<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995 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 33-19367
PALMETTO BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 74-2235055
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
101 West Main Street
Laurens, South Carolina 29360
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(803) 984-4551
--------------------------------------------------
Registrant's telephone number, including area code
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 period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 11, 1995
----------------------------- -------------------------------
Common stock, $5.00 par value 1,005,184
<PAGE>
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For Quarter Ended June 30, 1995
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial
Condition at June 30, 1995 and
December 31, 1994 1
Consolidated Statements of Operations
for the Three Months Ended June 30, 1995
and 1994 2
Consolidated Statements of Operations for
the Six Months Ended June 30, 1995 and 1994 3
Consolidated Statements of Cash Flows for
the Six Months Ended June, 1995 and 1994 4
Notes to Consolidated Interim Financial
Statements 5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- -------------
<S> <C> <C>
Assets (unaudited)
Cash and due from banks $ 22,558,616 18,377,297
Federal funds sold 4,702,776 3,218,599
Investments held to maturity(market values of $59,208,254 58,252,275 54,704,675
and $53,906,564 in 1995 and 1994, respectively)
Investments available for sale, at market 15,889,705 9,204,219
Loans 230,323,321 215,408,319
Less allowance for loan losses (3,154,100) (3,016,464)
------------- -------------
Loans, net 227,169,221 212,391,855
Premises and equipment, net 10,230,190 9,599,864
Goodwill 1,102,232 1,132,890
Other assets 3,438,420 3,513,164
------------- -------------
Total assets $ 343,343,435 312,142,563
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 46,978,643 46,307,878
Interest-bearing 250,613,399 228,218,905
------------- -------------
Total deposits 297,592,042 274,526,783
Securities sold under agreements to repurchase 10,074,174 5,251,901
Commercial paper 8,323,000 6,914,000
Note payable to a bank 0 478,959
Other liabilities 1,395,075 757,729
------------- -------------
Total liabilities 317,384,291 287,929,372
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 2,000,000 shares;
issued 1,010,884; outstanding 1,005,184 in 1995;
issued 1,008,384; outstanding 1,003,884 in 1994 5,054,420 5,050,920
Surplus 10,442,083 10,433,133
Retained earnings 10,385,011 9,067,365
Treasury Stock, 5,700 shares (176,700) (176,700)
Net unrealized gain/(loss) on investments available for sale 254,330 (161,527)
------------- -------------
Total shareholders' equity 25,959,144 24,213,191
------------- -------------
Total liabilities and shareholders' equity $ 343,343,435 312,142,563
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans 5,151,392 4,217,560
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 658,193 617,378
State and municipal 366,411 333,102
Interest on federal funds sold 168,999 42,142
----------- -----------
Total interest income 6,344,995 5,210,182
Interest expense:
Interest on deposits 2,415,171 1,635,681
Interest on securities sold under agreements
to repurchase 117,604 55,934
Interest on commercial paper 82,791 31,909
Interest on note payable to a bank 4,065 10,169
----------- -----------
Total interest expense 2,619,631 1,733,693
----------- -----------
Net interest income 3,725,364 3,476,489
Provision for loan losses 195,000 270,000
Net interest income after provision for -- --
loan losses 3,530,364 3,206,489
Non-interest income:
Service charges on deposit accounts 599,607 578,354
Fees for trust services 181,389 146,384
Loss on sale of investments available for sale (552) --
Other income 286,924 316,888
----------- -----------
Total non-interest income 1,067,368 1,041,626
Non-interest expenses:
Salaries and other personnel expense 1,741,866 1,832,466
Net occupancy expense 291,052 264,580
Furniture and equipment expense 259,761 245,228
FDIC assessment 152,500 141,283
Postage and supplies expense 181,574 148,745
Advertising expense 114,110 121,596
Telephone expense 106,491 112,770
Other expense 530,474 528,210
----------- -----------
Total non-interest expenses 3,377,828 3,394,878
----------- -----------
Income before income taxes 1,219,904 853,237
Provision for income taxes 305,000 213,000
----------- -----------
Net income $ 914,904 640,237
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Six Months Ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 9,997,896 8,229,857
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 1,240,822 1,192,817
State and municipal 723,381 655,858
Interest on federal funds sold 258,985 111,103
------------ ------------
