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 SEPTEMBER 30, 2000
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
--------------------------------------------
(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 November 8, 2000
----------------------------- -------------------------------
Common stock, $5.00 par value 6,247,034
<PAGE>
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter and Nine Months Ended September 30, 2000
INDEX Page No.
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PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 1
Consolidated Income Statements for the Three Months
Ended September 30, 2000 and 1999 2
Consolidated Income Statements for the Nine Months
Ended September 30, 2000 and 1999 3
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for the Nine Months Ended September 30, 4
2000 and 1999
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Interim Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 16
PART II - OTHER INFORMATION 17-18
---------------------------
SIGNATURES 19
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<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------------------------
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $ 30,484 $ 42,446
Federal funds sold - 1,371
Federal Home Loan Bank stock, at cost 1,733 1,733
Investment securities available for sale (amortized cost of $112,903
and $110,670, in 2000 and 1999, respectively) 110,743 106,772
Loans held for sale 693 1,169
Loans 484,909 445,757
Less allowance for loan losses (5,663) (6,362)
--------------------------------
Loans, net 479,246 439,395
Premises and equipment, net 16,608 16,319
Accrued interest 4,995 4,648
Other assets 11,535 11,982
--------------------------------
Total assets $ 656,037 $ 625,835
================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 92,655 85,796
Interest-bearing 464,650 452,528
--------------------------------
Total deposits 557,305 538,324
Securities sold under agreements to repurchase 27,081 19,021
Commercial paper (Master notes) 16,908 12,573
Federal funds purchased 1,800 7,800
Other liabilities 2,570 2,490
--------------------------------
Total liabilities 605,664 580,208
--------------------------------
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
6,247,034 issued and outstanding in 2000; and
6,226,834 issued and outstanding in 1999 31,235 31,134
Capital surplus 22 -
Retained earnings 20,444 16,890
Accumulated other comprehensive loss (1,328) (2,397)
--------------------------------
Total shareholders' equity 50,373 45,627
--------------------------------
Total liabilities and shareholders' equity $ 656,037 $ 625,835
================================
See accompanying notes to consolidated interim financial statements.
</TABLE>
1
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
For the three months ended September 30, 2000 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
-------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 10,334 $ 9,282
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 391 261
State and municipal 789 882
Mortgage-backed securities 398 398
Interest on federal funds sold 30 120
Dividends on FHLB stock 35 36
----------------------
Total interest income 11,977 10,979
----------------------
Interest expense:
Interest on deposits 4,623 3,807
Interest on securities sold under agreements to repurchase 292 153
Interest on federal funds purchased 228 20
Interest on commercial paper (Master notes) 218 150
----------------------
Total interest expense 5,361 4,130
----------------------
Net interest income 6,616 6,849
Provision for loan losses 800 741
----------------------
Net interest income after provision for
loan losses 5,816 6,108
Non-interest income:
Service charges on deposit accounts 1,244 1,004
Fees for trust services 386 622
Investment securities gains 3 -
Other income 681 566
----------------------
Total non-interest income 2,314 2,192
Non-interest expense:
Salaries and other personnel 2,691 2,609
Net occupancy 511 523
Furniture and equipment 551 531
FDIC assessment 28 15
Postage and supplies 270 253
Marketing and advertising 134 130
Telephone 194 210
Cardholder processing expense 158 132
Other expense 1,182 903
----------------------
Total non-interest expense 5,719 5,306
----------------------
Income before income taxes 2,411 2,994
----------------------
Income tax provision 608 897
----------------------
Net income $ 1,803 $ 2,097
=========================
Net income per share-basic $ 0.29 $ 0.34
Net income per share-dilutive $ 0.28 $ 0.33
Cash dividends declared per share $ 0.09 $ 0.08
See accompanying notes to consolidated interim financial statements.
