U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
301 Hillcrest Drive, Laurens, South Carolina 29360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number - (864) 984 - 4551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of February 23, 1999, $103,418,178 based on the
most recent sales price of $38.00 per share. There is no established public
trading market for the shares. See Part II, Item 5.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 3,102,795 February
23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement dated March 19, 1999 with respect to an
Annual Meeting of Shareholders to be held April 20, 1999: Incorporated by
reference in Part III of this Form 10-K.
PALMETTO BANCSHARES, INC.
AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 8. Financial Statements and Supplementary Data 27
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K 54
2
PART I
(Dollars in Thousands, except per share data, throughout document)
Item 1. Business
Palmetto Bancshares, Inc. ("Bancshares" or the "Company") is a bank holding
company organized in 1982 under the laws of South Carolina. Through its
wholly-owned subsidiary, The Palmetto Bank (the "Bank"), and the Bank's
wholly-owned subsidiary, Palmetto Capital, Inc. ("Palmetto Capital"), Bancshares
engages in the general banking business in the upstate South Carolina market of
Laurens, Greenville, Spartanburg, Greenwood, Anderson, and Cherokee counties.
The Bank is a state, non-member bank which was organized and chartered under
South Carolina law in 1906. There are 26 full service branch offices in addition
to the headquarters located in Laurens, South Carolina.
The Bank performs a full range of banking activities, including such services as
checking, savings, money market, and other time deposits of various types of
consumer and commercial depositors; loans for business, real estate, and
personal uses; safe deposit box rental and various electronic funds transfer
services. The Bank also offers both individual and commercial trust services
through an active trust department. Palmetto Capital is a brokerage subsidiary
of the Bank, which offers customers stocks, treasury and municipal bonds, mutual
funds and insurance annuities, as well as college and retirement planning. The
Bank's Dealer Finance Department establishes relationships with Upstate
automobile dealers to provide customer financing of automobile purchases. In the
later part of 1995, the Bank started a mortgage banking operation to continue to
meet a broader range of its customers' financial service needs. This mortgage
banking operation was in full operation by March 1996: originating, selling, and
servicing mortgage loans. Due to a reorganization in the Bank's mortgage
servicing department in 1997, the Bank did not actively purchase and originate
loans to be sold in 1997. The Bank re-engaged in these originating and selling
activities in 1998. The Bank continues to service its portfolio of loans sold.
Financial Information
See Item 8., "Financial Statements and Supplementary Data."
Competition
The upstate South Carolina market is a highly competitive banking market in
which all of the largest financial institutions in the state are represented.
The competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of service rendered and the convenience of banking
facilities. The Bank believes it has competed effectively in its market.
Interstate Banking
In 1986, South Carolina adopted legislation which permits banks and bank holding
companies in certain southern states to acquire banks in South Carolina to the
extent that such other states have reciprocal legislation applicable to South
Carolina banks and bank holding companies. The legislation resulted in a number
of the Bank's competitor banks being purchased by large, out-of-state bank
holding companies. Size gives the larger banks certain advantages in competing
for business from larger corporations. These advantages include higher lending
limits and the ability to offer services in other areas of South Carolina and
the region. As a result, the Bank does not generally attempt to compete for the
banking relationships of larger corporations, but concentrates its efforts on
small and medium-size businesses and individuals. The Bank believes it has
competed effectively in this market segment by offering quality, personalized
service. It is management's intention to remain a locally-based, independent,
South Carolina Bank.
Customers
The majority of the Bank's customers are individuals and small to medium-sized
businesses headquartered within its service area. The Bank is not dependent upon
a single or a very few customers, the loss of which would have a material
adverse effect on the Bank. No customer accounts for more than 5% of the Bank's
total deposits at any time. Management does not believe that the Bank's loan
portfolio is dependent on a single customer or group of customers concentrated
in a particular industry whose loss or insolvency would have a material adverse
effect on the Bank.
3
Growth
For a discussion of growth in the current year, please see the "General" heading
in Managements' Discussion and Analysis, page 12.
Management continually reviews opportunities to expand in the upstate South
Carolina market that it believes to be in the best interest of the Bank and its
customers.
Systems
During 1998, the Company completely tested all of its core application systems
for Year 2000 readiness. For further information, please see the "General"
heading in Managements' Discussion and Analysis, page 12.
In November 1996, the Bank began operating its Telephone Banking Center (the
"TBC"), an in-house sales and service center. The TBC provides the Bank's
customers with more options to do their banking business and offers extended
service hours. The telephone bankers are qualified to answer account inquiries,
process transactions, and provide updated rate and service information.
In 1999, the Bank plans to offer internet banking services to its customers. The
Company also plans on installing a wide area network in the coming year.
Employees
At December 31, 1998, the Bank had 306 full-time equivalent employees, none of
whom are subject to a collective bargaining agreement. Management believes its
relationship with its employees is excellent.
Monetary Policy
The results of operations of Bancshares and the Bank are affected by credit
policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, changes in reserve requirements against member bank
deposits and limitations on interest rates which member banks may pay on time
and savings deposits. In view of changing conditions in the national economy and
in the money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of Bancshares and the Bank.
Regulatory Environment
GENERAL
Bancshares and its subsidiaries are extensively regulated under federal and
state law. To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
may have a material effect on the business and prospects of Bancshares. The
operations of Bancshares may be affected by possible legislative and regulatory
changes and by the monetary policies of the United States.
Bancshares. As a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), Bancshares is subject to regulation and
supervision by the Federal Reserve. Under the BHCA, Bancshares' activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity that the Federal Reserve determines to be so closely
related to banking, managing or controlling banks as to be a proper incident
thereto. The BHCA also restricts the ability of Bancshares to acquire ownership
or control of more than 5% of the outstanding voting stock of banks or certain
other nonbanking businesses.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss exposure to the depositors
of such depository institutions and to the Federal Deposit Insurance Corporation
("FDIC") insurance funds in the event the depository institution becomes in
danger of defaulting or in default under its obligations to repay deposits. For
example, under current federal law, to reduce the likelihood of receivership of
an insured depository institution subsidiary, a bank holding company is required
to guarantee the compliance of any insured depository institution subsidiary
that may become "undercapitalized:" with the terms of any capital restoration
plan filed by such subsidiary
4
with its appropriate federal banking agency up to the lesser of (i) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under a policy of the Federal Reserve with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. The Federal Reserve also has the authority under
the BHCA to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
law grants federal bank regulatory authorities additional discretion to require
a bank holding company to divest itself of any bank or nonbank subsidiary if the
agency determines that divestiture may aid the depository institution's
financial condition.
Bancshares is subject to the obligations and restrictions described above.
However, management currently does not expect that any of those provisions will
have any material impact on its operations.
As a bank holding company registered under the South Carolina Bank Holding
Company Act, Bancshares also is subject to regulation by the State Board.
Bancshares must file with the State Board periodic reports with respect to its
financial condition and operations, management and intercompany relationships
between Bancshares and its subsidiaries.
The Bank. The Bank is a FDIC-insured, South Carolina-chartered banking
corporation and is subject to various statutory requirements and rules and
regulations promulgated and enforced primarily by the State Board and the FDIC.
These statutes, rules and regulations relate to insurance of deposits, required
reserves, allowable investments, loans, mergers, consolidations, issuance of
securities, payment of dividends, establishment of branches and other aspects of
the business of the Bank. The FDIC has broad authority to prohibit the Bank from
engaging in what it determines to be unsafe or unsound banking practices. In
addition, federal law imposes a number of restrictions on state-chartered,
FDIC-insured banks and their subsidiaries. These restrictions range from
prohibitions against engaging as a principal in certain activities to the
requirement of prior notification of branch closings. The Bank also is subject
to various other state and federal laws and regulations, including state usury
laws, laws relating to fiduciaries, consumer credit and equal credit and fair
credit reporting laws. The Bank is not a member of the Federal Reserve System.
Dividends. The holders of Bancshares common stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefor. Bancshares is a legal entity separate and distinct from the
Bank and Palmetto Capital and depends for its revenues on the payment of
dividends from the Bank. Current federal law would prohibit, except under
certain circumstances and with prior regulatory approval, an insured depository
institution, such as the Bank, from paying dividends or making any other capital
distribution if, after making the payment or distribution, the institution would
be considered "undercapitalized," as that term is defined in applicable
regulations. In addition, as a South Carolina-chartered bank, the Bank is
subject to legal limitations on the amount of dividends it is permitted to pay.
In particular, the Bank must receive the approval of the South Carolina
Commissioner of Banking prior to paying dividends to Bancshares.
CAPITAL ADEQUACY
Bancshares. The Federal Reserve has adopted risk-based capital guidelines for
bank holding companies. Under these guidelines, the minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier 1 capital," principally consisting of common shareholders'
equity, noncumulative preferred stock, a limited amount of cumulative perpetual
preferred stock and minority interest in the equity accounts of consolidated
subsidiaries, less certain goodwill items. The remainder (Tier 2 capital) may
consist of a limited amount of subordinated debt and intermediate-term preferred
stock, certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier 1 (leverage) capital ratio under which a bank holding company must
maintain a minimum level of Tier 1 capital (as determined under applicable
rules) to average total consolidated assets of at least 3% in the case of bank
holding companies which have the highest regulatory examination ratios and are
not contemplating significant growth or expansion. All other bank holding
companies are required to maintain a ratio of at least 100 to 200 basis points
5
above the stated minimum. At December 31, 1998, Bancshares was in compliance
with both the risk-based capital guidelines and the minimum leverage capital
ratio.
The Bank. As a state-chartered, FDIC-insured institution which is not a member
of the Federal Reserve System, the Bank is subject to capital requirements
imposed by the FDIC. The FDIC requires state-chartered nonmember banks to comply
with risk-based capital standards substantially similar to those required by the
Federal Reserve, as described above. The FDIC also requires state-chartered
nonmember banks to maintain a minimum leverage ratio similar to that adopted by
the Federal Reserve. Under the FDIC's leverage capital requirement, state
nonmember banks that (a) receive the highest rating during the examination
process and (b) are not anticipating or experiencing any significant growth are
required to maintain a minimum leverage ratio of 3% of Tier 1 capital to total
assets; all other banks are required to maintain a minimum leverage ratio of not
less than 4%. As of December 31, 1998, the Bank was in compliance with both the
risk-based capital guidelines and the minimum leverage capital ratio. For
further discussion on the Bank's current capital rating, see notes to
consolidated financial statements number 17.
INSURANCE
As an FDIC-insured institution, the Bank is subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid by
insured institutions shall be as specified in a schedule required to be issued
by the FDIC that specifies, at semiannual intervals, target reserve ratios
designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department of
the Treasury (the "Treasury Department").
Effective January 1, 1993, the FDIC implemented a risk-based assessment
schedule, having assessments ranging from 0.23% to 0.31% of an institution's
average assessment base. The actual assessment to be paid by each FDIC-insured
institution is based on the institution's assessment risk classification, which
is determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized," as such terms have been defined
in applicable federal regulations adopted to implement the prompt corrective
action provisions of FEDERAL DEPOSIT INSURANCE CORPORATION INSURANCE ACT
("FDICIA") (see "Other Safety and Soundness Regulations -- Prompt Corrective
Action" below), and whether such institution is considered by its supervisory
agency to be financially sound or to have supervisory concerns. In August 1995,
the FDIC approved a reduction in the insurance assessments for Bank Insurance
Fund ("BIF") deposits. This reduction decreased the Bank's insurance assessment
for BIF deposits from 0.26% to 0.04% of the average assessment base. During
1996, the insurance assessment for the Bank's BIF deposits was set at zero
(although banks pay a $2 annual fee) due to the fact that it was "well
capitalized." In 1997 and most of 1998, the Bank was "adequately capitalized,"
and paid insurance premiums ranging from 0.00% to 0.27% of the average
assessment base. Now the Bank has returned to the "well capitalized" category
and should see a reduction in FDIC insurance premiums in 1999.
Under the DEPOSIT INSURANCE FUND ACT, BIF-assessable deposits are subject to
assessment for payment on the $780 million annual Financing Corporation ("FICO")
bond obligation at 1/5 the rate of Savings Association Insurance Fund-assessable
deposits. Accordingly, the FDIC has estimated that the annual FICO rate will be
1.30 basis points per $100 of BIF-assessable deposits in the years 1997 -- 1999.
Starting in the year 2000 until the FICO bonds are retired, banks and thrifts
will pay the assessment on a pro rata basis (estimated at 2.5 basis points for
banks).
OTHER SAFETY AND SOUNDNESS REGULATIONS
Prompt Corrective Action. Current law provides the federal banking agencies with
broad powers to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under uniform regulations defining such capital levels issued
by each of the federal banking agencies, a bank is considered "well capitalized"
if it has (i) a total risk-
6
based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of
6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject
to any order or written directive to meet and maintain a specific capital level
for any capital measure. An "adequately capitalized" bank is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1
risk-
based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or
greater (or 3% or greater in the case of a bank with a composite CAMELS rating
of 1). A bank is considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio
of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of
a bank with a composite CAMELS rating of 1); (B) "significantly
undercapitalized" if the bank has (i) a total risk-based capital ratio of less
than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3%, or (iii) a
leverage ratio of less than 3%; and (C) "critically undercapitalized" if the
bank has a ratio of tangible equity to total assets equal to or less than 2%. At
December 31, 1998, Bancshares and the Bank each currently meet the definition of
well capitalized.
Brokered Deposits. Current federal law also regulates the acceptance of brokered
deposits by insured depository institutions to permit only a "well capitalized"
depository institution to accept brokered deposits without prior regulatory
approval. Under FDIC regulations, "well capitalized" insured depository
institutions may accept brokered deposits without restriction, "adequately
capitalized" insured depository institutions may accept brokered deposits with a
waiver from the FDIC (subject to certain restrictions on payments of interest
rates), while "undercapitalized" insured depository institutions may not accept
brokered deposits. The regulations provide that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" are the same as
the definitions adopted by the agencies to implement the prompt corrective
action provisions of FDICIA (as described in the previous paragraph). Bancshares
does not believe that these regulations will have a material adverse effect on
its current operations.
Other FDICIA Regulations. To facilitate the early identification of problems,
FDICIA required the federal banking agencies to prescribe more stringent
reporting requirements. The FDIC final regulations implementing those
provisions, among other things, require that management report on the
institution's responsibility for preparing financial statements and establishing
and maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness, and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC approved audit procedures. These regulations apply to
financial institutions with greater than $500 million in assets at the beginning
of their fiscal year. Accordingly, the Bank is now subject to these regulations.
COMMUNITY REINVESTMENT ACT
The Bank is subject to the requirements of the COMMUNITY REINVESTMENT ACT
("CRA"). The CRA requires that financial institutions have an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low-income and moderate-income neighborhoods, consistent with the safe
and sound operation of those institutions. Each financial institution's efforts
in meeting community credit needs are evaluated as part of the examination
process pursuant to twelve assessment factors. These factors are also considered
in evaluating mergers, acquisitions and applications to open a branch or
facility. The Bank received an "outstanding" rating in its most recent
evaluation dated April 15, 1996.