Total interest income 12,221,084 10,189,635
Interest expense:
Interest on deposits 4,459,382 3,205,785
Interest on securities sold under agreements
to repurchase 229,683 91,013
Interest on commercial paper 159,983 53,369
Interest on note payable to a bank 13,389 20,648
------------ ------------
Total interest expense 4,862,437 3,370,815
------------ ------------
Net interest income 7,358,647 6,818,820
Provision for loan losses 390,000 555,000
Net interest income after provision for -- --
loan losses 6,968,647 6,263,820
Non-interest income:
Service charges on deposit accounts 1,181,356 1,077,352
Fees for trust services 366,389 311,384
Loss on sale of investments available for sale (111,495) --
Other income 618,055 658,633
------------ ------------
Total non-interest income 2,054,305 2,047,369
Non-interest expenses:
Salaries and other personnel expense 3,521,363 3,666,062
Net occupancy expense 563,165 505,651
Furniture and equipment expense 516,771 484,298
FDIC assessment 307,623 282,565
Postage and supplies expense 356,305 291,531
Advertising expense 275,384 268,197
Telephone expense 199,674 197,915
Other expense 1,083,466 1,002,634
------------ ------------
Total non-interest expenses 6,823,751 6,698,853
------------ ------------
Income before income taxes 2,199,201 1,612,336
Provision for income taxes 580,000 403,000
------------ ------------
Net income $ 1,619,201 1,209,336
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For Six Months Ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
Cash flows from operating activities: ------------- -------------
<S> <C> <C>
Net income $ 1,619,201 $ 1,209,336
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of premium on investment
securities 31,153 37,862
Loss on sale of investments available for sale 111,495 --
Provision for loan losses 390,000 555,000
Depreciation of premises and equipment 412,340 376,447
Amortization of goodwill 30,657 30,658
Amortization of premium on core deposits 23,500 23,500
Change in other assets 74,744 (222,755)
Change in other liabilities, net 637,346 (147,199)
------------- -------------
Net cash provided by operating
activities 3,330,436 1,862,849
Cash flows from investing activities:
Purchase of investments held to maturity (13,270,910) (7,812,575)
Purchase of investments available for sale (11,068,572) (1,704,453)
Proceeds from maturities of investments held to maturity 7,255,000 5,205,359
Proceeds from sale of investments held to maturity 2,238,668
Proceeds from sale of investments available for sale 4,885,938 --
Principal collected on loans 98,100,412 70,590,548
Purchase and origination of loans (113,267,778) (85,641,309)
Purchases of premises and equipment (1,042,666) (2,507,449)
------------- -------------
Net cash used in investing activities (26,169,908) (21,869,879)
Cash flows from financing activities:
Net increase in transaction and savings accounts 95,667 11,817,223
Proceeds from issuance of certificates of deposits 71,275,833 40,368,907
Payments on maturing certificates of deposit (48,329,741) (34,864,005)
Net increase in securities sold under
agreements to repurchase 4,822,273 2,530,121
Net increase in commercial paper 1,409,000 1,685,000
Repayments on note payable to a bank (478,959) (151,250)
Proceeds from issuance of common stock 12,450 13,500
Purchase of treasury stock -- (176,700)
Dividends paid (301,555) (259,788)
------------- -------------
Net cash provided by financing activities 28,504,968 20,963,008
------------- -------------
Net increase in cash and cash equivalents 5,665,496 955,978
Cash and cash equivalents at beginning of the period 21,595,896 19,893,367
------------- -------------
Cash and cash equivalents at end of the period $ 27,261,392 $ 20,849,345
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Notes To Consolidated Interim Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information or footnotes necessary for a complete presentation of financial
condition, results of operations, and in cash flows in conformity with
generally accepted accounting principles. However, all adjustments which, in
the opinion of management, are necessary for fair presentation of the
financial statements have been included, and were of a normal recurring
nature. The results of operations for the six month period ended June 30,
1995 are not necessarily indicative of the results which may be expected for
the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, The Palmetto Bank (the Bank), and Palmetto
Capital, Inc., a wholly-owned subsidiary of The Palmetto Bank, (the
"corporation") incorporated February 26, 1992. Palmetto Capital, Inc. offers
the brokerage of stocks, bonds, mutual funds and unit investment trusts. The
corporation also offers advisory services and variable rate annuities. In
consolidation, all significant intercompany accounts and transactions have
been eliminated.
