FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 33-19367 PALMETTO BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) South Carolina 74-2235055 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 101 West Main Street Laurens, South Carolina 29360 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (803) 984-4551 -------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 11, 1995 ----------------------------- ------------------------------- Common stock, $5.00 par value 1,005,184 PALMETTO BANCSHARES, INC. Quarterly Report on Form 10-Q For Quarter Ended June 30, 1995 INDEX Page No. PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition at June 30, 1995 and December 31, 1994 1 Consolidated Statements of Operations for the Three Months Ended June 30, 1995 and 1994 2 Consolidated Statements of Operations for the Six Months Ended June 30, 1995 and 1994 3 Consolidated Statements of Cash Flows for the Six Months Ended June, 1995 and 1994 4 Notes to Consolidated Interim Financial Statements 5 - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 16 PART II - OTHER INFORMATION 17 SIGNATURES 18 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition June 30, December 31, 1995 1994 ------------- ------------- Assets (unaudited) Cash and due from banks $ 22,558,616 18,377,297 Federal funds sold 4,702,776 3,218,599 Investments held to maturity(market values of $59,208,254 58,252,275 54,704,675 and $53,906,564 in 1995 and 1994, respectively) Investments available for sale, at market 15,889,705 9,204,219 Loans 230,323,321 215,408,319 Less allowance for loan losses (3,154,100) (3,016,464) ------------- ------------- Loans, net 227,169,221 212,391,855 Premises and equipment, net 10,230,190 9,599,864 Goodwill 1,102,232 1,132,890 Other assets 3,438,420 3,513,164 ------------- ------------- Total assets $ 343,343,435 312,142,563 ============= ============= Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest-bearing 46,978,643 46,307,878 Interest-bearing 250,613,399 228,218,905 ------------- ------------- Total deposits 297,592,042 274,526,783 Securities sold under agreements to repurchase 10,074,174 5,251,901 Commercial paper 8,323,000 6,914,000 Note payable to a bank 0 478,959 Other liabilities 1,395,075 757,729 ------------- ------------- Total liabilities 317,384,291 287,929,372 Shareholders' Equity: Common stock-$5.00 par value. Authorized 2,000,000 shares; issued 1,010,884; outstanding 1,005,184 in 1995; issued 1,008,384; outstanding 1,003,884 in 1994 5,054,420 5,050,920 Surplus 10,442,083 10,433,133 Retained earnings 10,385,011 9,067,365 Treasury Stock, 5,700 shares (176,700) (176,700) Net unrealized gain/(loss) on investments available for sale 254,330 (161,527) ------------- ------------- Total shareholders' equity 25,959,144 24,213,191 ------------- ------------- Total liabilities and shareholders' equity $ 343,343,435 312,142,563 ============= ============= See accompanying notes to consolidated financial statements 1 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Three Months Ended June 30, 1995 and 1994 (Unaudited) 1995 1994 ----------- ----------- Interest income: Interest and fees on loans 5,151,392 4,217,560 Interest and dividends on investment securities: U.S. Treasury and U.S. Government agencies 658,193 617,378 State and municipal 366,411 333,102 Interest on federal funds sold 168,999 42,142 ----------- ----------- Total interest income 6,344,995 5,210,182 Interest expense: Interest on deposits 2,415,171 1,635,681 Interest on securities sold under agreements to repurchase 117,604 55,934 Interest on commercial paper 82,791 31,909 Interest on note payable to a bank 4,065 10,169 ----------- ----------- Total interest expense 2,619,631 1,733,693 ----------- ----------- Net interest income 3,725,364 3,476,489 Provision for loan losses 195,000 270,000 Net interest income after provision for -- -- loan losses 3,530,364 3,206,489 Non-interest income: Service charges on deposit accounts 599,607 578,354 Fees for trust services 181,389 146,384 Loss on sale of investments available for sale (552) -- Other income 286,924 316,888 ----------- ----------- Total non-interest income 1,067,368 1,041,626 Non-interest expenses: Salaries and other personnel expense 1,741,866 1,832,466 Net occupancy expense 291,052 264,580 Furniture and equipment expense 259,761 245,228 FDIC assessment 152,500 141,283 Postage and supplies expense 181,574 148,745 Advertising expense 114,110 121,596 Telephone expense 106,491 112,770 Other expense 530,474 528,210 ----------- ----------- Total non-interest expenses 3,377,828 3,394,878 ----------- ----------- Income before income taxes 1,219,904 853,237 Provision for income taxes 305,000 213,000 ----------- ----------- Net income $ 914,904 640,237 =========== =========== See accompanying notes to consolidated financial statements 2 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Six Months Ended June 30, 1995 and 1994 (Unaudited) 1995 1994 ------------ ------------ Interest income: Interest and fees on loans $ 9,997,896 8,229,857 Interest and dividends on investment securities: U.S. Treasury and U.S. Government agencies 1,240,822 1,192,817 State and municipal 723,381 655,858 Interest on federal funds sold 258,985 