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 MARCH 31, 1999
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.)
301 Hillcrest Drive
Laurens, South Carolina
29360
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(Address of principal executive offices)
(Zip Code)
(864) 984-4551
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( 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 May 7, 1999
----------------------------- -------------------------------
Common stock, $5.00 par value 3,104,117
<PAGE>
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter and Three Months Ended March 31, 1999
INDEX Page No.
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PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 1
Consolidated Income Statements for the Three Months
Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for
the Three months Ended March 31, 1999 and 1998 3-4
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for the Three months Ended
March 31, 1999 and 1998 5
Notes to Consolidated Interim Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 13
PART II - OTHER INFORMATION 14 - 16
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SIGNATURES 17
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<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------------------
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $23,453 $27,929
Federal funds sold 5,198 110
Federal Home Loan Bank stock, at cost 1,733 1,541
Investment securities held to maturity (market values of $0
and $68,737 in 1999 and 1998, respectively) - 66,455
Investment securities available for sale (amortized cost of $101,184
and $45,551, in 1999 and 1998, respectively) 102,971 46,087
Loans held for sale 3,765 2,122
Loans 414,983 410,012
Less allowance for loan losses (5,962) (5,795)
------------------------------------------
Loans, net 409,021 404,217
Premises and equipment, net 14,663 14,347
Accrued interest 4,060 4,499
Other assets 12,791 10,093
------------------------------------------
Total assets $577,655 $577,400
==========================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 83,190 83,788
Interest-bearing 417,449 415,885
------------------------------------------
Total deposits 500,639 499,673
Securities sold under agreements to repurchase 13,664 21,630
Commercial paper (Master note) 14,600 10,859
Other liabilities 4,390 3,153
------------------------------------------
Total liabilities 533,293 535,315
------------------------------------------
Common stock subject to put/call option (ESOP) 4,732 4,732
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
3,103,617 issued and outstanding in 1999; and
3,099,695 issued and outstanding in 1998; 15,518 15,498
Capital surplus 325 293
Retained earnings 27,420 25,964
Accumulated other comprehensive income 1,099 330
Common stock subject to put/call option, 270,384 common
shares at $17.50 per share in 1999 and 1998 (ESOP) (4,732) (4,732)
------------------------------------------
Total shareholders' equity 39,630 37,353
------------------------------------------
Total liabilities and shareholders' equity $577,655 $577,400
==========================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
1
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $8,943 $8,354
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 240 194
State and municipal 813 72
Mortgage-backed securities 405 6
Interest and dividends on investment securities held to maturity:
U.S. Treasury and U.S. Government agencies - 263
State and municipal - 485
Mortgage-backed securities - 395
Interest on federal funds sold 28 63
Dividends on FHLB stock 31 27
------------------------------------------
Total interest income 10,460 9,859
------------------------------------------
Interest expense:
Interest on deposits 3,669 3,773
Interest on securities sold under agreements to repurchase 158 170
Interest on federal funds purchased 64 25
Interest on commercial paper (Master note) 105 128
------------------------------------------
Total interest expense 3,996 4,096
------------------------------------------
Net interest income 6,464 5,763
Provision for loan losses 491 390
------------------------------------------
Net interest income after provision for
loan losses 5,973 5,373
Non-interest income:
Service charges on deposit accounts 880 823
Fees for trust services 394 335
Other income 475 334
------------------------------------------
Total non-interest income 1,749 1,492
Non-interest expenses:
Salaries and other personnel 2,441 2,409
Net occupancy 432 415
Furniture and equipment 470 431
FDIC assessment 50 46
Postage and supplies 274 254
Marketing and advertising 236 237
Telephone 146 143
Other expense 946 834
------------------------------------------
Total non-interest expenses 4,995 4,769
------------------------------------------
Income before income taxes 2,727 2,096
------------------------------------------
Income tax provision 836 629
------------------------------------------
Net Income $1,891 $1,467
==========================================
Net income per share-basic, not subject to put/call $0.61 $0.47
Net income per share-dilutive, not subject to put/call $0.60 $0.47
Cash dividends declared per share $0.14 $0.12
</TABLE>
See accompanying notes to consolidated interim financial statements.
