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, 1998
OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-26016
PALMETTO BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 74-2235055
--------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
301 Hillcrest Drive
Laurens, South Carolina
29360
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 984-4551
--------------------------------------------------
( Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 1998
----------------------------- -------------------------------
Common stock, $5.00 par value 3,086,542
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter and Nine Months Ended September 30, 1998
INDEX Page No.
----- --------
PART I - FINANCIAL INFORMATION
- -------------------------------
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 1
Consolidated Income Statements for the Three Months
Ended September 30, 1998 and 1997 2
Consolidated Income Statements for the Nine months
Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for
the Nine months Ended September 30, 1998 and 1997 4-5
Consolidated Statements of Changes in Shareholders' Equity
for the Nine months Ended September 30, 1998 and 1997 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 17
PART II - OTHER INFORMATION 18 - 19
- ---------------------------
SIGNATURES 20
- ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
September 30 December 31
1998 1997
------------------------------
Assets (unaudited)
Cash and due from banks $30,534 $25,539
Federal funds sold -- 388
Federal Home Loan Bank stock, at cost 1,541 1,452
Investment securities held to maturity (market values of $73,308
and $81,578 in 1998 and 1997, respectively) 71,264 80,006
Investment securities available for sale (amortized cost of $29,025
and $17,410, in 1998 and 1997, respectively) 29,682 17,725
Loans held for sale 1,498 --
Loans 398,563 367,963
Less allowance for loan losses (5,593) (5,152)
------------------------------
Loans, net 392,970 362,811
Premises and equipment, net 14,484 13,386
Accrued interest 4,083 3,990
Other assets 9,313 7,910
------------------------------
Total assets $555,369 $513,207
==============================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 78,865 70,595
Interest-bearing 397,464 378,795
------------------------------
Total deposits 476,329 449,390
Securities sold under agreements to repurchase 13,517 12,224
Commercial paper (Master note) 13,198 11,289
Federal funds purchased 8,825 1,500
Other liabilities 2,997 2,188
------------------------------
Total liabilities 514,866 476,591
------------------------------
Common stock subject to put/call option (ESOP) 4,734 3,784
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
3,086,542 issued and outstanding in 1998; and
3,089,552 issued and outstanding in 1997; 15,433 15,448
Capital Surplus 267 317
Retained earnings 24,399 20,658
Accumulated other comprehensive income 404 193
Common stock subject to put/call option, 270,531 common shares at $17.50 per
share in 1998 and 275,180 common
shares at $13.75 in 1997 (ESOP) (4,734) (3,784)
------------------------------
Total shareholders' equity 35,769 32,832
------------------------------
Total liabilities and shareholders' equity $555,369 $513,207
==============================
See accompanying notes to consolidated interim financial statements.
1
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
Three Months Ended September 30, 1998 and 1997
(Dollars in Thousands, except per share data)
1998 1997
------------------------------
Interest income:
Interest and fees on loans $8,656 $7,779
Interest and dividends on investment securities available for sale:
U.S. Treasury 180 263
State and municipal 165 87
Mortgage-backed securities 100 --
Interest and dividends on investment securities held to maturity:
U.S. Treasury and U.S. Government agencies 226 351
State and municipal 498 413
Mortgage-backed securities 340 451
Interest on federal funds sold 54 84
Dividends on FHLB stock 31 30
------------------------------
Total interest income 10,250 9,458
------------------------------
Interest expense:
Interest on deposits 3,833 3,759
Interest on securities sold under agreements to repurchase 175 150
Interest on federal funds purchased 21 8
Interest on commercial paper (Master note) 143 119
------------------------------
Total interest expense 4,172 4,036
------------------------------
Net interest income 6,078 5,422
Provision for loan losses 570 350
------------------------------
Net interest income after provision for
loan losses 5,508 5,072
Non-interest income:
Service charges on deposit accounts 867 815
Fees for trust services 335 236
Other income 463 348
------------------------------
Total non-interest income 1,665 1,399
Non-interest expenses:
Salaries and other personnel 2,292 2,078
Net occupancy 461 387
Furniture and equipment 453 453
FDIC assessment 54 43
Postage and supplies 266 219
Marketing and advertising 105 81
Telephone 163 129
Other expense 900 840
------------------------------
Total non-interest expenses 4,694 4,230
------------------------------
Income before income taxes 2,479 2,241
------------------------------
Income tax provision 755 717
------------------------------
NET INCOME $1,724 $1,524
==============================
Change in fair value of common stock (ESOP) 75 --
------------------------------
Net income on common shares not subject to put/call $1,799 $1,524
==============================
Net income per share-basic, not subject to put/call $0.56 $0.50
Net income per share-dilutive, not subject to put/call $0.54 $0.49
Cash dividends declared per share $0.13 $0.10
See accompanying notes to consolidated interim financial statements.
