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, 1997
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 October 30, 1997
----------------------------- -------------------------------
Common stock, $5.00 par value 3,061,552
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter and Nine Months Ended September 30, 1997
INDEX Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 1
Consolidated Income Statements for the Three Months
Ended September 30, 1997 and 1996 2
Consolidated Income Statements for the Nine Months
Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Interim Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 14
PART II - OTHER INFORMATION 15 - 16
- ---------------------------
SIGNATURES 17
- ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
September 30, December 31,
1997 1996
-----------------------------------
Assets (unaudited)
Cash and due from banks $25,487 $28,373
Federal funds sold 919 1,951
Federal Home Loan Bank stock, at cost 1,452 --
Investment securities held to maturity (market values of $77,567
and $66,770 in 1997 and 1996, respectively) 76,740 66,207
Investment securities available for sale (amortized cost of $18,013
and $15,970, in 1997 and 1996, respectively) 18,293 16,240
Loans held for sale -- 4,075
Loans 360,363 332,986
Less allowance for loan losses (4,992) (4,729)
-----------------------------------
Loans, net 355,371 328,257
Premises and equipment, net 13,029 12,323
Accrued interest 3,551 3,437
Other assets 8,077 7,514
-----------------------------------
Total assets $502,919 $468,377
===================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 69,814 71,349
Interest-bearing 369,035 341,037
-----------------------------------
Total deposits 438,849 412,386
Securities sold under agreements to repurchase 15,112 11,636
Commercial paper (Master note) 10,608 7,435
Federal funds purchased 525 3,000
Other liabilities 2,499 2,483
-----------------------------------
Total liabilities 467,593 436,940
-----------------------------------
ESOP stock subject to put/call option 3,784 3,313
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
3,060,552 issued and outstanding in 1997;
3,032,952 issued and 3,023,841 outstanding in 1996 15,303 15,165
Additional paid-in capital 324 334
Retained earnings 19,527 15,894
Treasury stock (9,111 shares in 1996) -- (122)
Net unrealized gain on investment securities available for sale,
net of income taxes 172 166
ESOP stock subject to put/call option, 275,180 common
shares at $13.75 per share in 1997 and 284,007 common
shares at $11.67 per share in 1996 (3,784) (3,313)
-----------------------------------
Total shareholders' equity 31,542 28,124
-----------------------------------
Total liabilities and shareholders' equity $502,919 $468,377
===================================
See accompanying notes to consolidated interim financial statements.
1
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
Three Months Ended September 30, 1997 and 1996
(Dollars in Thousands, except per share data)
1997 1996
-----------------------------------
Interest income:
Interest and fees on loans $7,807 $7,081
Interest and dividends on investment securities:
U.S. Treasury and U.S. Government agencies 615 444
State and municipal 500 449
Mortgage-backed securities 450 335
Interest on federal funds sold 84 11
Dividends on FHLB stock 30 --
-----------------------------------
Total interest income 9,486 8,320
-----------------------------------
Interest expense:
Interest on deposits 3,759 3,217
Interest on securities sold under agreements to repurchase 150 125
Interest on federal funds purchased 8 59
Interest on commercial paper 119 83
-----------------------------------
Total interest expense 4,036 3,484
-----------------------------------
Net interest income 5,450 4,836
Provision for loan losses 350 350
-----------------------------------
Net interest income after provision for
loan losses 5,100 4,486
Non-interest income:
Service charges on deposit accounts 815 720
Fees for trust services 236 210
Other income 386 353
-----------------------------------
Total non-interest income 1,437 1,283
Non-interest expenses:
Salaries and other personnel 2,078 1,844
Net occupancy 387 390
Furniture and equipment 453 376
Postage and supplies 219 225
Marketing and advertising 81 160
Telephone 129 131
Other expenses 949 907
-----------------------------------
Total non-interest expenses 4,296 4,033
-----------------------------------
Income before income taxes 2,241 1,736
Income tax provision 717 455
-----------------------------------
Net income $1,524 $1,281
===================================
Increase in fair value of ESOP stock -- (32)
===================================
Net income on common shares not subject to put/call $1,524 $1,249
===================================
Net income per common share not subject to put/call $0.55 $0.46
===================================
Cash dividends declared per share $0.10 $0.07
===================================
Weighted average shares outstanding 3,060,004 3,005,829
===================================
Weighted average shares outstanding not subject to put/call 2,784,824 2,739,828
===================================
2
See accompanying notes to consolidated interim financial statements.