2
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,891 $1,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 625 669
Gain on sale of investment securities (25) -
Provision for loan losses 491 390
Origination of loans held for sale (9,719) (13,486)
Sale of loans held for sale 8,130 10,251
Gain on sale of loans (54) (70)
Change in accrued interest receivable 439 170
Change in other assets (2,916) (747)
Change in other liabilities, net 756 786
------------------------------------------
Net cash used in operating activities (382) (570)
Cash flows from investing activities:
Purchase of investment securities held to maturity - (388)
Purchase of investment securities available for sale (5,234) (3,743)
Proceeds from maturities of investment securities held to maturity - 1,000
Proceeds from maturities of investment securities available for sale 9,780 545
Proceeds from sale of investment securities available for sale 3,610 -
Principal paydowns on mortgage-backed securities held to maturity - 1,620
Principal paydowns on mortgage-backed securities available for sale 2,682 -
Purchase of Federal Home Loan Bank stock (192) (89)
Net increase in loans (5,295) (12,230)
Purchases of premises and equipment (679) (1,267)
------------------------------------------
Net cash provided by (used in) investing activities 4,672 (14,552)
Cash flows from financing activities:
Net increase in deposit accounts 930 18,363
Net increase (decrease) in securities sold under agreements to repurchase (7,966) 4,740
Net increase in commercial paper 3,741 174
Net decrease in federal funds purchased - (1,500)
Proceeds from issuance of common stock 52 2
Dividends paid (435) (371)
------------------------------------------
Net cash provided by (used in) financing activities (3,678) 21,408
------------------------------------------
Net increase in cash and cash equivalents 612 6,286
------------------------------------------
Cash and cash equivalents at beginning of the period 28,039 25,927
------------------------------------------
Cash and cash equivalents at end of the period $28,651 $32,213
==========================================
(Continued)
</TABLE>
3
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows Continued (Unaudited)
For Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------
<S> <C> <C>
Supplemental Information:
Cash paid during the period for:
Interest expense 4,076 4,182
==========================================
Income taxes 294 55
==========================================
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain on investment securities available for sale 769 2
==========================================
Transfer of investment securities held to maturity to available for sale 66,455 -
==========================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
4
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Accumulated Stock
Additional Other Subject to
Common Paid-in Retained Comprehensive Put/Call
Stock Capital Earnings Income, Net Option Total
----- ------- -------- ----------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 15,448 317 20,658 193 (3,784) 32,832
Net income 1,467 1,467
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $1 2
Less: reclassification adjustment for gains included
in net income, net of tax effect of $0 -
Net unrealized gains on securities 2
----------
Comprehensive Income 1,469
----------
Cash dividend declared (371) (371)
Issuance of 300 shares in connection with stock options 1 1 2
-------------------------------------------------------------------
Balance at March 31, 1998 15,449 318 21,754 195 (3,784) 33,932
===================================================================
Balance at December 31, 1998 15,498 293 25,964 330 (4,732) 37,353
Net income 1,891 1,891
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $491 784
Less: reclassification adjustment for gains included
in net income, net of tax effect of $10 (15)
Net unrealized gains on securities 769
----------
Comprehensive Income 2,660
----------
Cash dividend declared (435) (435)
Issuance of 3,922 shares in connection with stock options 20 32 52
-------------------------------------------------------------------
Balance at March 31, 1999 15,518 325 27,420 1,099 (4,732) 39,630
===================================================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
5
<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.'s (the
"Company's") Annual Report on Form 10-K for the year ended December 31, 1998.
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 three-month period ended March 31,
1999 are not necessarily indicative of the results that 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. 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.
3. Summary of Significant Accounting Changes
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999, with earlier
adoption permitted. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. The statement requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company adopted SFAS No. 133 in its entirety effective January 1, 1999. On
January 1, 1999, the Company transferred 100% of its held-to-maturity investment
securities to the available-for-sale category at fair value as allowed by SFAS
No. 133. Such transfers from the held-to-maturity category at the date of
initial adoption shall not call into question the Company's intent to hold other
debt securities to maturity in the future. The adoption of this standard did not
have a material effect on the Company. The Company has no investments that are
considered derivatives under SFAS No. 133 and does not engage in any hedging
activities.