TRANSACTIONS BETWEEN BANCSHARES, ITS SUBSIDIARIES AND AFFILIATES
Bancshares' subsidiaries are subject to certain restrictions on extensions of
credit to executive officers, directors, principal shareholders or any related
interest of such persons. Extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unaffiliated persons; and (ii) must
not involve more than the normal risk of repayment or present other unfavorable
features. Aggregate limitations on extensions of credit also may apply.
Bancshares' subsidiaries also are subject to certain lending limits and
restrictions on overdrafts to such persons.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its nonbank subsidiary, on investments in their securities and on the
use of their securities as collateral for loans to any borrower. Such
restrictions may limit Bancshares' ability to obtain funds from its bank
subsidiary for its cash needs, including funds for acquisitions, interest and
operating expenses.
In addition, under the BHCA and certain regulations of the Federal Reserve, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, a subsidiary may not
generally require a customer to obtain other services from any other subsidiary
or Bancshares, and may not require the customer to promise not to obtain other
services from a competitor, as a condition to an extension of credit to the
customer.
7
Item 2. Properties
The corporate headquarters, the telephone banking center, and the finance,
operations, data processing, trust, human resources, loan administration,
internal audit and marketing departments are located in a facility at 301
Hillcrest Drive, Laurens, South Carolina ("Corporate Center"). The main office
of the Bank is located in a facility at 101 West Main Street, Laurens, South
Carolina which also contains a three lane drive-in facility.
The Bank has twenty-six full-service branches in the Upstate region of South
Carolina in the following locations: Laurens (3), Duncan, Clinton, Greenwood
(2), Ninety-Six, Fountain Inn, Hodges, Mauldin, Simpsonville, Anderson (2),
Greenville (5), Pendleton, Spartanburg (3), Inman, Blacksburg and Gaffney.
The Bank has automatic teller machines at the following branches: Church Street
(Laurens), Clinton, Montague Avenue (Greenwood), South Main (Greenwood),
Ninety-Six, Fountain Inn, Mauldin, Simpsonville, Woodruff Road (Greenville),
Haywood Road (Greenville), East North Street at Howell Road (Greenville), Grove
Road (Greenville), Blackstock Road (Spartanburg), Hillcrest (Spartanburg),
Duncan, Inman, Blacksburg, Gaffney, Pendleton, Anderson and North Anderson
branches. The Bank also has ATM's at three non-branch locations: the Flour
Daniel office complex (Greenville), and the Cato Corners Shopping Center
(Laurens). In addition, the Bank owns five limited service branches in various
retirement centers located in the Upstate region of South Carolina.
The Bank owns all of its facilities except the following leased facilities,
which have annual rental expenses from $1 to $115:
East North Street, Haywood Road, East North Street at Howell Road, Woodruff Road
offices - Greenville
Spartan Centre, Blackstock Road, Fernwood, Hillcrest offices - Spartanburg
Gaffney office - Gaffney
South Main Street and Ninety-Six offices - Greenwood
North Main office - North Anderson
Offices range in size from branch locations of approximately 800 to 10,000
square feet, to the Corporate Center location of approximately 55,000 square
feet. The Corporate Center underwent renovations in 1996 totalling approximately
$700 (thousand). Because of the renovations, this location houses the corporate
offices, finance department, and telephone banking center. All facilities are
protected by alarm and security systems which meet or exceed regulatory
standards. Each facility is in good condition and capable of handling increased
volume. All of the locations are considered suitable and adequate for their
intended purposes.
Item 3. Legal Proceedings
Bancshares is not currently engaged in legal proceedings. From time to time 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 Bancshares or the Bank.
8
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
There is no public market for the common stock of Bancshares or the Bank. The
last known selling price of Bancshares' common stock, based on information
available to Bancshares' management, was $38.00 per share on February 17, 1999.
As of February 23, 1999, the Company had 746 shareholders with 3,102,795 shares
outstanding.
Bancshares, or its predecessor, the Bank, has paid regular dividends on common
stock since 1909. For the years ended December 31, 1998, 1997 and 1996,
Bancshares paid cash dividends of $1,544 or $0.50 per share, $1,165 or $0.38 per
share, and $842 or $0.28 per share, respectively. These dollars equate to
dividend payout ratios (dividends declared divided by net income) of 22.54%,
19.66% and 17.72% in 1998, 1997 and 1996, respectively. Certain other
information concerning dividends and historical trading prices is set forth
below.
QUARTERLY COMMON STOCK DATA
Set forth below is information concerning high and low sales prices by quarter
for each of the last two fiscal years and dividend information for the last two
fiscal years. The Company's common stock is not traded on any established public
trading market. The Company acts as its own transfer agent, and the information
concerning sales prices set forth below is derived from the Company's stock
transfer records. As of December 31, 1998, there were 748 shareholders of
record.
SALES PRICES BY QUARTER
Fiscal Year 1998 HIGH LOW
---------------- ----------------------
First Quarter $29.00 $28.00
Second Quarter $35.00 $29.00
Third Quarter $37.00 $35.00
Fourth Quarter $37.00 $35.00
Fiscal Year 1997
First Quarter $22.50 $20.00
Second Quarter $26.50 $20.00
Third Quarter $26.00 $26.00
Fourth Quarter $28.00 $26.00
DIVIDENDS PAID PER SHARE
Fiscal Year 1998 Fiscal Year 1997
---------------- ----------------
March 31 $.12 March 28 $.08
June 30 $.12 June 30 $.09
September 30 $.13 September 30 $.10
December 28 $.13 December 26 $.11
The ability of Bancshares to pay dividends depends upon the amount of dividends
that is received from the Bank. The only restrictions on the amount of dividends
available for payment to Bancshares are guidelines established by the regulatory
authorities for capital to asset ratios. As of December 31, 1998, the Bank's
primary capital to asset ratio was 8.06%.
9
Item 6. Selected Financial Data
5 Year Summary
FOR THE YEAR 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------
Total interest income $ 40,829 36,969 32,191 26,268 21,293
Total interest expense 16,440 15,841 13,810 10,842 7,208
Net interest income 24,389 21,128 18,381 15,426 14,085
Provision for loan losses 1,877 1,331 1,450 1,140 819
Total non-interest income 6,468 5,628 5,018 4,192 4,029
Total non-interest expense 19,130 17,085 15,544 13,630 13,625
Income before income taxes 9,850 8,340 6,405 4,848 3,670
Income tax provision 3,000 2,415 1,652 1,246 910
Net income 6,850 5,925 4,753 3,602 2,760
- ----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income per share-basic, not subject to put/call $ 2.10 1.97 1.54 1.20 0.92
Net income per share-dilutive, not subject to put/call 2.04 1.93 1.51 1.18 0.91
Cash dividends declared 0.50 0.38 0.28 0.22 0.18
Book value at year end (1) 13.62 11.99 10.45 9.27 8.07
Average common shares outstanding (1) 3,089,159 3,054,877 3,007,661 3,010,320 3,000,690
- ----------------------------------------------------------------------------------------------------------------------------------
AT YEAR END
Total assets $ 577,400 513,207 468,377 376,241 312,143
Investment securities 112,542 97,731 82,447 83,404 63,909
Loans 410,012 367,585 332,986 255,187 215,408
Total deposits 499,673 449,390 412,386 329,659 274,527
Total shareholders' equity (2) 42,085 36,616 31,438 27,909 24,213
Total shareholders' equity 37,353 32,832 28,124 25,138 24,213
Common shares outstanding 3,099,695 3,089,552 3,023,841 3,014,940 3,013,452
Full-time equivalent employees 306 281 257 219 210
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Assets $ 541,799 493,737 430,718 342,374 304,883
Investment securities 102,635 97,136 86,655 73,395 67,364
Loans 389,767 350,493 301,839 230,908 204,959
Deposits 467,749 432,031 373,244 294,608 264,785
Total shareholders' equity (2) 39,552 33,858 29,131 26,142 22,868
- ----------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS (1)
Return on average assets 1.26% 1.20% 1.10% 1.05% 0.91%
Return on average equity 17.32% 17.50% 16.32% 13.78% 12.07%
Primary capital to assets at year end 8.21% 8.06% 7.65% 8.33% 8.64%
Net interest margin (fully tax-equivalent) 5.07% 4.80% 4.88% 5.23% 5.33%
Allowance for loan losses to total loans 1.41% 1.40% 1.42% 1.45% 1.40%
Nonperforming assets to total assets 0.33% 0.25% 0.24% 0.20% 0.20%
Net charge-offs to average loans 0.32% 0.26% 0.14% 0.20% 0.10%
Average equity to average asset ratio 7.30% 6.86% 6.76% 7.64% 7.50%
(1) These numbers are calculated using balances and shares of total common
stock outstanding excluding reclassification of ESOP stock for $4,732,
$3,784 and $3,314 at December 31, 1998, 1997 and 1996, respectively.
(2) Excluding reclassification of ESOP stock for $4,732, $3,784 and $3,314 at
December 31, 1998, 1997 and 1996, respectively.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto. The consolidated financial
statements of Palmetto Bancshares, Inc. and subsidiaries (the "Company"),
represent account balances for Palmetto Bancshares, Inc., (the "Parent
Company"), and its wholly-owned subsidiary, The Palmetto Bank, (the "Bank"), and
the Bank's wholly-owned subsidiary, Palmetto Capital, Inc.
Year 2000 Readiness Disclosure
The Year 2000 problem consists of the inability or potential inability of
various software and hardware, including non-computer equipment using embedded
microprocessors, to function properly or at all when dealing with dates beyond
December 31, 1999. The problem has arisen because until recently most software
and hardware was designed to accept only two-digit date codes for the year and
to assume that the first two digits were "19."
The Company has completed a study to determine the remedial action necessary to
deal with the year 2000 problem with respect to its information technology
systems and business relationships. While most view the project as a data
processing or computer concern, every department and function of the Company are
affected and have been included in the Company's analysis and compliance
process. The significance of the risks for noncompliance are substantial and
include both business and legal risks to the Company. The process of assessing
the problem has been completed. 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 direct costs of remediation are not
expected to exceed $150.
INFORMATION TECHNOLOGY SYSTEMS
The Company's information technology ("IT") systems consist of proprietary and
third-party software installed on a mainframe, three local area networks
("LANs") and over 125 terminals, most of which are also personal computers
("PCs"). The mainframe vendor has assured the Company that the mainframe and its
operating system software are Year 2000 compliant, and have been certified as
such by the Information Technology Association of America ("ITAA"). ITAA is a
consortium of more than 11,000 IT professionals committed to developing and
standardizing some of the best IT practices in the world. ITAA is currently the
only independent provider of a Year 2000 certification program. All of the
Company's testing of the network hardware and software associated with the LANs
indicates that such hardware and software is now Year 2000 ready. With respect
to PCs, the Company has identified which PC hardware and software is specified
by the manufacturer as Year 2000 compliant and is in the process of upgrading as
necessary, depending generally on the extent to which specific hardware or
software is mission critical for the Company.
The Company has successfully advanced the core application systems' "test bank"
to April 4, 2000, with such testing revealing no Year 2000 problems. This "test
bank" emulates a production environment, involving relevant applications
software, system software, hardware and critical internal and external
interfaces. Company employees also participate in the user group of the vendor
of this core banking applications system. This user group has also successfully
tested the vendor's systems for Year 2000 readiness. The costs of rennovating
the core system to make it Year 2000 ready were included as part of the
Company's on-going maintenance agreement with the vendor. In addition to the
core banking applications system, the Company has successfully tested its credit
decision making and trust operations software.
ATMS
To address potential Year 2000 problems, the Company has reconfigured its
automatic teller machines ("ATMs") to utilize the mainframe's Year 2000
compliant operating system.
TRANSACTIONS WITH THIRD PARTIES
Other primary areas where Year 2000 compliance is a material issue for the
Company include transactions with the Federal Reserve, payroll processing and
management of the Company's investment portfolio. Testing of the Company's
ability to conduct transactions with the Federal Reserve via the Fedline has not
uncovered any Year 2000 problems. In addition, the Company recently transferred
its payroll processing to a new vendor willing to assure Year 2000 compliance.
The new payroll processing system has been certified Year 2000 ready by ITAA,
and over the next several months, the Company will be conducting Year 2000
testing of the new system. Finally, the Company has
11
reviewed results of Year 2000 testing performed by the Company's agent for its
portfolio account. Those results indicate that the portfolio agent's systems are
Year 2000 ready.
YEAR 2000 IMPACT ON THE LOAN PORTFOLIO
The Company is evaluating the Year 2000 readiness of its borrowers and the
potential effect of such readiness, or lack thereof, on the credit quality of
its loan portfolio. A Year 2000 credit risk policy has been developed requiring
that a risk assessment be performed on new and existing borrowers, with the
exception of certain borrowers that are not significantly exposed to the Year
2000 problem or whose aggregate outstanding debt to the Company is relatively
minimal. As of December 31, 1998, all borrowers covered by the Year 2000 credit
risk policy had been assigned a Year 2000 credit risk rating.
BUSINESS RESUMPTION CONTINGENCY PLANS
Based on the results of the system-wide testing conducted so far and the
Business Resumption Contingency Plans being developed, the Company believes it
will be Year 2000 ready by December 31, 1999. By June 30, 1999, all Business
Resumption Contingency Plans will be completed. These contingency plans will
include consideration of the most reasonably likely worst case scenario that the
Company could encounter.
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
increased 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.
The Company's assets grew $64,193, or 13%, total loans grew $42,427, or 12%, and
deposits grew $50,283, or 11% in 1998 as a result of growth in all geographic
markets. In 1997, total assets grew $44,830, or 10%, total loans grew $34,599,
or 10%, and deposits grew $37,004, or 9%.
Results of Operations
Three Years Ended December 31, 1998, 1997 and 1996
Net income for 1998 was $6,850, an increase of 16% from the $5,925 reported in
1997. Net income in 1997 increased 25% from the $4,753 reported in 1996. Net
income per common share-basic, not subject to put/call was $2.10 in 1998,
compared with $1.97 in 1997, and $1.54 in 1996. Net income per common
share-dilutive, not subject to put/call was $2.04 in 1998, compared with $1.93
in 1997, and $1.51 in 1996. Return on average assets before effect of the ESOP
adjustment (discussed on page 25) was 1.26% in 1998 compared with 1.20% in 1997
and 1.10% 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 earning
assets (primarily loans and investment securities), and interest paid on
deposits and borrowed funds. Net interest income is affected by the interest
rate earned or paid and by volume changes in loans, securities, deposits and
borrowed funds.
In 1998, net interest income was $24,389, which represented a 15% increase over
the $21,128 earned in 1997. This increase is due to increases in the volume of
earning assets and an increase in the net interest margin. In 1997, net interest
income increased $2,747 or 15%, over the $18,381 earned in 1996.
During 1998, the average tax equivalent yield on all interest-earning assets was
8.38%, up from 8.29% and down from 8.42% in 1997 and 1996, respectively. The
prime interest rate remained constant at 8.25% for most of 1998, compared to an
average prime rate of 8.5% and 8.25% for 1997 and 1996, respectively. The Bank's
average effective rate paid on all interest-bearing liabilities decreased in
1998 to 3.86%, from 4.06% and 4.05% in 1997 and 1996, respectively. The Bank's
net tax equivalent yield on interest-earning assets (net interest margin) was
5.07%, 4.80%
12
and 4.88% in 1998, 1997 and 1996, respectively. The Company was able to increase
its net interest margin through strategic asset-liability management as
discussed on page 16.