</TABLE>
2
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
For the nine months ended September 30, 2000 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 29,719 $ 27,308
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 1,001 701
State and municipal 2,392 2,551
Mortgage-backed securities 1,255 1,161
Interest on federal funds sold 164 224
Dividends on FHLB stock 104 101
----------------------
Total interest income 34,635 32,046
----------------------
Interest expense:
Interest on deposits 12,994 11,159
Interest on securities sold under agreements to repurchase 750 427
Interest on federal funds purchased 442 100
Interest on commercial paper (Master notes) 567 369
----------------------
Total interest expense 14,753 12,055
----------------------
Net interest income 19,882 19,991
Provision for loan losses 2,935 1,772
----------------------
Net interest income after provision for
loan losses 16,947 18,219
Non-interest income:
Service charges on deposit accounts 3,392 2,830
Fees for trust services 1,495 1,450
Investment securities gains 3 30
Other income 2,008 1,608
----------------------
Total non-interest income 6,898 5,918
Non-interest expense:
Salaries and other personnel 8,020 7,495
Net occupancy 1,478 1,407
Furniture and equipment 1,665 1,519
FDIC assessment 84 117
Postage and supplies 864 810
Marketing and advertising 540 545
Telephone 577 588
Cardholder processing expense 416 363
Other expense 3,006 2,660
----------------------
Total non-interest expense 16,650 15,504
----------------------
Income before income taxes 7,195 8,633
----------------------
Income tax provision 1,956 2,629
----------------------
Net income $ 5,239 $ 6,004
=======================
Net income per share-basic $ 0.84 $ 0.97
Net income per share-dilutive $ 0.82 $ 0.94
Cash dividends declared per share $ 0.27 $ 0.23
See accompanying notes to consolidated interim financial statements.
</TABLE>
3
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income (Unaudited)
For the nine months ended September 30, 2000 and 1999
(Dollars in thousands except number of shares)
<TABLE>
<CAPTION>
Common
Accumulated Stock
Capital Other Subject to
Common Surplus Retained Comprehensive Put/Call
Stock (Deficit) Earnings Loss, Net Option Total
-------- --------- ---------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 30,997 (19) 10,777 330 (4,732) 37,353
Net income 6,004 6,004
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net
of tax effect of $1,301 (2,078)
Less: reclassification adjustment for gains included
in net income, net of tax effect of $12 (18)
Net unrealized losses on securities (2,096)
------------
Comprehensive income 3,908
------------
Cash dividend declared (1,398) (1,398)
Issuance of 8,844 shares in connection with stock options 44 17 61
Expiration of put/call option on common stock subject to put/call 4,732 4,732
------------------------------------------------------------------
Balance at September 30, 1999 31,041 (2) 15,383 (1,766) - 44,656
==================================================================
Balance at December 31, 1999 31,134 - 16,890 (2,397) - 45,627
Net income 5,239 5,239
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $670 1,071
Less: reclassification adjustment for gains included
in net income, net of tax effect of $1 (2)
Net unrealized gains on securities 1,069
------------
Comprehensive income 6,308
------------
Cash dividend declared (1,685) (1,685)
Issuance of 20,200 shares in connection with stock options 101 22 123
------------------------------------------------------------------
Balance at September 30, 2000 31,235 22 20,444 (1,328) - 50,373
==================================================================
See accompanying notes to consolidated interim financial statements.