6
<PAGE>
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1998
TO MARCH 31, 1999
Year 2000 Readiness Disclosure
Please see the Company's complete discussion of its Year 2000 readiness in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The discussion here is only an update to the year-end discussion.
As of April 20, 1999, Business Resumption Contingency Plans have been
drafted and approved by the Company's board of directors. Management believes
that the most likely worst case scenario entails customers withdrawing
significant amounts of cash from deposit accounts and on lines of credit as a
result of fears of a Year 2000 banking crisis that would limit their access to
cash. Management is currently anticipating and planning for this potential
liquidity issue. Management believes the second most likely worst case scenario
entails temporary interruptions of power service. Management believes the risk
of this occurring is low. The contingency plans in place include using a
generator to power the Company's Corporate Center, sending our customers to
nearby branches where power service has not been interrupted or processing
transactions manually at a branch without power. In the event such scenarios
occur, they are not expected to have a material adverse impact on consolidated
results of operations or financial position.
Based on assessments completed to date and contingency plans in place,
management believes Year 2000 issues, including the cost of making critical
systems and equipment ready, will not have a material adverse effect on the
Company's business operation or consolidated results of operations or financial
position. Nevertheless, achieving Year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if the Company's internal systems, or the internal
systems of external parties, fail to achieve Year 2000 readiness in a timely
manner, the Company's business, consolidated results of operations or financial
condition could be adversely affected.
Assets
Liquid assets, which include cash, federal funds sold, and investments
available for sale increased by $57.5 million, or 78%, for the three-month
period. This increase was due to the $66.5 million transfer of investment
securities held to maturity to investment securities available for sale (see
note 3 on page 6), and reduced by $9.8 million in maturities of those
securities.
Loans, net, increased by $4.8 million, or 1%, during the three-month period
as a result of normal growth. The Company increased the allowance for loan
losses to 1.44% from 1.39% at March 31, 1999 and 1998, respectively.
7
<PAGE>
At March 31, 1999, the Company had $3.8 million in loans held for sale with
commitments to sell these loans in April and May 1999. The mortgage servicing
rights ("MSRs") related to the mortgage servicing department's activities were
$1.2 million at March 31, 1999, which represents their fair value. Loans
serviced for the benefit of others amounted to $138.2 million at March 31, 1999.
Other assets increased by $2.7 million, or 27%, due to normal growth, offset
by amortization of intangibles and various prepaids.
Liabilities and Shareholders' Equity
Deposit balances increased by less than 1% during the three-month period,
from $499.7 million to $500.6 million. The increase was due to normal growth.
Securities sold under agreements to repurchase decreased by $8.0 million, or
37%, and commercial paper associated with the alternative commercial sweep
accounts (master note program) increased by $3.7 million, or 34%. These changes
are the result of normal fluctuations in the accounts.
Total shareholders equity increased by $2.3 million, or 6%, for the
three-month period as a result of comprehensive income of $2.7 million, less
dividends paid of $435,000.
The stock in the Company's Employee Stock Ownership Plan ("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 distributed in 1998 are
subject to the put/call feature. Accordingly, 270,384 shares are recorded
outside of shareholders' equity at their fair value, which is determined
annually by an independent valuation. The most recent valuation dated April 2,
1998, values the stock at $17.50 per share. The Company's Board of Directors
voted to terminate the ESOP effective February 28, 1997. The shares distributed
in 1998 due to the termination of the ESOP will be subject to the put/call until
June 29, 1999.
Liquidity
The liquidity ratio is an indication of a company's ability to meet its
short-term funding obligations. The Company's policy is to maintain a liquidity
ratio between 15% and 25%. At March 31, 1999, the Company's liquidity ratio was
19.06%.
The Company has certain cash needs, including general operating expenses and the
payment of dividends and interest on borrowings. The Company currently has no
debt outstanding and has declared $0.14 per share in dividends so far in 1999.
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 the Company are
guidelines established by regulatory authorities for capital to asset ratios.
The Bank's current primary capital ratio is 8.47%. At March 31, 1999, the Bank
had $8.6 million of excess retained earnings available for the payment of
dividends. The Bank plans to continue its quarterly dividend payout.
