<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 SEPTEMBER 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 November 13, 1995
----------------------------- -------------------------------
Common stock, $5.00 par value 999,280
<PAGE>
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For Quarter and Nine Months Ended September 30, 1995
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial
Condition at September 30, 1995 and
December 31, 1994 1
Consolidated Statements of Operations
for the Three Months Ended September 30,
1995 and 1994 2
Consolidated Statements of Operations
for the Nine Months Ended September 30,
1995 and 1994 3
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1995 4
and 1994
Notes to Consolidated Interim Financial
Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION 18
SIGNATURES 19
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- -------------
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $ 19,062,472 18,377,297
Federal funds sold -- 3,218,599
Investments held to maturity(market values of $69,038,625 67,630,741 54,704,675
and $53,906,564 in 1995 and 1994, respectively)
Investments available for sale, at market 17,863,157 9,204,219
Loans 243,768,185 215,408,319
Less allowance for loan losses (3,342,841) (3,016,464)
------------- -------------
Loans, net 240,425,344 212,391,855
Premises and equipment, net 10,353,218 9,599,864
Goodwill 1,086,904 1,132,890
Other assets 3,934,125 3,513,164
------------- -------------
Total assets $ 360,355,961 312,142,563
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 46,708,774 46,307,878
Interest-bearing 257,641,240 228,218,905
------------- -------------
Total deposits 304,350,014 274,526,783
Securities sold under agreements to repurchase 11,679,919 5,251,901
Commercial paper 8,404,977 6,914,000
Federal Funds Purchased 8,000,000 --
Note payable to a bank -- 478,959
Other liabilities 1,304,498 757,729
------------- -------------
Total liabilities 333,739,408 287,929,372
Shareholders' equity:
Common stock-$5.00 par value. Authorized 2,000,000 shares;
issued 1,010,884; outstanding 999,280 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 11,280,192 9,067,365
Treasury stock, 11,604 and 5,700 shares in 1995
and 1994, respectively (406,956) (176,700)
Unrealized gain(loss) on investments available for sale, net 246,814 (161,527)
------------- -------------
Total shareholders' equity 26,616,553 24,213,191
------------- -------------
Total liabilities and shareholders' equity $ 360,355,961 312,142,563
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
(1)
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
Interest income: ----------- -----------
<S> <C> <C>
Interest and fees on loans $ 5,482,254 4,487,011
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 819,799 601,851
State and municipal 403,033 352,383
Interest on federal funds sold 76,633 40,791
----------- -----------
Total interest income 6,781,719 5,482,036
Interest expense:
Interest on deposits 2,694,566 1,705,122
Interest on federal funds purchased and securities
sold under agreements to repurchase 121,107 82,900
Interest on commercial paper 91,644 47,788
Interest on note payable to a bank 0 10,627
----------- -----------
Total interest expense 2,907,317 1,846,437
----------- -----------
Net interest income 3,874,402 3,635,599
Provision for loan losses 300,000 105,000
Net interest income after provision for ---------- -----------
loan losses 3,574,402 3,530,599
Non-interest income: ---------- -----------
Service charges on deposit accounts 629,593 595,657
Fees for trust services 185,000 165,000
Investment securities losses (10,711) --
Other income 319,022 240,986
----------- -----------
Total non-interest income 1,122,904 1,001,643
Non-interest expenses:
Salaries and other personnel expense 1,787,022 1,803,160
Net occupancy expense 319,159 307,327
Furniture and equipment expense 290,134 293,514
FDIC assessment 29,529 150,919
Postage and supplies expense 169,440 153,477
Advertising expense 97,983 155,968
Telephone expense 101,064 94,353
Other expense 517,017 462,094
----------- -----------
Total non-interest expenses 3,311,348 3,420,812
----------- -----------
Income before income taxes 1,385,958 1,111,430
Income tax provision 340,000 333,000
----------- -----------
Net income $ 1,045,958 778,430
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
(2)
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
Interest income: ------------ ------------
<S> <C> <C>
Interest and fees on loans $ 15,480,150 $ 12,716,868
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 2,060,621 1,794,668
State and municipal 1,126,414 1,008,241
Interest on federal funds sold 335,618 151,894
------------ ------------
Total interest income 19,002,803 15,671,671
Interest expense:
Interest on deposits 7,153,948 4,910,907
Interest on federal funds purchased and securities
sold under agreements to repurchase 350,790 173,913
Interest on commercial paper 251,627 101,157