2
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands, except per share data)
1998 1997
------------------------------
Interest income:
Interest and fees on loans $25,590 $22,716
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 572 711
State and municipal 354 293
Mortgage-backed securities 165 --
Interest and dividends on investment securities held to maturity:
U.S. Treasury and U.S. Government agencies 742 1,014
State and municipal 1,469 1,125
Mortgage-backed securities 1,102 1,281
Interest on federal funds sold 188 249
Dividends on FHLB stock 87 30
------------------------------
Total interest income 30,269 27,419
------------------------------
Interest expense:
Interest on deposits 11,363 10,961
Interest on securities sold under agreements to repurchase 524 428
Interest on federal funds purchased 59 63
Interest on commercial paper 395 266
------------------------------
Total interest expense 12,341 11,718
------------------------------
Net interest income 17,928 15,701
Provision for loan losses 1,412 950
------------------------------
Net interest income after provision for
loan losses 16,516 14,751
Non-interest income:
Service charges on deposit accounts 2,545 2,382
Fees for trust services 1,005 709
Other income 1,227 1,078
------------------------------
Total non-interest income 4,777 4,169
Non-interest expenses:
Salaries and other personnel 7,153 6,325
Net occupancy 1,297 1,061
Furniture and equipment 1,323 1,265
FDIC assessment 148 128
Postage and supplies 793 658
Marketing and advertising 529 451
Telephone 450 387
Other expenses 2,568 2,365
------------------------------
Total non-interest expenses 14,261 12,640
------------------------------
Income before income taxes 7,032 6,280
------------------------------
Income tax provision 2,148 1,825
------------------------------
NET INCOME $4,884 $4,455
Change in fair value of common stock (ESOP) (950) (470)
------------------------------
Net income on common shares not subject to put/call $3,934 $3,985
==============================
Net income per share-basic, not subject to put/call $1.40 $1.44
Net income per share-dilutive, not subject to put/call $1.36 $1.41
Cash dividends declared per share $0.37 $0.27
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, 1998 and 1997
(Dollars in Thousands)
1998 1997
------------------------------
Cash flows from operating activities:
Net income $4,884 $4,455
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,026 1,415
Gain on sale of investment securities (141) (40)
Provision for loan losses 1,412 950
Origination of loans held for sale (25,595) (25,077)
Sale of loans held for sale 24,314 29,166
Gain on sale of loans (217) (14)
Change in accrued interest receivable (93) (114)
Change in other assets (2,067) (859)
Change in other liabilities, net 677 13
------------------------------
Net cash provided by operating activities 5,200 9,895
Cash flows from investing activities:
Purchase of investment securities held to maturity (1,559) (23,756)
Purchase of investment securities available for sale (21,446) (10,956)
Proceeds from maturities of investment securities held to maturity 4,000 11,171
Proceeds from maturities of investment securities available for sale1,030 5,400
Proceeds from sale of investment securities available for sale 8,584 3,614
Principal paydowns on mortgage-backed securities held to maturity 6,229 1,989
Principal paydowns on mortgage-backed securities available for sale 349 --
Purchase of Federal Home Loan Bank stock (89) (1,452)
Net increase in loans (31,571) (28,064)
Purchases of premises and equipment (2,131) (1,612)
------------------------------
Net cash used in investing activities (36,604) (43,666)
Cash flows from financing activities:
Net increase in deposit accounts 24,663 26,252
Acquisition of deposits, net 2,029 --
Net increase in securities sold under agreements to repurchase 1,293 3,476
Net increase in commercial paper 1,909 3,173
Net increase (decrease) in federal funds purchased 7,325 (2,475)
Proceeds from issuance of common stock 10 128
Retirement of common stock (75) --
Proceeds from sale of treasury stock -- 125
Dividends paid (1,143) (826)
------------------------------
Net cash provided by financing activities 36,011 29,853
------------------------------
Net increase (decrease) in cash and cash equivalents 4,607 (3,918)
------------------------------
Cash and cash equivalents at beginning of the period 25,927 30,324
------------------------------
Cash and cash equivalents at end of the period $30,534 $26,406
==============================
(Continued)
4
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows Continued (Unaudited)
For Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
------------------------------
Supplemental Information:
Cash paid during the period for:
Interest expense 12,411 11,603
==============================
Income taxes 1,817 1,655
==============================
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain on investment securities
available for sale 211 6
==============================
See accompanying notes to consolidated interim financial statements.