111,103 ------------ ------------ Total interest income 12,221,084 10,189,635 Interest expense: Interest on deposits 4,459,382 3,205,785 Interest on securities sold under agreements to repurchase 229,683 91,013 Interest on commercial paper 159,983 53,369 Interest on note payable to a bank 13,389 20,648 ------------ ------------ Total interest expense 4,862,437 3,370,815 ------------ ------------ Net interest income 7,358,647 6,818,820 Provision for loan losses 390,000 555,000 Net interest income after provision for -- -- loan losses 6,968,647 6,263,820 Non-interest income: Service charges on deposit accounts 1,181,356 1,077,352 Fees for trust services 366,389 311,384 Loss on sale of investments available for sale (111,495) -- Other income 618,055 658,633 ------------ ------------ Total non-interest income 2,054,305 2,047,369 Non-interest expenses: Salaries and other personnel expense 3,521,363 3,666,062 Net occupancy expense 563,165 505,651 Furniture and equipment expense 516,771 484,298 FDIC assessment 307,623 282,565 Postage and supplies expense 356,305 291,531 Advertising expense 275,384 268,197 Telephone expense 199,674 197,915 Other expense 1,083,466 1,002,634 ------------ ------------ Total non-interest expenses 6,823,751 6,698,853 ------------ ------------ Income before income taxes 2,199,201 1,612,336 Provision for income taxes 580,000 403,000 ------------ ------------ Net income $ 1,619,201 1,209,336 ============ ============ See accompanying notes to consolidated financial statements 3 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For Six Months Ended June 30, 1995 and 1994 (Unaudited) 1995 1994 Cash flows from operating activities: ------------- ------------- Net income $ 1,619,201 $ 1,209,336 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premium on investment securities 31,153 37,862 Loss on sale of investments available for sale 111,495 -- Provision for loan losses 390,000 555,000 Depreciation of premises and equipment 412,340 376,447 Amortization of goodwill 30,657 30,658 Amortization of premium on core deposits 23,500 23,500 Change in other assets 74,744 (222,755) Change in other liabilities, net 637,346 (147,199) ------------- ------------- Net cash provided by operating activities 3,330,436 1,862,849 Cash flows from investing activities: Purchase of investments held to maturity (13,270,910) (7,812,575) Purchase of investments available for sale (11,068,572) (1,704,453) Proceeds from maturities of investments held to maturity 7,255,000 5,205,359 Proceeds from sale of investments held to maturity 2,238,668 Proceeds from sale of investments available for sale 4,885,938 -- Principal collected on loans 98,100,412 70,590,548 Purchase and origination of loans (113,267,778) (85,641,309) Purchases of premises and equipment (1,042,666) (2,507,449) ------------- ------------- Net cash used in investing activities (26,169,908) (21,869,879) Cash flows from financing activities: Net increase in transaction and savings accounts 95,667 11,817,223 Proceeds from issuance of certificates of deposits 71,275,833 40,368,907 Payments on maturing certificates of deposit (48,329,741) (34,864,005) Net increase in securities sold under agreements to repurchase 4,822,273 2,530,121 Net increase in commercial paper 1,409,000 1,685,000 Repayments on note payable to a bank (478,959) (151,250) Proceeds from issuance of common stock 12,450 13,500 Purchase of treasury stock -- (176,700) Dividends paid (301,555) (259,788) ------------- ------------- Net cash provided by financing activities 28,504,968 20,963,008 ------------- ------------- Net increase in cash and cash equivalents 5,665,496 955,978 Cash and cash equivalents at beginning of the period 21,595,896 19,893,367 ------------- ------------- Cash and cash equivalents at end of the period $ 27,261,392 $ 20,849,345 ============= ============= See accompanying notes to consolidated financial statements 4 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes To Consolidated Interim Financial Statements 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations, and in cash flows in conformity with generally accepted accounting principles. However, all adjustments which, in the opinion of management, are necessary for fair presentation of the financial statements have been included, and were of a normal recurring nature. The results of operations for the six month period ended June 30, 1995 are not necessarily indicative of the results which may be expected for the entire year. 2. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, The Palmetto Bank (the Bank), and Palmetto Capital, Inc., a wholly-owned subsidiary of The Palmetto Bank, (the "corporation") incorporated February 26, 1992. Palmetto Capital, Inc. offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. The corporation also offers advisory services and variable rate annuities. In consolidation, all significant intercompany accounts and transactions have been eliminated. 