8
<PAGE>
Capital Resources
As of March 31, 1999, the Company and the Bank were in compliance with each
of the applicable regulatory capital requirements and met or exceeded the
"well-capitalized" regulatory guidelines. The table below sets forth various
capital ratios for the Company and the Bank:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ADEQUATELY
AS OF CAPITALIZED WELL-CAPITALIZED
3/31/99 REQUIREMENT REQUIREMENT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Company:
Total Risk-based Capital 10.46% 8.00% 10.00%
Tier 1 Risk-based Capital 9.21 4.00 6.00
Tier 1 Leverage Ratio 6.89 4.00 5.00
Bank:
Total Risk-based Capital 10.44 8.00 10.00
Tier 1 Risk-based Capital 9.19 4.00 6.00
Tier 1 Leverage Ratio 6.88 4.00 5.00
- ----------------------------------------------------------------------------------------
</TABLE>
Because the Bank's total risk-based capital ratio is 10.44%, the Company is
defined to be "well- capitalized" under currently applicable regulatory
guidelines.
Accounting and Reporting Matters
The Financial Accounting Standards Board has not released any accounting
pronouncements that have not been adopted and that affect the Company or the
Bank.
9
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND 1998
Net income for the three months ended March 31, 1999 was $1.9 million, an
increase of 29% from the $1.5 million reported for the same period in 1998. Net
income per common share-basic, not subject to put/call, was $0.61 for the 1999
period as compared with $0.47 for the comparable period in 1998. Net income per
common share-dilutive, not subject to put/call, was $0.60 for the 1999 period as
compared with $0.47 for the comparable period in 1998.
Net Interest Income
The largest component of the Company's net income is the Bank's 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 March 31, 1999, net interest income was
$6.5 million, which represented a 12% increase from the same period in 1998.
This increase was the result of increases in the volume of earning assets offset
by a decreased average rate. Earning assets averaged $529.4 million and $477.8
million during the first quarters of 1999 and 1998, respectively. The increases
in volume were due to the growth of loans compared to first quarter-end 1998.
The average tax-equivalent net interest margin for the 1999 period was 5.17%,
compared to 5.06% for the same period in 1998.
Interest and fees on loans increased 7%, from $8.4 million to $8.9 million,
for the 1999 three-month period compared to the corresponding period in 1998 due
to increased volume offset by a decreased average rate. Interest and dividends
on investment securities increased 3% for the 1999 three-month period compared
to the corresponding period in 1998 due to increased volume. Interest income on
federal funds sold decreased due to decreased average volume of federal funds
sold for the quarter compared to the same period last year. The yield on average
earning assets, which includes loans and investment securities, decreased from
8.37% for the three months ended March 31, 1998 to 8.01% for the three months
ended March 31, 1999. The prime interest rate remained constant at 7.75% and
8.5% for the quarters ended March 31, 1999 and 1998, respectively.
Total interest expense decreased by 2%, from $4.1 million to $4.0 million,
due to a decrease in the average cost of interest-bearing liabilities from 4.02%
to 3.61% for the quarters ended March 31, 1998 and 1999, respectively, and
relatively static levels of interest-bearing liabilities.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its inherent rate risk exposure. Although the Company
manages other risks, such as credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and believes that this risk
10
<PAGE>
could potentially have the largest material effect on the Company's financial
condition and results of operations. Other types of market risks, such as
foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis. The
Company monitors the impact of changes in interest rates on its net interest
income using several tools.
The Bank's goal is to minimize interest rate risk between interest bearing
assets and liabilities at various maturities through its Asset-Liability
Management ("ALM"). ALM involves managing the mix and pricing of assets and
liabilities in the face of uncertain interest rates and an uncertain economic
outlook. It seeks to achieve steady growth of net interest income with an
acceptable amount of interest rate risk exposure and sufficient liquidity. The
process provides a framework for determining, in conjunction with the profit
planning process, which elements of the Company's profitability factors can be
controlled by management. Understanding the current position and implications of
past decisions is necessary in providing direction for the future financial
management of the Company. The Company uses an asset-liability model to
determine the appropriate strategy for current conditions.