5
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
Common
Accumulated Stock
Additional Other Subject to
Common Paid-in Retained Treasury Comprehensive Put/Call
Stock Capital Earnings Stock Income, net Option Total
----- ------- -------- ----- ----------- ------ -----
Balance at December 31, 1996 15,165 334 15,894 (121) 166 (3,314) 28,124
Net income 4,455 4,455
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net
of tax effect of $10 (21)
Less: reclassification adjustment for gains included
in net income, net of tax effect of $13 27
Net unrealized gains on securities 6
-----------
Comprehensive Income 4,461
-----------
Cash dividend declared (826) (826)
Issuance of 27,600 shares in connection with stock option 138 (10) 128
Sale of 9,111 shares treasury stock 4 121 125
Common stock subject to put/call option (470) (470)
-------------------------------------------------------------------------------
Balance at September 30, 1997 15,303 324 19,527 0 172 (3,784) 31,542
===============================================================================
Balance at December 31, 1997 15,448 317 20,658 0 193 (3,784) 32,832
Net income 4,884 4,884
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $187 298
Less: reclassification adjustment for gains included
in net income, net of tax effect of $54 (87)
Net unrealized gains on securities 211
-----------
Comprehensive Income 5,095
-----------
Cash dividend declared (1,143) (1,143)
Issuance of 1,300 shares in connection with stock option 6 4 10
Retirement of 4,310 shares common stock (21) (54) (75)
Common stock subject to put/call option (950) (950)
-------------------------------------------------------------------------------
Balance at September 30, 1998 15,433 267 24,399 0 404 (4,734) 35,769
===============================================================================
See accompanying notes to consolidated interim financial statements.
6
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, 1997.
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,
1998 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.
3. Summary of Significant Accounting Changes
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 Reporting Comprehensive Income.
The statement is effective for annual and quarterly financial statements for
fiscal years beginning after December 15, 1997, with earlier application
permitted. For the Company, the statement became effective in the first quarter
of 1998 and required reclassification of earlier financial statements for
comparative purposes. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement.
Comprehensive income is defined by the statement as "the changes in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." On January 1, 1998, the Company adopted the provisions
of SFAS No. 130. The Company adopted the Statement of Changes in Equity approach
to disclosing changes in comprehensive income.
7
PALMETTO BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1997
TO SEPTEMBER 30, 1998
Y2K
The Company has completed a study to determine the remedial action necessary
to deal with the year 2000 issue with respect to its computer and business
systems. While most view the project as a data processing or computer concern,
every department and function of the Company is affected and has been included
in the Company's analysis and compliance process. The significance of the risks
for noncompliance are substantial and include business, legal and personal risks
to the Company. The process of assessing the problem has been completed.
The testing phase has begun and is almost completed. All testing is scheduled
to be completed by December 31, 1998. The Company will not rely on assurances
from vendors. Contingency plans have been developed in case the Company's
testing proves that the its systems are not compliant. The Company has
successfully advanced the core application systems' test bank to January 14,
2000, and in-house tests performed to date have shown no Y2K problems
whatsoever. In the unlikely event that the Company's core application systems
proved to not be Y2K compliant, the Company will work with its software
supplier, FiServ, and other FiServ users to get the applications ready. If the
Sunguard software used by trust department appears to not be Y2K compliant by
December 31, 1998, the Company will examine the possibility of switching to
another processor or running the system manually. The Human Resources department
is already considering transferring the payroll processing to another vendor.