3. Investments The carrying and market values of investments held to maturity are summarized as follows: June 30, 1995 Carrying Market Value Value U.S. Treasury and other U.S. Government agencies $26,824,786 27,061,373 State and municipal 27,448,765 28,156,195 Mortgage-backed securities 3,978,724 3,990,686 ---------- ---------- Total $58,252,275 59,208,254 ========== ========== 5 December 31, 1994 Carrying Market Value Value U.S. Treasury and other U.S. Government agencies $30,536,734 29,908,053 State and municipal 24,167,941 23,998,511 ---------- ---------- Total $54,704,675 53,906,564 ========== ========== The amortized cost and market values of investments available for sale are as follows: June 30, 1995 Amortized Market Cost Value U. S. Treasury securities $15,476,160 15,889,705 ========== ========== December 31, 1994 Amortized Market Cost Value U. S. Treasury securities $ 9,466,865 9,204,219 ========== ========= The Company determines investments as held to maturity or available for sale at the purchase date. Investments available for sale are recorded at market value. Although management does not intend to sell such investments in the immediate future, if certain market conditions exist, the Company may sell these investments prior to maturity. Valuation losses or recovery of previously recorded valuation losses are recorded in shareholders' equity as net appreciation (depreciation) of investments available for sale in the period incurred. Gain or loss on the sale of investments available for sale is based on the specific identification method. Investments with an aggregate carrying value of approximately $46,613,000 and $40,144,000 at June 30, 1995, and December 31, 1994, respectively, are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. 6 4. Loans A summary of loans, by classification, follows: June 30, December 31, 1995 1994 Commercial, financial and agricultural $ 37,889,163 32,672,103 Real estate - const. 2,228,513 1,940,631 Real estate - mortgage 142,277,133 134,788,527 Installment loans to individuals 47,928,512 46,007,058 ----------- ----------- Total $ 230,323,321 215,408,319 =========== =========== The following is a summary of activity affecting the allowance for loan losses for the periods indicated: For the three months ended June 30 ----------------------------- 1995 1994 Balance at beginning of period $3,068,366 2,630,688 Provision for loan losses 195,000 270,000 Loan recoveries 68,698 33,628 Less loans charged-off (177,964) (94,111) --------- --------- Balance at end of period $3,154,100 2,840,205 ========= ========= For the six months ended June 30 ---------------------------- Balance at beginning of period $3,016,464 2,393,638 Provision for loan losses 390,000 555,000 Loan recoveries 94,195 101,489 Less loans charged-off (346,559) (209,922) --------- --------- Balance at end of period $3,154,100 2,840,205 ========= ========= The Bank had outstanding, unused commitments as of June 30, 1995 as follows: Home equity loans $ 7,310,000 Credit cards 10,642,000 Commercial real estate development 6,141,000 Other unused lines of credit 11,131,000 ---------- $ 35,224,000 ========== 7 Standby letters of credit $ 1,894,000 ========== The following table sets forth each category of non-performing loans, total loans outstanding and the percentage of each type of nonperforming loans having that status for more than 90 days as of June 30, 1995: Percentage 90 Days Total 90 Days or More Loans or More ------- ----- ---------- Commercial, financial and agricultural $ 117,000 37,889,163 .31% Real estate-construction 2,228,513 Real estate-mortgage 85,000 142,277,133 .06% Installment loans to individuals 271,000 47,928,512 .57% ------- ----------- Total $ 473,000 230,323,321 .21% ======= =========== 5. Deposits A summary of deposits follows: June 30, December 31, 1995 1994 ---------- ------------ Transaction accounts $106,155,801 106,367,423 Savings deposits 21,669,375 20,931,228 Insured money market accts. 40,964,305 40,669,164 Time deposits over $100,000 32,843,047 23,570,814 Other time deposits 96,100,514 83,152,654 Premium on deposits acquired (141,000) (164,500) ----------- ----------- Total $297,592,042 274,526,783 =========== =========== 8 PALMETTO BANCSHARES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1994 TO JUNE 30, 1995 Liquid assets which include cash, federal funds sold, and investments available for sale increased $12.4 million for the six month period. This represents an increase of 40.1%. Cash and due from banks and federal funds sold increased $5.7 million, and the investments available for sale portfolio increased $6.7 million. Investments held to maturity increased during the six month period $3.5 million, or 6.5%. Deposit growth during the period that was not consumed by loan demand and was used to purchase investment securities. Loans, net, increased $14.8 million, or 7.0%, during the six month period as a result of normal growth. The allowance for loan losses increased 4.6% as the loan portfolio grows and management adjusts the reserve to approximate 1.40% of total loans. The provision for loan losses decreased as the allowance is considered to be at an adequate level, based on management's analysis. Premises and equipment increased $630,300, or 6.6% due primarily to capitalized expenditures associated with the conversion of the Bank's central computer software systems. This conversion with an anticipated five-year total cost of $1.0 million is scheduled to be completed in September 