UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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 0-26016
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)
(864) 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 1, 1996
----------------------------- -------------------------------
Common stock, $5.00 par value 1,001,943
<PAGE>
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For Quarter Ended June 30, 1996
INDEX Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
at June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations for the Three
Moths Ended June 30, 1996 and 1995 2
Consolidated Statements of Operations for the Six
Months Ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the Six
Monts Ended June 30, 1996 and 1995 4
Notes to Consolidated Interim Financial Statements 5 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 17
PART II - OTHER INFORMATION 18 - 19
- ---------------------------
SIGNATURES 20
- ----------
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------------------
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $31,820,573 22,921,841
Federal funds sold 863,117 2,096,752
Investment securities held to maturity (market values of $59,978,064
and $44,548,986 in 1996 and 1995, respectively) 60,989,240 43,788,656
Investment securities available for sale (amortized cost of
$18,898,080 and $38,580,347 in 1996 and 1995, respectively) 18,779,712 39,615,105
Loans Held for Sale (amortized cost of $7,691,104) 7,678,345 0
Loans 309,182,381 255,186,659
Less allowance for loan losses (4,183,046) (3,700,216)
------------------------------------
Loans, net 304,999,335 251,486,443
Premises and equipment, net 11,933,251 10,709,912
Accrued Interest 3,778,800 2,547,791
Other assets 6,342,993 3,074,240
------------------------------------
Total assets $447,185,366 376,240,740
====================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 64,622,813 53,447,631
Interest-bearing 325,364,131 276,211,852
------------------------------------
Total deposits 389,986,944 329,659,483
Securities sold under agreements to repurchase 12,694,229 7,545,710
Commercial paper 8,234,272 6,186,855
Federal funds purchased 5,575,000 2,900,000
Other liabilities 1,924,936 2,040,011
------------------------------------
Total liabilities 418,415,381 348,332,059
------------------------------------
ESOP stock subject to put/call option 3,101,315 2,770,528
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 2,000,000 shares;
issued 1,010,884; outstanding 1,001,943 in 1996;
outstanding 1,004,980 in 1995 5,054,420 5,054,420
Additional paid-in capital 10,442,083 10,442,083
Retained earnings 13,698,014 12,006,058
Treasury Stock (8,941 and 5,904 shares in 1996 and
1995, respectively) (351,736) (230,256)
Net unrealized gain(loss) on investment securities available for sale (72,796) 636,376
ESOP stock subject to put/call option, 88,609 common shares at $35 per share in
1996 and 95,371 common
shares at $29.05 per share in 1995 (3,101,315) (2,770,528)
------------------------------------
Total shareholders' equity 25,668,670 25,138,153
------------------------------------
Total liabilities and shareholders' equity 447,185,366 376,240,740
====================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
1
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,447,876 $5,151,392
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 690,761 658,193
State and municipal 588,824 366,411
Mortgage backed securities 154,462 0
Interest on Federal funds sold 44,374 168,999
-----------------------------------
Total interest income 7,926,297 6,344,995
-----------------------------------
Interest expense:
Interest on deposits 3,168,996 2,415,171
Interest on securities sold under agreements to repurchase 128,534 117,604
Interest on Federal funds purchased 105,678 0
Interest on commercial paper 70,993 82,791
Interest on note payable to a bank 0 4,065
-----------------------------------
Total interest expense 3,474,201 2,619,631
-----------------------------------
Net interest income 4,452,096 3,725,364
Provision for loan losses 450,000 195,000
-----------------------------------
Net interest income after provision for
loan losses 4,002,096 3,530,364
Non-interest income:
Service charges on deposit accounts 711,014 599,607
Fees for trust services 191,959 181,389
Investment securities gains (losses) 12,503 (552)
Bankcard income 167,397 150,314
Other income 215,574 136,610
-----------------------------------
Total non-interest income 1,298,447 1,067,368
Non-interest expenses:
Salaries and other personnel expense 1,598,222 1,741,866
Net occupancy expense 371,080 291,052
Furniture and equipment expense 392,632 259,761