Interest on note payable to a bank 13,389 31,275
------------ ------------
Total interest expense 7,769,754 5,217,252
------------ ------------
Net interest income 11,233,049 10,454,419
Provision for loan losses 690,000 660,000
Net interest income after provision for ------------ ------------
loan losses 10,543,049 9,794,419
Non-interest income:
Service charges on deposit accounts 1,810,949 1,673,009
Fees for trust services 551,389 476,384
Investment securities losses (122,206) --
Other income 937,077 899,619
------------ ------------
Total non-interest income 3,177,209 3,049,012
Non-interest expenses:
Salaries and other personnel expense 5,308,385 5,469,222
Net occupancy expense 882,324 812,978
Furniture and equipment expense 806,905 777,812
FDIC assessment 337,152 433,484
Postage and supplies expense 525,745 445,008
Advertising expense 373,367 424,165
Telephone expense 300,738 292,268
Other expense 1,600,483 1,464,728
------------ ------------
Total non-interest expenses 10,135,099 10,119,665
------------ ------------
Income before income taxes 3,585,159 2,723,766
Provision for income taxes 920,000 736,000
------------ ------------
Net Income $ 2,665,159 $ 1,987,766
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
(3)
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
Cash flows from operating activities: ------------ ------------
<S> <C> <C>
Net income $ 2,665,159 $ 1,987,766
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of premium on investment securities 72,654 53,248
Losses from sales of investments 122,206 --
Provision for loan losses 690,000 660,000
Depreciation of premises and equipment 655,637 590,794
Loss on sale of premises and equipment 2,018
Amortization of goodwill 45,986 45,986
Amortization of premium on core deposits 35,250 35,250
Change in other assets (420,960) (441,385)
Change in other liabilities, net 291,140 (106,542)
------------ ------------
Net cash provided by operating activities 4,157,072 2,827,135
Cash flows from investing activities:
Purchase of investments held to maturity (23,410,903) (8,533,575)
Purchase of investments available for sale (14,050,760) (1,704,453)
Proceeds from maturities of investments 8,228,721 7,370,572
Proceeds from sale of investments held to maturity 2,238,668 --
Proceeds from maturities of invesments available for sale -- 1,353,963
Proceeds from sale of investments available for sale 5,878,380 --
Net increase in loans outstanding (28,723,489) (20,877,876)
Purchases of premises and equipment, net (1,408,991) (3,093,306)
Proceeds for sale of premises and equipment -- 10,000
------------ ------------
Net cash used in investing activities (51,248,374) (25,474,675)
Cash flows from financing activities:
Net increase in transaction and savings accounts 2,430,061 11,817,357
Net increase in certificates of deposit 27,357,920 3,117,778
Net increase in securities sold under agreements
to repurchase 6,428,018 447,190
Net increase in commercial paper 1,490,977 1,803,000
Change in federal funds purchased 8,000,000 5,850,000
Repayments on note payable to a bank (478,959) (226,875)
Proceeds from issuance of common stock 12,450 24,300
Purchase of treasury stock (230,256) (176,700)
Dividends paid (452,333) (389,786)
------------ ------------
Net cash provided by financing activities 44,557,878 22,266,264
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,533,424) (381,276)
Cash and cash equivalents at beginning of the period 21,595,896 19,893,367
------------ ------------
Cash and cash equivalents at end of the period $ 19,062,472 $ 19,512,091
============ ============
</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 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 three and nine month periods ended September
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. Investment Securities
The carrying and market values of investment securities are summarized as
follows:
September 30, 1995
Carrying Market
Value Value
U.S. Treasury and other
U.S. Government agencies $35,312,448 35,638,271
State and municipal 28,578,477 29,656,973
Mortgage-backed securities 3,739,816 3,743,381
---------- ----------
Total $67,630,741 69,038,625
========== ==========
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
========== ==========
(5)
<PAGE>
The amortized costs and market values of securities available for sale at
September 30, 1995 and December 31, 1994 are as follows:
September 30, 1995
Amortized Market
Cost Value
---------- ----------
U. S. Treasury securities $17,461,834 17,863,157
========== ==========
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. Securities 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 securities prior to maturity. Valuation losses or recovery of
previously recorded valuation losses are recorded in shareholders' equity,
net of taxes 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 $45,008,000 and
$40,144,000 at September 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.