1995. Goodwill is being amortized over 25 years using the stright-line method. The Company periodically assesses the recoverability of this goodwill by evaluating whether the amortization of the remaining balance can be recovered through projected undiscounted future cash flows which are based on historical trends. Other assets decreased $74,700, or 2.1%, during the period primarily due to the amortization of prepaid expenses. Deposits increased by 8.4% during the period, from $274.5 million at December 31, 1994 to $297.6 million at June 30, 1995. The increase was due to normal growth. Retail repurchase agreements increased by $4.8 million or 91.8%, and commercial paper associated with the alternative commercial sweep accounts increased by $1.4 million or 20.4%. These changes are the result of normal fluctuations in the accounts. 9 Long-term debt consisted of one loan which totalled $479,000 on December 31, 1994 which was paid off in June 1995. This loan was used to fund the purchase of Bank of Hodges. Other liabilities increased by $637,300, or 84.1%, due primarily to increased accruals for expenses for property taxes and other operating expenses. Retained earnings increased $1.3 million for the six month period as a result of net income of $1.6 million, less dividends paid of $301,600. Liquidity The Company's liquidity position is dependent upon its debt servicing needs and dividends declared. Bancshares' long-term debt to equity ratio was 0% and .7% as of June 30, 1995, and December 31, 1994, respectively. Liquidity is provided from its subsidiary, The Palmetto Bank. The only restrictions on the amount of dividends available for payment to Bancshares are guidelines established by regulatory authorities for capital to asset ratios. As of June 30, 1995, The Palmetto Bank had total primary capital of $27.8 million and total assets of $346.6 million. The resulting primary capital to assets ratio is 8.0%. The South Carolina Board of Financial Institutions' guideline suggests a primary capital to asset ratio of at least 7%. Therefore, as of June 30, 1995, the subsidiary had approximately $3.5 million excess retained earnings available to pay as dividends to Bancshares if additional liquidity were required. Capital Resources Under the capital guidelines of the Federal Reserve Board and the FDIC, Bancshares and the Bank are currently required to maintain minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common shareholders' equity, qualifying perpetual preferred stock (which can constitute up to 25% of total Tier 1 capital) and minority interest in equity accounts of consolidated subsidiaries, less goodwill. In addition, Bancshares and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 3%, but this minimum ratio is increased by 1% to 2% for other than the highest rated institutions. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profile among financial institutions, to account for off- balance sheet exposure and to minimize disincentives for holding liquid assets. Management believes the risk-based capital guidelines will not have a material effect on the Company's operations or the operations of its subsidiaries. 10 At June 30, 1995, the Company had a total risk-based capital ratio of 11.04%, a Tier 1 risked-based capital ratio of 9.79% and a leverage ratio of 7.08%. Accordingly, the Company is deemed to be a "well-capitalized" institution under currently applicable regulator guidelines. Also, at June 30, 1995, the Company had a primary capital ratio (total shareholders' equity plus the allowance for loan losses to total assets) of 8.01%, compared to a ratio of 8.27% at June 30, 1994. On February 25, 1994 the Company purchased 5,700 shares of treasury stock for $31 per share totalling $176,700. Effect in Inflation and Changing Prices The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike most other industries, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect in a financial institution's performance than does the effect of inflation. The yield on a majority of the Company's earning assets adjusts simultaneously with changes in the general level of interest rates. Most of the Company's liabilities are issued with fixed terms and can be repriced only at maturity. The degree of interest rate sensitivity of the Company's assets and liabilities and the differences in timing of repricing assets and liabilities provides an indication of the extent to which the Company's net interest income may be affected by interest rate movements. Accounting and Reporting Matters The Financial Accounting Standards Board("FASB") issued SFAS No. 107, "Disclosures about Fair Values of Financial Instruments" which will be effective for the Company for the fiscal year ended December 31, 1995. SFAS No. 107 will require financial statement disclosure of fair value of all financial instruments and certain off-balance sheet items. When adopted, this standard is expected to require the Company to increase its reporting information related to fair value of financial instruments in its financial statements. 