3. Investments
The carrying and market values of investments held to maturity are summarized
as follows:
June 30, 1995
Carrying Market
Value Value
U.S. Treasury and other
U.S. Government agencies $26,824,786 27,061,373
State and municipal 27,448,765 28,156,195
Mortgage-backed securities 3,978,724 3,990,686
---------- ----------
Total $58,252,275 59,208,254
========== ==========
5
<PAGE>
December 31, 1994
Carrying Market
Value Value
U.S. Treasury and other
U.S. Government agencies $30,536,734 29,908,053
State and municipal 24,167,941 23,998,511
---------- ----------
Total $54,704,675 53,906,564
========== ==========
The amortized cost and market values of investments available for sale are as
follows:
June 30, 1995
Amortized Market
Cost Value
U. S. Treasury securities $15,476,160 15,889,705
========== ==========
December 31, 1994
Amortized Market
Cost Value
U. S. Treasury securities $ 9,466,865 9,204,219
========== =========
The Company determines investments as held to maturity or available for sale at
the purchase date. Investments available for sale are recorded at market value.
Although management does not intend to sell such investments in the immediate
future, if certain market conditions exist, the Company may sell these
investments prior to maturity. Valuation losses or recovery of previously
recorded valuation losses are recorded in shareholders' equity as net
appreciation (depreciation) of investments available for sale in the period
incurred. Gain or loss on the sale of investments available for sale is based on
the specific identification method.
Investments with an aggregate carrying value of approximately $46,613,000 and
$40,144,000 at June 30, 1995, and December 31, 1994, respectively, are pledged
to secure public deposits, securities sold under agreements to repurchase and
for other purposes as required or permitted by law.
6
<PAGE>
4. Loans
A summary of loans, by classification, follows:
June 30, December 31,
1995 1994
Commercial, financial
and agricultural $ 37,889,163 32,672,103
Real estate - const. 2,228,513 1,940,631
Real estate - mortgage 142,277,133 134,788,527
Installment loans to
individuals 47,928,512 46,007,058
----------- -----------
Total $ 230,323,321 215,408,319
=========== ===========
The following is a summary of activity affecting the allowance for loan
losses for the periods indicated:
For the three months ended
June 30
-----------------------------
1995 1994
Balance at beginning
of period $3,068,366 2,630,688
Provision for loan losses 195,000 270,000
Loan recoveries 68,698 33,628
Less loans charged-off (177,964) (94,111)
--------- ---------
Balance at end of period $3,154,100 2,840,205
========= =========
For the six months ended
June 30
----------------------------
Balance at beginning
of period $3,016,464 2,393,638
Provision for loan losses 390,000 555,000
Loan recoveries 94,195 101,489
Less loans charged-off (346,559) (209,922)
--------- ---------
Balance at end of period $3,154,100 2,840,205
========= =========
The Bank had outstanding, unused commitments as of June 30, 1995 as follows:
Home equity loans $ 7,310,000
Credit cards 10,642,000
Commercial real estate development 6,141,000
Other unused lines of credit 11,131,000
----------
$ 35,224,000
==========
7
<PAGE>
Standby letters of credit $ 1,894,000
==========
The following table sets forth each category of non-performing loans, total
loans outstanding and the percentage of each type of nonperforming loans
having that status for more than 90 days as of June 30, 1995:
Percentage
90 Days Total 90 Days
or More Loans or More
------- ----- ----------
Commercial, financial
and agricultural $ 117,000 37,889,163 .31%
Real estate-construction 2,228,513
Real estate-mortgage 85,000 142,277,133 .06%
Installment loans to
individuals 271,000 47,928,512 .57%
------- -----------
Total $ 473,000 230,323,321 .21%
======= ===========
5. Deposits
A summary of deposits follows:
June 30, December 31,
