To Our Shareholders:
We are pleased to report our results for the three month and six month
periods ended June 30, 2003. Presented against the backdrop of a still sluggish
Upstate economy, the performance during the first six months of 2003 was
outstanding with higher levels of both profitability and balance sheet growth
being well achieved. Fiscal stimulus, through recently enacted tax cuts, as well
as record low interest rates, are positioning the economy and especially the job
market for a quick recovery. In Upstate South Carolina the housing finance
market continues as the bright spot leading all economic indicators of a growing
economy. Recent moves by the Federal Reserve to lower the benchmark overnight
funds rate by 1/4 percent will no doubt further stimulate the demand for
refinancing and purchases of single family housing, a market in which we
continue to see excellent results for our company. All things considered, we are
very fortunate to be well positioned to participate in a dynamic and growing
Upstate economy. We hope the balance of 2003 will show support for efforts
currently underway to stimulate the economy.
Palmetto Bancshares, Inc. reported net income for the three month
period ended June 30, 2003 of $2.7 million, a 9% increase from net income for
the same quarter of 2002. Net income per diluted share for the second quarter
was $.42, an 11% increase over the $.38 per diluted share reported for the
second quarter of 2002.
Likewise, operating results for the six month period ended June 30,
2003 also improved significantly. Net income for the six month period ended June
30, 2003 was $5.6 million, a 14% increase over $4.9 million reported for the
same period in 2002. Per diluted share net income for the six month period ended
June 30, 2003 was $.87, a 14% increase over the $.76 per diluted share reported
for the same period of 2002.
Increased net income for the six month period ended June 30, 2003
resulted from a continued growth of earning assets, 7% improvement in net
interest income before provision for loan losses, and a 5% decline in the
provision for loan losses, compared with the same six months period ended June
30, 2002.
During the six month period ended June 30, 2003, $92.4 million in loans
were originated by our mortgage lending department. This increase in
originations over 2002 is due in part to the experience and training of our
staff and their commitment to superior customer service. Increased income
resulting from the growth in originations has been a contributor to increased
earnings.
The Company's emphasis on expense control also contributed to the
increased earnings of the periods ended June 30, 2003 over those periods of
2002. Overhead costs incurred through the first six months of 2003, as measured
by our operating efficiency ratio, improved from 60.2% for the six month period
ended June 30, 2002 to 59.6% for the same period of 2003. Additionally, overhead
as a percentage of average assets improved from 2.0% for the six month period
ended June 30, 2002 to 1.9% for the same period of 2003.
The Company reported return on average shareholders' equity of 16.09%
at June 30, 2003, as compared with 16.12% reported at June 30, 2002. Return on
average assets at June 30, 2003 was 1.35%, up from 1.32% reported at June 30,
2002. As a direct reflection of the Company's excellent financial condition and
operating results of the last quarter, the Board of Directors approved a
dividend payment for the quarter of $.12 per share.
Total assets at June 30, 2003 were $860 million, an increase of 13%
compared with June 30, 2002. Comparing the same periods, total loans, including
mortgage loans held for sale, increased 18% to $680 million, while total
deposits, including commercial paper and retail repurchase agreements, rose to
$777 million, a 12% increase compared with June 30, 2002. The company reported
total assets under management, which in addition to Company assets include
mortgage loans serviced for others and trust and investment assets, of $1.5
billion at June 30, 2003, a 14% increase from the total reported at June 30,
2002.
Growing our asset base with high quality loans is particularly
important to bottom line results. We are pleased to report a strong 18% increase
in loan volume with continued excellent loan quality. Though loan quality
remained excellent, non-performing loans as a percentage of total assets at June
30, 2003 were .48%, a 13 basis point increase over June 30, 2002. Despite these
issues, we saw a significant decline in net charge offs as a percentage of
average loans excluding mortgage loans held for sale from .61% for the six month
period ended June 30, 2002 to .37% for the same period of 2003.