Interest and fees on loans increased $3,840, or 12% from 1997 to 1998, and
increased $3,908, or 15% from 1996 to 1997 due to loan growth of 12% in 1998 and
10% in 1997. Interest on investment securities increased $38 or 1% from 1997 to
1998 due to a 15% growth in securities, offset by a decrease in the fully
tax-equivalent weighted average rate on the security portfolio from 6.72% in
1997 to 6.59% in 1998. Interest on investment securities increased $616 or 12%
from 1996 to 1997 due to an 19% growth in securities. Interest income on federal
funds sold decreased $79 or 27% due to lower average balances invested. This
compares to an increase of $198, or 213%, from 1996 to 1997 due to higher
average balances invested.
Total interest expense increased 4% or $599 from 1997 to 1998 and 15% or $2,031
from 1996 to 1997. The largest component of total interest expense is interest
expense on deposits, which increased $342 or 2% from 1997 to 1998 due to a 11%
growth in deposits, offset by effective management of the cost of deposits.
Interest expense on deposits increased $2,092 or 16% from 1996 to 1997 due to a
9% growth in deposits. The average rate paid on deposits was 3.24%, 3.43% and
3.41% in 1998, 1997 and 1996, respectively.
Interest on securities sold under agreements to repurchase increased $81, or 14%
from 1997 to 1998 due to an increase in the average balances outstanding, offset
by a decrease in the average rate paid from 4.01% to 3.97%. This compares to an
increase of $99, or 22% from 1996 to 1997 due to an increase in the average rate
paid from 3.84% to 4.01%. Interest on commercial paper increased $139, or 37%,
from 1997 to 1998 due to an increase in the average rate paid from 4.06% to
4.11% and an increase in the average balances outstanding during the year. This
compares to an increase of $68, or 22%, from 1996 to 1997 due to an increase in
the average rate paid from 3.88% to 4.06%. For more information on short term
borrowings, please see notes to consolidated financial statements number 9.
Rate/Volume Analysis
The following table includes, for the years ended December 31, 1998, 1997 and
1996 interest income on earning assets and related average yields, as well as
interest expense on liabilities and related average rates paid. Also shown are
the dollar amounts of change due to rate and volume variances. The effect of the
combination of rate and volume change has been divided equally between the rate
change and volume change.
13
TABLE 1
Rate Volume Analysis
1998 1997
-------------------------------------------------------- ---------------
Average Income/ Volume Rate Average
Assets Balances Expense Yield Change Change Balances
-------- ------- ----- ------ ------ --------
Cash and due from banks $ 22,145 $ 20,098
Federal funds sold 3,876 $ 211 5.44% $ (86) $ 6 5,465
Federal Home Loan Bank stock 1,520 118 7.76% 55 7 779
Taxable investment securities 53,756 3,357 6.24% (452) (85) 60,915
Non-taxable investment securities 48,879 3,408 6.97% 902 (131) 36,221
Loans, net of unearned discount 389,767 34,600 8.88% 3,467 373 350,493
Less: allowance for loan losses (5,393) (4,876)
------------ ---------------
Net loans 384,374 345,617
Premises and equipment, net 14,255 12,679
Accrued Interest 4,065 3,563
Other assets 8,929 8,400
------------ ---------------
Total assets $ 541,799 $ 493,737
============ ===============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing demand 73,266 66,333
Interest-bearing demand 147,580 2,788 1.89% 392 (334) 128,098
Savings 28,718 663 2.31% 26 (39) 27,639
Time 218,185 11,706 5.37% 444 (148) 209,961
-------------------------------------------------------- ---------------
Total deposits 467,749 15,157 3.24% 1,191 (850) 432,031
Federal funds purchased and
securities sold under
agreements to repurchase 18,747 762 4.06% 144 (26) 15,279
Commercial paper 12,668 521 4.11% 134 6 9,382
Other liabilities 3,083 3,187
------------ ---------------
Total liabilities 502,247 459,879
Shareholders' equity:
Common stock - $5.00 par value 15,445 15,288
Capital surplus 302 325
Retained earnings 23,547 18,101
Less: Treasury stock - (37)
Accumulated other
comprehensive income 258 181
------------ ---------------
Total shareholders' equity 39,552 33,858
------------ ---------------
Total liabilities and
shareholders' equity $ 541,799 $ 493,737
============ ===============
Average yield on all interest-earning assets (fully taxable equivalent) 8.38%
Average effective rate paid on all interest-bearing liabilities 3.86%
Net yield on interest-earning assets (fully taxable equivalent) 5.07%
Yields on non-taxable investment securities are stated on a fully taxable
equivalent basis, assuming a federal tax rate of 34% for the three years
reported on. The adjustments made to convert to a fully taxable equivalent basis
were $865, $669 and $655 for 1998, 1997 and 1996, respectively.
The effect of foregone interest income as a result of loans on non-accrual was
not considered in the above analysis.
14
TABLE 1
(CONTINUED)
1997 1996
- -------------------------------------------------------- --------------------------------------------------------------------
Income/ Volume Rate Average Income/ Volume Rate
Expense Yield Change Change Balances Expense Yield Change Change
------- ----- ------ ------ -------- ------- ----- ------ ------
$ 23,743
$ 291 5.32% $ 197 $ 1 1,758 $ 93 5.29% $ (150) $ (137)
56 7.19% 28 28 - - - - -
3,894 6.39% 293 283 56,145 3,318 5.91% 532 (338)
2,637 7.28% 450 (396) 30,510 2,583 8.47% 387 164
30,760 8.78% 4,299 (391) 301,839 26,852 8.90% 6,445 (1,016)
(4,088)
------------
297,751
11,670
3,260
5,881
------------
$ 430,718
============
58,440
2,730 2.13% 277 (240) 115,674 2,693 2.33% 371 (157)
676 2.45% 32 (9) 26,331 653 2.48% 127 (74)
11,410 5.43% 2,018 13 172,799 9,379 5.43% 2,389 83
- ---------------------------------------------------- ----------------------------------------------------------------
14,816 3.43% 2,010 82 373,244 12,724 3.41% 2,673 65
644 4.21% (103) (25) 17,668 773 4.37% 241 30
381 4.06% 52 16 8,075 313 3.88% 2 (30)
2,600
------------
401,587
15,165
334
13,671
(312)
273
------------
29,131
------------
$ 430,718
============
8.29% 8.42%
4.06% 4.05%
4.80% 4.88%
15
Asset-Liability Management and Market Risk Sensitivity
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 and commodity price risk, do
not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates on interest-earning assets and interest-bearing liabilities
do not change at the same speed, to the same extent or on the same basis. The
Company monitors the impact of changes in interest rates on its net interest
income using several tools.
The Bank's goal is to minimize interest rate risk between interest bearing
assets and liabilities at various maturities through its Asset-Liability
Management (ALM). ALM involves managing the mix and pricing of assets and
liabilities in the face of uncertain interest rates and an uncertain economic
outlook. It seeks to achieve steady growth of net interest income with an
acceptable amount of interest rate risk and sufficient liquidity. The process
provides a framework for determining, in conjunction with the profit planning
process, which elements of the Company's profitability factors can be controlled
by management. Understanding the current position and implications of past
decisions is necessary in providing direction for the future financial
management of the Company. The Company uses an asset-liability model to
determine the appropriate strategy for current conditions.
Interest sensitivity management is part of the asset-liability management
process. Interest sensitivity gap (GAP) is the difference between total rate
sensitive assets and rate sensitive liabilities in a given time period. The
Company's rate sensitive assets are those repricing within one year and those
maturing within one year. Rate sensitive liabilities include insured money
market accounts, savings accounts, interest-bearing transaction accounts, time
deposits and borrowings. The profitability of the Company is influenced
significantly by management's ability to manage the relationship between rate
sensitive assets and liabilities. At December 31, 1998, approximately 27% of the
Company's earning assets could be repriced within one year compared to
approximately 92% of its interest-bearing liabilities. This compares to 26% and
95%, respectively, in 1997 and 28% and 93%, respectively, in 1996.
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. At
December 31, 1998, this model shows that if interest rates rose by 300 basis
points over the next twelve months, net interest margin would be adversely
affected by approximately 10%. 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.
16
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Company could undertake in response to changes in interest
rates.
On the following pages, Table 2 shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected maturity,
and the instruments' fair values at December 31, 1998. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
Notes to Market Risk Sensitivity table:
o Expected maturities are contractual maturities adjusted for prepayments of
principal when possible. The Company uses certain assumptions to estimate
fair values and expected maturities.
o For loans, the Company has used contractual maturities due to the fact that
the Company has no historical information on prepayment speeds. Since most
of these loans are consumer and commercial loans, and since the Company's
customer base is community-based, the Company feels its prepayment rates
are insignificant.
o For mortgage-backed securities, expected maturities are based upon
contractual maturity, projected repayments and prepayment of principal. The
prepayment experience herein is based on industry averages as provided by
the Company's investment trustee.
o Loans receivable includes non-performing loans and unamortized deferred
loan costs, and is reduced by unamortized discounts. It does not include
Loans Held for Sale as those are not considered to be interest-sensitive
given that the Bank already has commitments to sell these loans at agreed
upon rates.
o Interest-bearing liabilities are included in the period in which the
balances are expected to be withdrawn as a result of contractural
maturities. For accounts with no stated maturities, the balances are
included in the one day category.
o The interest rate sensitivity gap represents the difference between total
interest-earning assets and total interest-bearing liabilities.
An important aspect of achieving satisfactory net interest income is the
composition and maturities of rate sensitive assets and liabilities. Table 2
generally reflects that in periods of rising interest rates, rate sensitive
liabilities will reprice faster than rate sensitive assets, thus having a
negative effect on net interest income. It must be understood, however, that
such an analysis is only a snapshot picture and does not reflect the dynamics of
the market place. Therefore, management reviews simulated earnings statements on
a monthly basis to more accurately anticipate its sensitivity to changes in
interest rates.
The table below shows the amounts of loans included in Table 2, except for real
estate-mortgage and installment loans to individuals, due to mature and
available for repricing within the time period stated.
TABLE 3
Maturities and Sensitivity of Selected Loans to Changes in Interest Rates
After 1 Year
1 Year Through After 5
or Less Five Years Years Total
------- ---------- ----- -----
Commercial, financial and agricultural $ 42,721 40,318 9,569 92,608
Real estate-construction 6,634 2,924 702 10,260
--------- --------- -------- --------
Total $ 49,355 43,242 10,721 102,868
========= ========== ======== ========
The amounts of the preceding loans with a maturity over one year which have a
predetermined interest rate or a floating or adjustable interest rate are as
follows:
December 31, 1998
Predetermined interest rate $ 53,513
Floating or adjustable interest rate -
Total $ 53,513
=========
Thirty-three percent of total loans are repricable within one year.
17
TABLE 2
Market Risk Sensitivity
Expected Maturity/Repricing/Principal Repayments at December 31, 1998
1999
-----------------------------------------------------------
Average 2 Days to 3 to 6 6 to 12
Rate 1 Day 3 Months Months Months
---- ----- -------- ------ ------
Interest-sensitive assets:
Federal funds sold 5.44% $ 110 - - -
Federal Home Loan Bank stock 7.76% - - - -
Mortgage-backed investment securities 6.15% 171 3,406 - -
Other investment securities 7.02% 185 - 1,085 2,042
Loans receivable 8.88% 54,043 35,251 31,682 12,794
===========================================================
Total interest-earning assets 8.38% $ 54,509 38,657 32,767 14,836
===========================================================
Interest-sensitive liabilities:
Interest-bearing demand 1.15% 99,762 - - -
Insured money markets 3.05% 56,258 - - -
Savings deposits 2.31% 27,939 - - -
Time deposits over $100 - 21,467 9,609 8,490
Other time deposits 53 67,544 50,888 36,554
===========================================================
Total time deposits 5.37% 53 89,011 60,497 45,044
===========================================================
Short-term borrowings 4.14% 32,489 - - -
===========================================================
Total interest-bearing
liabilities 3.86% $ 216,501 89,011 60,497 45,044
===========================================================
Interest rate sensitivity gap $(161,992) (50,354) (27,730) (30,208)
================================================
Cumulative interest rate sensitivity gap $(161,992) (212,346) (240,076) (270,284)
================================================
Cumulative interest rate sensitive gap
as a % of total interest-earning assets -30.90% -40.51% -45.80% -51.56%
================================================
Off-balance sheet items:
Commitments to extend credit * - - - -
Unused lines of credit 7.94% - - - -
- -----------------------------------------
* There is no way to determine the rates on the commitments because they
have not been set yet. The rates will vary according to prime.
NOTE: For information regarding how fair values were determined, please
see notes to consolidated financial statements, number 15.
18
TABLE 2
(CONTINUED)
- -----------------------------------------------------------------
There- Carrying Fair
2000 2001 2002 2003 after Value Value
---- ---- ---- ---- ----- ----- -----
- - - - - 110 110
- - - - 1,541 1,541 1,541
1,646 1,714 8,381 15,141 - 30,459 30,596
5,180 7,370 6,475 2,568 57,178 82,083 84,228
41,035 42,510 86,056 31,576 75,065 410,012 408,354
-
=========================================================================================
47,861 51,594 100,912 49,285 133,784 524,205 524,829
=========================================================================================
- - - - - 99,762 99,762
- - - - - 56,258 56,258
- - - - - 27,939 27,939
5,978 540 628 - - 46,712
21,226 4,553 4,383 - 13 185,214
=========================================================================================
27,204 5,093 5,011 - 13 231,926 234,101
=========================================================================================
- - - - - 32,489 32,489
=========================================================================================
27,204 5,093 5,011 - 13 448,374 450,549
=========================================================================================
20,657 46,501 95,901 49,285 133,771 75,831
==============================================================================
(249,627) (203,126) (107,225) (57,940) 75,831 -
==============================================================================
-47.62% -38.75% -20.45% -11.05% 14.47% 0.00%
==============================================================================
- - - - 73,539 73,539 73,539
- - - - 15,839 15,839 15,839
19
Provision For Loan Losses
The allowance for possible loan losses is established through charges to expense
in the form of a provision for loan losses. The provision for loan losses was
$1,877, $1,331 and $1,450, respectively, for the years ended December 31, 1998,
1997 and 1996. The provision in 1998 reflects replenishing the allowance for
loan losses to cover net charge-offs of $1,234, plus providing for the 12%
increase in total loans outstanding. The allowance for loan losses totaled
$5,795, $5,152 and $4,729 at December 31, 1998, 1997 and 1996, respectively. The
level of the allowance for loan losses to total loans outstanding is 1.41% at
December 31, 1998. This compares to 1.40% and 1.42% as of December 31, 1997 and
1996, respectively. Net charge-offs to average loans are 0.32% for 1998 as
compared to 0.26% for 1997 and 0.14% for 1996.