11 In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", was issued. This pronouncement, which is effective for years beginning after December 15, 1994, requires a lender to consider a loan to be impaired if the lender believes it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan. If a loan is impaired, the lender will be required to record a loan valuation allowance equal to the present value of the estimated future cash flows discounted at the loan's effective rate. Based upon the present status of the loan portfolio, management does not believe this standard will have a material adverse effect on the Bank. In May 1995, the FASB issued a SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65" which is effective prospectively for years beginning after December 15, 1995. The statement requires the recognition of an asset for the rights to service mortgage loans for others, regardless of how these rights were acquired (either purchased or originated). Further, it amends SFAS 65 to require assessment of impairment based on fair value. The Company recently commenced the origination and sale of mortgage loans. Currently, the Company is pre-selling all mortgages and based upon the Company's present mortgage lending operation does not anticipate that this statement will have a material adverse affect on the Company. On December 30, 1994, the AICPA issued Statement of Position 94-6, "Disclosure of Certain Significant Risks and Uncertainties" (SOP 94-6). The disclosure requirements of SOP 94-6 are similar to or overlap disclosure requirements in Financial Accounting Standards Board(FASB) Statement No. 5, "Accounting for Contingencies", and for public companies, Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," and certain pronouncements of the Securities and Exchange Commission (SEC). This SOP does not alter the requirements of any FASB or SEC pronouncement. The Disclosures required under SOP 94-6 focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term, and stem from (a) the nature of the entity's operations, (b) the necessary use of estimates in the preparation of financial statements, and (c) significant concentrations on certain aspects of the entity's operations. SOP 94-6 is effective for financial statements issued for fiscal years ending after December 15, 1995, and for financial statements for interim periods in fiscal years subsequent to the year for which this SOP is to be first applied. Based on the its operations and preparation of its financial statements, management does not believe this statement will have a material adverse effect on the Company. 12 On March 31, 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (the Statement). This Statement provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. The Statement requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by the provisions of APB Opinion No. 30. Statement No. 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995 although earlier application is encouraged. Thus, for calendar year entities, Statement No. 121 is effective for 1996 financial statements. Based on the condition of assets held by the Company, management believes this statement will have no material adverse effect on the Company. 13 COMPARISON OF OPERATION RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1995, AND 1994 Net income for the three months ended June 30, 1995 was $914,900, an increase of 42.9% from the $640,200 reported for the same period in 1994. Net income per share was $0.91 for the 1995 period as compared with $0.64 for the comparable period in 1994. Net Interest Income The Bank's earnings are dependent to a large degree on net interest income, defined as the difference between gross interest and fees on 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 June 30, 1995, net interest income was $3.7 million, which represented a 7.2% increase from the same period in 1994. This increase was the result of increases in the volume of earning assets and deposits, as well as increased yields. Average net interest margin for the 1995 period was 5.03%, compared to 5.05% for the same period in 1994. The increase in volumes was due to normal growth, while the increases in rate is a function of the rising interest rate environment. Interest income on investments increased 7.8% during the 1995 period compared to the corresponding period in 1994. This was due primarily to the 5.7% increase of the investment portfolio from the 1994 period, as well as an increase in the yields in the investment securities purchased. Total interest expense increased by 51.1% during the 1995 period due primarily to increased interest rates paid on deposits from 1994 to 1995. Average total interest bearing liabilities increased by 9.1%. The average rate paid on interest bearing liabilities increased from 2.9% during the three month period in 1994, to 3.8% during the 1995 period. The profitability of the Bank is influenced significantly by management's ability to control the relationship between rate sensitive assets and liabilities, and the current interest rate environment. Provision For Loan Losses The provision for loan losses was $195,000 for the 1995 period, compared to $270,000 in 1994. The provision is adjusted each month to reflect loan volume growth and allow for loan charge-offs and recoveries. Management's objective is to maintain the allowance for loan losses at an adequate level as it relates to the loan portfolio. 