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
Nine Months Ended September 30, 1997 and 1996
(Dollars in Thousands, except per share data)
1997 1996
-----------------------------------
Interest income:
Interest and fees on loans $22,798 $19,504
Interest and dividends on investment securities
U.S. Treasury and U.S. Government agencies 1,725 2,411
State and municipal 1,418 990
Mortgage-backed securities 1,281 613
Interest on federal funds sold 249 67
Dividends on FHLB stock 30 --
-----------------------------------
Total interest income 27,501 23,585
-----------------------------------
Interest expense:
Interest on deposits 10,961 9,288
Interest on securities sold under agreements to repurchase 428 353
Interest on federal funds purchased 63 247
Interest on commercial paper 266 227
-----------------------------------
Total interest expense 11,718 10,115
-----------------------------------
Net interest income 15,783 13,470
Provision for loan losses 950 1,100
-----------------------------------
Net interest income after provision for
loan losses 14,833 12,370
Non-interest income:
Service charges on deposit accounts 2,382 2,044
Fees for trust services 709 612
Other income 1,173 1,036
-----------------------------------
Total non-interest income 4,264 3,692
Non-interest expenses:
Salaries and other personnel 6,325 5,472
Net occupancy 1,061 1,096
Furniture and equipment 1,265 1,110
Postage and supplies 658 664
Marketing and advertising 451 528
Telephone 387 343
Other expenses 2,670 2,317
-----------------------------------
Total non-interest expenses 12,817 11,530
-----------------------------------
Income before income taxes 6,280 4,532
Income tax provision 1,825 1,157
-----------------------------------
Net income $4,455 $3,375
===================================
Increase in fair value of ESOP stock (470) (336)
===================================
Net income on common shares not subject to put/call $3,985 $3,039
===================================
Net income per common share not subject to put/call $1.44 $1.11
===================================
Cash dividends declared per share $0.27 $0.20
===================================
Weighted average shares outstanding 3,049,924 3,008,157
===================================
Weighted average shares outstanding not subject to put/call 2,764,852 2,729,823
===================================
See accompanying notes to consolidated interim financial statements.
3
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For Nine Months Ended September 30, 1997 and 1996
(Dollars in Thousands)
1997 1996
-----------------------------------
Cash flows from operating activities:
Net income $4,455 3,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,415 1,271
Provision for loan losses 950 1,100
Origination or acquisition of loans held for sale (25,077) (119,644)
Sale of loans held for sale 29,152 114,227
Change in accrued interest receivable (114) (556)
Change in other assets (859) (4,366)
Change in other liabilities, net 12 606
-----------------------------------
Net cash provided by operating activities 9,934 (3,987)
Cash flows from investing activities:
Purchase of investment securities held to maturity (23,756) (23,357)
Purchase of investment securities available for sale (10,956) (9,991)
Proceeds from maturities of investment securities held to maturity 11,171 5,000
Proceeds from maturities of investment securities available for sale 5,400 1,272
Proceeds from sale of investment securities available for sale 3,574 28,979
Principal paydowns on mortgage-backed securities 1,989 1,589
Purchase of Federal Home Loan Bank stock (1,452) --
Net increase in loans (28,064) (69,536)
Purchases of premises and equipment (1,612) (2,118)
-----------------------------------
Net cash used in investing activities (43,706) (68,162)
Cash flows from financing activities:
Net increase in deposit accounts 26,252 8,175
Acquisition of deposits, net -- 53,242
Net increase in securities sold under agreements to repurchase 3,476 3,171
Net decrease in commercial paper 3,173 2,715
Net increase (decrease) in federal funds purchased (2,475) 9,350
Proceeds from issuance of common stock 128 --
Purchase of treasury stock -- (122)
Proceeds from sale of treasury stock 126 --
Dividends paid (826) (601)
-----------------------------------
Net cash provided by financing activities 29,854 75,930
-----------------------------------
Net increase (decrease) in cash and cash equivalents (3,918) 3,781
Cash and cash equivalents at beginning of the period 30,324 25,019
-----------------------------------
Cash and cash equivalents at end of the period $26,406 28,800
===================================
Supplemental Information:
Cash paid during the period for:
Interest expense 11,603 10,065
===================================
Income taxes 1,655 1,441
===================================
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain on investment securities available for sale 6 90
===================================
Securitization of mortgage loans -- 6,334
===================================
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, 1996.