A strong margin of 4.63%, a decline of 23 basis points over the six
month period ended June 30, 2002, was maintained for the six month period ended
June 30, 2003, and we believe this positions the company should short-term
interest rates continue to fluctuate.
While we remain optimistic for the last half of 2003, we recognize
excellent results will not come without significant challenges. Margins will
continue to be under pressure requiring even greater pricing discipline and
operating efficiency in managing overhead costs. In light of this, we continue
to reinforce our aggressive business plan for the Upstate with better technology
and the most talented and capable employees in our 97 year history. They are
dedicated and strive to seek the best possible results for your company.
Sincerely,
L. Leon Patterson
Chairman and Chief Executive Officer
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
2003 2002
---------- ---------
(unaudited)
Assets
Cash and due from banks $ 28,387 32,939
Federal funds sold 1,880 21,316
Federal Home Loan Bank (FHLB) stock, at cost 1,868 1,733
Investment securities available for sale at fair market value 115,380 102,101
Mortgage loans held for sale 12,963 4,147
Loans 666,627 570,283
Less allowance for loan losses (7,022) (5,867)
--------- ---------
Loans, net 659,605 564,416
Premises and equipment, net 19,934 19,789
Accrued interest receivable 4,002 4,628
Other assets 15,937 12,505
--------- ---------
Total assets $ 859,956 763,574
========= =========
Liabilities and shareholders' equity
Liabilities
Deposits
Noninterest-bearing $ 120,343 105,444
Interest-bearing 624,062 558,949
--------- ---------
Total deposits 744,405 664,393
Retail repurchase agreements 12,750 17,306
Commercial paper (Master notes) 19,676 14,401
Federal funds purchased 5,900 -
Other liabilities 5,119 3,853
--------- ---------
Total liabilities 787,850 699,953
--------- ---------
Shareholders' equity
Common stock - par value $5.00 per share; authorized 10,000,000 shares; issued
and outstanding 6,351,339 and 6,295,578
at June 30, 2003 and 2002, respectively. 31,757 31,478
Capital surplus 225 44
Retained earnings 38,260 30,941
Accumulated other comprehensive income, net of tax 1,864 1,158
--------- ---------
Total shareholders' equity 72,106 63,621
--------- ---------
Total liabilities and shareholders' equity $ 859,956 763,574
========= =========
Consolidated Statements of Income
(in thousands, except share data)
For the three months For the six months
ended June 30, ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
(unaudited) (unaudited)
Interest income
Interest and fees on loans $ 10,772 10,297 $ 21,494 20,825
Interest and dividends on investment securities available
for sale 871 1,042 1,878 2,119
Interest on federal funds sold 28 153 63 211
Dividends on FHLB stock 20 24 42 50
-------- ------- -------- --------
Total interest income 11,691 11,516 23,477 23,205
Interest expense
Interest on deposits, including retail repurchase agreements 2,688 3,035 5,492 6,343
Interest on federal funds purchased 8 - 12 1
Interest on commercial paper (Master notes) 29 37 52 71
-------- ------- -------- --------
Total interest expense 2,725 3,072 5,556 6,415
-------- ------- -------- --------
Net interest income 8,966 8,444 17,921 16,790
Provision for loan losses 900 1,000 1,800 1,900
-------- ------- -------- --------
Net interest income after provision for loan losses 8,066 7,444 16,121 14,890
Noninterest income
Service charges on deposit accounts 2,217 1,982 4,221 3,807
Fees for trust and brokerage services 715 651 1,352 1,263
Gains on sales of mortgage loans 335 193 674 418
Gains on sales of investment securities 186 95 281 235
Other 337 634 736 1,203
-------- ------- -------- --------
Total noninterest income 3,790 3,555 7,264 6,926
Noninterest expense
Salaries and other personnel 4,132 3,677 7,802 7,356