FDIC assessment 500 152,500
Postage and supplies expense 212,946 181,574
Advertising expense 167,519 114,110
Telephone expense 113,526 106,491
Bankcard expense 174,663 150,314
Other expense 667,344 380,160
-----------------------------------
Total non-interest expenses 3,698,432 3,377,828
-----------------------------------
Income before income taxes 1,602,111 1,219,904
Income tax provision 404,000 305,000
-----------------------------------
Net income $1,198,111 $914,904
===================================
Increase in fair value of ESOP stock (330,787) 0
===================================
Net income on common shares not subject to put/call $867,324 $914,904
===================================
Net income per common share not subject to put/call $0.96 $0.91
===================================
Cash dividends declared per share $0.20 $0.15
===================================
Weighted average shares outstanding 1,001,943 1,005,184
===================================
Weighted average shares outstanding not subject to put/call 907,602 1,005,184
===================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
2
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $12,422,904 $9,997,896
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 1,484,431 1,240,822
State and municipal 1,029,179 723,381
Mortgage backed securities 271,411 0
Interest on Federal funds sold 56,632 258,985
----------------------------------
Total interest income 15,264,557 12,221,084
----------------------------------
Interest expense:
Interest on deposits 6,071,104 4,459,382
Interest on securities sold under agreements to repurchase 228,133 229,683
Interest on Federal funds purchased 188,283 0
Interest on commercial paper 143,788 159,983
Interest on note payable to a bank 0 13,389
----------------------------------
Total interest expense 6,631,308 4,862,437
----------------------------------
Net interest income 8,633,249 7,358,647
Provision for loan losses 750,000 390,000
----------------------------------
Net interest income after provision for
loan losses 7,883,249 6,968,647
Non-interest income:
Service charges on deposit accounts 1,324,504 1,181,356
Fees for trust services 401,959 366,389
Investment securities gains ( losses) 12,503 (111,495)
Bankcard income 308,968 321,593
Other income 378,996 296,462
----------------------------------
Total non-interest income 2,426,930 2,054,305
Non-interest expenses:
Salaries and other personnel expense 3,628,128 3,521,363
Net occupancy expense 705,303 563,165
Furniture and equipment expense 734,340 516,771
FDIC assessment 1,500 307,623
Postage and supplies expense 439,153 356,305
Advertising expense 367,460 275,384
Telephone expense 212,078 199,674
Bankcard expense 358,058 317,400
Other expense 1,069,346 766,066
----------------------------------
Total non-interest expenses 7,515,366 6,823,751
----------------------------------
Income before income taxes 2,794,813 2,199,201
Income tax provision 702,000 580,000
----------------------------------
Net income $2,092,813 $1,619,201
==================================
Increase in fair value of ESOP stock (330,787) 0
==================================
Net income on common shares not subject to put/call $1,762,026 $1,619,201
==================================
Net income per common share not subject to put/call $1.94 $1.61
==================================
Cash dividends declared per share $0.40 $0.30
==================================
Weighted average shares outstanding 1,003,111 1,005,095
==================================
Weighted average shares outstanding not subject to put/call 908,255 1,005,095
==================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
3
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,092,813 $1,619,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 766,183 497,650
(Gain)/Loss on sale of investment securities available for sale (12,503) 111,495
(Gain)/Loss on sale of loans (17,243) 0
Provision for loan losses 750,000 390,000
Origination or acquisition of loans held for sale (71,496,288) 0
Sale of loans held for sale 63,822,427 0
Mark to market loss on loans held for sale 12,759 0
Change in accrued interest receivable (1,231,009) (758,330)
Change in other assets (3,355,766) 833,074
Change in other liabilities, net 328,878 637,346
-------------------------------------
Net cash provided by operating activities (8,339,749) 3,330,436
Cash flows from investing activities:
Net decrease (increase) in federal funds sold 1,233,635 (1,484,177)
Purchase of investment securities held to maturity (23,358,096) (13,270,910)
Purchase of investment securities available for sale (9,977,241) (11,068,572)
Proceeds from maturities of investment securities held to maturity 5,000,000 7,255,000