1995 1994
---------- ------------
Transaction accounts $106,155,801 106,367,423
Savings deposits 21,669,375 20,931,228
Insured money market accts. 40,964,305 40,669,164
Time deposits over $100,000 32,843,047 23,570,814
Other time deposits 96,100,514 83,152,654
Premium on deposits
acquired (141,000) (164,500)
----------- -----------
Total $297,592,042 274,526,783
=========== ===========
8
<PAGE>
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31,
1994 TO JUNE 30, 1995
Liquid assets which include cash, federal funds sold, and investments available
for sale increased $12.4 million for the six month period. This represents an
increase of 40.1%. Cash and due from banks and federal funds sold increased $5.7
million, and the investments available for sale portfolio increased $6.7
million.
Investments held to maturity increased during the six month period $3.5 million,
or 6.5%. Deposit growth during the period that was not consumed by loan demand
and was used to purchase investment securities.
Loans, net, increased $14.8 million, or 7.0%, during the six month period as a
result of normal growth. The allowance for loan losses increased 4.6% as the
loan portfolio grows and management adjusts the reserve to approximate 1.40% of
total loans. The provision for loan losses decreased as the allowance is
considered to be at an adequate level, based on management's analysis.
Premises and equipment increased $630,300, or 6.6% due primarily to capitalized
expenditures associated with the conversion of the Bank's central computer
software systems. This conversion with an anticipated five-year total cost of
$1.0 million is scheduled to be completed in September 1995.
Goodwill is being amortized over 25 years using the stright-line method. The
Company periodically assesses the recoverability of this goodwill by evaluating
whether the amortization of the remaining balance can be recovered through
projected undiscounted future cash flows which are based on historical trends.
Other assets decreased $74,700, or 2.1%, during the period primarily due to the
amortization of prepaid expenses.
Deposits increased by 8.4% during the period, from $274.5 million at December
31, 1994 to $297.6 million at June 30, 1995. The increase was due to normal
growth.
Retail repurchase agreements increased by $4.8 million or 91.8%, and commercial
paper associated with the alternative commercial sweep accounts increased by
$1.4 million or 20.4%. These changes are the result of normal fluctuations in
the accounts.
9
<PAGE>
Long-term debt consisted of one loan which totalled $479,000 on December 31,
1994 which was paid off in June 1995. This loan was used to fund the purchase of
Bank of Hodges.
Other liabilities increased by $637,300, or 84.1%, due primarily to increased
accruals for expenses for property taxes and other operating expenses.
Retained earnings increased $1.3 million for the six month period as a result of
net income of $1.6 million, less dividends paid of $301,600.
Liquidity
The Company's liquidity position is dependent upon its debt servicing needs and
dividends declared. Bancshares' long-term debt to equity ratio was 0% and .7% as
of June 30, 1995, and December 31, 1994, respectively. Liquidity is provided
from its subsidiary, The Palmetto Bank. The only restrictions on the amount of
dividends available for payment to Bancshares are guidelines established by
regulatory authorities for capital to asset ratios. As of June 30, 1995, The
Palmetto Bank had total primary capital of $27.8 million and total assets of
$346.6 million. The resulting primary capital to assets ratio is 8.0%. The South
Carolina Board of Financial Institutions' guideline suggests a primary capital
to asset ratio of at least 7%. Therefore, as of June 30, 1995, the subsidiary
had approximately $3.5 million excess retained earnings available to pay as
dividends to Bancshares if additional liquidity were required.
