[Palmetto Bancshares, Inc. Logo Omitted]
To Our Shareholders:
As we complete the first quarter of another year, we are pleased to report on
the excellent financial condition of Palmetto Bancshares, Inc. and improved
operating results over the first quarter of last year. Net income for the first
quarter of this year was $2.9 million, an increase of 18.2% over the $2.5
million posted for the first quarter of 2002. Net income per share on a fully
diluted basis was $.45 compared with $.38 for the same period of 2002, an
increase of 18.4%. Return on average assets improved to 1.42% for the first
quarter of 2003 while return on average shareholders' equity increased to
17.01%. The Board of Directors approved an increased dividend payment for the
quarter of $.12 per share reflecting the excellent operating results of the
quarter.
The boost in first quarter net income was achieved primarily from a 7.3%
increase in net interest income, a 3.0% improvement in noninterest income, and
relatively unchanged overhead expenses of $7.2 million compared with first
quarter 2002.
Growing our asset base is particularly strategic to bottom line results. We are
pleased with a 15.6% growth in the total loan portfolio to $657.7 million at
March 31, 2003 over the same period for 2002. In addition to good growth in
consumer and commercial loans, strong gains in single family mortgage
originations continued to boost interest income and mortgage servicing fees. The
refinancing of mortgages has continued at a brisk rate in the first quarter of
2003 as a result of the lowest interest rates for mortgage financing in recent
memory.
Asset quality continues to receive close management attention. In the first
quarter of 2003, net charged-off loans declined 35% from levels reported in the
first quarter of 2002 to .34%, as a percentage of average loans, less those
mortgage loans held for sale, reflecting improved loan quality even under
challenging times for many of our local economies. We continue to see excellent
progress toward developing a credit culture for Palmetto Bank that reflects a
desire for the highest possible asset quality under present conditions. While
non-performing loans as a percentage of the total loan portfolio are slightly
ahead of first quarter last year, we expect improvement as we go further into
the year.
From our retail offices we continued to see strong deposit growth. Excellent
growth in transaction balances partly reflects a shift to financial asset
stability and safety from the poor performance of equity investments in recent
years. We, of course, could expect this trend to reverse as equity markets
improve. For the quarter, total deposits, including retail repurchase agreements
and commercial paper, increased 10.7% over 2002 results and have provided
adequate funding for total asset expansion of 11.6% at March 31, 2003.
To date we have seen excellent operating results that support an improved
share-trading price for your company. Recent trades in the $28.50 - $29.00 per
share range continued to outperform the broad indexes for equity investments in
the first three months of 2003.
The exceptional performance of the first quarter is a direct result of the
outstanding abilities and efforts of our employees and their desire to achieve
superior long-term shareholder value for the company.
As we enter the 97th year in our history and growth, we are mindful of the
lessons and experiences of the past, yet are comfortable in the knowledge that
we have assembled a staff of dedicated employees who individually understand a
responsibility to shareholders, to customers, to each fellow employee, and to
our communities. As shareholders, we are always mindful of your concerns, and we
appreciate your continued loyal support.