Year 2000 readiness will be the first priority and a test must be conducted with
each potential supplier. The Company will transfer the payroll processing to the
successful applicant by June 30, 1999. Based on the results of the system-wide
testing conducted so far and the contingency plans in place, the Company
believes it will be Y2K ready by December 31, 1999.
Implementation of Y2K compliant systems will begin when testing has been
completed on each system. All systems and functions will be implemented and
compliant by December 31, 1999. Year 2000 project progress has been and will
continue to be reported to the Board of Directors at least quarterly until
complete. The historical and estimated costs of remediation are not expected to
be material.
General
On April 13, 1998, the Bank opened a new office on Butler Road in Mauldin,
South Carolina, which is located in Greenville County. On April 17, 1998, the
Bank assumed the deposits of Greenwood Bank & Trust's Ninety-Six office located
in Greenwood County, South Carolina. This assumption of approximately $2 million
increases the Bank's presence in this market. On April 20, 1998, the Bank opened
a new office on Woodruff Road in Greenville, South Carolina. These openings
bring the Bank's total number of branches to 26.
8
Assets
Liquid assets which include cash, federal funds sold, and investments
available for sale increased by $16.6 million, or 38%, for the nine-month
period. This increase was largely due to the increase in cash and due from banks
of $5 million and a $12 million increase in available for sale securities.
During 1997, the Bank joined the Federal Home Loan Bank ("FHLB") of Atlanta
to increase the Bank's available liquidity. As a FHLB member, the Bank is
required to acquire and retain shares of capital stock in the FHLB of Atlanta
based on certain ratios as of the beginning of the year. Based on these
calculations, the Bank was required to make an additional investment of $89,000
in FHLB stock in 1998. No ready market exists for this stock and it has no
quoted market value. However, redemption of this stock has historically been at
par value.
Investment securities held to maturity decreased during the nine-month period
by $8.7 million, or 11%. This decrease was due to maturities of $4 million and
principal pay downs on mortgage-backed securities of $6.2 million. These
decreases were slightly offset by purchases of $1.6 million.
Loans, net, increased by $30.2 million, or 8%, during the nine-month period
as a result of normal growth. The allowance for loan losses was increased to
1.40% from 1.39% at September 30, 1998 and 1997, respectively.
At September 30, 1998, the Company had $1.5 million in loans held for sale
with commitments to sell these loans in October 1998. The mortgage servicing
rights ("MSR") related to the mortgage servicing department's activities are
approximately $1.4 million at September 30, 1998, which represents their fair
value. Loans serviced for the benefit of others amounted to approximately $145.5
million at September 30, 1998.
Other assets increased by $1.4 million, or 18%, due to normal growth, offset
by amortization of intangibles and various prepaids.
Liabilities and Shareholders' Equity
Deposit balances increased by 6% during the period, from $449.4 million to
$476.3 million. The increase was due to normal growth at our existing branches
and concentrated growth at our new branches.
Securities sold under agreements to repurchase have increased by $1.3 million
or 11%, and commercial paper associated with the alternative commercial sweep
accounts (master note program) increased by $1.9 million or 17%. These changes
are the result of normal fluctuations in the accounts. Federal funds purchased
increased by $7.3 million due to normal fluctuations.
Total shareholders equity increased by $2.9 million, for the nine-month
period as a result of net income of $4,884,000 and other comprehensive income of
$211,000; less dividends paid of $1,143,000; and reduced by the increase in the
reclassification of the Employee Stock Ownership Plan (ESOP) shares subject to
put/call of $950,000.
9
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 1998 are subject to the
put/call feature. Accordingly, 270,531 shares are recorded outside of
shareholders' equity at their fair value, which is determined annually by an
independent valuation. The most recent valuation dated April 2, 1998, values the
stock at $17.50 per share. The Company's Board of Directors voted to terminate
the ESOP effective February 28, 1997. The shares distributed in 1998 due to the
termination of the ESOP will be subject to the put/call until June 29, 1999. If
participants elect to take cash instead of stock, their shares are retired by
the Company and the put/call adjusted accordingly.
