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, 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.
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(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 9, 2000
----------------------------- -------------------------------
Common stock, $5.00 par value 6,240,034
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2000
INDEX Page No.
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PART I - FINANCIAL INFORMATION
- ------------------------------
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 1
Consolidated Income Statements for the Three Months
Ended March 31, 2000 and 1999 2
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for the Three Months Ended
March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2000 and 1999 4
Notes to Consolidated Interim Financial Statements 5 - 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 12
PART II - OTHER INFORMATION 13-14
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SIGNATURES 15
- ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, 2000 December 31, 1999
Assets (unaudited)
Cash and due from banks $ 34,743 $ 42,446
Federal funds sold 6,879 1,371
Federal Home Loan Bank stock, at cost 1,733 1,733
Investment securities available for sale (amortized cost of $109,916
and $110,670, in 2000 and 1999, respectively) 104,170 106,772
Loans held for sale 116 1,169
Loans 454,999 445,757
Less allowance for loan losses (6,166) (6,362)
--------------------------------
Loans, net 448,833 439,395
Premises and equipment, net 16,657 16,319
Accrued interest 4,328 4,648
Other assets 12,603 11,982
--------------------------------
Total assets $630,062 $625,835
================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 92,672 85,796
Interest-bearing 456,368 452,528
--------------------------------
Total deposits 549,040 538,324
Securities sold under agreements to repurchase 16,759 19,021
Commercial paper (Master notes) 14,981 12,573
Federal funds purchased - 7,800
Other liabilities 2,316 2,490
--------------------------------
Total liabilities 583,096 580,208
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
6,239,034 issued and outstanding in 2000; and
6,226,834 issued and outstanding in 1999 31,195 31,134
Capital surplus 15 -
Retained earnings 18,224 16,890
Accumulated other comprehensive loss (2,468) (2,397)
--------------------------------
Total shareholders' equity 46,966 45,627
--------------------------------
Total liabilities and shareholders' equity $630,062 $625,835
================================
See accompanying notes to consolidated interim financial statements.
1
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
For the three months ended March 31, 2000 and 1999
(Dollars in thousands, except per share data)
2000 1999
Interest income:
Interest and fees on loans $ 9,497 $ 8,943
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 224 240
State and municipal 810 813
Mortgage-backed securities 437 405
Interest on federal funds sold 79 28
Dividends on FHLB stock 34 31
--------------------
Total interest income 11,081 10,460
Interest expense:
Interest on deposits 4,187 3,669
Interest on securities sold under agreements to repurchase 231 158
Interest on federal funds purchased 36 64
Interest on commercial paper (Master notes) 147 105
--------------------
Total interest expense 4,601 3,996
--------------------
Net interest income 6,480 6,464
Provision for loan losses 525 491
Net interest income after provision for
loan losses 5,955 5,973
--------------------
Non-interest income:
Service charges on deposit accounts 1,016 880
Fees for trust services 532 394
Investment securities gains - 25
Other income 629 450
--------------------
Total non-interest income 2,177 1,749
Non-interest expense:
Salaries and other personnel 2,663 2,441
Net occupancy 488 432
Furniture and equipment 580 470
FDIC assessment 28 50
Postage and supplies 322 274
Marketing and advertising 186 236
Telephone 200 146
Cardholder processing expense 138 103
Other expense 889 843
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Total non-interest expense 5,494 4,995
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Income before income taxes 2,638 2,727
--------------------
Income tax provision 743 836
--------------------
Net income $1,895 $1,891
====================
Net income per share-basic $ 0.30 $ 0.30
Net income per share-dilutive $ 0.30 $ 0.30
Cash dividends declared per share $ 0.09 $ 0.07
See accompanying notes to consolidated interim financial statements.
2
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Unaudited)
For the three months ended March 31, 2000 and 1999
(Dollars in thousands)
Common
Accumulated Stock
Capital Other Subject to
Common Surplus Retained Comprehensive Put/Call
Stock (Deficit) Earnings Income (Loss), Net Option Total
--------------------------------------------------------------------
Balance at December 31, 1998 30,997 (19) 10,777 330 (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 7,844 shares in connection with stock options 39 13 52
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Balance at March 31, 1999 31,036 (6) 12,233 1,099 (4,732) 39,630
====================================================================
Balance at December 31, 1999 31,134 - 16,890 (2,397) - 45,627
Net income 1,895 1,895
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net
of tax effect of $44 (71)
Less: reclassification adjustment for gains included
in net income, net of tax effect of $0
Net unrealized losses on securities (71) -
-----
Comprehensive income 1,824
Cash dividend declared (561) (561)
Issuance of shares in connection with stock options 61 15 76
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Balance at March 31, 2000 31,195 15 18,224 (2,468) - 46,966
====================================================================
See accompanying notes to consolidated interim financial statements.