</TABLE>
4
<PAGE>
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,239 $ 6,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,690 1,925
Gain on sale of investment securities (3) (30)
Provision for loan losses 2,935 1,772
Origination of loans held for sale (3,712) (24,658)
Sale of loans held for sale 4,242 25,713
Gain on sale of loans (54) (206)
Change in accrued interest receivable (347) (52)
Change in other assets (652) (2,012)
Change in other liabilities, net 80 691
----------------------
Net cash provided by operating activities 9,418 9,147
Cash flows from investing activities:
Purchase of investment securities available for sale (10,000) (40,244)
Proceeds from maturities of investment securities available for sale 1,854 11,865
Proceeds from sale of investment securities available for sale 2,065 10,186
Principal paydowns on mortgage-backed securities available for sale 3,815 6,020
Purchase of Federal Home Loan Bank stock - (192)
Net increase in loans (42,792) (26,979)
Purchases of premises and equipment, net (1,507) (2,526)
----------------------
Net cash used in investing activities (46,565) (41,870)
Cash flows from financing activities:
Net increase in deposit accounts 18,981 19,184
Acquisition of deposits, net - 12,636
Net increase (decrease) in securities sold under agreements
to repurchase 8,060 (4,876)
Net increase in commercial paper 4,335 5,948
Net increase (decrease) in federal funds purchased (6,000) 9,100
Proceeds from issuance of common stock 123 61
Dividends paid (1,685) (1,398)
----------------------
Net cash provided by financing activities 23,814 40,655
----------------------
Net increase (decrease) in cash and cash equivalents (13,333) 7,932
----------------------
Cash and cash equivalents at beginning of the period 43,817 28,039
----------------------
Cash and cash equivalents at end of the period $ 30,484 $ 35,971
======================
Supplemental Information:
Cash paid during the period for:
Interest expense $ 14,637 $ 12,101
======================
Income taxes 1,514 2,544
======================
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain (loss) on investment securities available for sale,
before tax 1,738 (3,409)
======================
Transfer of investment securities held to maturity to available for sale - 66,455
======================
Loans transferred to other real estate owned 6 335
======================
See accompanying notes to consolidated interim financial statements.
</TABLE>
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, 1999.
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 and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the entire year.
Certain amounts from 1999 have been reclassified to conform to the 2000
presentation. These reclassifications have no effect on shareholders' equity or
on net income as previously reported.
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 Policies
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, 2000, with earlier
adoption permitted, as amended by SFAS No. 137. SFAS 138 amends SFAS 133 to
address a limited number of issues causing implementation difficulties. 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>
4. Stock Split
On December 14, 1999, the Board of Directors approved a two-for-one stock
split effected in the form of a 100% stock dividend to shareholders of record as
of January 3, 2000. All number of common shares outstanding and per share
amounts contained in this report have been retroactively restated to give effect
to the stock split.
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1999 TO
SEPTEMBER 30, 2000
Forward-Looking Statements
This document may contain certain "forward-looking statements," within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and deposit decline rates, the
timing and amount of revenues that may be recognized by the Company,
continuation of current revenue, expense and charge-off trends, legal and
regulatory changes, and general changes in the economy. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected or projected.
These forward-looking statements speak only as of the date of the document. The
Company assumes no obligation to update any forward-looking statements. Because
of the risks and uncertainties inherent in forward-looking statements, readers
are cautioned not to place undue reliance on them.
Assets
Liquid assets, which include cash, federal funds sold, and investments
available for sale decreased by $9.4 million, or 6%, for the nine-month period.
The decrease in liquid assets was attributable to the $12.0 million decrease in
cash and due from banks and the $1.4 million decrease in federal funds sold. The
decrease in cash and due from banks is due to steady run-off of the excess cash
built up at the branches for anticipated Y2K needs at December 31, 1999. The
current amount of cash and due from banks is at a normal level. These decreases
were offset in part by the $4.0 million increase in investment securities
available for sale. The increase in investment securities available for sale is
attributed to $10.0 million in purchases and $1.7 million in unrealized gains,
offset by $1.9 million in maturities, $2.0 million in proceeds from sales, and
$3.8 million in principal paydowns.
7
<PAGE>
Loans, net, increased by $39.9 million, or 9%, during the nine-month period
as a result of normal growth. The allowance for loan losses decreased to 1.17%
from 1.45% at September 30, 2000 and 1999, respectively. Management feels the
allowance is adequate at September 30, 2000 due to the fact that over the last
12 to 18 months the Bank has been charging off significant amounts of lower
quality loans, improving its underwriting standards, and shifting its emphasis
toward higher-dollar, higher-quality loans.
At September 30, 2000, the Company had $693,000 in loans held for sale with
commitments to sell these loans in October and November 2000. The mortgage
servicing rights related to the mortgage servicing department's activities were
$1.1 million at September 30, 2000, which approximates their fair value. Loans
serviced for the benefit of others amounted to $135.8 million at September 30,
2000.