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, 1998, the Company's liquidity ratio
was 18.58%.
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 $0.37 per share in dividends so far in
1998. 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 8.08%; therefore, at September 30, 1998, the Bank had $6.0 million of excess
retained earnings available for the payment of dividends. The Bank plans to
continue its quarterly dividend payout.
10
Capital Resources
As of September 30, 1998, 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:
- ---------------------------------------------------------------------------
Adequately
As of Capitalized Well Capitalized
9/30/98 Requirement Requirement
- --------------------------- ----------- ------------------- ---------------
Company:
Total Risk-based Capital 10.02% 8.00% 10.00%
Tier 1 Risk-based Capital 8.77 4.00 6.00
Tier 1 Leverage Ratio 6.63 4.00 5.00
Bank:
Total Risk-based Capital 10.03 8.00 10.00
Tier 1 Risk-based Capital 8.78 4.00 6.00
Tier 1 Leverage Ratio 6.62 4.00 5.00
Primary Capital to Assets 8.08 7.00 7.00
- --------------------------- ----------- ------------------- ---------------
Because the Bank's total risk-based capital ratio is 10.03%, the Company is
defined to be "well capitalized" under currently applicable regulatory
guidelines.
Accounting and Reporting Matters
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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). Although the adoption
of this standard changed the appearance of the Company's income statement, there
is not a material difference between basic and diluted earnings per share for
the Company.
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income.
The statement is effective for annual and quarterly financial statements for
fiscal years beginning after December 15, 1997, with earlier application
permitted. For the Company, the statement became effective in the first quarter
of
11
1998 and required reclassification of earlier financial statements for
comparative purposes. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement.
Comprehensive income is defined by the statement as "the changes in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." The Company adopted the Statement of Changes in Equity
approach to disclosing changes in comprehensive income.
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The statement is effective for
financial statements for fiscal years beginning after December 15, 1997, with
earlier application permitted. 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. A company is required to report on
operating segments based on the management approach. An operating segment is
defined as any component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses. The management approach is
based on the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. The Company
anticipates that adoption of this standard will not have a material effect on
the Company.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. The statement is effective for
fiscal years beginning after December 15, 1997. SFAS No. 132 provides additional
information to facilitate financial analysis and eliminates certain disclosures
which are no longer useful. To the extent practical, the statement also
standardizes disclosures for retiree benefits. The Company anticipates that
adoption of this standard will not have a material effect on the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company anticipates
that adoption of this standard will not have a material effect on the Company.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment to SFAS No. 65. This statement is
effective for the first fiscal quarter beginning after December 15, 1998, or
January 1, 1999 for the Company. The statement requires that after the
securitization of mortgage loans held for sale, any retained mortgage-backed
securities be classified in accordance with SFAS No. 115, based on the entity's
ability and intent to sell or hold those investments. Prior to this statement,
mortgage banking entities were required to classify these securities as trading
only. The Company anticipates that adoption of this standard will not have a
material effect on the Company.
12
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
Net income for the three months ended September 30, 1998 was $1.7 million, an
increase of 13% from the $1.5 million reported for the same period in 1997. Net
income per common share-basic, not subject to put/call, was $0.56 for the 1998
period as compared with $0.50 for the comparable period in 1997. Net income per
common share-dilutive, not subject to put/call, was $0.54 for the 1998 period as
compared with $0.49 for the comparable period in 1997.
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, 1998, net interest income was
$6.1 million, which represented an 12% increase from the same period in 1997.
This increase was the result of increases in the volume of earning assets.
Earning assets averaged $501.9 million and $463.9 million during the third
quarters of 1998 and 1997, respectively. The increases in volume were due to the
growth of loans and investments compared to year-end 1997. The average
tax-equivalent net interest margin for the 1998 period was 4.99%, compared to
4.81% for the same period in 1997.