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 nine-month period ended September 30,
1997 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 Bank provides a
full-range of banking services, including the taking of deposits and the making
of loans. Palmetto Capital, Inc. offers the brokerage of stocks, bonds, mutual
funds and unit investment trusts. Palmetto Capital, Inc. also offers advisory
services and variable rate annuities. In consolidation, all significant
intercompany accounts and transactions have been eliminated.
5
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1996
TO SEPTEMBER 30, 1997
General
In response to the Bank's commitment to quality customer service, the
Medical Savings Account (MSA) was introduced in early September for the Bank's
small business customers. The MSA is a product which provides a tax-sheltered
savings account for medical expenses for customers who have high deductible
health insurance and are either self-employed or are employed by a small
business. Also in September, the Bank enhanced the capabilities of its 24-Hour
Account Information Line through a new voice response system. This system offers
many new features including more detailed account information and statement
retrieval via fax, as well as, an increased number of phone lines due to
customer demand. In October, the Bank introduced its Super Money Market Account.
This new money market account offers an annual percentage yield higher than the
Bank's Premium Money Market Account when a customer maintains a $25,000 minimum
balance.
On October 14, the board of directors for Palmetto Bancshares, Inc.,
approved three new additions to the board. Ann Smith, Director of Annual Giving
for Clemson University, Edward K. (Keith) Snead, owner of Keith Snead Builders
Supply in Greenwood, and William (Bill) Moore, former President of Reeves
Brothers, Inc., in Spartanburg and consultant for Sally Foster, Inc., began
their respective terms. Each of these directors has served in an advisory
capacity on local boards for the Bank in their respective communities for
several years. They will serve as directors until the next annual meeting of
shareholders, when they will be submitted as nominees for full terms as
directors.
Assets
Liquid assets which include cash, federal funds sold, and investments
available for sale decreased by $1.9 million, or 4%, for the nine-month period.
This decrease was largely due to the decrease in cash and due from banks of $2.9
million and a decrease in federal funds sold of $1 million due to better cash
management and a reduction in the amount of required reserves. This reduction in
reserves is due to the reclassification of certain deposit accounts from
reservable to non-reservable categories. These decreases were partially offset
by a $2 million increase in available for sale securities.
Early in 1996, application was made by the Bank for membership in the
Federal Home Loan Bank of Atlanta. Membership requirements were approved in
June, and the required investment of $1,452,000 was made at that time. Access to
additional bank liquidity, loan funding, and investment opportunities are among
the options available to the Bank through this membership.
Investment securities held to maturity increased during the nine-month
period by $10.5 million, or 16%. This increase was due to purchases of $23.8
million with the funds received from the implementation of certain new cash
management strategies and the reduction in the amount of required reserves.
These purchases were offset with maturities of $11.2 million and with principal
pay downs on mortgage-backed securities of $2.0 million.