Other assets decreased by $447,000, or 4%, primarily due to a decrease in
the deferred tax benefit related to the unrealized loss on the investment
securities available for sale and a decrease in intangible assets because of
normal amortization offset by an increase in repossessed autos related to the
sales finance area as discussed below.
Liabilities and Shareholders' Equity
Deposit balances increased by 4% during the nine-month period, from $538.3
million to $557.3 million, due to normal growth.
Securities sold under agreements to repurchase increased by $8.0 million,
or 42%, and commercial paper associated with the alternative commercial sweep
accounts (master note program) increased by $4.3 million, or 34%. These changes
are the result of normal fluctuations in the accounts.
Total shareholders' equity increased by $4.7 million, or 10%, for the
nine-month period as a result of comprehensive income of $6.3 million, less
dividends paid of $1.7 million. The Company also added $123,000 to equity
through the issuance of common stock as the result of the exercising of stock
options.
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 10% and 25%. At September 30, 2000, the Company's liquidity ratio
was 12.45%.
At September 30, 2000, the Bank has unused short-term lines of credit
totaling approximately $35.2 million (which are withdrawable at the lender's
option). At September 30, 2000, unused borrowing capacity from the FHLB totaled
$48 million. Management believes that these sources are adequate to meet its
liquidity needs and to maintain the liquidity ratio within policy guidelines.
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 and paid $0.27 per share in dividends
so far in 2000. There can be no guarantee that any additional dividends will be
paid in 2000. Liquidity is provided from the Company's subsidiary, the Bank. The
8
<PAGE>
Company and the Bank are subject to certain regulatory restrictions on the
amount of dividends they are permitted to pay. The Bank's current total
risk-based capital ratio is 10.68%. At September 30, 2000, the Bank had $3.6
million of excess retained earnings available to pay out for dividends and still
be considered "well-capitalized." The Bank plans to continue its quarterly
dividend payments.
Capital Resources
As of September 30, 2000, 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
9/30/00 Requirement Requirement
----------------------------------------- -------------- --------------------------- ----------------------
<S> <C> <C> <C>
Company:
-------
Total Risk-based Capital 10.75% 8.00% 10.00%
Tier 1 Risk-based Capital 9.59 4.00 6.00
Tier 1 Leverage Ratio 7.30 4.00 5.00
Bank:
----
Total Risk-based Capital 10.68 8.00 10.00
Tier 1 Risk-based Capital 9.52 4.00 6.00
Tier 1 Leverage Ratio 7.25 4.00 5.00
----------------------------------------- -------------- --------------------------- ----------------------
</TABLE>
Accounting and Reporting Matters
In September 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125". This statement will
become effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitizations and collateral for fiscal years ending
after December 15, 2000. In addition to replacing SFAS No. 125, this statement
will rescind SFAS No. 127 "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it will carry over most of the provisions of
Statement 125 without reconsideration. The Company anticipates that adoption of
the standard will not have a material effect on the Company.
9
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
Net income for the three months ended September 30, 2000 and 1999 was
$1.8 million and $2.1 million, respectively. Net income per common share-basic
for the three months ended September 30, 2000 and 1999 was $0.29 and $0.34,
respectively. Net income per common share-dilutive for the same periods was for
$0.28 and $0.33, respectively.
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 September 30, 2000 and 1999, net interest
income was $6.6 million and $6.8 million, respectively. This relatively static
net interest income was the result of increases in the volume of earning assets
offset by a decrease in the average tax-equivalent net interest margin. Earning
assets averaged $594.2 million and $556.9 million during the third quarters of
2000 and 1999, respectively. The increases in volume were due to the growth of
loans. The average tax-equivalent net interest margin for the 2000 period was
4.68%, compared to 5.03% for the same period in 1999.