4. Loans
A summary of loans, by classification, follows:
September 30, December 31,
1995 1994
------------- -----------
Commercial, financial
and agricultural $ 38,877,196 32,672,103
Real estate - const. 3,347,636 1,940,631
Real estate - mortgage 149,607,474 134,788,527
Installment loans to
individuals 51,935,879 46,007,058
----------- -----------
Total $ 243,768,185 215,408,319
=========== ===========
(6)
<PAGE>
The following is a summary of activity affecting the allowance for loan
losses for the periods indicated:
For the three months ended
September 30
-----------------------------
1994 1993
Balance at beginning
of period $3,154,100 2,840,205
Provision for loan losses 300,000 105,000
Loan recoveries 41,865 118,408
Less loans charged-off (153,124) (94,611)
--------- ---------
Balance at end of period $3,342,841 2,969,002
========= =========
For the nine months ended
September 30
----------------------------
1994 1993
Balance at beginning
of period $3,016,464 2,393,638
Provision for loan losses 690,000 660,000
Loan recoveries 136,060 219,897
Less loans charged-off (499,683) (304,533)
--------- ---------
Balance at end of period $3,342,841 2,969,002
========= =========
The Company had outstanding, unused loan commitments at September 30, 1995 as
follows:
Home equity loans $ 7,374,000
Credit cards 15,335,000
Commercial real estate development:
Secured 6,426,000
Unsecured 250,000
Other unused lines of credit 11,916,000
----------
$ 41,301,000
==========
Standby letters of credit $ 1,880,000
==========
(7)
<PAGE>
The following table sets forth each category of nonperforming loans, total
loans outstanding and the percentage of each type of nonperforming loans
having that status for more than 90 days as of September 30, 1995:
Percentage
90 Days Total 90 Days
or More Loans or More
----------- ---------- ----------
Commercial, financial
and agricultural $205,000 38,877,000 .53%
Real estate-construction - 3,348,000 _
Real estate-mortgage 191,000 149,607,000 .13%
Installment loans to
individuals 177,000 51,936,000 .34%
----------- -----------
Total $573,000 243,768,000 .24%
=========== ===========
5. Deposits
A summary of deposits follows:
September 30, December 31,
1995 1994
------------ ------------
Transaction accounts $103,591,430 106,367,423
Savings deposits 21,941,751 20,931,228
Insured money market accts. 44,264,519 40,669,164
Time deposits over $100,000 31,804,990 23,570,814
Other time deposits 102,876,574 83,152,654
Premium on deposits
acquired (129,250) (164,500)
------------ ------------
Total $304,350,014 274,526,783
============ ============
(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 SEPTEMBER 30, 1995
Liquid assets which include cash, federal funds sold, and investments available
for sale increased by $6.1 million for the nine month period. This increase of
19.9% consisted of an increase in investments of $8.6 million. Federal funds
sold decreased $3.2 million.
Investments held to maturity increased during the nine month period $12.9
million, or 23.6%. Deposit growth during the period that was not consumed by
loan demand was used to purchase investments. Investments for the portfolio are
based on the balance between higher yield short term maturities and longer term
tax exempt obligations of state and municipalities.