Interest and fees on loans increased 11% due to increased volume and
increased average rate. Interest and dividends on investment securities
decreased 4% during the 1998 period compared to the corresponding period in 1997
due to decreased rate. Interest income on federal funds sold decreased due to
decreased volume of federal funds sold compared to the same period last year.
The yield on average earning assets, which includes loans and investment
securities, remained fairly constant at 8.11% for the three months ended
September 30, 1997 and 8.10% for the three months ended September 30, 1998. The
prime interest rate remained constant at 8.5% for the quarter ended September
30, 1997, but decreased to 8.25% in September 1998. In October 1998, the prime
rate dropped to 8.00%.
Total interest expense increased by 3% during the 1998 period mostly due to
an 9% increase in the volume of deposits at September 30, 1998, compared to
September 30, 1997.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its inherent rate risk exposure. Although the Company
manages other risks, 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 and 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 ad commodity price
risk, do not arise in the normal course of the Company's
13
business activities.
The Company's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis. The
Company monitors the impact of changes in interest rates on its net interest
income using several tools.
The Bank's goal is to minimize interest rate risk between interest bearing
assets and liabilities at various maturities through its Asset-Liability
Management (ALM). ALM involves managing the mix and pricing of assets and
liabilities in the face of uncertain interest rates and an uncertain economic
outlook. It seeks to achieve steady growth of net interest income with an
acceptable amount of interest rate risk and sufficient liquidity. The process
provides a framework for determining, in conjunction with the profit planning
process, which elements of the Company's profitability factors can be controlled
by management. Understanding the current position and implications of past
decisions is necessary in providing direction for the future financial
management of the Company. The Company uses an asset-liability model to
determine the appropriate strategy for current conditions.
Interest sensitivity management is part of the asset-liability management
process. Interest sensitivity gap (GAP) is the difference between total rate
sensitive assets and rate sensitive liabilities in a given time period. The
Company's 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. The Company does not feel that the
market risk to the Company has changed significantly since December 31, 1997.
14
Provision for Loan Losses
The provision for loan losses was $570,000 and $350,000, for the three
months ended September 30, 1998 and 1997, 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 $1,917,000 and $974,000 at September 30, 1998 and 1997,
respectively. The annualized net charge-off ratio has increased from 0.27% at
September 30, 1997 to 0.34% at September 30, 1998. 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 $266,000, or 19%, for the three
months ended September 30, 1998, as compared to the same period in 1997. The
largest portion of this increase can be attributed to other income, which
increased by $115,000, or 33%, during the 1998 period compared to the same
period in 1997 due primarily to a gain of $141,000 on a $6 million sale of
investment securities in September 1998.
The second largest contributor to the increase in non-interest income is
fees for trust services, which increased $99,000, or 42%, due to new business
and increased assets under management.
Other Operating Expenses
Total non-interest expenses increased by $464,000, or 11%, during the 1998
three-month period over the same period in 1997. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$214,000, or 10%, due to normal salary increases and personnel at the new
branches. The second largest contributor to the increase was net occupancy
expense, which increased $74,000, or 19%, due to increased depreciation,
utilities and lease expense related to the new branches.
Income Taxes
The Company incurred income tax expense of $755,000 for the 1998
three-month period compared to $717,000 for the same period in 1997 due to the
increase in taxable income. This expense is based on an expected annual
effective tax rate of approximately 30%.
15
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997
Net income for the nine months ended September 30, 1998 was $4.9 million,
an increase of 10% from the $4.5 million reported for the same period in 1997.
Net income per common share-basic, not subject to put/call, was $1.40 for the
1998 period as compared with $1.44 for the comparable period in 1997. Net income
per common share-dilutive, not subject to put/call, was $1.36 for the 1998
period as compared with $1.41 for the comparable period in 1997. The reason that
net income per share declined in 1998 versus 1997 even though net income
increased is because the adjustment to net income for the ESOP valuation
increased dramatically compared to prior year.
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, 1998, net interest income was
$17.9 million, which represented a 14% increase from the same period in 1997.
This increase was the result of increases in the volume of earning assets.