Interest and fees on loans increased 11%, from $9.3 million to $10.3
million, for the 2000 three-month period compared to the corresponding period in
1999 due to increased volume and an increase in the average loan rate from 8.50%
to 8.59% for the three month period ended September 30, 1999 and 2000,
respectively. Interest on investment securities increased $37,000 for the 2000
three-month period compared to the corresponding period in 1999 due to increased
rates. Interest income on federal funds sold decreased $90,000 due to a decrease
in 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,
federal funds sold and investment securities, increased from 7.82% to 8.02% for
the three months ended September 30, 1999 and 2000, respectively.
Total interest expense increased by 30%, from $4.1 million to $5.4 million,
due to an increase in the average cost of interest-bearing liabilities from
3.47% for the quarter ended September 30, 1999 to 4.34% for the quarter ended
September 30, 2000.
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, borrowing and investing activities. Management
actively monitors and manages its inherent rate risk exposure. Although the
Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be its
most significant market risk. This risk could potentially have the largest
material effect on the Company's financial condition and results of
10
<PAGE>
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 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 rate sensitive assets are those repricing within one year and those
maturing within one year. Rate sensitive liabilities include insured money
market accounts, savings accounts, interest-bearing transaction accounts, time
deposits and borrowings. The profitability of the Company is influenced
significantly by management's ability to manage the relationship between rate
sensitive assets and liabilities.
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.
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 change 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 significantly since December 31, 1999.
11
<PAGE>
Provision for Loan Losses
The provision for loan losses increased to $800,000 from $741,000 for the
three months ended September 30, 2000 and 1999, respectively, due to loan growth
and charges against the allowance for loan losses primarily due to the increased
repossessed assets related to the sales finance area. The provision is adjusted
each month to reflect loan volume growth and allow for loan charge-offs,
recoveries and other factors which impact management's assessment of the
adequacy of the allowance for loan losses. Management's objective is to maintain
the allowance for loan losses at an adequate level to cover probable 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 $3.2 million and $1.9 million at
September 30, 2000 and 1999, respectively. The annualized net charge-off ratio
has increased from 0.38% at September 30, 1999 to 1.05% at September 30, 2000.
The increase in net charge-offs can be attributed to the sales finance area of
the Bank. During 1999 and 2000, the Bank redirected its emphasis on
indirect-lending in the sales finance area to purchasing higher-quality indirect
loans and reducing the number of lower-quality loans in the portfolio.
Activities associated with this process, as management expected, contributed to
the increase of charge-offs as these lower-quality loans were eliminated.
Management believes it has taken these lower quality loans into consideration in
estimating the level of the allowance for loan losses, nevertheless, charge-offs
are expected to remain high until this process is complete.
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 $122,000, or 6%, for the three
months ended September 30, 2000, as compared to the same period in 1999. The
largest portion of this increase, $240,000 or 24%, can be attributed to service
charges on customer deposit accounts and the increased collection of
insufficient funds charges associated with debit card transactions during the
2000 period compared to the same period in 1999. Other income increased $115,000
or 20% during the 2000 period compared to the same period in 1999 due primarily
to an increase in mortgage servicing fee income of $71,000 as a result of a
partial reduction of the valuation allowance due to the increased rates since
last year.
The increase in income from the above fees was offset by a decrease in
fees for trust services of $236,000 or 38%. At September 30, 2000, trust assets
under management amounted to $210.2 million.
12
<PAGE>
Non-interest Expense
Total non-interest expense increased by $413,000, or 8%, during the 2000
three-month period compared to the same period in 1999. The largest contributor
to this increase was other expense, which increased $279,000 or 31%. This
increase is largely due to losses on sales of repossessed autos and the
collection expense associated with those sales in conjunction with the refocused
emphasis on indirect-lending in the sales finance area as discussed above in the
"Provision for Loan Losses" section.
The second biggest contributor to this increase was salaries and other
personnel expense, which increased $82,000, or 3%, due to normal raises.