6
Loans, net, increased by $27.1 million, or 8%, during the nine-month period
as a result of normal growth. The allowance for loan losses was increased to
1.39% from 1.38% at September 30, 1997 and 1996, respectively.
At September 30, 1997, the Company had no loans held for sale due to a
reorganization in the Bank's mortgage servicing department. The Bank is
currently not actively purchasing and originating mortgage loans to be sold. The
Bank plans to re-engage in these activities in the future, but not to the same
extent or volume as before. The Bank continues to service its portfolio of loans
sold. These loans serviced for the benefit of others amounted to approximately
$152.2 million at September 30, 1997.
The Bank began recognizing originated mortgage servicing rights and
purchased mortgage servicing rights in the second quarter of 1996 for loans sold
with servicing retained with the startup of its mortgage servicing operations.
The mortgage servicing rights related to the mortgage servicing department's
activities are approximately $1.7 million at September 30, 1997, which
represents their fair market value.
Other assets increased by $563,000, or 7%, due to the aforementioned
mortgage servicing rights. This increase was slightly offset with amortization
of various prepaids and intangibles.
Liabilities and Shareholders' Equity
Deposit balances increased by 6% during the period, from $412.4 million to
$438.8 million. The increase was due to normal growth.
Securities sold under agreements to repurchase have increased by $3.5
million or 30%, and commercial paper associated with the alternative commercial
sweep accounts (master note program) increased by $3.2 million or 43%. These
changes are the result of normal fluctuations in the accounts. Federal funds
purchased decreased by $2.5 million due to normal fluctuations.
Total shareholders equity increased by $3.4 million, for the nine-month
period as a result of net income of $4.5 million; less dividends paid of
$826,000; an increase in the unrealized gain on investment securities available
for sale net of income taxes of $6,000; proceeds from the issuance of common
stock for $128,000; proceeds from the sale of treasury stock of $126,000; and
reduced by the increase in the reclassification of the Employee Stock Ownership
Plan (ESOP) shares subject to put/call of $470,000.
The stock in the ESOP has a put and a call feature if the stock is not
"readily tradable on an established market." A 1995 private letter ruling by the
IRS clarified that such term means listed on a national securities exchange.
Since the Company's stock is not listed on a national securities exchange, the
shares in the ESOP Plan and shares distributed in 1996 are subject to the
put/call feature. Accordingly, 275,180 shares are recorded outside of
shareholders' equity at their fair value, which is determined annually by an
independent valuation. The most recent valuation dated March 4, 1997, values the
stock at $13.75 per share. The Company's Board of Directors voted to terminate
the ESOP effective February 28, 1997. The shares distributed in 1997 due to the
termination of the ESOP will be subject to the put/call until June 29, 1998.
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% - 25%. At September 30, 1997, the
7
Company's liquidity ratio was 21%.
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 $0.27 per share in dividends so far in
1997. There can be no guarantee, however, that any additional dividends will be
paid. Liquidity is provided from the Company's subsidiary, the Bank. The only
restrictions on the amount of dividends available for payment to Bancshares are
guidelines established by regulatory authorities for capital to asset ratios.
The South Carolina Board of Financial Institutions' guideline suggests a primary
capital to asset ratio of at least 7%. The Bank's current primary capital ratio
is 7.76%; therefore, at September 30, 1997, the Bank had $3.8 million of excess
retained earnings available for the payment of dividends. The Bank plans to
continue its quarterly dividend payout.