Proceeds from maturities of investment securities held for sale 682,000 0
Proceeds from sale of investment securities held to maturity 0 2,238,668
Proceeds from sale of investment securities available for sale 28,979,943 4,885,938
Principal paydowns on mortgage-backed securities 1,101,571 0
Net increase in loans (54,262,892) (15,167,366)
Purchases of premises and equipment (1,758,196) (1,042,666)
-------------------------------------
Net cash used in investing activities (52,359,276) (27,654,085)
Cash flows from financing activities:
Net increase in transaction and savings accounts 15,808,087 95,667
Net decrease in certificates of deposit (8,801,112) 22,946,092
Acquisition of deposits, net 53,242,183 0
Net increase in securities sold under agreements to repurchase 5,148,519 4,822,273
Net increase in commercial paper 2,047,417 1,409,000
Net increase in federal funds purchased 2,675,000 0
Repayments on note payable to a bank 0 (478,959)
Proceeds from issuance of common stock 0 12,450
Purchase of Treasury Stock (121,480) 0
Dividends paid (400,857) (301,555)
-------------------------------------
Net cash provided by financing activities 69,597,757 28,504,968
-------------------------------------
Net increase in cash and cash equivalents 8,898,732 4,181,319
Cash and cash equivalents at beginning of the period 22,921,841 18,377,297
-------------------------------------
Cash and cash equivalents at end of the period $31,820,573 $22,558,616
=====================================
Supplemental Information:
Cash paid during the period for:
Interest Expense 6,528,967 4,331,921
=====================================
Income Taxes 1,092,000 534,819
=====================================
Supplemental schedule of non-cash investing and financing transactions:
Unrealized gain(loss) on investment securities available for sale (72,796) 636,376
=====================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
4
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Interim Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated interim financial statements have
been prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in Palmetto Bancshares', Inc. (the
Company's) Annual Report on Form 10-K for the year ended December 31, 1995.
In the Company's opinion, all adjustments necessary for a fair presentation
of these interim statements have been included and are of a normal and recurring
nature. The results of operations for the six-month period ended June 30, 1996
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 Bank, incorporated February 26,
1992. The Bank provides a full-range of banking services, including the taking
of deposits and the making of loans. Palmetto Capital, Inc. offers the brokerage
of stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital,
Inc. also offers advisory services and variable rate annuities. In
consolidation, all significant intercompany accounts and transactions have been
eliminated.
5
<PAGE>
3. Investment Securities
The carrying and market values of investment securities held to maturity
are summarized as follows:
June 30, 1996
Carrying Value Market Value
U.S. Government agencies $16,019,812 $15,643,570
State and municipal 25,621,574 25,534,227
Mortgage-backed securities 19,347,854 18,800,267
---------- ----------
Total $60,989,240 $59,978,064
=========== ===========
December 31, 1995
Carrying Value Market Value
U.S. Treasury and U.S.
Government agencies $15,032,602 $15,175,600
State and municipal 22,592,824 23,183,380
Mortgage-backed securities 6,163,230 6,190,006
--------- ---------
Total $43,788,656 $44,548,986
=========== ===========
The amortized cost and market values of investment securities available for
sale are as follows:
June 30, 1996
Cost Basis Market Value
U.S. Treasury $11,246,950 $11,157,622
State and municipal 7,651,130 7,622,090
--------- ---------
Total $18,898,080 $18,779,712
=========== ===========
6
<PAGE>
December 31, 1995
Cost Basis Market Value
U.S. Treasury and U.S.
Government agencies $29,995,691 $30,686,225
State and municipal 8,584,656 8,928,880
--------- ---------
Total $38,580,347 $39,615,105
=========== ===========
The Company determines investment securities as held to maturity or
available for sale at the purchase date. Investment 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 investments prior to maturity. Valuation losses or
recovery of previously recorded valuation losses are recorded in shareholders'
equity as net appreciation (depreciation) of investment securities available for
sale in the period incurred. Gain or loss on the sale of investment securities
available for sale is based on the specific identification method.