14 Other Operating Income Other operating income increased by 2.5% in 1995 as compared to the same period in 1994. Service charges on deposit accounts increased $21,300 or 3.7% during the 1995 period compared to the same period in 1994 due primarily to increased deposit volumes. Fiduciary service fees increased 23.9% due to an increase in account volumes. Other income decreased $30,000, or 9.5%, due primarily to an decrease of $13,000 in origination and processing fees from the mortgage loan department. Commission fees from the Bank's subsidiary, Palmetto Capital, Inc., decreased $38,000 during the three month period as compared to the same period in 1994. These decreases were partially offset by an increase of $8,400 in merchant income associated with the Company's check card product introduced during 1994. Other Operating Expenses Other operating expenses decreased by $17,000, or .5% during the 1995 three month period over the same period in 1994. A general increase in all other operating expense categories was offset by a decrease in salaries and other personnel expenses due to lower than estimated pension expenses in the current year. Income Taxes The Company incurred an income tax liability of $305,000 for the 1995 three month period compared to $213,000 for the same period in 1994 due to the increase in taxable income. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 Net income for the six month period ended June 30, 1995 was $1.6 million as compared to $1.2 million for the same period in 1994, or a 33.9% increase. As a result of increased yields on earning assets, net losses on sales of investments were more than offset by an increase in net interest income. Net income per common share increased from $1.21 in 1994, to $1.61 in 1995. Return on average assets(annualized) increased from .81% in 1994, to 1.04% in 1995. Net Interest Income Net interest income for the 1995 six month period was $7.4 million, an increase of 7.9% over the $6.8 million for the 1994 period. Average earning assets have increased 8.1% from the six months ended June 30, 1994 to the same period June 30, 1995. This increase coupled with an average net 15 interest margin approximating 5% for both periods more than offset an increase of 10.9% increase in the average rate paid on interest bearing liabilities. Provision for Loan Losses The provision was reduced from $555,000 for the 1994 period, to $390,000 for the same period in 1995. The amount charged to the provision for loan losses by the Bank is based on management's judgment as to the amounts required to maintain an allowance adequate to provide for potential losses in the loan portfolio. The level is this allowance is dependent upon the total amount of past due loans, nonperforming loans, general economic conditions and management's assessment of potential losses based upon internal credit grading on the loans and periodic reviews and assessments of credit risk associated with particular loans. Other Operating Income and Expenses Service charges on deposit accounts increased due to increases in the number of deposit account transactions which was offset by the losses on sales of investment securities. Five million dollars of investments available for sale were sold during the 1995 six month period in order to capitalize on the rising bond market. The proceeds of the sales were used to purchase investment securities with an approximate yield increase of 360 basis points over the securities sold. The losses are expected to be more than compensated for by the income from the higher yielding investments. Non- interest expenses during the 1995 six month period increased $124,900 or 1.9% over the 1994 period due to normal growth. Salaries and other personnel expenses decreased $144,700 primarily due to a reduction in the employee pension plan expense estimated. Income Taxes The provision for income taxes increased $177,000 or 43.9% from the 1994 due to an increase in taxable income. 16 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Part II - Other Information Item 1. Legal Proceedings Palmetto Bancshares, Inc. is not engaged in any legal proceedings. From time to time The Palmetto Bank (subsidiary) is involved in legal proceedings involving its normal course of business as a bank. Item 2. Changes in Securities There have been no changes in securities during the reporting period. Please refer to the three months Management Discussion and Analysis for an explanation of working capital restrictions and any limitations upon the payment of dividends. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) No exhibits are required to be filed by Bancshares pursuant to item 601 of Regulation S-K. (b) Bancshares did not file reports on Form 8-K during the quarter ended June 30, 1995. 17 PALMETTO BANCSHARES, INC. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Palmetto Bancshares, Inc. Laurens, South Carolina Date: August 11, 1995 (Signature of L. Leon Patterson) --------------------------- L. Leon Patterson Chairman and Chief Executive Officer Date: August 11, 1995 (Signature of Paul W. Stringer) --------------------------- Paul W. Stringer President and Chief Operating Officer 18