TABLE 4
Summary of Loan Loss and Recovery Experience
(Dollars in Thousands)
The allowance for loan losses is based on an in-depth analysis of the loan
portfolio. Specifically, included in that analysis are the following types of
loans: loans determined to be of a material amount, loans commented on by
regulatory authorities, loans which are past due more than 60 days and loans
which are in a non-accrual status. The unallocated portion of the reserve has
been established for other credit risks that are not related to individual
credits but is necessary to provide for probable losses inherent in the loan
portfolio. Based on the above analysis, management makes a provision for
possible loan losses which will bring the allowance for loan losses to an
adequate level.
The following table summarizes the activity in the allowance for loan losses for
the years indicated:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Average loans, net of unearned discount $ 389,767 350,493 301,839 230,908 204,959
========== ========== ========== ========== ========
Allowance for loan losses:
Beginning balance $ 5,152 4,729 3,700 3,016 2,394
Add provision for loan losses 1,877 1,331 1,450 1,140 819
Loan charge-offs:
Commercial, financial and agricultural 344 158 131 262 100
Real estate - construction - - - - -
Real estate - mortgage - - 92 14 -
Installment loans to individuals 1,018 891 487 337 357
---------- ---------- ---------- ---------- --------
Total loan charge-offs 1,362 1,049 710 613 457
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 5 56 42 60 123
Real estate - construction - - - - -
Real estate - mortgage - - 65 33 -
Installment loans to individuals 123 85 182 64 137
---------- ---------- ---------- ---------- --------
Total recoveries of loans previously charged off 128 141 289 157 260
---------- ---------- ---------- ---------- --------
Net charge-offs 1,234 908 421 456 197
---------- ---------- ---------- ---------- --------
Ending balance $ 5,795 5,152 4,729 3,700 3,016
========== ========== ========== ========== ========
Net charge-offs to average loans, net 0.32% 0.26% 0.14% 0.20% 0.10%
Allowance for loan losses to average
loans, net 1.49 1.47 1.57 1.60 1.47
Allowance for loan losses to total loans at
period-end 1.41 1.40 1.42 1.45 1.40
Losses and recoveries are charged or credited to the allowance at the time
realized.
20
The following table summarizes the allocation of the allowance for loan losses
at December 31:
1998 1997 1996 1995 1994
% of % of % of % of % of
Total Total Total Total Total Total Total Total Total Total
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance applicable to:
Commercial,
financial and
agricultural$ 1,309 22.59% 1,145 22.22% 974 20.61% 658 17.78% 457 15.15%
Real estate -
construction 145 2.50 123 2.39 136 2.88 79 2.14 27 0.90
Real estate -
mortgage 3,025 52.20 2,739 53.17 2,582 54.59 2,161 58.40 1,887 62.60
Installment loans
to individuals 1,316 22.71 1,145 22.22 1,037 21.92 802 21.68 644 21.35
------ ------- ------- -------- ------- ------- ----- -------- ------ ------
Total $ 5,795 100.00% 5,152 100.00% 4,729 100.00% 3,700 100.00% 3,016 100.00%
====== ======= ======= ======== ======= ======= ===== ======== ====== ======
Non-Interest Income
Non-interest income for 1998 increased by $840 or 15% over 1997, as compared to
an increase in 1997 of $610 or 12% over 1996. These increases generally resulted
from increased fees for trust services, which continued to increase in 1998 to
$1,343 from $986 in 1997 and $861 in 1996. Fees for trust services increased 36%
as a result of the generation of new trust business and additional assets under
management, which increased 25%. The trust department had assets under
management of $190,866, $152,968 and $122,667 at December 31, 1998, 1997 and
1996, respectively.
A significant contributor to non-interest income is service charges on deposit
accounts which increased 7% as a result of increases in the volume of deposit
relationships. Management views deposit fee income as a critical influence on
profitability. Periodic monitoring of competitive fee schedules and examination
of alternative opportunities insure that the Company realizes the maximum
contribution to profits from this area.
There were $150, $40 and $21 of gains from sales of investment securities during
1998, 1997 and 1996, respectively. These gains were in response to the market
rebound in the recent years. The larger gain in 1998 was due to a conscientious
restructuring of the investment portfolio. In 1998, the Company sold $6 million
of "over-priced" U.S. Treasury notes in order to reinvest in more
economically-priced, shorter-term municipal securities.
Non-Interest Expenses
Non-interest expenses totaled $19,130 in 1998 as compared to $17,085 in 1997 and
$15,544 in 1996. This represented a 12% increase from 1997 to 1998, and a 10%
increase from 1996 to 1997. The overall increases during the year were due to
growth in all geographic markets, which is evidenced by the growth in deposits
of 11% from 1997 to 1998 and 9% from 1996 to 1997. Salaries and other personnel
expense, which comprised 49% of total non-interest expenses for 1998, were up
$960 or 11% over 1997 due to normal salary increases and increased personnel due
to the two new branches. During 1997 and 1996, salaries and other personnel
expenses accounted for 50% and 48%, of total other operating expenses,
respectively.
Combined net occupancy and furniture and equipment expenses increased $381, or
12% from 1997 to 1998, as compared to an increase of $179, or 6%, in 1997. The
increase in 1998 is due to the opening of two new branches. The increase in 1997
is due to normal growth and activity.
Postage and supplies expense increased 22% from $885 in 1997 to $1,081 in 1998.
This increase can be attributed to growth in all geographical markets, as well
as the opening of two new branches in 1998. Postage and supplies expense
increased by only 1% from 1996 to 1997.
21
Income Taxes
Income tax expense totaled $3,000 in 1998 as compared to $2,415 in 1997 and
$1,652 in 1996. The changes in income tax expense for all three years were due
to changes in taxable income for each respective year. Taxable income is
affected by net income, income on tax exempt investment securities and loans,
and the provision for loan losses. For tax purposes, the Bank can only recognize
actual loan losses. The Company works actively with outside tax consultants to
minimize tax expense.
Financial Condition
As of December 31, 1998, 1997 and 1996
At December 31, 1998, Bancshares had total assets of $577.4 million, loans
outstanding of $410.0 million and deposits of $499.7 million. This compares with
total assets of $513.2 million, loans outstanding of $367.6 million and deposits
of $449.4 million, at December 31, 1997; and with total assets of $468.4
million, loans outstanding of $333.0 million and deposits of $412.4 million, at
December 31, 1996. The table on the following page shows the average balances
and distributions of the Company's assets and liabilities for each of the last
four years.
Loans and Asset Quality
Management of the Company believes that the loan portfolio is adequately
diversified. Commercial loans are spread through numerous types of businesses
with no particular industry concentrations. Loans to individuals are made
primarily to finance consumer goods purchased. At December 31, 1998, total
loans, net of unearned discounts, were 78% of total earning assets. Loans
secured by real estate accounted for 55% of total loans as of December 31, 1998.
Most of the loans classified as real estate-mortgage are commercial loans where
real estate provides additional collateral.
Non-accrual loans are those loans which management, through its continuing
evaluation of loans, has determined offer a more than normal risk of
collectability of future interest. Interest income on non-accrual loans is
recognized only as received. Interest on past due loans continues to accrue
until such time that the loans are either charged-off or placed in non-accrual
status. The non-accrual loan policy provides that it is the responsibility of
the chief credit officer to administer the placing of loans on non-accrual
status. Loans which become ninety days past due will be placed on non-accrual.
Loans on which bankruptcy notices are received will also be placed on
non-accrual. In addition, other loans on which repayment appears doubtful may be
placed on non-accrual at the discretion of the chief credit officer.
Non-performing loans for 1998, 1997 and 1996 were approximately $1,572 or 0.38%
(of total loans), $862 or 0.23% and $1,113 or 0.33%, respectively. The majority
of these non-performing loans are smaller-balance homogeneous consumer loans.
For information on impaired loans, please see footnote number 5.
Table 6 on page 24 sets forth, for each loan category, the amounts of total
loans 90 days or more past due and on non-accrual, the amounts of total loans 90
days or more past due and accruing, total loans outstanding, the percentage of
each type of loan 90 days or more past due and the amount of foregone interest
income for each of the five years for December 31, 1994 through December 31,
1998.
22
Table 5
Distribution of Assets and Liabilities
(DOLLARS IN THOUSANDS)
Years Ended December 31,
1998 1998 1997 1997 1996 1996 1995 1995
Average % of Average % of Average % of Average % of
ASSETS Balance Total Balance Total Balance Total Balance Total
------- ----- ------- ----- ------- ----- ------- -----
Cash and due from banks $22,145 4.09% 20,098 4.07% 23,743 5.51% 21,724 6.35%
Federal funds sold 3,876 0.72% 5,465 1.11% 1,758 0.41% 3,684 1.08%
Federal Home Loan Bank stock 1,520 0.28% 779 0.16% - - - -
Taxable investment securities 53,756 9.92% 60,915 12.34% 56,145 13.04% 47,618 13.91%
Non-taxable investment securities 48,879 9.02% 36,221 7.34% 30,510 7.08% 25,777 7.53%
Loans, net of unearned discount 389,767 71.94% 350,493 70.99% 301,839 70.08% 230,908 67.44%
Less: allowance for loan losses (5,393) -1.00% (4,876) -0.99% (4,088) -0.95% (3,247) -0.95%
--------------------------------------------------------------------------------
Net loans 384,374 70.94% 345,617 70.00% 297,751 69.13% 227,661 66.49%
Premises and equipment, net 14,255 2.63% 12,679 2.57% 11,670 2.71% 10,275 3.00%
Accrued Interest 4,065 0.75% 3,563 0.72% 3,260 0.76% 2,495 0.73%
Other assets 8,929 1.65% 8,400 1.70% 5,881 1.37% 3,140 0.92%
--------------------------------------------------------------------------------
Total assets $541,799 100.00% 493,737 100.00% 430,718 100.00% 342,374 100.00%
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing deposits 73,266 13.52% 66,333 13.43% 58,440 13.57% 44,299 12.94%
Interest-bearing demand 147,580 27.24% 128,098 25.94% 115,674 26.86% 100,236 29.28%
Savings 28,718 5.30% 27,639 5.60% 26,331 6.11% 21,518 6.28%
Time 218,185 40.27% 209,961 42.52% 172,799 40.12% 128,555 37.55%
--------------------------------------------------------------------------------
Total deposits 467,749 86.33% 432,031 87.50% 373,244 86.66% 294,608 86.05%
Federal funds purchased and securities sold under
agreements to repurchase 18,747 3.46% 15,279 3.09% 17,668 4.10% 12,020 3.51%
Commercial paper 12,668 2.34% 9,382 1.90% 8,075 1.87% 8,017 2.34%
Note payable to a bank - - - - - - 107 0.03%
Other liabilities 3,083 0.57% 3,187 0.65% 2,600 0.60% 1,480 0.43%
--------------------------------------------------------------------------------
Total liabilities 502,247 92.70% 459,879 93.14% 401,587 93.24% 316,232 92.36%
Shareholders equity:
Common stock - $5.00 par value 15,445 2.85% 15,288 3.10% 15,165 3.52% 15,163 4.43%
Capital surplus 302 0.06% 325 0.07% 334 0.08% 333 0.10%
Retained earnings 23,547 4.35% 18,101 3.67% 13,671 3.17% 10,615 3.10%
Less: Treasury stock - - (37) -0.01% (312) -0.07% (239) -0.07%
Accumulated other comprehensive income 258 0.05% 181 0.04% 273 0.06% 270 0.08%
--------------------------------------------------------------------------------
Total shareholders' equity 39,552 7.30% 33,858 6.86% 29,131 6.76% 26,142 7.64%
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $541,799 100.00% 493,737 100.00% 430,718 100.00% 342,374 100.00%
===============================================================================
23
TABLE 6
Nonperforming Loans
(Dollars in Thousands)
90 Days Foregone
or More Interest
Past Due Percentage Income
and not on Total 90 Days From
Non- Non- Loans or More Non-
Accrual Accrual Outstanding Past Due Accrual
December 31, 1998:
Commercial, financial and agricultural $ 223 - 92,608 0.24% 26
Real estate - construction - - 10,260 0.00 -
Real estate - mortgage 445 - 214,010 0.21 22
Installment loans to individuals 817 87 93,134 0.97 82
--------- ------- --------- -------- ---------
Total $ 1,485 87 410,012 0.38% 130
========= ======= ========= ======== =========
December 31, 1997:
Commercial, financial and agricultural 63 - 81,678 0.08 2
Real estate - construction - - 8,799 0.00 -
Real estate - mortgage 256 - 195,462 0.13 26
Installment loans to individuals 399 144 81,646 0.67 38
--------- ------- --------- -------- ---------
Total $ 718 144 367,585 0.23% 66
========= ======= ========= ======== =========
December 31, 1996:
Commercial, financial and agricultural 140 - 68,617 0.20 4
Real estate - construction - - 9,598 0.00 -
Real estate - mortgage 428 - 181,775 0.24 25
Installment loans to individuals 545 - 72,996 0.75 23
--------- ------- --------- -------- ---------
Total $ 1,113 - 332,986 0.33% 52
========= ======= ========= ======== =========
December 31, 1995:
Commercial, financial and agricultural 146 - 45,377 0.32 20
Real estate - construction - - 5,453 0.00 -
Real estate - mortgage 241 - 149,017 0.16 11
Installment loans to individuals 409 3 55,340 0.74 35
--------- ------- --------- -------- ---------
Total $ 796 3 255,187 0.31% 66
========= ======= ========= ======== =========
December 31, 1994:
Commercial, financial and agricultural 295 - 32,672 0.90 14
Real estate - construction - - 1,941 0.00 -
Real estate - mortgage - - 134,789 0.00 9
Installment loans to individuals 341 18 46,006 0.78 27
--------- ------- --------- -------- ---------
Total $ 636 18 215,408 0.30% 50
========= ======= ========= ======== =========
24
Deposits
For the average balances and average rates paid by category of deposit for the
years ended December 31, 1998, 1997 and 1996, please see Table 1 on pages 14-15.
The company has no foreign deposits.
The following table sets forth, by time remaining to maturity, domestic
certificates of deposit over $100, as of December 31, 1998, 1997 and 1996.
TABLE 7
Maturities of Time Deposits Over $100
1998 1997 1996
---- ---- ----
Maturities:
3 months or less $ 21,467 23,062 18,082
3 through 6 months 9,609 12,206 8,569
6 through 12 months 8,490 11,004 11,286
Over 12 months 7,146 3,680 4,163
------------- ------------- -------------
$ 46,712 49,952 42,100
============= ============= =============
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 December 31, 1998, the Company's liquidity ratio was
approximately 21%.
The Company's liquidity position is dependent upon its debt servicing needs and
dividends declared. The Company had no outstanding debt at December 31, 1998 and
1997, respectively.
During 1991 the Company began selling commercial paper as an alternative
investment tool for its commercial customers (Master note program). The
commercial paper is issued only in conjunction with the automated sweep account
customer agreement on deposits at the Bank level. At December 31, 1998, the
Company had $10,859 in commercial paper with a weighted average rate of 3.06%,
as compared to $11,289 in 1997 with a weighted average of 3.69% and $7,435 in
1996 with a weighted average rate of 4.69%.