Sincerely,
/s/ L. Lean Patterson
L. Lean Patterson
Chairman and Chief Executive Officer
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,
2003 2002
---- ----
(unaudited)
Assets
Cash and due from banks $ 32,953 36,079
Federal funds sold 14,479 22,280
Federal Home Loan Bank (FHLB) stock, at cost 1,868 1,733
Investment securities available for
sale at fair market value 113,138 104,873
Mortgage loans held for sale 11,093 13,363
Loans 646,628 555,660
Less allowance for loans losses (6,771) (5,744)
-------- --------
Loans, net 639,857 549,916
Premises and equipment, net 19,805 19,522
Accrued interest receivable 4,114 4,740
Other assets 15,792 12,014
-------- --------
Total assets $853,099 764,520
======== ========
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing $116,615 101,945
Interest-bearing 622,144 565,695
-------- --------
Total deposits 738,759 667,640
Retail repurchase agreements 16,261 16,798
Commercial paper (Master notes) 16,965 13,154
Other liabilities 11,358 6,225
-------- --------
Total liabilities 783,343 703,817
-------- --------
Shareholders' equity
Common stock - par value $5.00 per share;
authorized 10,000,000 shares; issued
and outstanding 6,329,909 and 6,291,578
at March 31, 2003 and 2002, respectively 31,650 31,458
Capital surplus 89 29
Retained earnings 36,314 29,148
Accumulated other comprehensive
income, net of tax 1,703 68
-------- --------
Total shareholders' equity 69,756 60,703
-------- --------
Total liabilities and shoareholders'
equity $853,099 764,520
======== ========
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
For the three months
ended March 31,
2003 2002
---- ----
(unaudited)
Interest income
Interest and fees on loans $ 10,722 10,528
Interest and dividends on investment
securities available for sale 1,006 1,077
Interest on federal funds sold 35 58
Dividends on FHLB stock 23 26
--------- --------
Total interest income 11,786 11,689
Interest expense
Interest on deposits, including retail 2,804 3,308
repurchase agreements
Interest on federal funds purchased 4 1
Interest on commercial paper (Master
notes) 23 34
--------- --------
Total interest expense 2,831 3,343
--------- --------
Net interest income 8,955 8,346
--------- --------
Provision for loan losses 900 900
--------- --------
Net interest income after provision
for loan losses 8,055 7,446
--------- --------
Noninterest income
Service charges on deposit accounts 2,004 1,825
Fees for trust and brokerage services 637 612
Gains on sales of mortgage loans 339 225
Gains on sales of investment securities 95 140
Other 398 569
--------- --------
Total noninterest income 3,473 3,371
Noninterest expense
Salaries and other personnel 3,670 3,679
Net occupancy 567 548
Furniture and equipment 813 635
FDIC assessment 39 28
Postage and supplies 396 382
Marketing and advertising 184 255
Telephone 184 193
Cardholder processing 136 141
Sales finance losses 11 24
Other 1,228 1,288
--------- --------
Total noninterest expense 7,228 7,173
--------- --------
Income before income taxes 4,300 3,644
--------- --------
Income tax provision 1,398 1,189
--------- --------
Net income $ 2,902 2,455
========= ========
Share Data
Net income - Basic $ 0.46 0.39
Net income - Diluted 0.45 0.38
Cash dividends 0.12 0.11
Book value 11.02 9.65
Highest trading price during period 29.00 27.00
Weighted average common shares 6,326,698 6,287,279
outstanding - Basic
Weighted average common shares 6,482,699 6,473,816
outstanding - Diluted
Selected Financial Ratios
FOR THE THREE MONTHS
ENDED MARCH 31,
2003 2002
---- ----
(unaudited)
Significant Operating Ratios Based on Earnings
Return on average assets 1.42% 1.34
Return on average equity 17.01 16.33
Net interest margin 4.73 4.94
Efficiency ratio 57.88 60.29
Significant Capital Ratios
Average equity to average assets 8.33% 8.19
Equity to assets at year end 8.18 7.94
Tier 1 risk based capital 9.50 9.94
Total risk based capital 10.53 10.96
Tier 1 leverage ratio 7.59 7.61
Significant Credit Quality Ratios
Nonaccrual loans to total assets 0.42% 0.36
Net charge-offs to average loans less 0.34 0.59
mortgage loans held for sale
BANK NOTES
- - We hope that you have had an opportunity to see The Palmetto Bank's
commercials on WYFF Channel 4, as we have made a commitment to sponsor the Money
Matters segment of the news. Recently, two additional commercial spots
highlighting banking conveniences - the Telephone Banking Center and Early Bird
Hours - were shot to rotate with the existing spot, which focuses on The
Palmetto Bank overall. We are always looking for ways to market our fine
organization, its products, and excellent service, thus boosting exposure,
building our business across the Upstate, and increasing your shareholder value.
- - As a Bank of Promise, we are committed to investing into the youth of our
communities. The Palmetto Bank recently submitted a story describing a five-hour
Saturday class taught by a group of five Palmetto Bank employees to Old 96 Girl
Scout troops. The class, called CentsAbility, was designed to teach kids the
importance of good personal finance. The Palmetto Bank was selected as the
"featured Bank of Promise" and the article submitted has been posted on the
national ABA Bank of Promise web site. We invite you to read the article by
accessing the following link on-line at
http://www.aba.com/About+ABA/ap_main.htm.