Capital Resources
Under the capital guidelines of the Federal Reserve Board and the FDIC,
Bancshares and the Bank are currently required to maintain minimum risk-based
total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital
consists of common shareholders' equity, qualifying perpetual preferred stock
(which can constitute up to 25% of total Tier 1 capital) and minority interest
in equity accounts of consolidated subsidiaries, less goodwill. In addition,
Bancshares and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1
capital to total assets) of at least 3%, but this minimum ratio is increased by
1% to 2% for other than the highest rated institutions.
The risk-based capital rules are designed to make regulatory capital
requirements more sensitive to differences in risk profile among financial
institutions, to account for off- balance sheet exposure and to minimize
disincentives for holding liquid assets. Management believes the risk-based
capital guidelines will not have a material effect on the Company's operations
or the operations of its subsidiaries.
10
<PAGE>
At June 30, 1995, the Company had a total risk-based capital ratio of 11.04%, a
Tier 1 risked-based capital ratio of 9.79% and a leverage ratio of 7.08%.
Accordingly, the Company is deemed to be a "well-capitalized" institution under
currently applicable regulator guidelines.
Also, at June 30, 1995, the Company had a primary capital ratio (total
shareholders' equity plus the allowance for loan losses to total assets) of
8.01%, compared to a ratio of 8.27% at June 30, 1994.
On February 25, 1994 the Company purchased 5,700 shares of treasury stock for
$31 per share totalling $176,700.
Effect in Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation.
Unlike most other industries, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant effect in a financial institution's
performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts simultaneously
with changes in the general level of interest rates. Most of the Company's
liabilities are issued with fixed terms and can be repriced only at maturity.
The degree of interest rate sensitivity of the Company's assets and liabilities
and the differences in timing of repricing assets and liabilities provides an
indication of the extent to which the Company's net interest income may be
affected by interest rate movements.
Accounting and Reporting Matters
The Financial Accounting Standards Board("FASB") issued SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments" which will be effective
for the Company for the fiscal year ended December 31, 1995. SFAS No. 107 will
require financial statement disclosure of fair value of all financial
instruments and certain off-balance sheet items. When adopted, this standard is
expected to require the Company to increase its reporting information related to
fair value of financial instruments in its financial statements.
11
<PAGE>
In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
was issued. This pronouncement, which is effective for years beginning after
December 15, 1994, requires a lender to consider a loan to be impaired if the
lender believes it is probable that it will be unable to collect all principal
and interest due according to the contractual terms of the loan. If a loan is
impaired, the lender will be required to record a loan valuation allowance equal
to the present value of the estimated future cash flows discounted at the loan's
effective rate. Based upon the present status of the loan portfolio, management
does not believe this standard will have a material adverse effect on the Bank.
In May 1995, the FASB issued a SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of SFAS No. 65" which is effective prospectively for years
beginning after December 15, 1995. The statement requires the recognition of an
asset for the rights to service mortgage loans for others, regardless of how
these rights were acquired (either purchased or originated). Further, it amends
SFAS 65 to require assessment of impairment based on fair value. The Company
recently commenced the origination and sale of mortgage loans. Currently, the
Company is pre-selling all mortgages and based upon the Company's present
mortgage lending operation does not anticipate that this statement will have a
material adverse affect on the Company.