Income Taxes
The Company incurred income tax expense of $608,000 for the 2000
three-month period compared to $897,000 for the same period in 1999 due to an
expected decrease in taxable income. This expense is based on an expected annual
effective tax rate of approximately 27%. The effective tax rate for the same
period in 1999 was 30% and the effective tax rate for the year ended December
31, 1999 was 27.4%
Net Income Per Share
The following table illustrates a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net income for
the three-months ended September 30, 2000 and 1999 (dollars in thousands except
per share numbers):
<TABLE>
<CAPTION>
Income Shares Per-Share
2000 (Numerator) (Denominator) Amount
---- ---------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net income $1,803 6,244,686 $0.29
--------------------------------------------
Effect of dilutive securities: stock options -- 183,903 --
Diluted EPS:
Net income plus assumed exercises of stock options $1,803 6,428,589 $0.28
=============================================
Income Shares Per-Share
1999 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
Net income $2,097 6,208,234 $0.34
--------------------------------------------
Effect of dilutive securities: stock options -- 176,924 --
Diluted EPS:
Net income plus assumed exercises of stock options $2,097 6,396,120 $0.33
============================================
</TABLE>
13
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
Net income for the nine months ended September 30, 2000 and 1999 was $5.2
million and $6.0 million, respectively. Net income per common share-basic for
the nine months ended September 30, 2000 and 1999 was $0.84 and $0.97,
respectively. Net income per common share-dilutive for the same periods was
$0.82 and $0.94, respectively.
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 nine-month period ended September 30, 2000 and 1999, net interest
income was $19.9 million and $20.0 million, respectively. This relatively static
net interest income was the result of increases in the volume of earning assets
offset by a decrease in the average tax-equivalent net interest margin. Earning
assets averaged $578.2 million and $544.7 million during the nine months ended
September 30, 2000 and 1999, respectively. The increases in volume were due to
the growth of loans. The average tax-equivalent net interest margin for the 2000
period was 4.79%, compared to 5.13% for the same period in 1999.
Interest and fees on loans increased 9%, from $27.3 million to $29.7
million, for the 2000 nine-month period compared to the corresponding period in
1999 due to increased volume and a slight increase in the average loan rate from
8.55% to 8.57% for the 1999 and 2000 nine-month periods, respectively. Interest
on investment securities increased $235,000 for the 2000 nine-month period
compared to the corresponding period in 1999 due to increased rates. Interest
income on federal funds sold decreased $60,000 due to a decrease in the average
rate received and a slight decrease in the volume of federal funds sold for the
nine months compared to the same period last year. The yield on average earning
assets, which includes loans, federal funds sold and investment securities,
increased from 7.87% to 8.00% for the nine months ended September 30, 1999 and
2000, respectively.
Total interest expense increased by 22%, from $12.1 million to $14.8
million, due to increased volume and an increase in the average cost of
interest-bearing liabilities from 3.51% for the nine months ended September 30,
1999 to 4.05% for the nine months ended September 30, 2000.
Provision for Loan Losses
The provision for loan losses increased to $2.9 million from $1.8 million for
the nine months ended September 30, 2000 and 1999, respectively, due to loan
growth and charges against the allowance for loan losses primarily due to the
increased repossessed assets related to the sales finance area. The provision is
adjusted each month to reflect loan volume growth and allow for loan
charge-offs, recoveries and other factors which impact management's assessment
of the adequacy of the allowance for loan losses. Management's objective is to
maintain the allowance for loan losses at an adequate level to cover probable
losses in the portfolio. Additions to the allowance for loan losses are based on
management's evaluation
14
<PAGE>
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.
Non-interest Income
Total non-interest income increased by $980,000, or 17%, for the nine
months ended September 30, 2000, as compared to the same period in 1999. The
largest portion of this increase can be attributed to service charges on deposit
accounts, which increased by $562,000, or 20%, during the 2000 period compared
to the same period in 1999 due primarily to the increased collection of
insufficient funds charged on debit card transactions. Other income increased
$400,000 or 25% during the 2000 period compared to the same period in 1999 due
primarily to an increase in the mortgage servicing fee income of $299,000 as a
result of a partial reduction of the valuation allowance due to the increasing
rate environment.