The Parent Company's liquidity needs are met through the payment of dividends
from the Bank. At December 31, 1998, the Bank had available retained earnings of
$6,191 for payment of dividends. Prior approval of the Office of the
Commissioner of Banking, State Board of Financial Institutions is required for
any payment of dividends by a state bank.
The Bank's liquidity is affected by its ability to attract deposits, the
maturity of its loan portfolio, the flexibility of its investment securities,
lines of credit from correspondent banks, and current earnings. Sufficient
liquidity must be available to meet continuing loan demand and deposit
withdrawal requirements. Competition for deposits is intense in the markets
served by the Bank. However, the Bank has been able to attract deposits as
needed through pricing adjustments and expansion of its geographic market area.
The deposit base is comprised of diversified customer deposits with no one
deposit or type of customer accounting for a significant portion. Therefore,
withdrawals are not expected to fluctuate from historical levels. The loan
portfolio of the Bank is a source of liquidity through maturities and repayments
by existing borrowers. The investment securities portfolio is a source of
liquidity through scheduled maturities and sales of securities, and prepayment
of principal on mortgage-backed securities. Approximately 62% of the securities
portfolio was pledged to secure liabilities as of December 31, 1998, as compared
to 63% at December 31, 1997. Management believes that its sources of liquidity
are adequate to meet operational needs. Additional sources of short-term
liquidity are existing lines of credit from correspondent banks totaling $80
million, all of which are available. Loan demand has been constant and loan
originations can be controlled through pricing decisions.
25
Capital Resources
At December 31, 1998 the Company and the Bank were each categorized as "well
capitalized," under the regulatory framework for prompt corrective action. At
December 31, 1997 the Company and the Bank were each categorized as "adequately
capitalized," under the regulatory framework for prompt corrective action. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The Company was categorized as "adequately capitalized" due to the infusion of
approximately $54,000 in deposits related to the acquisition of the three
branches in 1996. As a result of this change in capital adequacy, the Bank
incurred higher FDIC insurance premiums in 1998 and 1997 compared to 1996. The
Company's strategic plan for controlled growth and profit improvement generated
enough internal capital to return the risk-weighted ratios to the
"well-capitalized" guidelines during 1998. Please see notes to consolidated
financial statements number 17 for the Company's and the Bank's various capital
ratios at December 31, 1998.
Pursuant to the Internal Revenue Code of 1986, as amended, and the regulations
thereunder, the stock in the Employee Stock Option Plan (the "ESOP") has a put
and a call feature if the stock is not "readily tradable on an established
market." This term was clarified in 1995 as a result of a private letter ruling,
to mean publicly 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 those recently distributed are subject to the put/call feature.
Accordingly, 270,384 shares of common stock are now recorded outside
shareholders' equity at their fair value, which is determined by an independent
valuation. 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 are subject to the put/call until June 29, 1999.
In the coming year, the Company plans on making various capital expenditures to
enhance its computer systems in order to improve its service to its customers.
The Company plans on offering internet banking to its customers in 1999. The
estimated costs for the hardware, software, installation and consulting services
needed to complete this project are approximately $62. The Company also plans on
installing a wide area network at an estimated cost of $350 for the hardware and
engineering services required. The source of financing for both projects will be
current earnings.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Virtually all of the assets and
liabilities of the Bank are monetary in nature and, as a result, its operations
can be significantly affected by interest rate fluctuations as discussed above.
Therefore, inflation will affect the Bank only to the extent that interest rates
change and according to the Bank's sensitivity to such changes. The Company
attempts to manage the effects of inflation through its asset/liability
management as described above in "Asset-Liability Management and Market Risk
Sensitivity."
Accounting and Reporting Changes
In June 1997, the FASB issued SFAS Nos. 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 change 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." While
the adoption of this statement changed the look of the Company's financial
statements, it did not have a material effect on the Company.
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
26
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 adoption of this standard did 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. Although the adoption of this
standard changed the look of note number 11 to the consolidated financial
statements, the adoption of this standard did 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, with earlier
adoption permitted. 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 adopted SFAS No. 133 in its entirety effective January 1, 1999. On
January 1, 1999, the Company transferred 100% of its held-to-maturity investment
securities to the available-for-sale category at fair value as allowed by SFAS
No. 133. Such transfers from the held-to-maturity category at the date of
initial adoption shall not call into question the Company's intent to hold other
debt securties to maturity in the future. The adoption of this standard did 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 adoption of this standard did not have a material effect on the
Company.
Industry Developments
Certain recently-enacted and proposed legislation could have an effect on both
the costs of doing business and the competitive factors facing the financial
institution's 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth on the following pages, 28
through 53.
27
Independent Auditors' Report
The Board of Directors
Palmetto Bancshares, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of Palmetto
Bancshares, Inc. and subsidiary (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Palmetto Bancshares,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
February 12, 1999
28
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands, except per share data)
Assets 1998 1997
- ------- ---- ----
Cash and due from banks $ 27,929 25,539
Federal funds sold 110 388
Federal Home Loan Bank stock, at cost 1,541 1,452
Investment securities held to maturity (market values of $68,737
and $81,578 in 1998 and 1997, respectively) 66,455 80,006
Investment securities available for sale (amortized cost of $45,551
and $17,410 in 1998 and 1997, respectively) 46,087 17,725
Loans held for sale 2,122 -
Loans 410,012 367,585
Less allowance for loan losses (5,795) (5,152)
-------------- -------------
Loans, net 404,217 362,433
-------------- -------------
Premises and equipment, net 14,347 13,386
Accrued interest 4,499 3,990
Other assets 10,093 8,288
-------------- -------------
Total assets $ 577,400 513,207
============== =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 83,788 70,595
Interest-bearing 415,885 378,795
-------------- -------------
Total deposits 499,673 449,390
Securities sold under agreements to repurchase 21,630 12,224
Commercial paper (Master note) 10,859 11,289
Federal funds purchased - 1,500
Other liabilities 3,153 2,188
-------------- -------------
Total liabilities 535,315 476,591
-------------- -------------
Common stock subject to put/call option (ESOP) 4,732 3,784
Shareholders' equity:
Common stock - $5.00 par value. Authorized
10,000,000 shares; issued and outstanding 3,099,695 in 1998;
issued and outstanding 3,089,552 in 1997; 15,498 15,448
Capital surplus 293 317
Retained earnings 25,964 20,658
Accumulated other comprehensive income 330 193
Common stock subject to put/call option, 270,384 shares at $17.50
per share in 1998 and 275,180 shares at $13.75 per share in 1997 (4,732) (3,784)
------------- -------------
Total shareholders' equity 37,353 32,832
-------------- -------------
Total liabilities and shareholders' equity $ 577,400 513,207
============== =============
See accompanying notes to consolidated financial statements.
29
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands, except per share data)
1998 1997 1996
---- ---- ----
Interest income:
Interest and fees on loans $ 34,600 30,760 26,852
Interest and dividends on investment securities available for sale:
U.S. Treasury 682 909 1,310
State and municipal 591 373 598
Mortgage-backed securities 333 - -
Interest and dividends on investment securities held to maturity:
U.S. Treasury and U.S. Government agencies 934 1,282 1,029
State and municipal 1,952 1,595 1,330
Mortgage-backed securities 1,408 1,703 979
Interest on federal funds sold 211 291 93
Dividends on FHLB stock 118 56 -
---------- ------------ ----------
Total interest income 40,829 36,969 32,191
---------- ------------ ----------
Interest expense:
Interest on deposits 15,157 14,816 12,724
Interest on securities sold under agreements to repurchase 639 558 459
Interest on federal funds purchased 123 86 314
Interest on commercial paper (Master note) 521 381 313
---------- ------------ ----------
Total interest expense 16,440 15,841 13,810
---------- ------------ ----------
Net interest income 24,389 21,128 18,381
Provision for loan losses 1,877 1,331 1,450
---------- ------------ ----------
Net interest income after provision for loan losses 22,512 19,797 16,931
---------- ------------ ----------
Non-interest income:
Service charges on deposit accounts 3,449 3,215 2,863
Fees for trust services 1,343 986 861
Gains on sales of loans 269 14 148
Investment securities gains 150 40 21
Other income 1,257 1,373 1,125
---------- ------------ ----------
Total non-interest income 6,468 5,628 5,018
---------- ------------ ----------
Non-interest expense:
Salaries and other personnel 9,428 8,468 7,536
Net occupancy 1,793 1,501 1,452
Furniture and equipment 1,768 1,679 1,549
FDIC assessment 206 177 2
Postage and supplies 1,081 885 873
Advertising 720 629 737
Telephone 601 518 474
Other expense 3,533 3,228 2,921
---------- ------------ ----------
Total non-interest expense 19,130 17,085 15,544
---------- ------------ ----------
Income before income taxes 9,850 8,340 6,405
Income tax provision 3,000 2,415 1,652
---------- ------------ ----------
NET INCOME $ 6,850 5,925 4,753
========== ============ ==========
(Continued)
30
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations (continued)
Years ended December 31,
1998, 1997 and 1996 (Dollars in
Thousands, except per share data)
1998 1997 1996
Increase in fair value of ESOP stock (948) (470) (543)
----------- ---------- -----------
Net income on common shares not subject to put/call $ 5,902 5,455 4,210
========== ========== ==========
Per share data:
Net income per common share-basic, not subject to put/call $ 2.10 1.97 1.54
========== ============ ==========
Net income per common share-dilutive, not subject to put/call $ 2.04 1.93 1.51
========== ============ ==========
Cash dividends declared $ 0.50 0.38 0.28
========== ============ ==========
Weighted average common shares outstanding 3,089,159 3,054,877 3,007,661
========== ============ ==========
Weighted average common shares outstanding not subject to put/call 2,815,520 2,772,298 2,732,305
========== ============ ==========
See accompanying notes to consolidated financial statements.
31
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 6,850 5,925 4,753
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,758 2,221 1,829
Gain on sale of investment securities (150) (40) (21)
Gain on sale of loans (269) (14) (148)
Provision for loan losses 1,877 1,331 1,450
Origination/acquisition of loans held for sale (33,927) (25,077) (58,239)
Sale of loans held for sale 32,074 29,166 54,311
Provision (credit) for deferred taxes (42) 259 309
Change in accrued interest receivable (509) (553) (889)
Change in other assets (2,770) (1,697) (2,350)
Change in other liabilities, net 921 (311) 736
-------- -------- --------
Net cash provided by operating activities 6,813 11,210 1,741
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities held to maturity (1,559) (29,594) (23,357)
Purchase of investment securities available for sale (38,971) (10,956) (9,991)
Proceeds from maturities of investment securities
held to maturity 6,533 12,170 5,153
Proceeds from maturities of investment securities available
for sale 1,717 6,000 2,102
Proceeds from sale of investment securities available for sale 8,594 3,614 30,501
Principal paydowns on mortgage-backed securities available for sale 8,480 3,537 2,014
Principal paydowns on mortgage-backed securities held to maturity 656 -- --
Purchase of Federal Home Loan Bank stock (89) (1,452) --
Net increase in loans outstanding (43,661) (35,507) (84,554)
Increase in premises and equipment (2,345) (2,310) (2,746)
-------- -------- --------
Net cash used in investing activities (60,645) (54,498) (80,878)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 47,957 36,723 29,246
Acquisition of deposits, net 2,029 -- 50,512
Net increase in securities sold under
agreements to repurchase 9,406 588 4,090
Net increase (decrease) in commercial paper (430) 3,854 1,248
Increase (decrease) in federal funds purchased (1,500) (1,500) 100
Proceeds from issuance of common stock 104 266 2
Retirement of common stock (78) -- --
Purchase of treasury stock -- -- (121)
Proceeds from sale of treasury stock -- 125 207
Dividends paid (1,544) (1,165) (842)
-------- -------- --------
Net cash provided by financing activities 55,944 38,891 84,442
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,112 (4,397) 5,305
Cash and cash equivalents at beginning of year 25,927 30,324 25,019
-------- -------- --------
Cash and cash equivalents at end of year $ 28,039 25,927 30,324
======== ======== ========
(Continued)
32
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
---- ---- ----
Supplemental information:
Cash paid during the year for:
Interest $ 16,470 15,697 13,653
============= ============ ===========
Income taxes $ 2,622 2,385 1,641
============= ============ ===========
Supplemental schedule of non-cash investing and financing transactions:
Unrealized gain on investment securities
available for sale, net $ 137 27 (470)
============= ============ ============
Securitization of mortgage loans $ - - 6,334
============= ============ ============
See accompanying notes to consolidated financial statements.
33
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income Years
ended December 31, 1998, 1997 and 1996
(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, 1995 $ 15,163 334 12,006 (230) 636 (2,771) 25,138
Net income - - 4,753 - - - 4,753
Other comprehensive income, net of tax:
Unrealized holding losses arising during
period, net of tax effect of $286 - - - - - - (457)
Less: reclassification adjustment for gains included
in net income, net of tax effect of $8 - - - - - - (13)
Net unrealized gains on securities - - - - (470) - -
--------
Comprehensive income - - - - - - 4,283
--------
Cash dividend declared - - (842) - - - (842)
Issuance of 300 shares in connection with
stock options 2 - - - - - 2
Purchase of 9,111 shares of treasury stock - - - (121) - - (121)
Sale of 17,712 shares of treasury stock - - (23) 230 - - 207
Common stock subject to put/call option - - - - - (543) (543)
------------------------------------------------------------------------
Balance at December 31, 1996 15,165 334 15,894 (121) 166 (3,314) 28,124
Net income - - 5,925 - - - 5,925
Other comprehensive income, net of tax:
Unrealized holding gains arising during
period, net of tax effect of $33 - - - - - - 52
Less: reclassification adjustment for gains included
in net income, net of tax effect of $15 - - - - - - (25)
Net unrealized gains on securities - - - - 27 - -
--------
Comprehensive income - - - - - - 5,952
--------
Cash dividend declared - - (1,165) - - - (1,165)
Issuance of 56,600 shares in connection with
stock options 283 (17) - - - - 266
Sale of 9,111 shares of treasury stock - - 4 121 - - 125
Common stock subject to put/call option - - - - - (470) (470)
------------------------------------------------------------------------
Balance at December 31, 1997 15,448 317 20,658 - 193 (3,784) 32,832
Net income - - 6,850 - - - 6,850
Other comprehensive income, net of tax:
Unrealized holding gains arising during
period, net of tax effect of $143 - - - - - - 229
Less: reclassification adjustment for gains included
in net income, net of tax effect of $58 - - - - - - (92)
Net unrealized gains on securities - - - - 137 - -
--------
Comprehensive income - - - - - - 6,987
--------
Cash dividend declared - - (1,544) - - - (1,544)
Issuance of 14,600 shares in connection with
stock options 72 32 - - - - 104
Retirement of 4,457 shares of common stock (22) (56) - - - - (78)
Common stock subject to put/call option - - - - - (948) (948)
------------------------------------------------------------------------
Balance at December 31, 1998 $ 15,498 293 25,964 - 330 (4,732) 37,353
========================================================================
See accompanying notes to consolidated financial statements.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Dollars in Thousands, except per
share data, in all notes)
The following is a description of the more significant accounting policies used
in preparing the consolidated financial statements. The accounting and reporting
policies of Palmetto Bancshares, Inc. (the "Company") conform to generally
accepted accounting principles ("GAAP") and to general practices within the
banking industry. The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, they affect the reported amounts of income and expense
during the reporting period. Actual results could differ from these estimates
and assumptions.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Palmetto Bank (the "Bank"). The Bank provides a
full range of banking services, including the taking of deposits and the making
of loans. Palmetto Capital, Inc. ("Palmetto Capital"), a wholly owned subsidiary
of Palmetto Bank, was incorporated February 26, 1992. Palmetto Capital offers
the brokerage of stocks, bonds, mutual funds and unit investment trusts.