3
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2000 and 1999
(Dollars in thousands)
2000 1999
------------------
Cash flows from operating activities:
Net income $ 1,895 $ 1,891
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 579 625
Gain on sale of investment securities - (25)
Provision for loan losses 525 491
Origination of loans held for sale (993) (9,719)
Sale of loans held for sale 2,057 8,130
Gain on sale of loans (11) (54)
Change in accrued interest receivable 320 439
Change in other assets (775) (670)
Change in other liabilities, net (130) 756
---------------------
Net cash provided by operating activities 3,467 1,864
Cash flows from investing activities:
Purchase of investment securities available for sale - (5,234)
Proceeds from maturities of investment securities available for sale 1,014 9,780
Proceeds from sale of investment securities available for sale - 3,610
Principal paydowns on mortgage-backed securities available for sale 1,461 2,682
Purchase of Federal Home Loan Bank stock - (192)
Net increase in loans (9,963) (7,541)
Purchases of premises and equipment (751) (679)
---------------------
Net cash provided by (used in) investing activities (8,239) 2,426
Cash flows from financing activities:
Net increase in deposit accounts 10,716 930
Net decrease in securities sold under agreements to repurchase (2,262) (7,966)
Net increase in commercial paper 2,408 3,741
Net decrease in federal funds purchased (7,800) -
Proceeds from issuance of common stock 76 52
Dividends paid (561) (435)
---------------------
Net cash provided by (used in) financing activities 2,577 (3,678)
---------------------
Net increase (decrease) in cash and cash equivalents (2,195) 612
---------------------
Cash and cash equivalents at beginning of the period 43,817 28,039
---------------------
Cash and cash equivalents at end of the period $41,622 $28,651
=====================
Supplemental Information:
Cash paid during the period for:
Interest expense 4,541 4,076
---------------------
Income taxes 76 294
---------------------
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain (loss) on investment securities available
for sale, before tax (115) 1,250
---------------------
Transfer of investment securities held to maturity to available for sale - 66,455
---------------------
Loans transferred to other real estate owned - 249
---------------------
See accompanying notes to consolidated interim financial statements.
4
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 three-month periods ended
March 31, 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 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.
4. Stock Split
-----------
5
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
MARCH 31, 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 $4.8 million, or 3%, for the three-month period.
The decrease in liquid assets was attributable to the $7.7 million decrease in
cash and due from banks and the $2.6 million decrease in investment securities
available for sale, offset by the $5.5 million increase in federal funds sold.
The decrease in investment securities available for sale is attributed to $1.0
million in maturities and $1.5 million in principal paydowns.
Loans, net, increased by $9.4 million, or 2%, during the three-month period
as a result of normal growth. The Company decreased the allowance for loan
losses to 1.36% from 1.42% at March 31, 2000 and 1999, respectively. Management
feels the allowance is adequate at March 31, 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.
6
At March 31, 2000, the Company had $116,000 in loans held for sale with
commitments to sell these loans in April and May 2000. The mortgage servicing
rights related to the mortgage servicing department's activities were $1.1
million at March 31, 2000, which approximates their fair value. Loans serviced
for the benefit of others amounted to $139.5 million at March 31, 2000.
Other assets increased by $621,000, or 5%, due to normal growth offset by
the amortization of intangibles and various prepaids.
Liabilities and Shareholders' Equity
- ------------------------------------
Deposit balances increased by 2% during the three-month period, from $538.3
million to $549.0 million due to normal growth.
Securities sold under agreements to repurchase decreased by $2.3 million,
or 12%, and commercial paper associated with the alternative commercial sweep
accounts (master note program) increased by $2.4 million, or 19%. These changes
are the result of normal fluctuations in the accounts.
Total shareholders' equity increased by $1.3 million, or 3%, for the
three-month period as a result of comprehensive income of $1.8 million, less
dividends paid of $561,000.
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, 2000, the Company's liquidity ratio was
15%.
At March 31, 2000, the Bank has unused short-term lines of credit totaling
approximately $35 million (which are withdrawable at the lender's option). At
March 31, 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 $0.09 per share in dividends so far in
2000. There can be no guarantee, however, that any additional dividends will be
paid. Liquidity is provided from the Company's subsidiary, the Bank. The 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 10.72%. At March 31, 2000, the Bank had $3.4 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 March 31, 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:
7
- ----------------------------- -------------- --------------- -------------------
ADEQUATELY
AS OF CAPITALIZED WELL-CAPITALIZED
3/31/00 REQUIREMENT REQUIREMENT
- ----------------------------- -------------- --------------- -------------------
Company:
- -------
Total Risk-based Capital 10.78% 8.00% 10.00%
Tier 1 Risk-based Capital 9.53 4.00 6.00
Tier 1 Leverage Ratio 7.27 4.00 5.00
Bank:
- ----
Total Risk-based Capital 10.72 8.00 10.00
Tier 1 Risk-based Capital 9.47 4.00 6.00
Tier 1 Leverage Ratio 7.23 4.00 5.00
- ----------------------------- -------------- --------------- -------------------
Because the Bank's total risk-based capital ratio is 10.72%, 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.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND 1999
Net income for the three months ended March 31, 2000 and 1999 was
$1,895,000 and $1,891,000, respectively. Net income per common share-basic was
$0.30 for both periods. Net income per common share-dilutive was $0.30 for both
periods.