Interest sensitivity management is part of the asset-liability management
process. Interest sensitivity gap ("GAP") is the difference between total rate
sensitive assets and rate sensitive liabilities in a given time period. The
Company's current GAP analysis reflects that in periods of increasing interest
rates, rate sensitive assets will reprice slower than rate sensitive
liabilities. The Company's GAP analysis also shows that at the interest
repricing of one year, the Company's net interest margin would be adversely
impacted. This analysis, however, does not take into account the dynamics of the
marketplace. GAP is a static measurement that assumes that if the prime rate
increases by 100 basis points, all assets and liabilities that are due to
reprice will increase by 100 basis points at the next opportunity. However, the
Company is actually able to experience a benefit from rising rates in the short
term because deposit rates generally do not follow the national money market,
but are instead controlled by the local market. Loans do follow the money
market, so when rates increase they reprice immediately, but the Company is able
to manage the deposit side. The Company generally does not raise deposit rates
as fast or as much as loan rates. The Company also has the ability to manage its
funding costs by choosing alternative sources of funds.
The Company's current GAP position would also be interpreted to mean that
in periods of declining interest rates, the Company's net interest margin would
benefit. However, competitive pressures in the local market may not allow the
Company to lower rates on deposits, but may force the Company to lower rates on
loans.
Because the Company's management feels that GAP analysis is a static
measurement, it manages its interest income through its asset/liability
strategies which focus on a net interest income model based on management's
projections. The Company has a targeted net interest income range of plus or
minus twenty percent based on a 300 basis point shock over twelve months. The
asset/liability committee meets weekly to address interest pricing issues, and
this model is reviewed monthly. Management will continue to monitor its
liability sensitive position in times of higher interest rates which might
adversely affect its net interest margin. The Company does not feel that the
market risk to the Company has changed
11
<PAGE>
significantly since December 31, 1998.
Provision for Loan Losses
The provision for loan losses was $491,000 and $390,000 for the three
months ended March 31, 1999 and 1998, respectively. 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 probable 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. Loans over 90 days delinquent and on non-accrual amounted to
approximately $1,292,000 and $870,000 at March 31, 1999 and 1998, respectively.
The annualized net charge-off ratio has increased from 0.27% at March 31, 1998
to 0.32% at March 31, 1999. 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.
Non-interest Income
Total non-interest income increased by $257,000, or 17%, for the three
months ended March 31, 1999, as compared to the same period in 1998. The largest
portion of this increase can be attributed to other income, which increased by
$141,000, or 42%, during the 1999 period compared to the same period in 1998 due
primarily to ATM fee income. This income is due to the fact that the Bank is
charging $1.00 per foreign transaction. The Bank began charging this fee in June
1998.
The second largest contributor to the increase in non-interest income is
fees for trust services, which increased $59,000, or 18%, due to new business
and increased assets under management. At March 31, 1999, assets under
management amounted to $193,955,000 compared to $181,192,000 at March 31, 1998,
a 7% increase.
Non-interest Expenses
Total non-interest expenses increased by $226,000, or 5%, during the 1999
three-month period compared to the same period in 1998. The largest contributor
to non-interest expense was other expense, which increased $112,000, or 13%, due
to increased expenses related to outside management consultants, credit card
processing, armored car couriers and miscellaneous loan expense. These increases
were due to increased fees and/or increased activity in these areas. The other
categories within total non-interest expense increased due to normal growth and
activity.
12
<PAGE>
Income Taxes
The Company incurred income tax expense of $836,000 for the 1999
three-month period compared to $629,000 for the same period in 1998 due to the
increase in taxable income. This expense is based on an expected annual
effective tax rate of approximately 30%.
INDUSTRY DEVELOPMENTS
Certain proposed industry-related legislation could have an effect on both
the costs of doing business and the competitive factors facing the financial
institution industry. Because of the uncertainty of the final terms and
likelihood of passage of the proposed legislation, the Company is unable to
assess the impact of any proposed legislation on its financial condition or
operations at this time.