Earning assets averaged $491.7 million and $449.8 million during the first nine
months of 1998 and 1997, respectively. The increases in volume were due to the
growth of loans and investments compared to year-end 1997. The average tax
equivalent net interest margin for the 1998 period was 5.05%, compared to 4.82%
for the same period in 1997.
Interest and fees on loans increased 13% due to increased volume and
increased rate. Despite growth in the investment security portfolio, interest
and dividends on investment securities remained fairly constant at $4.4 million
during the 1998 period compared to the corresponding period in 1997 due to a
lower weighted average rate (WAR) earned on the portfolio. The WAR (tax
equivalent) on the portfolio was 6.99% and 7.05%, at September 30, 1998 and
1997, respectively. The reduction in the WAR appears reasonable based on the
decrease in the Treasury Yield curve in the last 12 months. At September 30,
1998, the Treasury Yield curve for a 5 year term was 4.08%, compared to 5.98%
one year ago. (The reason the 5 year Treasury Yield curve is used is because the
weighted average life of the investment security portfolio is 5.03 years at
September 30, 1998.) Interest income on federal funds sold decreased due to
decreased average 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, increased from 8.15% for the nine months
ended September 30, 1997 to 8.23% for the nine months ended September 30, 1998.
The prime interest rate remained constant at 8.50% for the first and second
quarters, but decreased to 8.25% in September 1998.
Total interest expense increased by 5% during the 1998 period mostly due to
an increased volume of deposits at September 30, 1998, compared to September 30,
1997. Average total interest-bearing liabilities, increased by 9% from September
30, 1997 to September 30, 1998. The average cost of interest bearing liabilities
decreased from 4.09% during the nine-month period in 1997, to 3.90% during the
1998 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, 1998
16
and 1997" above.
Provision for Loan Losses
The provision for loan losses was $1,412,000 for the nine months ended
September 30, 1998 compared to $950,000 for the nine months ended September 30,
1997. See further discussion under "Comparison of the Results of Operations for
the Three Months Ended September 30, 1998 and 1997" above.
Other Operating Income
Total non-interest income increased by $608,000, or 15%, for the nine
months ended September 30, 1998, as compared to the same period in 1997. The
largest contributor to this increase is fees for trust services, which increased
$296,000, or 42%, due to new business and increased assets under management.
Assets under management were $182.0 million and $142.8 million at September 30,
1998 and 1997, respectively, representing a 27% increase.
The second largest portion of this increase can be attributed to service
charges on deposit accounts, which increased by $163,000, or 7%, during the 1998
period compared to the same period in 1997 due primarily to increased deposit
accounts and increased transactions.
Other Operating Expenses
Total non-interest expenses increased by $1.6 million, or 13%, during the
1998 nine-month period over the same period in 1997. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$828,000, or 13%, due to normal salary increases and personnel at the new
branches. The number of full-time equivalent employees at September 30, 1998 was
303, compared to 280 at September 30, 1997.
The second largest increase was in net occupancy expense which increased
$236,000 or 22%. This increase was due to increased depreciation, rent and
utilities related to the new branches.
Income Taxes
The Company incurred income tax expense of $2.1 million for the 1998
nine-month period compared to $1.8 million for the same period in 1997 due to
the increase in taxable income. This expense is based on an expected effective
tax rate of approximately 30%.
INDUSTRY DEVELOPMENTS
Certain proposed industry-related legislation could have an effect on both
the costs of doing business and the competitive factors facing the financial
institution industry. Because of the uncertainty of the final terms and
likelihood of passage of the proposed legislation, the Company is unable to
assess the impact of any proposed legislation on its financial condition or
operations at this time.
17
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
18
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 Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994: Incorporated
by reference to Exhibit 3.2.2 to the Company's Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
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 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 23, 1998.
27.1* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1998.
18
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 3, 1998
20
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 September 30, 1996.
3.2.1 By-Laws adopted Arpil 10, 1990: Incorporated by
reference to Exhibit 3.2.1 to the Company's Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
3.2.2 Amendment to By-Laws dated April 12, 1994: Incorporated
by reference to Exhibit 3.2.2 to the Company's Annual
Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1997.
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.
21
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 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 23, 1998.
27.1* Financial Data Schedule
* Filed herewith.
22