Palmetto Capital also offers advisory services and variable rate annuities. The
Company's primary market area is the upstate of South Carolina. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Assets held by the Company or its subsidiary in a fiduciary or agency capacity
for customers are not included in the consolidated financial statements as such
items are not assets of the Company or its subsidiary.
Certain amounts for prior years have been reclassified to conform to 1998
presentation. These reclassifications have no effect on shareholders' equity or
net income as previously reported.
Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks and federal funds sold.
Generally, both cash and cash equivalents are considered to have maturities of
three months or less, and accordingly, the carrying amount of such instruments
is deemed to be a reasonable estimate of fair value. To comply with Federal
Reserve regulations, the Bank is required to maintain certain average cash
reserve balances on-hand as vault cash and/or at the Federal Reserve as
compensating balances. There were no compensating balances at December 31, 1998
or 1997.
Federal Home Loan Bank Stock
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 in an
amount equal to the greater of (1) 1.0% of the aggregate outstanding principal
amount of the residential mortgage loans, home purchase contracts and similar
obligations, or (2) 0.3% of total assets at the beginning of each year. The Bank
is in compliance with this requirement with an investment in FHLB stock of
$1,541 and $1,452 at December 31, 1998 and 1997, respectively. 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. The Bank has available $48,000 in
lines of credit from the FHLB. There were no advances on these lines at December
31, 1998 or 1997.
Investment Securities
The Bank accounts for its investment securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values - other than those accounted for under the
equity method or as investments in consolidated subsidiaries - and all
investments in debt securities. Under SFAS No. 115, investments are classified
into three categories as follows: (1) Held to Maturity - debt securities that
the Company has the positive intent and ability to hold to maturity, which are
reported at amortized cost; (2) Trading - debt and equity securities that are
bought and held principally for the purpose of selling them in the near term,
which are reported at fair value, with unrealized gains and losses included in
earnings; and (3) Available for Sale - debt and equity securities that may be
sold under certain conditions, which are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of income taxes. The Company does not have any trading
securities.
35
(1) Summary of Significant Accounting Policies, Continued
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan basis. Deferred net fees or costs are included as part of the
Company's net investment in loans held for sale until such loans are sold. Gains
or losses realized on the sales of loans are recognized at the time of sale and
are determined by the difference between the net sales proceeds and the carrying
value of loans sold.
At December 31, 1998 and 1997, the Company has loans held for sale of $2,122 and
$0, respectively. Loans serviced for the benefit of others amounted to
approximately $141 million at December 31, 1998, of which approximately $85
million resulted from an acquisition of servicing in 1996. Most of these loans
are serviced for Federal Home Loan Mortgage Corporation (FHLMC).
The Bank recognizes mortgage servicing rights (MSR's) in accordance with SFAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, an Amendment of SFAS No. 122, which became
effective for transactions occurring after December 31, 1996. The statement
requires the recognition of a separate asset for the right to service mortgage
loans for others, regardless of how those rights were acquired. Further, it
requires assessment of impairment based on fair value. The Company evaluates
these rights quarterly for possible impairment. At December 31, 1998 and 1997,
the Company recognized impairment of $229 and $62, respectively.
At December 31, 1998, the Company had net MSR's of approximately $1.2 million
related to these loans included in other assets on the consolidated balance
sheet. The fair value of the mortgage servicing rights are determined
considering market prices for similar MSR's and on the discounted anticipated
future net cash flows considering market consensus loan prepayment predictions,
historical prepayment rates, interest rates, and other economic factors. For
purposes of measuring the impairment, the Company stratifies the MSR's based on
the predominant risk characteristics of the underlying loans, including interest
rate, loan type, and amortization type (fixed rate or adjustable rate). To the
extent that the carrying value of MSR's exceeds this fair value by individual
stratum, a valuation allowance is established. The allowance may be adjusted in
the future as the values of the MSR's increase or decrease. The cost of MSR's is
amortized over the estimated period of net servicing revenues, considering
historical industry-average prepayment rates.
Loans and Interest Income
Loans are carried at principal amounts outstanding reduced by unearned
discounts. Interest income on all loans is recorded on an accrual basis. The
accrual of interest is generally discontinued on loans which become 90 days past
due as to principal or interest. The accrual of interest on some loans, however,
may continue even though they are 90 days past due if the loans are well
secured, in the process of collection, and management deems it appropriate. If
non-accrual loans decrease their past due status to 60 days or less, they are
reviewed individually by management to determine if they should be returned to
accrual status.
Impaired Loans
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, which requires that all
creditors value all specifically reviewed nonhomogenous loans for which it is
probable that the creditor will be unable to collect all amounts due according
to the terms of the loan agreement at the loan's fair value. Fair value may be
determined based upon the present value of expected cash flows, market price of
the loan, if available, or value of the underlying collateral. Expected cash
flows are required to be discounted at the loan's effective interest rate. SFAS
No. 114 was amended by SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest income on impaired loans and by requiring additional
disclosures about how a creditor recognizes interest income related to impaired
loans.
The Bank determines which loans are impaired through a loan review process. When
the ultimate collectibility of an impaired loan's principal is in doubt, wholly
or partially, all cash receipts are applied to principal. When this doubt no
longer exists, cash receipts are applied under the contractual terms of the loan
agreement first to principal and then to interest income. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent that any interest has been foregone. Further cash
receipts are recorded as recoveries of any amounts previously charged off.
36
(1) Summary of Significant Accounting Policies, Continued
SFAS No. 114 specifically states that it need not be applied to "large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment." Thus, the Company determined that the statement does not apply to
its consumer loan, credit card or residential mortgage loan portfolios, except
that it may choose to apply it to certain specific larger loans determined by
management. In effect, these portfolios are covered adequately in the Company's
normal formula for determining loan loss reserves.
Loan Fees and Costs
Non-refundable fees and certain direct costs associated with originating or
acquiring loans are recognized as a yield adjustment over the contractual life
of the related loans, or if the related loan is held for resale, until the loan
is sold. Recognition of deferred fees and costs is discontinued on non-accrual
loans until they return to accrual status or are charged-off. Commitment fees
associated with lending are deferred and if the commitment is exercised, the fee
is recognized over the life of the related loan as a yield adjustment. If the
commitment expires unexercised the amount is recognized upon expiration of the
commitment.
Allowance for Loan Losses
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. 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.
Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is recorded using the straight-line method over the
estimated useful life of the related asset as follows: buildings, 12 to 39
years; and furniture and equipment, 5 to 12 years. Amortization of leasehold
improvements is recorded using the straight-line method over the lesser of the
estimated useful life of the asset or the term of the lease. Maintenance and
repairs are charged to operating expense as incurred.
Foreclosed Properties
Property acquired through foreclosure is included in other assets and amounted
to $0 and $30, at December 31, 1998 and 1997, respectively. Such property is
recorded at the lower of cost or fair value minus estimated selling costs. Gains
and losses on the sale of foreclosed properties and write-downs resulting from
periodic reevaluation are charged to other operating expenses.
Income Taxes
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Intangibles
At December 31, 1998, deposits are shown net of premium on deposits acquired of
approximately $796, net of amortization, which is being amortized principally
over 10 years using the double-declining balance method. At December 31, 1998,
goodwill of approximately $3,197, net of amortization, is being amortized on a
straight-line basis over 15 years. The Company periodically assesses the
recoverability of these intangibles by evaluating whether the amortization of
the remaining balance can be recovered through projected undiscounted future
cash flows which are based on historical trends.
Net Income Per Share
Net income per share-basic, not subject to put/call is based on the weighted
average number of shares outstanding not subject to put/call. See note 11 for
further explanation on this put/call feature. Net income per common
share-dilutive, not subject to put/call is calculated based on SFAS No. 128, as
discussed in note 12.
37
(1) Summary of Significant Accounting Policies, Continued
Stock Options
In 1996, the Company adopted SFAS No. 123, Accounting for Stock-based
Compensation. SFAS No. 123 introduces a preferable fair-value based method of
accounting for stock-based compensation. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options,
and other equity instruments to employees based on fair value. Companies that
choose not to adopt the fair value method will continue to apply the existing
accounting rules contained in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has chosen the latter
option. SFAS No. 123 requires companies that choose not to adopt the fair value
method of accounting to disclose pro forma net income and earnings per share
under the fair value method. In addition, all companies with stock-based plans
are required to make detailed disclosures about plan terms, exercise prices, and
assumptions used in measuring the fair value of stock-based grants (see note
11).
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. 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 change 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." In accordance
with SFAS No. 130, the Company elected to disclose changes in comprehensive
income in its Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income.
Employee Benefit Plans
Also in 1998, the Company adopted SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 provides additional
information to facilitate financial analysis and eliminates certain disclosures
which are no longer useful. In accordance with SFAS No. 132, the disclosures in
note 11 have changed somewhat since prior year.
(2) Federal Funds Sold
At December 31, 1998 and 1997, the Bank had $110 and $388, respectively,
outstanding in federal funds sold. The daily averages of these outstanding
agreements during 1998 and 1997 were $3,876 and $5,465, respectively. The
maximum amount of these outstanding agreements at any month-end during 1998 and
1997 were $5,615 and $12,497, respectively. The securities underlying these
agreements were maintained in safekeeping by an authorized broker.
(3) Investment Securities Held to Maturity
The amortized cost and fair values of investment securities held to maturity as
of December 31 are summarized as follows:
1998
---------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government agencies $ 10,985 44 - 11,029
State and municipal 36,685 2,101 - 38,786
Mortgage-backed securities 18,785 151 (14) 18,922
-------- ------- --------- ------
$ 66,455 2,296 (14) 68,737
======== ======= ========= ======
1997
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies $ 16,984 65 (13) 17,036
State and municipal 36,861 1,572 (5) 38,428
Mortgage-backed securities 26,161 101 (148) 26,114
-------- ------- --------- ------
$ 80,006 1,738 (166) 81,578
======== ======= ========= ======
38
(3) Investment Securities Held to Maturity, Continued
1996
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury and U.S.
Government agencies $ 16,006 7 (122) 15,891
State and municipal 25,450 1,072 (30) 26,492
Mortgage-backed securities 24,751 12 (376) 24,387
-------- ------- -------- ------
$ 66,207 1,091 (528) 66,770
======== ======= ======== ======
The following is a maturity distribution of investment securities held to
maturity as of December 31, 1998:
Due After Due After
Due One Year Five Years
Within Through Through Due After
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield
-------- ----- ---------- ----- --------- ----- --------- -----
U.S. Government
agencies $ - - % 7,000 6.10% 3,985 7.30% - -
State and municipals - - 7,946 8.21 16,866 7.36 11,873 7.32
Mortgage-backed securities 1,128 5.48 17,657 6.19 - - - -
--------- ------ --------- --------- --------- ------ -------- ------
Amortized Cost Total $1,128 5.48% 32,603 6.69% 20,851 7.34% 11,873 7.32%
========= ====== ========= ========= ========= ====== ======== ======
Fair Value $1,142 33,117 21,812 12,666
========= ========= ========= ========
(4) Investment Securities Available for Sale
The amortized cost and fair values of investment securities available for sale
as of December 31 are summarized as follows:
1998
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $ 6,500 205 - 6,705
State and Municipal 27,436 366 (94) 27,708
Mortgage-backed securities 11,615 70 (11) 11,674
------- ------- ------- -------
$45,551 641 (105) 46,087
======= ======= ======= =======
1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $12,492 201 (12) 12,681
State and Municipal 4,918 126 - 5,044
------- ------- ------- -------
$17,410 327 (12) 17,725
======= ======= ======= =======
1996
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $ 8,993 93 (51) 9,035
State and Municipal 6,976 229 - 7,205
------- ------- ------- -------
$15,969 322 (51) 16,240
======= ======= ======= =======
39
(4) Investment Securities Available for Sale, Continued
During the year ended December 31, 1998 the Company had realized gains of $150
and no realized losses; compared to realized gains of $49 and realized losses of
$9 in 1997. During 1996, the realized gains amounted to $121, and the realized
losses were $100. Specific identification is the basis on which cost was
determined in computing realized gains and losses.
The following is a maturity distribution of investment securities available for
sale at December 31, 1998:
Due After Due After
Due One Year Five Years
Within Through Through Due After
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield
U.S. Treasury $ 1,545 7.70% 5,160 6.52% - - - -
State and municipals 1,767 9.10 1,488 8.49 3,906 5.91 20,547 6.34
Mortgage-backed securities - - 11,674 6.15 - - - -
------- ------- -------- ----- -------- ------- ------- ------
Fair Value Total $ 3,312 8.45 % 18,322 6.44% 3,906 5.91 % 20,547 6.34%
======= ====== ======== ===== ========= ======= ======== ======
Amortized Cost $ 3,247 18,064 3,912 20,328
======= ======== ========= ========
Investment securities held to maturity and available for sale with an aggregate
carrying value of approximately $69,757 and $61,734 at December 31, 1998 and
1997, respectively, are pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required or permitted by
law.
(5) Loans
A summary of loans, by classification, as of December 31 follows:
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial, financial and
agricultural $ 92,608 81,678 68,616 45,377 32,672
Real estate-construction 10,260 8,799 9,598 5,453 1,941
Real estate-mortgage 214,010 195,462 181,775 149,017 134,789
Installment loans to individuals 93,134 81,646 72,997 55,340 46,006
--------- -------- --------- --------- ---------
Total $ 410,012 367,585 332,986 255,187 215,408
========= ========= ========= ========= =========
Non-accrual loans included above $ 1,485 718 1,113 796 636
========= ========= ========= ========= =========
The foregone interest income related to loans on non-accrual amounted to $130,
$66 and $52 for the years ended December 31, 1998, 1997 and 1996, respectively.
The following is a summary of activity affecting the allowance for loan losses
for the years ended December 31:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 5,152 4,729 3,700
Provision for loan losses 1,877 1,331 1,450
Loan recoveries 128 141 289
Loans charged-off (1,362) (1,049) (710)
---------- ---------------- -------
Balance at end of year $ 5,795 5,152 4,729
========== =============== =======
At December 31, 1998, there were no impaired loans and no reserve in the
allowance for loan losses related to impaired loans due to the fact that the
Company had charged-off loans previously considered impaired. During 1998, the
average recorded investment in impaired loans was approximately $19.
40
(5) Loans, Continued
At December 31, 1997, impaired loans amounted to approximately $70. During 1997,
the average recorded investment in impaired loans was approximately $44, and
there is $70 included in the allowance for loan losses related to impaired loans
at December 31, 1997.