Capital Resources
As of September 30, 1997, the Company and the Bank were in compliance with
each of the applicable regulatory capital requirements and met or exceeded the
"adequately capitalized" regulatory guidelines. The table below sets forth
various capital ratios for the Company and the Bank:
ADEQUATELY
AS OF CAPITALIZED WELL CAPITALIZED
9/30/97 REQUIREMENT REQUIREMENT
- --------------------------------- ---------------- ------------------- -------------------
Company:
Total Risk-based Capital 9.53% 8.00% 10.00%
Tier 1 Risk-based Capital 8.28 4.00 6.00
Leverage Ratio 6.06 4.00 5.00
Bank:
Total Risk-based Capital 9.53 8.00 10.00
Tier 1 Risk-based Capital 8.28 4.00 6.00
Leverage Ratio 6.05 4.00 5.00
Primary Capital to Assets 7.76 7.00 7.00
- --------------------------------- ---------------- ------------------- -------------------
Because the Company's total risk-based capital ratio is 9.53%, the Company
is defined to be "adequately-capitalized" under currently applicable regulatory
guidelines. The Company's strategic plan for controlled growth and profit
improvement reflects sufficient internally generated capital to return the
risk-weighted ratios to the "well-capitalized" guidelines, presently anticipated
to occur within 1998.
8
Accounting and Reporting Matters
In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of SFAS No. 125, an amendment of SFAS No. 125, which
was effective December 31, 1996. This statement delays the effective date of
certain provisions of SFAS No. 125 until after December 31, 1997. The amended
provisions include those related to the transfers of financial assets and
secured borrowings. The provisions in SFAS No. 125 related to servicing assets
and liabilities are not delayed by this amendment. The adoption of this
statement did not have a material effect on the Company.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
is effective for both interim and annual periods ending after December 15, 1997.
This statement supersedes Accounting Principles Board Opinion No. 15, Earnings
per Share. The purpose of this statement is to simplify current reporting and
make U.S. reporting comparable to international standards. The statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures (as defined by the statement). The Company anticipates that
adoption of this standard will not have a material affect on EPS.
Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which is effective for financial statements
for periods ending after December 15, 1997. This statement applies to both
public and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The Company anticipates that adoption of
this standard will not have a material affect on the Company.
In September 1997, the FASB issued SFAS Nos. 130 and 131, Reporting
Comprehensive Income and Disclosures about Segments of an Enterprise and Related
Information, respectively. Both statements are effective for financial
statements for fiscal years beginning after December 15, 1997, with earlier
application permitted. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement. SFAS No.
131 changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
While these statements may increase the detail of information the Company will
have to disclose, the adoption of these standards is not expected to have a
material affect on the Company.
9
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
Net income for the three months ended September 30, 1997 was $1.5 million,
an increase of 19% from the $1.3 million reported for the same period in 1996.
Net income per common share not subject to put/call was $0.55 for the 1997
period as compared with $0.46 for the comparable period in 1996.
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
earnings assets, primarily loans and investment securities, and interest paid on
deposits and borrowed funds. Net interest income is affected by the interest
rates earned or paid and by volume changes in loans, securities, deposits, and
borrowed funds.
For the three-month period ended September 30, 1997, net interest income
was $5.5 million, which represented a 13% increase from the same period in 1996.
This increase was the result of increases in the volume of earning assets.
Earning assets averaged $469.4 million and $400.7 million during the third
quarters of 1997 and 1996, respectively. The increases in volume were due to the
growth of loans and investments compared to year-end 1996. The average net
interest margin for the 1997 period was 4.66%, compared to 4.80% for the same
period in 1996.
Interest income on loans increased 10% due to increased volume, partially
offset by a slight decrease in rate. Interest income on investment securities
increased 27% to $1.6 million during the 1997 period compared to the
corresponding period in 1996 due to increased volume. Interest income on federal
funds sold increased due to increased volume of federal funds sold compared to
the same period last year. The yield on average earning assets, which includes
loans and investment securities, decreased from 8.26% for the three months ended
September 30, 1996 to 8.11% for the three months ended September 30, 1997. The
prime interest rate remained constant at 8.5% for the quarter ended September
30, 1997, but was 8.25% one year ago.
Total interest expense increased by 16% during the 1997 period mostly due
to an increased volume of deposits at September 30, 1997, compared to September
30, 1996.
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. 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.