13
<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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held April 20, 1999, the following
persons were elected as directors with the votes indicated:
FOR AGAINST
--- -------
John T. Gramling, II 2,732,672 shares 156,878 shares
James M. Shoemaker, Jr. 2,734,923 shares 157,003 shares
Paul W. Stringer 2,732,972 shares 156,578 shares
Edward K. Snead 2,598,108 shares 291,442 shares
Also at this Annual Meeting, the shareholders voted to amend the Company's
articles of incorporation to establish relevant factors for the board in
its consideration of a proposed business combination. This proposal amends
the Company's Articles of Incorporation to provide that in evaluating any
third party tender offer or offer regarding a potential merger,
consolidation, share exchange or disposition of substantially all of the
Company's assets, the Board is explicitly authorized to consider antitrust
and other regulatory issues; the reputation and business practices of the
offeror as they would affect the employees and customers of the Company;
and the impact on the employees and customers of the Company and its
subsidiaries and on the community that they serve. The vote was as
follows:
FOR AGAINST ABSTAINED
--- ------- ---------
2,335,667 shares 468,521 shares 39,102 shares
Also at the Annual Meeting, the shareholders voted to amend the Company's
articles of incorporation regarding the removal of directors. This
proposal amends the articles to provide that no director could be removed
from office prior to the expiration of such director's term of office
except for cause. The vote was as follows:
FOR AGAINST ABSTAINED
--- ------- ---------
2,522,786 shares 316,302 shares 3,702 shares
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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,
Commission File No. 33-51212, 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, Commission File No. 33-51212, 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
Carolina: Incorporated by reference to Exhibit
4.1.4 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
3.1.5 Articles of Amendment filed on October 16, 1996 in
the office of the Secretary of State of South
Carolina: Incorporated by reference to Exhibit
3.1.5 of the Company's quarterly report on Form
10-Q for the fiscal quarter ended March 31, 1996.
3.2.1 By-Laws adopted April 10, 1990: Incorporated by
reference to Exhibit 3.2.1 to the Company's Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994:
Incorporated by reference to Exhibit 3.2.2 to the
Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 31,
1997.
3.2.3 Amendment to By-Laws dated January 19, 1999:
Incorporated by reference to Exhibit 3.2.3 to the
Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 19,
1999.
15
<PAGE>
4.1.1 Articles of Incorporation of the Registrant:
Included in Exhibits 3.1.1 -- .5
4.2 Bylaws of the Registrant: Included in Exhibits
3.2.1 -- .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
4.4 Palmetto Bancshares, Inc. 1998 Stock Compensation
Plan, as amended to date. Incorporated by reference
to the Company's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on
March 23, 1998.
27.1* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1999.
16
<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 Operating Officer
(Chief Accounting Officer)
Date: May 11, 1999
17
<PAGE>
EXHIBIT INDEX
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,
Commission File No. 33-51212, 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, Commission File No. 33-51212, 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
Carolina: Incorporated by reference to Exhibit
4.1.4 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.
3.1.5 Articles of Amendment filed on October 16, 1996 in
the office of the Secretary of State of South
Carolina: Incorporated by reference to Exhibit
3.1.5 of the Company's quarterly report on Form
10-Q for the fiscal quarter ended March 31, 1996.
3.2.1 By-Laws adopted April 10, 1990: Incorporated by
reference to Exhibit 3.2.1 to the Company's Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994:
Incorporated by reference to Exhibit 3.2.2 to the
Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 31,
1997
3.2.3 Amendment to By-Laws dated January 19, 1999:
Incorporated by reference to Exhibit 3.2.3 to the
Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 19,
1999
18
<PAGE>
4.1.1 Articles of Incorporation of the Registrant:
Included in Exhibits 3.1.1 -- .5
4.2 Bylaws of the Registrant: Included in Exhibits
3.2.1 -- .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
4.4 Palmetto Bancshares, Inc. 1998 Stock Compensation
Plan, as amended to date. Incorporated by reference
to the Company's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on
March 23, 1998
27.1* Financial Data Schedule
* Filed herewith.
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Palmetto
Bancshares, Inc. and subsidiary Consolidated Income Statements and Consolidated
Balance Sheets and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<DEPOSITS> 500,639
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<LIABILITIES-OTHER> 4,390
<LONG-TERM> 0
0
0
<COMMON> 15,518
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