On December 30, 1994, the AICPA issued Statement of Position 94-6, "Disclosure
of Certain Significant Risks and Uncertainties" (SOP 94-6). The disclosure
requirements of SOP 94-6 are similar to or overlap disclosure requirements in
Financial Accounting Standards Board(FASB) Statement No. 5, "Accounting for
Contingencies", and for public companies, Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," and certain pronouncements of the
Securities and Exchange Commission (SEC). This SOP does not alter the
requirements of any FASB or SEC pronouncement.
The Disclosures required under SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near term, and stem from (a) the nature of the
entity's operations, (b) the necessary use of estimates in the preparation of
financial statements, and (c) significant concentrations on certain aspects of
the entity's operations.
SOP 94-6 is effective for financial statements issued for fiscal years ending
after December 15, 1995, and for financial statements for interim periods in
fiscal years subsequent to the year for which this SOP is to be first applied.
Based on the its operations and preparation of its financial statements,
management does not believe this statement will have a material adverse effect
on the Company.
12
<PAGE>
On March 31, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(the Statement). This Statement provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable intangibles
and goodwill related both to assets to be held and used and assets to be
disposed of. The Statement requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less cost to sell, except for assets covered by the provisions of APB
Opinion No. 30. Statement No. 121 is effective for financial statements issued
for fiscal years beginning after December 15, 1995 although earlier application
is encouraged. Thus, for calendar year entities, Statement No. 121 is effective
for 1996 financial statements. Based on the condition of assets held by the
Company, management believes this statement will have no material adverse effect
on the Company.
13
<PAGE>
COMPARISON OF OPERATION RESULTS FOR THE THREE MONTHS ENDED
JUNE 30, 1995, AND 1994
Net income for the three months ended June 30, 1995 was $914,900, an increase of
42.9% from the $640,200 reported for the same period in 1994. Net income per
share was $0.91 for the 1995 period as compared with $0.64 for the comparable
period in 1994.
Net Interest Income
The Bank's earnings are dependent to a large degree on net interest income,
defined as the difference between gross interest and fees on earning assets,
primarily loans and investment securities, and interest paid on deposits and
borrowed funds. Net interest income is affected by the interest rates earned or
paid and by volume changes in loans, securities, deposits, and borrowed funds.
For the three month period ended June 30, 1995, net interest income was $3.7
million, which represented a 7.2% increase from the same period in 1994. This
increase was the result of increases in the volume of earning assets and
deposits, as well as increased yields. Average net interest margin for the 1995
period was 5.03%, compared to 5.05% for the same period in 1994. The increase in
volumes was due to normal growth, while the increases in rate is a function of
the rising interest rate environment.
Interest income on investments increased 7.8% during the 1995 period compared to
the corresponding period in 1994. This was due primarily to the 5.7% increase of
the investment portfolio from the 1994 period, as well as an increase in the
yields in the investment securities purchased.
Total interest expense increased by 51.1% during the 1995 period due primarily
to increased interest rates paid on deposits from 1994 to 1995. Average total
interest bearing liabilities increased by 9.1%. The average rate paid on
interest bearing liabilities increased from 2.9% during the three month period
in 1994, to 3.8% during the 1995 period. The profitability of the Bank is
influenced significantly by management's ability to control the relationship
between rate sensitive assets and liabilities, and the current interest rate
environment.
Provision For Loan Losses
The provision for loan losses was $195,000 for the 1995 period, compared to
$270,000 in 1994. The provision is adjusted each month to reflect loan volume
growth and allow for loan charge-offs and recoveries. Management's objective is
to maintain the allowance for loan losses at an adequate level as it relates to
the loan portfolio.
14
<PAGE>
Other Operating Income
Other operating income increased by 2.5% in 1995 as compared to the same period
in 1994. Service charges on deposit accounts increased $21,300 or 3.7% during
the 1995 period compared to the same period in 1994 due primarily to increased
deposit volumes. Fiduciary service fees increased 23.9% due to an increase in
account volumes.