Investments with an aggregate carrying value of approximately $48,000,000
and $54,000,000 at June 30, 1996, and December 31, 1995, 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:
June 30, 1996 December 31, 1995
-------------- -----------------
Commercial, financial and agricultural $56,200,817 $45,377,386
Real estate - construction 9,744,516 5,452,663
Real estate - mortgage 174,803,232 149,017,139
Installment loans to individuals 68,433,816 55,339,471
---------- ----------
Total $309,182,381 $255,186,659
============ ============
7
<PAGE>
The following is a summary of activity affecting the allowance for loan
losses for the periods indicated:
For the three months ended
June 30
1996 1995
---- ----
Balance at beginning of period $3,834,230 $3,068,366
Provision for loan losses 450,000 195,000
Loan recoveries 68,018 68,698
Less loans charged-off (169,202) (177,964)
--------- ---------
Balance at end of period $4,183,046 $3,154,100
========== ==========
For the six months ended
June 30,
1996 1995
---- ----
Balance at beginning of period $3,700,216 $3,016,464
Provision for loan losses 750,000 390,000
Loan recoveries 99,104 94,195
Less loans charged-off (366,274) (346,559)
--------- ---------
Balance at end of period $4,183,046 $3,154,100
========== ==========
The Bank had outstanding, unused commitments as of June 30, 1996 as follows:
Home equity loans $8,638,000
Credit cards 18,812,000
Commercial real estate development 6,002,000
Other unused lines of credit 9,562,000
---------
$43,014,000
==========
Standby letters of credit $1,778,000
==========
8
5. Deposits
A summary of deposits follows:
June 30, December 31,
1996 1995
Transaction accounts $143,208,279 $114,380,010
Savings deposits 29,807,738 20,261,624
Insured money market accounts 43,960,768 42,113,681
Time deposits over $100,000 35,323,618 39,629,516
Other time deposits 139,090,922 113,392,152
Premium on deposits acquired (1,404,381) (117,500)
----------- ----------
Total $389,986,944 $329,659,483
============ ============
9
<PAGE>
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1995
TO JUNE 30, 1996
On April 15, 1996, the Bank acquired three existing branches of First Union
National Bank of South Carolina. The Bank assumed deposits of approximately $54
million, but assumed no loans.
Liquid assets which include cash, federal funds sold, and investments available
for sale decreased by $13.2 million for the six-month period. This represents a
decrease of 20.37%. This decrease was largely due to the sale of available for
sale securities ($20.8 million decrease) and a decrease of $1.2 million in the
amount of federal funds sold. These decreases were partially offset by an
increase in cash and due from banks of $8.9 million.
Investment securities held to maturity increased during the six-month period by
$17.2 million, or 39.28% due to the increased investment in securities in
response to the funds received from the acquisition of the new branches.
Loans, net, increased by $53.5 million, or 21.28%, during the six-month period
as a result of conscious efforts to grow the loan portfolio in order to make the
best use of the deposits acquired in the First Union branch acquisitions. The
allowance for loan losses increased 13.05% as a result of the increase in loan
volume.
The Company recently commenced the origination and sale of mortgage loans
through its mortgage servicing department. As a result, the Company shows $7.7
million in Loans Held for Sale at June 30, 1996. The Company already has
commitments to sell these loans in July and August 1996. The Company recognized
a mark to market loss on these loans of $13,000 at June 30, 1996. The mortgage
servicing department is also currently purchasing the rights to service mortgage
loans originated by others. The mortgage servicing rights related to the
mortgage servicing department's activities are discussed below under "Accounting
and Reporting Matters." Loans serviced for the benefit of others amounted to
approximately $64 million at June 30, 1996.
Other assets increased by $3.3 million, or 106% due to $2.7 million in goodwill
acquired in the First Union branch purchase. Other assets also increased due to
the capitalization of $1 million in purchased mortgage servicing rights referred
to in the previous paragraph. These increases were slightly offset with related
amortization and amortization of various prepaids.
Accrued interest increased by $1.2 million or 11.42% because interest earning
assets have increased significantly since year end. Investment securities held
to maturity and loans
10
<PAGE>
combined have increased 60% since the beginning of the year.
Deposit balances increased by 18.3% during the period, from $329.7 million to
$390.0 million. The increase was due to the acquisition of the three
aforementioned branches.
Securities sold under agreements to repurchase have increased by $5.1 million or
68.23%, and commercial paper associated with the alternative commercial sweep
accounts increased by $2.3 million or 36.9%. These changes are the result of
normal fluctuations in the accounts.
Other liabilities decreased by $115,000, or 5.64%, due primarily to decreased
accruals for expenses for taxes and other operating expenses.
Total shareholders equity increased by $530,517, for the six-month period as a
result of net income of $2,092,813; less dividends paid of $400,857; an
unrealized loss on investment securities available for sale of $72,796 compared
to an unrealized gain of $636,376 at December 31, 1995; the purchase of treasury
stock for $121,480; and the increase in the reclassification of the Employee
Stock Ownership Plan (ESOP) shares subject to put/call of $330,787.