Another contributor to the increase is fees for trust services, which
increased by $45,000 or 3% due to new business. Trust assets under management
amounted to $210.2 million at September 30, 2000.
Non-interest Expense
Total non-interest expense increased by $1.1 million, or 7%, during the
2000 nine-month period compared to the same period in 1999. The largest
contributor to this increase was salaries and other personnel expense, which
increased $525,000 or 7% due to normal raises, and new employees related to
growth. The number of full-time equivalent employees was 336 and 322 at
September 30, 2000 and 1999, respectively.
The second biggest contributor to this increase was other expense, which
increased $346,000, or 13%, due primarily to the $150,000 of expense related to
the loss on sale of repossessed autos and the $129,000 of collection expense
associated with those sales as previously discussed.
Income Taxes
The Company incurred income tax expense of $2.0 million for the 2000
nine-month period compared to $2.6 million for the same period in 1999 due to an
expected decrease in taxable income. This expense is based on an expected annual
effective tax rate of approximately 27%. The effective tax rate for the same
period in 1999 was 30% and the effective tax rate for the year ended December
31, 1999 was 27.4%
Net Income Per Share
The table on the following page illustrates a reconciliation of the numerators
and denominators of the basic and diluted per-share computations for net income
for the nine-months ended September 30, 2000 and 1999 (dollars in thousands
except per share numbers):
15
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per-Share
2000 (Numerator) (Denominator) Amount
---- ---------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net income $5,239 6,239,438 $0.84
--------------------------------------------
Effect of dilutive securities: stock options -- 181,498 --
Diluted EPS:
Net income plus assumed exercises of stock options $5,239 6,420,936 $0.82
============================================
Income Shares Per-Share
1999 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
Net income $6,004 6,207,022 $0.97
--------------------------------------------
Effect of dilutive securities: stock options -- 177,444 --
Diluted EPS:
Net income plus assumed exercises of stock options $6,004 6,384,466 $0.94
============================================
</TABLE>
INDUSTRY DEVELOPMENTS
In November 1999, the Gramm-Leach-Bliley Act was signed into law. This bill
provides The Palmetto Bank and the banking industry new opportunities to compete
at the local, national and international levels, allowing financial institutions
to better serve their customers' needs. The Act greatly expands the powers of
banks and bank holding companies to sell financial products and services,
including securities, insurance and financial planning and investment advice;
fully closes the so-called "unitary thrift holding company loophole," which
currently permits commercial companies to own and operate thrifts; reforms the
Federal Home Loan Bank System to significantly increase community banks' access
to loan funding; and protects banks from discriminatory state insurance
regulation. The bill also restricts financial institutions' ability to share
nonpublic personal customer information with third parties. Management is
pleased with the passage of this bill as it opens up avenues for the Bank to
offer new financial products and services to its customers
16
<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:
Exhibit No. Description
<TABLE>
<CAPTION>
<S> <C>
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 30, 1996.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.1.6 Articles of Amendment filed on May 17, 1999 in the office of the Secretary of State of South
Carolina: Incorporated by reference to Exhibit 3.1.6 of the Company's quarterly report on Form
10-Q for the fiscal quarter ended June 30, 1999.
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 30, 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
30, 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.
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. 1997 Stock Compensation Plan, as amended to date.
Incorporated by reference to the Company's 1997 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on
March 23, 1998.
27.1* Financial Data Schedule
</TABLE>
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file a Form 8-K during the three months ended
September 30, 2000.
18
<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: November 14, 2000
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
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 30, 1996.
3.1.6 Articles of Amendment filed on May 17, 1999 in the office of the Secretary of State of South Carolina:
Incorporated by reference to Exhibit 3.1.6 of the Company's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1999.
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 30, 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 30, 1997
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.2.3 Amendment to By-Laws dated January 19, 2000: 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
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. 1997 Stock Compensation Plan, as amended to date. Incorporated by reference
to the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 23, 1998
27.1* Financial Data Schedule
* Filed herewith.
</TABLE>
21