During 1996, the Company charged-off some of the loans previously considered
impaired and was able to reclassify others due to improved credit conditions; so
that at December 31, 1996 there were no impaired loans. During 1996, the average
recorded investment in impaired loans was approximately $76, and there is no
allowance for loan losses related to impaired loans at December 31, 1996.
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specific period of time. The Bank also provides standby letters of credit
which are issued on behalf of customers in connection with contracts between the
customers and third parties. Under a standby letter of credit the Bank assures
that the third party will not suffer a loss if the customer fails to meet the
contractual obligation. The Bank applies the same credit standards used in the
lending process when extending these commitments, and periodically reassesses
the customers' creditworthiness through ongoing credit reviews.
At December 31, 1998, except for the fact that the majority of the loan
portfolio is located in the Bank's immediate market area, there were no
concentrations of loans in any type of industry, type of property, or to one
borrower.
The Bank had outstanding, unused loan commitments as of December 31, 1998 as
follows:
Home equity loans $ 9,272
Credit cards 22,447
Commercial real estate development 15,439
Other unused lines of credit 26,381
-----------
$ 73,539
===========
Standby letters of credit $ 3,582
===========
All unused loan commitments are at adjustable rates that fluctuate with prime
rate, or are at fixed rates which approximate market rates. Current amounts
listed are therefore determined to be their market value.
(6) Premises and Equipment, Net
A summary of premises and equipment, net, as of December 31 follows:
1998 1997
---- ----
Land $ 2,125 1,925
Buildings and leasehold improvements 11,894 10,802
Furniture and equipment 11,096 10,151
------------- --------------
25,115 22,878
Less accumulated depreciation and amortization (10,768) (9,492)
------------- --------------
Premises and equipment, net $ 14,347 13,386
============= ==============
(7) Mortgage Servicing Rights
The following is a summary of activity affecting the valuation allowance for
impairment of mortgage servicing rights for the years ended December 31:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 62 -- --
Aggregate additions charged and
reductions credited to operations 167 62 --
Aggregate direct writedowns charged
against allowance -- -- --
---------- --------------- -------
Balance at end of year $ 229 62 --
========== =============== =======
41
(8) Deposits
A summary of deposits, by type, as of December 31 follows:
1998 1997
---- ----
Transaction accounts $ 184,346 156,299
Savings deposits 27,939 26,639
Insured money market accounts 56,258 55,033
Time deposits over $100 46,712 49,952
Other time deposits 185,214 162,430
Premium on deposits acquired (796) (963)
----------- --------------
Total deposits $ 499,673 449,390
=========== ================
Interest paid on time deposits of $100 or more amounted to $2,636, $2,784, and
$1,970 for the years ended December 31, 1998, 1997 and 1996, respectively.
The following table displays the aggregate amounts of time deposits with
maturities for the years following December 31, 1998:
Maturing within one year $ 194,605
Maturing after one year through two years 27,204
Maturing after two years through three years 5,093
Maturing after three years through five years 5,011
Maturing after five years 13
---------------
Total $ 231,926
===============
(9) Short-Term Borrowings
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE WITH CUSTOMERS 1998 1997 1996
---- ---- ----
Amount outstanding at year-end $ 11,630 12,224 11,636
Average amount outstanding during year 16,112 13,926 11,601
Maximum amount outstanding at any month-end 18,127 15,112 12,694
Weighted average rate paid at year-end 2.81% 3.44% 4.44%
Weighted average rate paid during the year 3.97% 4.01% 3.84%
The securities underlying these agreements are held in the Bank's name in
safekeeping by NationsBank for the benefit of the Bank's customers.
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE WITH A BANK
Amount outstanding at year-end $ 10,000 -- --
Average amount outstanding during year 438 -- 321
Maximum amount outstanding at any month-end 10,000 -- 4,876
Weighted average rate paid at year-end 5.32% --% --%
Weighted average rate paid during the year 5.32% --% 4.06%
The securities underlying these agreements are held in the Bank's name in
safekeeping by Sun Trust for the benefit of the Bank.
FEDERAL FUNDS PURCHASED
Amount outstanding at year-end $ -- 1,500 3,000
Average amount outstanding during year 2,197 1,353 5,746
Maximum amount outstanding at any month-end 9,200 8,125 17,500
Weighted average rate paid at year-end --% 6.13% 7.75%
Weighted average rate paid during the year 5.60% 6.36% 5.45%
42
(9) Short-Term Borrowings, Continued
COMMERCIAL PAPER (MASTER NOTE) 1998 1997 1996
---- ---- ----
Amount outstanding at year-end $ 10,859 11,289 7,435
Average amount outstanding during year 12,668 9,382 8,075
Maximum amount outstanding at any month-end 14,084 12,292 9,168
Weighted average rate paid at year-end 3.06% 3.69% 4.69%
Weighted average rate paid during the year 4.11% 4.06% 3.88%
During 1991 the Company began selling commercial paper as an alternative
investment tool for its commercial customers. Through a master note arrangement
between the Company and the Bank, Palmetto Master Notes are issued as an
alternative investment for commercial sweep accounts. These master notes are
unsecured but are backed by the full faith and credit of the Company. The
commercial paper of the Company is issued only in conjunction with the automated
sweep account customer agreement on deposits at the Bank level.
(10) Income Taxes
Components of income tax provision expense/(benefit) for the years ended
December 31 are as follows:
1998 1997 1996
---- ---- ----
Current:
Federal $ 2,704 1,888 1,155
State 338 268 188
-------- -------- ------
3,042 2,156 1,343
-------- -------- ------
Deferred:
Federal (42) 259 309
State - - -
--------- -------- ------
(42) 259 309
--------- -------- ------
Total $ 3,000 2,415 1,652
======== ======== ======
The effective tax rates for the years ended December 31 vary from the Federal
statutory rates as follows:
1998 1997 1996
U.S. Federal income tax rates 34.0% 34.0% 34.0%
Changes from statutory rates resulting from:
Tax-exempt interest income (8.2) (7.5) (9.1)
Expenses not deductible for tax purposes .7 .7 .8
State taxes, net of Federal income tax benefit 2.3 2.1 2.3
Other 1.7 (.3) (2.2)
--------- ------ ------
Effective tax rates 30.5% 29.0% 25.8%
========= ====== ======
Different accounting methods have been used for reporting income for income tax
and for financial reporting purposes. The tax provisions shown in the financial
statements relate to items of income or expense in those statements and as a
result may not be the amount paid for the period. Deferred income taxes have
been provided on such differences.
43
(10) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, are
presented below.
1998 1997
---- ----
Deferred tax assets:
Loan loss reserves $ 1,616 1,331
Basis of intangible assets for tax purposes
in excess of basis for financial reporting 140 167
Other 43 40
----------- -----------
Total gross deferred tax assets 1,799 1,538
Less valuation allowance - -
Net deferred tax assets 1,799 1,538
----------- -----------
Deferred tax liabilities:
Fixed assets, due to depreciation differences (571) (571)
Deferred loan costs deducted for tax purposes as incurred (468) (393)
Deferred loan fees recognized under the principal
reduction method for tax purposes (388) (304)
Unrealized gain on securities available for sale (207) (121)
Prepaid pension expense (360) (274)
Other (8) (34)
------------ -----------
Total gross deferred tax liabilities (2,002) (1,697)
------------ -----------
Net deferred tax liability $ (203) (159)
============ ============
A portion of the change in the net deferred tax liability relates to the
unrealized gains and losses on securities available for sale. A current period
deferred tax expense related to the change in unrealized gain on securities
available for sale of $86 has been recorded directly to shareholders equity. The
rest of the change in the deferred tax liability results from the current period
deferred tax benefit of $42.
No valuation allowance for deferred tax assets has been established at either
December 31, 1998 or 1997. Because of taxes paid in carry back periods, as well
as estimates of future taxable income, it is management's belief that
realization of the net deferred tax asset is more likely than not.
Tax returns for 1996 and subsequent years are subject to examination by the
taxing authorities.
44
(11) Employee Benefit Plans
(a) The Bank has a noncontributory defined benefit pension plan which
covers all full-time employees who have at least twelve months
continuous service and have attained age 21. The plan is designed to
produce a designated retirement benefit, and benefits are fully
vested at five years or more of service. No vesting occurs with less
than five years of service. The plan is administered by the Bank's
Trust Department. Contributions to the plan are made as required by
the Employee Retirement Income Security Act of 1974.
The following table details the funded status of the plan, the
amounts recognized in the Company's consolidated financial
statements, the components of net periodic benefit cost, and the
weighted-average assumptions used in determining these amounts for
the years ended December 31:
1998 1997
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 3,590 3,166
Service cost 335 237
Interest cost 310 249
Actuarial loss 934 --
Benefits paid (113) (62)
------- -------
Benefit obligation at end of year $ 5,056 3,590
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 4,846 3,903
Actual return on plan assets 397 617
Employer contribution 409 388
Benefits paid (113) (62)
------- -------
Fair value of plan assets at end of year $ 5,539 4,846
------- -------
Funded status 483 1,256
Unrecognized prior service cost 69 77
Unrecognized net actuarial loss (gain) 617 (266)
Unrecognized transition (103) (129)
------- -------
Prepaid benefit cost included in other assets $ 1,066 938
======= =======
1998 1997 1996
---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 237 205 186
Interest cost 249 221 193
Expected return on plan assets (328) (286) (229)
Amortization of transition asset (26) (26) (26)
Amortization of prior service cost 9 9 9
----- ----- -----
Net periodic benefit cost $ 141 123 133
===== ===== =====
WEIGHTED-AVERAGE ASSUMPTIONS AT DECEMBER 31:
Discount rate 7% 8% 8%
Rate of increase in compensation levels 5% 5% 5%
Expected long-term rate of return on plan assets 8% 8% 8%
45
(11) Employee Benefit Plans, Continued
(b) Until February 28, 1997, the Company had an Employee Stock Ownership
Plan (ESOP) established by its Board of Directors. The ESOP covered
the same employees and had the same vesting schedule as the pension
plan. Based on profits, the Company contributed annually to a trust
created to acquire shares of the Company's common stock for the
exclusive benefit of the participants. During 1997 and 1996, the
Company contributed to the ESOP common stock, which had been
previously repurchased as treasury stock, and accounted for these
transactions in accordance with Statement of Position 93-6. The
Company recorded compensation expense equal to the fair value of the
shares contributed. The Company made no contributions in 1998 due to
the termination of the plan in 1997. The charges to income for
contributions to the ESOP for the years ended December 31, are as
follows:
1997 1996
---- ----
Repurchase of treasury stock for ESOP $ 125 207
Investment income received by ESOP - (20)
------- -------
Contributions to ESOP $ 125 187
======= ========
At December 31, 1998, there were no allocated shares in the plan due
to the termination of the ESOP as of February 28, 1997.
Pursuant to the Internal Revenue Code of 1986, as amended, and the
regulations thereunder, the stock in the ESOP Plan has a put and a
call feature if the stock is not "readily tradable on an established
market." This term was clarified in 1995 as a result of a private
letter ruling, to mean publicly 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 recently
distributed shares are subject to the put/call feature. Accordingly,
270,384 shares of common stock are now recorded outside
shareholders' equity at their fair value, which is determined by an
independent valuation. 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 are subject
to the put/call until June 29, 1999.
(c) In 1987, the Company adopted a plan (Stock Option Plan) pursuant to
which the Company's Board of Directors may grant incentive stock
options and nonqualified stock options to officers and key employees
of the Company. The Stock Option Plan expired on December 31, 1997.
At that time, there were 58,000 options outstanding but unexercised.
These options have varying expiration dates through December 31,
2007.
On December 9, 1997, the Company's Board of Directors adopted the
1997 Stock Compensation Plan (the "1997 Plan"). The 1997 Plan allows
the Board to grant incentive and non-incentive stock options to
certain key employees and directors of the Company and its
subsidiaries. The 1997 Plan authorizes grants of options to purchase
up to 175,000 shares of authorized but unissued common stock. The
option price and term of the options shall be determined by the
Board on grant date, but shall not be less than 100% of fair market
value as of grant date and shall not be greater than 10 years,
respectively. Because the Company's stock is not traded on an
established market, the fair value may be determined by an annual
independent actuarial valuation. The 1997 Plan expires on December
8, 2007. As of December 31, 1997, no options had been granted under
this plan. As of December 31, 1998, 76,000 options had been granted
under this plan.
At December 31, 1998, there were 99,000 remaining shares available
for grant under the 1997 Plan. At December 31, 1997, there were no
shares available for grant under the Stock Option Plan because the
plan had expired. Stock option activity for both plans is summarized
in the following table:
46
(11) Employee Benefit Plans, Continued
Weighted-Average
Stock Options Exercise Price
------------- --------------
Outstanding at December 31, 1995 105,300 6.22
- -----------------------------------------------------------------------------------
Granted 3,000 11.67
Exercised (300) 7.84
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1996 108,000 6.37
- -----------------------------------------------------------------------------------
Granted 9,000 13.75
Forfeited (2,400) 11.67
Exercised (56,600) 4.69
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1997 58,000 8.93
- -----------------------------------------------------------------------------------
Granted 76,000 17.50
Exercised (14,600) 7.16
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1998 119,400 $ 14.60
===================================================================================
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
--------------- ----------- ---- ----- ----------- -----
$7.84 - 8.25 18,450 3.47 years 8.04 18,450 8.04
$9.05 - 9.69 17,750 5.51 years 9.37 15,950 9.34
$13.75 - 17.50 83,200 9.91 years 17.18 15,200 17.50
----------------------------------------------------------------------------------------------------
Total 119,400 8.26 years $14.60 49,600 $11.35
====================================================================================================
The Company follows the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, which requires compensation expense for
options to be recognized only if the market price of the underlying
stock exceeds the exercise price on the date of grant. Accordingly,
the Company has not recognized compensation expense for its options
granted in 1998, 1997 and 1996.
In 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 permits companies to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. In management's opinion,
the existing stock option valuation models do not necessarily
provide a reliable single measure of stock option fair value.
Therefore, as permitted, the Company will continue to apply the
existing accounting rules under APB No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1996 and subsequent years as
if the fair-value-based method defined in SFAS No. 123 had been
applied.
The per-share weighted average fair values of stock options granted
in 1998, 1997 and 1996 were $6.67, $5.48 and $4.12, respectively.
The fair values were estimated as of the respective grant dates
using the Black-Scholes option pricing model. Input variables used
in the model included weighted-average risk free interest rates of
5.57%, 6.03% and 6.16%, respectively; expected dividend yields of
1.40%, 1.30% and 1.48%, respectively; and expected volatility
factors of 22.20%, 22.30% and 15.60%, respectively; and estimated
option lives of 10 years. The pro forma impact on income assumes no
options will be forfeited. Had compensation expense for the
Company's Stock Option Plan been determined based on the fair value
grant date for awards granted in 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been effected as shown in the
following table:
47
(11) Employee Benefit Plans, Continued
1998 1997 1996
---- ---- ----
Net earnings - as reported $6,850 5,925 4,753
Net earnings - pro forma 6,793 5,912 4,747
Basic earnings per share - as reported 2.10 1.97 1.54
Basic earnings per share - pro forma 2.08 1.96 1.54
The pro forma effects may not be representative of the effects on
reported net income for future years as most of the Company's
employee stock option grants vest in cumulative increments over a
period of five years.