The stock in the ESOP has a put and a call feature if the stock is not "readily
tradable on an established market." A 1995 private letter ruling by the IRS
clarified that such term means listed on a national securities exchange. Since
the Company's stock is not listed on a national securities exchange, the shares
in the ESOP Plan are subject to the put/call feature. Accordingly, the 88,609
shares currently in the Plan are recorded outside of shareholders' equity at
their fair value, which is determined annually by an independent valuation. The
most recent valuation dated April 1, 1996, values the stock at $35 per share.
Liquidity
The Company's liquidity position is dependent upon its debt servicing needs and
dividends declared. The Company currently has no debt outstanding and has
declared $0.40 per share in dividends so far in 1996. There can be no guarantee,
however, that any additional dividends will be paid. Liquidity is provided from
the Company's subsidiary, the 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, 1996, the
Bank had a total risk-based capital ratio of 8.62%, a Tier 1 risked-based
capital ratio of 7.37% and a leverage ratio of 5.33%. Because the total
risk-based capital ratio is 8.62%, the Bank is defined to be an
"adequately-capitalized" institution under currently applicable regulatory
guidelines. Also, at June 30, 1996, the Bank had a primary capital ratio of 7%.
11
<PAGE>
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.
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 June 30, 1996, the Company had a total risk-based capital ratio of 8.71%, a
Tier 1 risked-based capital ratio of 7.46% and a leverage ratio of 5.39%.
Because the total risk- based capital ratio is 8.71%, the Company is defined to
be an "adequately-capitalized" institution under currently applicable regulatory
guidelines. Due to the infusion of approximately $54 million in deposits related
to the acquisition of the three branches, the Company's ratios have dropped from
the "well-capitalized" category into the "adequately- capitalized" category. The
Company's strategic plan for controlled growth and profit improvement reflects
sufficient internally generated capital to return the risk-weighted ratios to
the "well-capitalized" guidelines.
Also, at June 30, 1996, the Company had a primary capital ratio (total
shareholders' equity plus the allowance for loan losses to total assets) of
7.28%, compared to a ratio of 8.40% at June 30, 1995.
On March 11, 1996, the Company purchased 3,037 shares of Treasury Stock for $40
per share, totaling $121,480.
Accounting and Reporting Matters
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 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
12
<PAGE>
assets to be disposed of. The adoption of this statement did not have a
material effect on the Company.
In May 1995, the FASB issued 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 right to service mortgage loans for others, regardless of how
those rights were acquired (either purchased or originated). Further, it amends
SFAS No. 65 to require assessment of impairment based on fair value. The Company
recently commenced the origination, purchasing, and sale of mortgage loans. At
June 30, 1996, the Company shows net mortgage servicing rights of $1,028,926
related to these loans. The mortgage servicing rights are being amortized over a
nine-year period. The rights are also evaluated at each quarter end for possible
impairment. There was no impairment recognized by the Company at June 30, 1996.
In October 1995, the FASB issued 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 No. 123 provides guidance
on the valuation of compensation costs arising from both fixed and performance
stock compensation plans. The adoption of this statement did not have a material
effect on the Company.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. The statement
will become effective at the beginning of 1997. The Statement uses a "financial
components" approach that focuses on control to determine the proper accounting
for financial asset transfers. Under that approach, after financial assets are
transferred, an entity would recognize on the balance sheet all assets it
controls and liabilities it has incurred. It would remove from the balance sheet
those assets it no longer controls and liabilities it has satisfied. The Company
does not anticipate that adoption of this standard will have a material effect
on the Company's financial statements in 1997.
13
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 1996, AND 1995
Net income for the three months ended June 30, 1996 was $1,198,000, an increase
of 31% from the $915,000 reported for the same period in 1995. Net income per
share was $0.96 for the 1996 period as compared with $0.91 for the comparable
period in 1995.
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 June 30, 1996, net interest income was $4.5
million, which represented a 19.5% increase from the same period in 1995. This
increase was the result of increases in the volume of earning assets. The
increases in volume were due to the growth of loans and planned investment in
securities in response to the branch acquisitions. Average net interest margin
for the 1996 period was 4.73%, compared to 5.03% for the same period in 1995.
The decrease in the net interest margin is due to the fact that the Bank has
been utilizing more federal funds purchased and securities sold under agreements
to repurchase in preparation of the acquisition of the new deposits. Federal
funds purchased and securities sold under agreements to repurchase typically
cost more than deposits as a source of funds.