10
Interest sensitivity management is part of the asset-liability management
process. Interest sensitivity gap (GAP) is the difference between total rate
sensitive assets and rate sensitive liabilities in a given time period. The
Company's current GAP analysis reflects that in periods of increasing interest
rates, rate sensitive assets will reprice slower than rate sensitive
liabilities. The Company's GAP analysis also shows that at the interest
repricing of one year, the Company's net interest margin would be adversely
impacted. This analysis, however, does not take into account the dynamics of the
marketplace. GAP is a static measurement that assumes if the prime rate
increases by 100 basis points, all assets and liabilities that are due to
reprice will increase by 100 basis points at the next opportunity. However, the
Company is actually able to experience a benefit from rising rates in the short
term because deposit rates do not follow the national money market. They are
controlled by the local market. Loans do follow the money market; so when rates
increase they reprice immediately, but the Company is able to manage the deposit
side. The Company generally does not raise deposit rates as fast or as much. The
Company also has the ability to manage its funding costs by choosing alternative
sources of funds.
The Company's current GAP position would also be interpreted to mean that
in periods of declining interest rates, the Company's net interest margin would
benefit. However, competitive pressures in the local market may not allow the
Company to lower rates on deposits, but force the Company to lower rates on
loans.
Because the Company's management feels that GAP analysis is a static
measurement, it manages its interest income through its asset/liability
strategies which focus on a net interest income model based on management's
projections. The Company has a targeted net interest income range of plus or
minus twenty percent based on a 300 basis point shock over twelve months. The
asset/liability committee meets weekly to address interest pricing issues, and
this model is reviewed monthly. Management will continue to monitor its
liability sensitive position in times of higher interest rates which might
adversely affect its net interest margin.
Provision for Loan Losses
The provision for loan losses was $350,000 for the three months ended
September 30, 1997 and 1996, respectively. The provision is adjusted each month
to reflect loan volume growth and allow for loan charge-offs and recoveries.
Management's objective is to maintain the allowance for loan losses at an
adequate level to cover potential future 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 $974,000 and $688,000
at September 30, 1997 and 1996, respectively. The net charge-off ratio has
increased from prior year to 0.27%. While management uses the best information
available to make evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluation. The allowance for loan losses is subject to periodic
evaluation by various regulatory authorities and may be subject to adjustment,
based upon information that is available to them at the time of their
examination.
Other Operating Income
Total non-interest income increased by $154,000, or 12%, for the three
months ended September 30, 1997, as compared to the same period in 1996. The
largest portion of this increase can be attributed to service charges on deposit
accounts, which increased by $95,000, or 13%, during the 1997 period compared to
the
11
same period in 1996 due primarily to increased deposit accounts and increased
transactions.
The second largest contributor to non-interest income is fees for trust
services, which increased $26,000, or 12%, due to new business and increased
assets under management. Assets under management increased $5.9 million, or 4%,
during the three months ended September 30, 1997, compared to growth of $3.9
million, or 4%, for the same period in 1996.
Other Operating Expenses
Total non-interest expenses increased by $263,000, or 7%, during the 1997
three-month period over the same period in 1996. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$234,000, or 13%, due to normal salary increases and increased personnel in the
branches, telephone banking center, and trust department. The second largest
contributor was furniture and equipment expense, which increased $77,000, or
20%, due to normal growth and activity.
Income Taxes
The Company incurred income tax expense of $717,000 for the 1997
three-month period compared to $455,000 for the same period in 1996 due to the
increase in taxable income. This expense is based on an expected annual
effective tax rate of approximately 29%.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 AND 1996
Net income for the nine months ended September 30, 1997 was $4.5 million,
an increase of 32% from the $3.4 million reported for the same period in 1996.
Net income per common share not subject to put/call was $1.44 for the 1997
period as compared with $1.11 for the comparable period in 1996.
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
earnings assets, primarily loans and investment securities, and interest paid on
deposits and borrowed funds. Net interest income is affected by the interest
rates earned or paid and by volume changes in loans, securities, deposits, and
borrowed funds.