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, 2000 and 1999, net interest
income was $6,480,000 and
8
$6,464,000, respectively. This 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 $560.0 million and
$532.8 million during the first 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 4.86%, compared to 5.14% for the
same period in 1999.
Interest and fees on loans increased 6%, from $8.9 million to $9.5 million,
for the 2000 three-month period compared to the corresponding period in 1999 due
to increased volume offset by a slight decrease in average loan rates from 8.54%
at March 31, 1999 to 8.44% at March 31, 2000. Interest on investment securities
remained constant for the 2000 three-month period compared to the corresponding
period in 1999 due to decreased volume offset by an increase in the average rate
from 6.83% at March 31, 1999 to 6.91% at March 31, 2000. Interest income on
federal funds sold increased $51,000 due to increased 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, remained constant at 7.96% for the three months ended March 31, 2000
and 1999.
Total interest expense increased by 15%, from $4.0 million to $4.6 million,
due to an increase in the average cost of interest-bearing liabilities from
3.60% for the quarter ended March 30, 1999 to 3.85% for the quarter ended March
31, 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 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.
9
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.
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $525,000 from $491,000 for the
three months ended March 31, 2000 and 1999, respectively, due to loan growth.
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 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 $2,147,000 and $1,292,000 at March
31, 2000 and 1999, respectively. The annualized net charge-off ratio has
increased from 0.31% at March 31, 1999 to 0.65% at March 31, 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 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.
10
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 $428,000, or 24%, for the three
months ended March 31, 2000, as compared to the same period in 1999. The largest
portion of this increase can be attributed to other income, which increased by
$179,000, or 40%, during the 2000 period compared to the same period in 1999 due
primarily to an increase in mortgage servicing fee income of $117,000 as a
result of a partial reduction of the valuation allowance due to the increasing
rate environment. Also included in other income is brokerage commissions, which
increased $31,000 due to new business.
Another contributor to the increase is fees for trust services, which
increased by $138,000 or 35% due to a new fee structure, new business and
increased assets under management. At March 31, 2000, assets under management
amounted to $212.4 million compared to $194.0 million at March 30, 1999, a 10%
increase.
Non-interest Expense
- --------------------
Total non-interest expense increased by $499,000, or 10%, during the 2000
three-month period compared to the same period in 1999. The largest contributor
to this increase was salaries and other personnel expense, which increased
$222,000 or 9% due to normal raises, and new employees related to growth. The
number of full-time equivalent employees was 336 and 312 at March 31, 2000 and
1999, respectively.
The second biggest contributor to this increase was furniture and
equipment expense, which increased $110,000, or 23%, due to a $47,000 increase
in depreciation related to furniture acquired in the past year, a $50,000
increase in lease and rentals due to new item processing and sorter equipment
being leased, and an $8,000 increase in maintenance contracts due to maintenance
on this new equipment.
Income Taxes
- ------------
The Company incurred income tax expense of $743,000 for the 2000
three-month period compared to $836,000 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 28% for the quarter-ended March 31, 2000.
The effective tax rate for the same period in 1999 was 31% 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 March 31, 2000 and 1999
11
(dollars in thousands except per share numbers):
Income Shares Per-Share
2000 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
Net income $1,895 6,233,019 $0.30
--------------------------------------------
Effect of dilutive securities: stock options -- 179,645 --
Diluted EPS:
Net income plus assumed exercises of stock options $1,895 6,412,664 $0.30
============================================
Income Shares Per-Share
1999 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
Net income $1,891 6,204,702 $0.30
--------------------------------------------
Effect of dilutive securities: stock options -- 173,837 --
Diluted EPS:
Net income plus assumed exercises of stock options $1,891 6,378,539 $0.30
============================================
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 our customers.
12
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
----------- -----------
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
13
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
* Filed herewith.
(b) Reports on Form 8-K
The Company did file a Form 8-K during the three months ended March 31,
2000 to announce its two-for-one stock split effected in the form of a 100%
stock dividend.
14
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 9, 2000
____________________________
15
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 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
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
16
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.