Interest income on loans increased 25.17% due to increased volume and increased
rates. Interest income on investments increased 39.96% during the 1996 period
compared to the corresponding period in 1995 due to significantly higher
portfolio volumes throughout the 1996 period compared to the same period in
1995. At June 30, 1996, however, portfolio volumes show only a slight increase
of 7.59% compared to June 30, 1995, due to significant sales of available for
sale securities in May 1996. The interest income increases were partially offset
by a decrease in interest income on federal funds sold due to decreased volume
of federal funds sold compared to the same period last year. The yield on
average earning assets, which includes loans and investment securities,
decreased from 8.34% at June 30, 1995 to 8.28% at June 30, 1996.
Total interest expense increased by 32.62% during the 1996 period mostly due to
an increased volume of deposits from June 30, 1995 compared to June 30, 1996.
Part of the increase in interest expense is also due to the increased volume of
federal funds purchased. Average total interest-bearing liabilities (including
deposits, securities sold under agreements to repurchase, commercial paper, and
federal funds purchased), increased by 27.08% from
14
<PAGE>
June 30, 1995 to June 30, 1996. The average rate paid on interest bearing
liabilities increased from 3.8% during the three-month period in 1995, to 4.04%
during the 1996 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 $450,000 for the 1996 period, compared to
$195,000 in 1995. 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 to cover inherent
losses in the portfolio. Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current economic conditions,
past loan loss experience, and such other factors which, in management's
judgment, deserve recognition in estimating loan losses. Loans are charged off
when, in the opinion of management, they are deemed to be uncollectible.
Recognized losses are charged against the allowance, and subsequent recoveries
are added to the allowance. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. The allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustment, based upon
information that is available to them at the time of their examination.
Other Operating Income
Total other operating income increased by 21.65% in 1996 as compared to the same
period in 1995. Service charges on deposit accounts increased by $110,000 or
18.58% during the 1996 period compared to the same period in 1995 due primarily
to increased deposit accounts.
Other income increased by $96,000, or 33.47%, due primarily to an increase of
$28,000 in the commission fees from the Bank's subsidiary, Palmetto Capital,
Inc., during the three-month period as compared to the same period in 1995 due
to a significant new customer. Insurance commissions increased approximately
$15,000 due to the increased loan volume. Debit card income is also up $16,000.
The increase in other income is also attributable to the increase of $9,000 in
origination and processing fees from the mortgage loan department due to an
increase in volume of originations.
Other Operating Expenses
Other operating expenses increased by $321,000, or 9.49% during the 1996
three-month period over the same period in 1995. A general increase in all other
operating expense
15
<PAGE>
categories was due to normal operating growth and growth due to the branch
acquisitions.
Income Taxes
The Company incurred an income tax liability of $404,000 for the 1996
three-month period compared to $305,000 for the same period in 1995 due to the
increase in taxable income. This liability is based on an expected effective tax
rate of approximately 25%.
COMPARISON OF THE RESULTS OF OPERATION FOR THE SIX MONTHS
ENDED JUNE 30, 1996, AND 1995
Net income for the six-month period ended June 30, 1996 was $2.1 million as
compared to $1.6 million for the same period in 1995, or a 29.25% increase. Net
income per common share not subject to put/call increased from $1.61 in 1995, to
$1.94 in 1996. Return on average assets (annualized) decreased to 0.95% in 1996
compared to 1.04% in 1995 because of the ESOP adjustment.
Net Interest Income
Net interest income for the 1996 six-month period was $8.6 million, an increase
of 17.32% over the $7.4 million for the 1995 period. Average earning assets have
increased 25.5% from the six months ended June 30, 1995 to the same period June
30, 1996. This increase coupled with an average net interest margin of 4.68% in
1996 compared to 5.03% in 1995 more than offset an increase of 6.25% in the
average rate paid on interest bearing liabilities. See further discussion of Net
Interest Income in the "Comparison of the Results of Operations for the Three
Months Ended June 30, 1996 and 1995" above.
Provision for Loan Losses
The provision was increased to $750,000 for the 1996 period, from $390,000 for
the same period in 1995. See further discussion of Provision for Loan Losses in
the "Comparison of the Results of Operations for the Three Months Ended June 30,
1996 and 1995" above.