For the nine-month period ended September 30, 1997, net interest income
was $15.8 million, which represented a 17% increase from the same period in
1996. This increase was the result of increases in the volume of earning assets.
Earning assets averaged $449.8 million and $380.8 million during the first nine
months of 1997 and 1996, respectively. The average net interest margin for the
1997 period was 4.69%, compared to 4.73% for the same period in 1996.
Interest income on loans increased 17% due to increased average loan
volumes. Interest income on investment securities increased 10% to $4.4 million
during the 1997 period compared to the corresponding period in 1996 due to
growth in the investment securities portfolio. At September 30, 1997, the
weighted average rate (WAR) on the portfolio was 7.05%, with a weighted average
life (WAL) of 5.68 years. At
12
September 30, 1996, the WAR was 7.04%, with a WAL of 5.63 years. At September
29, 1997, the Treasury Yield curve for a 5 year term was 5.98%, compared to
6.46% one year ago.
Interest income on federal funds sold increased due to increased volume
of federal funds sold compared to the first nine months of last year. The yield
on average earning assets, which includes federal funds sold, loans and
investment securities, decreased from 8.27% for the nine months ended September
30, 1996 to 8.17% for the nine months ended September 30, 1997. The prime
interest rate remained constant at 8.25% for the first quarter; and at 8.50% for
the second and third quarters of 1997. The prime rate remained constant at 8.25%
for the nine months ended September 30, 1996.
Total interest expense increased by 16% during the 1997 period mostly due
to an increased volume of deposits at September 30, 1997, compared to September
30, 1996. Average total interest-bearing liabilities, increased by 18% from
September 30, 1996 to September 30, 1997. The average rate paid on interest
bearing liabilities decreased from 4.04% during the nine-month period in 1996,
to 4.03% during the 1997 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. See further discussion
under "Comparison of the Results of Operations for the Three Months Ended
September 30, 1997 and 1996" above.
Provision for Loan Losses
The provision for loan losses was $950,000 for the nine months ended
September 30, 1997 compared to $1,100,000 for the nine months ended September
30, 1996. See further discussion under "Comparison of the Results of Operations
for the Three Months Ended September 30, 1997 and 1996" above.
Other Operating Income
Total non-interest income increased by $572,000, or 15%, for the nine
months ended September 30, 1997, as compared to the same period in 1996. The
largest portion of this increase can be attributed to service charges on deposit
accounts, which increased by $338,000, or 17%, during the 1997 period compared
to the same period in 1996 due primarily to increased deposit accounts and
increased transactions.
The second largest component of non-interest income is other income,
which increased $137,000, or 13%, due to normal growth and activity and income
related to customer research, travelers express processing fees, and gains on
sales of fixed assets.
Another contributor to non-interest income is fees for trust services,
which increased $97,000, or 16%, due to new business and increased assets under
management. Assets under management were $142.8 million and $112.3 million at
September 30, 1997 and 1996, respectively, representing a 27% increase.
Other Operating Expenses
Total non-interest expenses increased by $1.3 million, or 11%, during the
1997 nine-month period over the same period in 1996. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$853,000, or 16%, due to normal salary increases and increased personnel. The
number of full-time equivalent employees at September 30, 1997 was 280, compared
to 247 at September 30,
13
1996.
The second largest contributor was other expenses, which increased
$353,000 or 15%. Other expense consists of many items, including goodwill
amortization and core deposit premium amortization related to the First Union
branch acquisition in the second quarter of 1996. These two expenses combined
have increased $104,000 compared to the same period in prior year because there
is 9 months of amortization in 1997 compared to only 5.5 months in 1996. Other
expenses also includes the FDIC assessment which has increased $126,000 compared
to prior year because the Company is now "adequately-capitalized" under
currently applicable regulatory guidelines, where it was "well-capitalized" in
prior year. See discussion above under "Capital Resources." This category also
includes bank service charges which have increased $45,000 since this time last
year due to a management decision to pay higher service charges in lieu of
maintaining higher compensating balances at correspondent banks. Management
feels that the Bank can earn enough of a return from investing these funds in
alternative investment vehicles to more than offset the increased service
charges. The remainder of the increase in other expenses is due to normal growth
and activity.