Other income decreased $30,000, or 9.5%, due primarily to an decrease of $13,000
in origination and processing fees from the mortgage loan department. Commission
fees from the Bank's subsidiary, Palmetto Capital, Inc., decreased $38,000
during the three month period as compared to the same period in 1994. These
decreases were partially offset by an increase of $8,400 in merchant income
associated with the Company's check card product introduced during 1994.
Other Operating Expenses
Other operating expenses decreased by $17,000, or .5% during the 1995 three
month period over the same period in 1994. A general increase in all other
operating expense categories was offset by a decrease in salaries and other
personnel expenses due to lower than estimated pension expenses in the current
year.
Income Taxes
The Company incurred an income tax liability of $305,000 for the 1995 three
month period compared to $213,000 for the same period in 1994 due to the
increase in taxable income.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1994
Net income for the six month period ended June 30, 1995 was $1.6 million as
compared to $1.2 million for the same period in 1994, or a 33.9% increase. As a
result of increased yields on earning assets, net losses on sales of investments
were more than offset by an increase in net interest income. Net income per
common share increased from $1.21 in 1994, to $1.61 in 1995. Return on average
assets(annualized) increased from .81% in 1994, to 1.04% in 1995.
Net Interest Income
Net interest income for the 1995 six month period was $7.4 million, an increase
of 7.9% over the $6.8 million for the 1994 period. Average earning assets have
increased 8.1% from the six months ended June 30, 1994 to the same period June
30, 1995. This increase coupled with an average net
15
<PAGE>
interest margin approximating 5% for both periods more than offset an increase
of 10.9% increase in the average rate paid on interest bearing liabilities.
Provision for Loan Losses
The provision was reduced from $555,000 for the 1994 period, to $390,000 for the
same period in 1995. The amount charged to the provision for loan losses by the
Bank is based on management's judgment as to the amounts required to maintain an
allowance adequate to provide for potential losses in the loan portfolio. The
level is this allowance is dependent upon the total amount of past due loans,
nonperforming loans, general economic conditions and management's assessment of
potential losses based upon internal credit grading on the loans and periodic
reviews and assessments of credit risk associated with particular loans.
Other Operating Income and Expenses
Service charges on deposit accounts increased due to increases in the number of
deposit account transactions which was offset by the losses on sales of
investment securities. Five million dollars of investments available for sale
were sold during the 1995 six month period in order to capitalize on the rising
bond market. The proceeds of the sales were used to purchase investment
securities with an approximate yield increase of 360 basis points over the
securities sold. The losses are expected to be more than compensated for by the
income from the higher yielding investments. Non- interest expenses during the
1995 six month period increased $124,900 or 1.9% over the 1994 period due to
normal growth. Salaries and other personnel expenses decreased $144,700
primarily due to a reduction in the employee pension plan expense estimated.
Income Taxes
The provision for income taxes increased $177,000 or 43.9% from the 1994 due to
an increase in taxable income.
16
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Part II - Other Information
Item 1. Legal Proceedings
Palmetto Bancshares, Inc. is not engaged in any
legal proceedings. From time to time The Palmetto
Bank (subsidiary) is involved in legal proceedings
involving its normal course of business as a bank.
Item 2. Changes in Securities
There have been no changes in securities during the reporting period.
Please refer to the three months Management Discussion and Analysis for
an explanation of working capital restrictions and any limitations upon
the payment of dividends.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are required to be filed by Bancshares pursuant to
item 601 of Regulation S-K.
(b) Bancshares did not file reports on Form 8-K during the quarter
ended June 30, 1995.
17
<PAGE>
PALMETTO BANCSHARES, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Palmetto Bancshares, Inc.
Laurens, South Carolina
Date: August 11, 1995
(Signature of L. Leon Patterson)
---------------------------
L. Leon Patterson
Chairman and Chief
Executive Officer
Date: August 11, 1995
(Signature of Paul W. Stringer)
---------------------------
Paul W. Stringer
President and Chief
Operating Officer
18