Loans, net, increased $28.0 million, or 13.2%, during the nine month period as a
result of growth in loan demand. The allowance for loan losses increased by
10.8% during the period as management adjusts the allowance to approximate 1.40%
of total loans.
Premises and equipment increased $753,300, or 7.8% 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 was completed in September 1995.
Goodwill is being amortized over 25 years using the straight-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 increased $421,000, or 12.0%, during the period primarily due to an
increase in interest earned not collected on loans and securities, resulting
from increases in the loan and investment portfolios.
Deposits increased by 10.9% during the period, from $274.5 million to $304.4
million. The increase was due to normal growth and new deposit customers from
the new North Anderson office which opened in July 1995.
Retail repurchase agreements increased by $6.4 million or 122.4%. These account
balances fluctuate based on the deposit customers' daily qualifying funds.
(9)
<PAGE>
Commercial paper associated with the alternative commercial sweep accounts
increased $1.5 million or 21.6%. These changes are the result of normal
fluctuations in the accounts.
Federal funds purchased increased $8.0 million. Funds are sold or purchased
based on available funds on an overnight basis.
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 decreased by $546,800, or 72.2%, due primarily to increased
accruals for expenses for property taxes and other operation expenses.
Retained earnings increased $2.2 million for the nine month period as a result
of net income of $2.7 million, less dividends paid of $453,300.
Liquidity
The Company's liquidity position is dependent upon its debt servicing needs and
dividends declared. Bancshares' long-term debt to equity ratio was 0.0% and .7%
as of September 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
September 30, 1995, The Palmetto Bank had total primary capital of $28.6 million
and total assets of $362.7 million. The resulting primary capital to assets
ratio is 7.9%. The South Carolina Board of Financial Institutions' guideline
suggests a primary capital to asset ratio of at least 7%. Therefore, as of
September 30, 1995, the subsidiary had approximately $3.2 million excess
retained earnings available to pay as dividends to Bancshares.
Capital Resources
Under the capital guidelines of the Federal Reserve Board and the FDIC,
Bancshares, and the Bank are currently required to maintain a 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.
(10)
<PAGE>
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.
At September 30, 1995, The Company had a total risk-based capital ratio of
10.87%, a Tier 1 risk-based capital ratio of 9.60% and a leverage ratio of
6.94%. Accordingly, the Company is deemed to be a "well-capitalized" institution
under currently applicable regulatory guidelines.
Also, at September 30, 1995, the Company had a primary capital ratio (total
shareholders' equity plus the allowance for loan losses to total assets) of
8.23%, compared to a ratio of 8.46% at September 30, 1994.
On February 25, 1994 the Company purchased 5,700 shares of treasury stock for
$31 per share totalling $176,700. On September 18, 1995 the Company purchased
5,904 shares of treasury stock for $39 per share totalling $230,256.
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.
(11)
<PAGE>
Accounting and Reporting Matters
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.
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.
In May 1995, the FASB issued a SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of SFAS No. 65" which is
(12)
<PAGE>
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 effect on the
Company.
In October 1995, the FASB issued a SFAS No. 123, "Accounting for Stock Based
Compensation." This statement is effective for financial statements issued for
fiscal years beginning after December 15, 1995. SFAS 123 provides guidance on
the valuation of compensation costs arising from both fixed and performance
stock compensation plans.
(13)
<PAGE>
COMPARISON OF OPERATION RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1995, AND 1994
Net income for the three months ended September 30, 1995 was $1.0 million, an
increase of 34.4% from the $778,400 reported for the same period in 1994. Net
income per share was $1.04 for the 1995 period as compared with $0.78 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 earnings 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 September 30, 1995, net interest income was
$3.9 million, which represented a 6.6% increase from the same period in 1994.
This increase was the result of increases in the volume of earning assets and
deposits combined with a consistent net interest margin, defined as net interest
income as a percent of average earning assets. Net interest margin for the 1995
period was 4.8%, compared to 5.2% for the same period in 1994. The increase in
volume was due to normal growth, and the opening of another full service office
in Anderson.
