2002, and incorporated
herein by reference)
10.7 Change in Control Employment Agreement dated January 1, 2001,
between the Company and Chief Executive Officer, E. Robinson
McGraw (filed as Exhibit 10.5 to the Company's Form 10-Q filed on
November 14, 2002, and incorporated herein by reference)
10.8 Change in Control Employment Agreement dated February 28, 1998,
between the Company and Executive Vice President, Stuart R.
Johnson (filed as Exhibit 10(viii) to the Company's Form 10-K
filed on March 10, 2003, and incorporated herein by reference)
10.9 Change in Control Employment Agreement dated February 28, 1998,
between the Company and Executive Vice President, James W. Gray
(filed as Exhibit 10(ix) to the Company's Form 10-K filed on
March 10, 2003, and incorporated herein by reference)
10.10 Amendment No. 2 to The Peoples Holding Company Deferred
Compensation Plan
99.1 Certifications of the Chief Executive Officer and the Chief
Financial Officer, as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On January 23, 2003, the registrant filed on Form 8-K a press release
dated January 26, 2003, announcing our fourth quarter 2002 earnings.
On February 27, 2003, the registrant filed on Form 8-K a press release
dated February 26, 2003, announcing a quarterly cash dividend of $0.27
per share.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEOPLES HOLDING COMPANY
---------------------------
Registrant
DATE: May 15, 2003 /s/ E. Robinson McGraw
---------------------------
E. Robinson McGraw
President & Chief Executive Officer
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, E. Robinson McGraw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Peoples Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 15, 2003 /s/ E. Robinson McGraw
---------------------------
E. Robinson McGraw
President & Chief Executive Officer
16
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stuart R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Peoples Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 15, 2003 /s/ Stuart R. Johnson
---------------------------
Stuart R. Johnson
Executive Vice President &
Chief Executive Officer
17