(12) Earnings per Share
The table below illustrates a reconciliation of the numerators and denominators
of the basic and diluted per-share computations for net income for the years
ended December 31, 1998, 1997 and 1996:
Income Shares Per-Share
1998 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
----------
Income available to common stockholders $5,902 2,815,520 $2.10
--------------------------------------------
Effect of Dilutive Securities: Stock Options -- 72,584 --
Diluted EPS:
Income available to common stockholders
plus assumed conversions $5,902 2,888,104 $2.04
============================================
Income Shares Per-Share
1997 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
----------
Income available to common stockholders $5,455 2,772,298 $1.97
--------------------------------------------
Effect of Dilutive Securities: Stock Options -- 52,371 --
Diluted EPS:
Income available to common stockholders
plus assumed conversions $5,455 2,824,669 $1.93
============================================
Income Shares Per-Share
1996 (Numerator) (Denominator) Amount
---- ---------------------------------------------
Basic EPS:
----------
Income available to common stockholders $4,210 2,732,305 $1.54
--------------------------------------------
Effect of Dilutive Securities: Stock Options -- 64,733 --
Diluted EPS:
Income available to common stockholders
plus assumed conversions $4,210 2,797,038 $1.51
============================================
(13) Related Party Transactions
Certain of the Company's directors and executive officers are also customers of
the Bank who, including their related interests, were indebted to the Bank in
the approximate amounts of $3,128 and $4,327 at December 31, 1998 and 1997,
respectively. From January 1 through December 31, 1998, these directors and
executive officers and their related interests borrowed $463 and repaid $1,662.
In the opinion of management, these loans do not involve more than the normal
risk of collectibility and do not present other unfavorable features.
48
(14) Commitments and Contingencies
On December 31, 1998, the Bank was obligated under a number of noncancelable
operating leases on certain property and equipment that have initial terms of
more than one year. The minimum scheduled payments under these leases are as
follows:
1999 $ 366
2000 283
2001 251
2002 248
2003 169
Subsequent years 962
-----------
$ 2,279
===========
Rental expense was $417, $392 and $398 for the years ended December 31, 1998,
1997 and 1996, respectively.
In the normal course of business, the Company and subsidiary are periodically
involved in legal proceedings. In the opinion of the Company's management, none
of these proceedings is likely to have a materially adverse effect on the
accompanying consolidated financial statements.
(15) Disclosures Regarding Fair Value of Financial Instruments
SFAS No. 107, Disclosure About Fair Value of Financial Instruments (Statement
107), requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in
time based on the characteristics of the financial instruments and the relevant
market information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and the judgments made regarding risk
characteristics of various financial instruments, discount rates, prepayments,
estimates of future cash flows, future expected loss experience and other
factors. Changes in assumptions could significantly affect these estimates.
Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, may or may not be realized in an
immediate sale of the instrument.
Under Statement 107, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of the assets and liabilities that are not financial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments:
(a) Cash and Due From Banks The carrying value approximates fair value.
(b) Investment Securities Held to Maturity and Available For Sale The
fair value of investment securities are derived from quoted market
prices.
(c) Federal Home Loan Bank Stock
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.
(d) Loans Held for Sale
The fair value of loans held for sale is based on prices in
outstanding commitments to sell these loans.
(e) Loans
The current value of variable-rate consumer and commercial loans or
consumer and commercial loans with remaining maturities of three
months or less approximates fair value. The fair value of fixed-rate
consumer and commercial loans with maturities greater than three
months are valued using a discounted
49
(15) Disclosures Regarding Fair Value of Financial Instruments, Continued
cash flow analysis and assumes the rate being offered on these
types of loans by the Company at December 31, 1998 and 1997,
approximates market.
For credit cards and lines of credit the carrying value approximates
fair value. No value has been placed on the underlying credit card
relationship rights.
Unused loan commitments are at adjustable rates which fluctuate with
the prime rate or are funded within ninety days. Current amounts are
considered to be their fair value. Please see note 5 for these
amounts.
(f) Deposits
Under Statement 107, the estimated fair value of deposits with no
stated maturity is equal to the carrying amount. The fair value of
time deposits is estimated by discounting contractual cash flows, by
applying interest rates currently being offered at the dates
indicated on the deposit products. Under Statement 107, the fair
value estimates for deposits do not include the benefit that results
from the low-cost funding provided by the deposits liabilities as
compared to the cost of alternative forms of funding.
(g) Securities Sold Under Agreements to Repurchase, Commercial Paper,
Federal Funds Sold and Federal Funds Purchased
The carrying amount approximates fair value due to the short-term
nature of these instruments.
(h) Other Assets, Other Liabilities, and Accrued Interest Income
The carrying amount approximates fair value because of the
short-term nature of these instruments.
The estimated fair values of the Company's financial instruments at December 31
are as follows:
1998 1997
-------------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Cash and due from banks $ 27,929 27,929 25,539 25,539
=========== ========== ========= ==========
Federal funds sold $ 110 110 388 388
=========== ========== ========= ==========
Federal Home Loan Bank stock $ 1,541 1,541 1,452 1,452
=========== ========== ========= ==========
Investment securities held to maturity $ 66,455 68,737 80,006 81,578
=========== ========== ========= ==========
Investment securities available for sale $ 46,087 46,087 17,725 17,725
=========== ========== ========= ==========
Loans held for sale $ 2,122 2,122 -- --
============ ========== ========= ==========
Loans:
Commercial mortgage $ 124,763 124,498 112,518 112,441
Commercial other 100,516 100,244 86,568 86,337
Real estate - mortgage 24,681 24,688 15,066 15,065
Installment mortgage 78,408 78,228 81,167 81,063
Installment other 81,644 80,696 72,266 70,574
Allowance for loan losses (5,795) (5,795) (5,152) (5,152)
--------- -------- --------- -------
Total loans, net $ 404,217 402,559 362,433 360,328
========= ======== ========= =======
Deposits $ 499,673 501,848 449,390 449,941
========= ======= ========= ========
Borrowings:
Securities sold under agreements
to repurchase $ 21,630 21,630 12,224 12,224
Commercial paper 10,859 10,859 11,289 11,289
Federal funds purchased -- -- 1,500 1,500
--------- -------- ------ -------
$ 32,489 32,489 25,013 25,013
========= ======== ====== =======
50
(16) Palmetto Bancshares, Inc. (Parent Company)
The Parent Company's principal source of income is dividends from the Bank.
Certain regulatory requirements restrict the amount of dividends which the Bank
can pay to the Parent Company. At December 31, 1998, the Bank had available
retained earnings of approximately $6,191 for payment of dividends.
The Parent Company's principal asset is its investment in its bank subsidiary.
The Parent Company's condensed statements of financial condition data as of
December 31, 1998 and 1997, and the related condensed statements of operations
data and cash flow data for the three-year period ended December 31, 1998 are as
follows:
Financial Condition Data
Assets 1998 1997
------ ---- ----
Cash $ 40 23
Due from subsidiary 10,859 11,289
Investment in wholly-owned bank subsidiary 41,157 35,644
Goodwill 888 949
--------- -----------
Total assets $ 52,944 47,905
========= ===========
Liabilities and Shareholders' Equity
Commercial paper $ 10,859 11,289
--------- -----------
Total liabilities 10,859 11,289
--------- -----------
Common stock subject to put/call 4,732 3,784
Shareholders' equity 37,353 32,832
--------- -----------
Total liabilities and shareholders' equity $ 52,944 47,905
========= ===========
Operations Data
1998 1997 1996
---- ---- ----
Interest income from commercial paper $ 521 381 313
Other interest income - 5 -
Dividends received from Bank 1,544 1,165 842
Equity in undistributed earnings of subsidiary 5,376 4,840 3,991
Net operating expenses (591) (466) (393)
------------- -------------- --------------
Net income $ 6,850 5,925 4,753
============= ============== ==============
51
(16) Palmetto Bancshares, Inc. (Parent Company), Continued
Cash Flow Data
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 6,850 5,925 4,753
Decrease (increase) in due from subsidiary 430 (3,557) (1,248)
Earnings retained by wholly-owned
subsidiary (5,376) (4,840) (3,991)
Amortization of goodwill 61 61 61
------------- ------------ ---------
Net cash provided (used) by
operating activities 1,965 (2,411) (425)
------------- ------------ ---------
Cash flows from financing activities:
Net change in commercial paper (430) 3,854 1,248
Proceeds from issuance of common stock 104 266 2
Retirement of common stock (78) - -
Purchase of treasury stock - - (121)
Sale of treasury stock - 125 207
Cash transfer to Bank capital - (885) -
Dividends paid (1,544) (1,165) (842)
------------- ------------ --------
Net cash (used) provided by
financing activities (1,948) 2,195 494
-------------- ------------ ---------
Net increase (decrease) in cash 17 (216) 69
Cash at beginning of year 23 239 170
------------- ------------ ---------
Cash at end of year $ 40 23 239
============= ============ =========
52
(17) Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a material
effect on the financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company's and the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulation) to risk-weighted assets (as defined) and to average assets.
Management believes, as of December 31, 1998, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
At December 31, 1998 the Company and the Bank were each categorized as "well
capitalized," under the regulatory framework for prompt corrective action. At
December 31, 1997 the Company and the Bank were each categorized as "adequately
capitalized," under the regulatory framework for prompt corrective action. To be
categorized as "adequately capitalized," the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no current conditions or events that
management believes would change the Company's or the Bank's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Company $43,065 10.16% $33,908 8.00% $42,385 10.00%
Bank $43,025 10.15% $33,908 8.00% $42,385 10.00%
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Company $37,761 8.91% $16,954 4.00% $25,431 6.00%
Bank $37,721 8.90% $16,954 4.00% $25,431 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS:
Company $37,761 6.79% $22,232 4.00% $27,790 5.00%
Bank $37,721 6.78% $22,270 4.00% $27,838 5.00%
As of December 31, 1997:
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Company $36,831 9.72% $30,305 8.00% $37,881 10.00%
Bank $36,808 9.72% $30,305 8.00% $37,881 10.00%
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Company $32,091 8.47% $15,152 4.00% $22,728 6.00%
Bank $32,068 8.47% $15,152 4.00% $22,728 6.00%
TIER 1 CAPITAL TO TOTAL ASSETS:
Company $32,091 6.20% $20,710 4.00% $25,888 5.00%
Bank $32,068 6.19% $20,710 4.00% $25,888 5.00%
53
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is set forth under the headings "Election
of Directors" and "Executive Officers" on pages 2 through 5 in the definitive
Proxy Statement of the Company filed in connection with its 1999 Annual Meeting
of the Shareholders, which is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the headings
"Compensation of Directors and Executive Officers," "Aggregated Option Exercises
in Last Fiscal Year and Year-end Option Values" and "Security Ownership of
Certain Beneficial Owners and Management" on pages 5 through 9 and pages 12
through 13 in the definitive Proxy Statement of the Company filed in connection
with its 1999 Annual Meeting of Shareholders, which is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" on pages 12 through 13 in
the definitive Proxy Statement of the Company filed in connection with its 1999
Annual Meeting of Shareholders, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the heading "Certain
Relationships and Related Transactions" on page 13 in the definitive Proxy
Statement of the Company filed in connection with its 1999 Annual Meeting of
Shareholders, which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (2)Additional financial statement schedules furnished pursuant to
the requirements of Form 10-K
All other schedules have been omitted as the required information
is either inapplicable or included in the Notes to the
Consolidated Financial Statements.
(3) 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,
Commission File 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
54
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 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30,
1996.
3.2.1 By-Laws adopted April 10, 1990.
3.2.2 Amendment to By-Laws dated April 12, 1994.
3.2.3^ Amendment to By-Laws dated January 19, 1999, filed
herewith.
4.1.1 Articles of Incorporation of the Registrant:
Included in Exhibits 3.1.1 - .5
4.2 Bylaws of the Registrant: Included in Exhibit
3.2.1 - .3
4.3 Specimen Certificate for Common Stock: Incorporated
by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8, Commission File
No. 33-51212, filed with the Securities and
Exchange Commission on August 20, 1992
4.4 Palmetto Bancshares, Inc. 1997 Stock Compensation
Plan, as amended to date. Incorporated by reference
to the Company's 1997 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission
on March 23, 1998.
21.1^ List of Subsidiaries of the Registrant
27.1^ Financial Data Schedule
* Management contract or compensatory plan or arrangement.
^ Filed herewith.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the three
months ended December 31, 1998.
(c) Exhibits required to be filed with this Form 10-K by Item 601 of
Regulation S-K are filed herewith or incorporated by reference herein.
(d) Certain additional financial statements.
Not Applicable.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below and on the dates by the following persons on behalf of the
registrant and in the capacities indicated:
Signature Title Date
/s/ L. Leon Patterson
- -----------------------------
L. Leon Patterson Director February 16, 1999
/s/ Paul W. Stringer
- -----------------------------
Paul W. Stringer Director February 16, 1999
- -----------------------------
James A. Cannon Director
/s/ W. Fred Davis, Jr.
- -----------------------------
W. Fred Davis, Jr. Director February 16, 1999
/s/ Michael D. Glenn
- -----------------------------
Michael D. Glenn Director February 16, 1999
56
Signature Title Date
--------- ----- ----
/s/ David P. George, Jr.
- -----------------------------
David P. George, Jr. Director February 16, 1999
/s/ John T. Gramling, II
- -----------------------------
John T. Gramling, II Director February 16, 1999
/s/ James M. Shoemaker, Jr.
- -----------------------------
James M. Shoemaker, Jr. Director February 16, 1999
/s/ J. David Wasson, Jr.
- -----------------------------
J. David Wasson, Jr. Director February 16, 1999
/s/ Ann B. Smith
- -----------------------------
Ann B. Smith Director February 16, 1999
/s/ Edward Keith Snead III
- -----------------------------
Edward Keith Snead III Director February 16, 1999
/s/ William S. Moore
- -----------------------------
William S. Moore Director February 16, 1999
57
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58
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59
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,
Commission File 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 to the Company's quarterly report on Form
10-Q for the fiscal quarter ended September 30,
1996.
3.2.1 By-Laws adopted April 10, 1990.
3.2.2 Amendment to By-Laws dated April 12, 1994.
3.2.3^ Amendment to By-Laws dated January, 19, 1999, filed
herewith.
4.1.1 Articles of Incorporation of the Registrant:
Included in Exhibits 3.1.1 - .5
4.2 Bylaws of the Registrant: Included in Exhibit
3.2.1 - .3
4.3 Specimen Certificate for Common Stock: Incorporated
by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8, Commission File
No. 33-51212, filed with the Securities and
Exchange Commission on August 20, 1992
4.4 Palmetto Bancshares, Inc. 1997 Stock Compensation
Plan, as amended to date. Incorporated by reference
to the Company's 1997 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission
on March 23, 1998.
21.1^ List of Subsidiaries of the Registrant
27.1^ Financial Data Schedule
^ Filed herewith.