Interest income on investments and fed funds sold increased 30.6% during the
1995 period compared to the corresponding period in 1994. Portfolio volumes and
average yields have increased during the 1995 period compared to the same period
in 1994.
Total interest expense increased by 57.5%, or $1.1 million during the 1995
period, due to an increase in interest-bearing deposit liabilities of $35.5
million, or 16.1% over the 1994 period. The average rate paid on interest
bearing liabilities increased from 3.0% during the three month period in 1994,
to 4.2% during the same period in 1995. The profitability of the Company is
influenced significantly by management's ability to control the relationship
between rate sensitive assets and liabilities, and the current interest rate
environment.
(14)
<PAGE>
Provision For Loan Losses
The provision for loan losses was $105,000 for the 1994 period, compared to
$300,000 in 1993. The provision expense 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 related to the loan portfolio.
Other Operating Income
Other operating income increased by $121,300 or 12.1% in 1995 as compared to the
same period in 1994. Service charges on deposit accounts increased 5.7%
primarily due to deposit growth and increased customer base. Fiduciary service
fees increased 12.1% due to an increase in account volumes.
Other Operating Expenses
Other operating expenses decreased by $109,500, or 3.2% during the 1995 three
month period over the same period in 1994 due primarily to the refund and
reduction in FDIC insurance assessments.
Income Taxes
The Company incurred an income tax expense of $340,000 for the 1995 three month
period compared to $333,000 for the same period in 1994. This increase was
related directly to the increase in taxable income.
(15)
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995, AND 1994
Net income for the nine months ended September 30, 1995 was $2.7 million
compared to $2.0 million for the 1994 period. Net income per share was $2.65 for
the 1995 period as compared to $1.99 for 1994. Return on average assets for 1995
was 1.08% (annualized), compared to .88% in 1994.
Net Interest Income
For the nine month period in 1995, net interest income was $11.2 million, which
represented a 7.4% increase over the same period in 1994. This increase was due
to increases in volume of both loans and deposits and a consistent net interest
margin. Average earning assets increased by 9.6%. Net interest margin, defined
as net interest income as a percent of average earning assets, was 4.97%
(annualized) for the 1995 period compared to 5.08% for the 1994 period.
Provision For Loan Losses
The provision for loan losses was $690,000 and $660,000 for the nine months
ended September 30, 1995, and 1994, respectively. The amount charged to the
provision for loan losses by the Bank is based on management's judgement as to
the amounts required to maintain an allowance adequate to provide for potential
losses in the loan portfolio. The level in 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
Other operating income during the 1995 nine month period increased by $128,200,
or 4.2% over the same nine month period in 1994. Service charges on deposit
accounts increased $137,900 due to an increased number of deposit account
transactions which was offset by the losses on sales of investments. Six million
dollars of investments available for sale and $2.2 million in investments held
to maturity with maturities of less than 90 days, were sold during the 1995 nine
month period in order to capitalize on the rising bond market. The proceeds of
the sales were used to purchase investments with an approximate yield
increase of 360 basis points over the investments sold. The losses have been
more than compensated for
(16)
<PAGE>
by the income from the higher yielding investments. Non-interest expenses
increased $15,400 during the 1995 period due to normal growth which was offset
by the refund and reduction in FDIC insurance assessments.
Income Taxes
The Company incurred an income tax expense of $920,000 for the 1995 nine month
period compared to $736,000 for the same period in 1994. This increase is due to
an increase in taxable income.
(17)
<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 any reports on Form 8-K during the quarter
ended September 30, 1995.
(18)
<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: November 13, 1995
(Signature of L. Leon Patterson)
------------------------
L. Leon Patterson
Chairman and Chief
Executive Officer
Date: November 13, 1995
(Signature of Paul W. Stringer)
---------------------------
Paul W. Stringer
President and Chief
Operating Officer
(19)