Net occupancy 541 561 1,108 1,109
Furniture and equipment 839 669 1,652 1,304
FDIC assessment 29 37 68 65
Postage and supplies 409 328 805 710
Marketing and advertising 253 276 437 530
Telephone 188 197 372 390
Cardholder processing 138 148 274 288
Sales finance losses 15 41 26 66
Other 1,316 1,375 2,545 2,664
-------- ------- -------- --------
Total noninterest expense 7,860 7,309 15,089 14,482
-------- ------- -------- --------
Income before income taxes 3,996 3,690 8,296 7,334
Income tax provision 1,288 1,205 2,686 2,394
-------- ------- -------- --------
Net income $ 2,708 2,485 $ 5,610 4,940
======== ======= ======== ========
Share Data
Net income - Basic $ 0.43 0.39 $ 0.89 0.79
Net income - Diluted 0.42 0.38 0.87 0.76
Cash dividends 0.12 0.11 0.24 0.22
Book value 11.35 10.11 11.35 10.11
Highest trading price during period 29.00 28.00 29.00 28.00
Weighted average common shares outstanding - Basic 6,346,105 6,293,765 6,336,455 6,290,529
Weighted average common shares outstanding - Diluted 6,498,919 6,465,218 6,483,582 6,461,727
Selected Financial Ratios
For the six months
ended June 30,
2003 2002
------ ------
(unaudited)
Significant Operating Ratios Based on Earnings
Return on average assets 1.35 % 1.32
Return on average equity 16.09 16.12
Net interest margin 4.63 4.86
Efficiency ratio 59.63 60.15
- -------------------------------------------------------------------------
Significant Capital Ratios
Average equity to average assets 8.37 % 8.19
Equity to assets at year end 8.38 8.33
Tier 1 risk based capital 9.53 10.14
Total risk based capital 10.55 11.16
Tier 1 leverage ratio 7.78 7.72
- --------------------------------------------------------------------------
Significant Credit Quality Ratios
Nonaccrual loans to total assets 0.48 % 0.35
Net charge-offs to average loans
less mortgage loans held for sale 0.37 0.61
- --------------------------------------------------------------------------
BANK NOTES
- -The Palmetto Bank is committed to the communities in which we are located,
sponsoring many different charitable organizations and functions. Every year,
the Laurens County bank employees work very hard to raise funds for the American
Cancer Society's Relay for Life walk held at Presbyterian College. On June 28th,
an "Extravaganza" was held in the Corporate Center parking lot in Laurens,
featuring a yard sale, dunking booth, face painting, children's games, and a hot
dog/ bake sale. Despite the continuous rainy weather that day, the Laurens
employees raised over $2,400 toward their goal.
- -Our bank has been contacted by several media sources as an industry expert to
discuss various topics including the market, rates, mortgage refinancing, and
tips on how to protect yourself from scams. Will Ferguson, vice president,
mortgage loans was recently featured in an article in the Spartanburg
Herald-Journal, while Matt Walter senior vice president, investment officer
interviewed with Newsweek's Jane Bryant Quinn. Derrick Copeland, security
officer and fraud investigator for the bank was recently included on WYFF
channel 4 during Tim Waller's "Buyer Beware" report.
- -Matthew I. (Matt) Walter, senior vice president, investment officer of The
Palmetto Bank has been elected to serve on the Board of Directors of the South
Carolina Association of Investment Professionals (SCAIP) for the 2003 - 2004
term.
- -The Palmetto Bank recently won two awards for the production of its 2002 Annual
Report. A Certificate of Excellence was awarded as a result of the Bank's annual
report entry into the ABAMN (American Bankers Association Marketing Network)
Advertising Awards competition. A "Silver Addy Award" from the Greenville Ad
Club for the 2002 Annual Report was also awarded this year. The piece was
created with the help of Gibbons/Peck, the agency with which The Palmetto Bank
has produced its annual reports over the last four years.