Other Operating Income and Expenses
Service charges on deposit accounts increased due to increases in the number of
deposit accounts and account transactions. Fiduciary service fees are up due to
an increase in volume of accounts handled. Non-interest expense during the 1996
six month period increased 691,615 or 10.14% over the 1995 period due to normal
growth. Salaries and other personnel expenses increased by $107,000 or 3% due to
normal salary increases. These increases were offset by deferred costs related
to the origination and acquiring of loans under SFAS No. 91. SFAS No. 91
requires that non-refundable fees and certain
16
<PAGE>
costs related to the origination and acquiring of loans be recognized over the
life of the related loans as a yield adjustment, and, therefore, not accounted
for as income or expense immediately. Net occupancy and furniture and fixture
expenses are up due to increased depreciation related to acquisitions in
association with renovating Laurens Center to include the corporate offices. The
Bank's FDIC assessment decreased by $306,000 or 100% due to decreased insurance
premiums being charged by the FDIC because the Bank Insurance Fund is fully
funded. Other non-interest expenses are up $344,000 or 31.74% due to a general
increase in all other operating expense categories due to normal growth and
growth associated with the acquisition of the three former First Union branches.
17
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Part II - Other Information
Item 1. Legal Proceedings
Palmetto Bancshares, Inc. (the Company) is not engaged in any legal
proceedings. From time to time The Palmetto Bank (the Bank) is involved in
legal proceedings incidental to its normal course of business as a bank.
Management believes none of these proceedings is likely to have a
materially adverse effect on the business of the Company or the Bank.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. Description
3.1.1 Articles of Incorporation filed on May 13,
1982 in the office of the Secretary of State
of South Carolina: Incorporated by reference
to Exhibit 3 to the Company's Registration
Statement on Form S-4, No. 33-19367, filed
with the Securities and Exchange Commission
on December 30, 1987
3.1.2 Articles of Amendment filed on May 5, 1988
in the office of the Secretary of State of
South Carolina: Incorporated by reference to
Exhibit 4.1.2 to the Company's Registration
Statement on Form S-8, filed with the
Securities and Exchange Commission on August
20, 1992
3.1.3 Articles of Amendment filed on January 26,
1989 in the office of the Secretary of State
of South Carolina: Incorporated by reference
to Exhibit 4.1.3 to the Company's
Registration Statement on Form S-8, filed
with the Securities and Exchange Commission
on August 20, 1992
3.1.4 Articles of Amendment filed on April 23,
1990 in the office of the Secretary of State
of South
18
<PAGE>
Carolina: Incorporated by reference
to Exhibit 4.1.4 to the Company's
Registration Statement on Form S-8, filed
with the Securities and Exchange Commission
on August 20, 1992
3.2 By-Laws: Incorporated by reference to Exhibit 3 to
the Company's Registration Statement on Form S-4,
No. 33-19367, filed with the Securities and
Exchange Commission on December 30, 1987
4.1.1 Articles of Incorporation of the Registrant: Included in
Exhibits 3.1.1--.4
4.2 Bylaws of the Registrant: Included in Exhibit 3.2
4.3 Specimen Certificate for Common Stock: Incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8, Commission File No. 33-51212,
filed with the Securities and Exchange Commission on
August 20, 1992
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALMETTO BANCSHARES, INC.
By:
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
/s/Paul W. Stringer
Paul W. Stringer
President and Chief Accounting Officer
Date: August 6, 1996
20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PALMETTO BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF OPERATIONS AND CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 31,821
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 863
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,780
<INVESTMENTS-CARRYING> 60,989
<INVESTMENTS-MARKET> 59,978
<LOANS> 309,182
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<TOTAL-ASSETS> 447,185
<DEPOSITS> 389,987
<SHORT-TERM> 26,503
<LIABILITIES-OTHER> 1,925
<LONG-TERM> 0
0
0
<COMMON> 5,054
<OTHER-SE> 20,615
<TOTAL-LIABILITIES-AND-EQUITY> 447,185
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<INTEREST-INVEST> 2,785
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<INTEREST-TOTAL> 15,265
<INTEREST-DEPOSIT> 6,071
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<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 7,515
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<INCOME-PRE-EXTRAORDINARY> 2,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,093
<EPS-PRIMARY> 1.94
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<YIELD-ACTUAL> 4.68
<LOANS-NON> 634
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