Income Taxes
The Company incurred income tax expense of $1.8 million for the 1997
nine-month period compared to $1.2 million for the same period in 1996 due to
the increase in taxable income. This expense is based on an expected effective
tax rate of approximately 29%.
INDUSTRY DEVELOPMENTS
Certain proposed industry-related legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institution industry. Because of the uncertainty of the final terms
and likelihood of passage of the proposed legislation, the Company is unable to
assess the impact of any proposed legislation on its financial condition or
operations at this time.
14
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,
filed with the Securities and Exchange Commission on August 20,
1992
3.1.3 Articles of Amendment filed on January 26, 1989 in the office of
the Secretary of State of South Carolina: Incorporated by
reference to Exhibit 4.1.3 to the Company's Registration Statement
on Form S-8, filed with the Securities and Exchange Commission on
August 20, 1992
3.1.4 Articles of Amendment filed on April 23, 1990 in the office of the
Secretary of State of South Carolina: Incorporated by reference to
Exhibit 4.1.4 to the Company's Registration Statement on Form
S-8, filed with the Securities and Exchange Commission on
August 20, 1992
3.1.5 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
15
fiscal quarter ended September 30, 1996.
3.2.1 By-Laws adopted April 10, 1990: Incorporated by reference to
Exhibit 3.2.1 to the Company's 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994: Incorporated by
reference to Exhibit 3.2.2 to the Company's 10-K, filed with the
Securities and Exchange Commission on March 31, 1997.
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
27.1* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997.
16
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 7, 1997
17
EXHIBIT INDEX
Exhibit No.
3.1.1 Articles of Incorporation filed on May 13, 1982 in the office of
the Secretary of State of South Carolina: Incorporated by
reference to Exhibit 3 to the Company's Registration Statement on
Form S-4, No. 33-19367, filed with the Securities and Exchange
Commission on December 30, 1987
3.1.2 Articles of Amendment filed on May 5, 1988 in the office of the
Secretary of State of South Carolina: Incorporated by reference to
Exhibit 4.1.2 to the Company's Registration Statement on Form S-8,
filed with the Securities and Exchange Commission on August 20,
1992
3.1.3 Articles of Amendment filed on January 26, 1989 in the office of
the Secretary of State of South Carolina: Incorporated by
reference to Exhibit 4.1.3 to the Company's Registration Statement
on Form S-8, filed with the Securities and Exchange Commission on
August 20, 1992
3.1.4 Articles of Amendment filed on April 23, 1990 in the office of the
Secretary of State of South Carolina: Incorporated by reference to
Exhibit 4.1.4 to the Company's Registration Statement on Form
S-8, filed with the Securities and Exchange Commission on
August 20, 1992
3.1.5 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 September 30, 1996.
3.2.1 By-Laws adopted Arpil 10, 1990: Incorporated by reference to
Exhibit 3.2.1 to the Company's 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994: Incorporated by
reference to Exhibit 3.2.2 to the Company's 10-K, filed with the
Securities and Exchange Commission on March 31, 1997.
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
18
Exhibit 4.3 to the Company's Registration Statement on Form S-8,
Commission File No. 33-51212, filed with the Securities and
Exchange Commission on August 20, 1992
27.1* Financial Data Schedule
* Filed herewith.
19
FINANCIAL DATA SCHEDULE
Exhibit 27.1
(Dollars in Thousands)
The schedule contains summary financial information extracted from Palmetto
Bancshares, Inc. and subsidiary Consolidated Statements of Operations and
Consolidated Statements of Financial Condition and is qualified in its entirety
by reference to such financial statements.