[Palmetto Bancshares, Inc. Logo Omitted]
To Our Shareholders:
We are pleased to report the Bank's performance and operating results
for the three and nine months ended September 30, 2003. Palmetto Bancshares,
Inc. continued to post strong earnings increases for the third quarter 2003 with
net income of $2,857,000, compared with $2,329,000 for the same quarter of 2002,
a 23% increase. On a per share diluted basis, net income was $0.45 for the
quarter ended September 30, 2003, compared with $0.36 for the same quarter of
2002. Contributing to the increase in third quarter net income was an increase
in noninterest income of 12% offset partially by increases in noninterest
expense of 2%. Net interest income for the quarter ended September 30, 2003
remained relatively unchanged compared with the quarter ended September 30, 2002
reflecting compressed margins with interest rates at historically low levels.
For the nine months ended September 30, 2003, net income was
$8,467,000, up 16% from $7,269,000 for the first nine months of 2002. Diluted
per share earnings for the nine months ended September 30, 2003 were $1.32
compared with $1.12 for the same nine month period of 2002.
Return on average shareholders' equity for the first nine months of
2003 was 16.08% compared with 15.42% for the first nine months of 2002. Return
on average assets improved to 1.33% from 1.28% when comparing the same periods.
Total deposits increased 9% to $805 million at September 30, 2003 over
$736 million at September 30, 2002, and total loans increased 12% to $679
million from $608 million at September 30, 2002. High volumes of originations
and refinancings within the residential mortgage loan portfolio continued to
provide a positive impact on net income during the first nine months of 2003.
Approximately 84% of these loans were sold in the secondary market for
residential mortgages at origination. There are indications that the volume in
the mortgage loan portfolio is slowing as a result of recent increases in rates
for 15 and 30 year loans.
Total Palmetto Bancshares, Inc. assets reached $883 million at
September 30, 2003 compared with $809 million at the same date in 2002. Growing
quality assets within our balance sheet remains a high priority in meeting
year-end financial projections. We are pleased with the 9% total asset growth
experienced over the end of third quarter 2002.
While our efforts have been focused toward total loan growth over the
last twelve months, our efforts to minimize credit risk have been as strong as
our efforts to grow the loan portfolio. We have experienced a decline in net
charge-offs during the first nine months of 2003 as compared with the first nine
months of 2002. Net charge-offs as a percentage of average loans (excluding
mortgage loans held for sale) declined from .59% as of September 30, 2002 to
..38% as of September 30, 2003. Over the same periods, we have increased our loan
loss reserves in order to compensate for the growth experienced this year in our
loan portfolio.
Looking ahead to the fourth quarter we project operating results that
should produce another record year in growth and profitability. We look forward
to presenting this information to you in our annual report for 2003.
Sincerely,
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
[Palmetto Bancshares, Inc. Logo Omitted]
Consolidated Balance Sheets
(in thousands, except share data)
September 30,
2003 2002
---- ----
(unaudited)
Assets
Cash and due from banks $ 32,898 40,120
Federal funds sold 24,745 29,840
Federal Home Loan Bank (FHLB) stock, at cost 1,868 1,733
Investment securities available for sale at fair market value 110,506 97,074
Mortgage loans held for sale 8,363 8,747
Loans 670,850 599,594
Less allowance for loan losses (7,241) (6,252)
-------- --------
Loans, net 663,609 593,342
Premises and equipment, net 21,378 19,726
Accrued interest receivable 3,880 4,535
Other assets 15,527 14,104
-------- --------
Total assets $882,774 809,221
======== ========
Liabilities and shareholders' equity
Liabilities
Deposits
Noninterest-bearing $118,710 113,887
Interest-bearing 648,771 590,333
-------- --------
Total deposits 767,481 704,220
Retail repurchase agreements 15,373 17,314
Commercial paper (Master notes) 21,750 16,226
Other liabilities 7,766 5,314
-------- --------
Total liabilities 812,370 743,074
-------- --------
Shareholders' equity
Common stock-par value $5.00 per share; authorized 10,000,000
shares; issued and outstanding 6,256,624 and 6,303,778
at September 30, 2003 and 2002, respectively. 31,283 31,519
Capital surplus (2,156) 84
Retained earnings 40,367 32,577
Accumulated other comprehensive income, net of tax 910 1,967
-------- --------
Total shareholders' equity 70,404 66,147
-------- --------
Total liabilities and shareholders' equity $882,774 809,221
======== ========
Consolidated Statements of Income
(in thousands, except share data)
For the three months For the nine months
ended September 30, ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(unaudited) (unaudited)
Interest income
Interest and fees on loans $ 10,633 10,584 $ 32,127 31,409
Interest and dividends on investment securities
available for sale 690 971 2,567 3,090
Interest on federal funds sold 48 96 111 307
Dividends on FHLB stock 17 22 60 72
-------- ------- -------- --------
Total interest income 11,388 11,673 34,865 34,878
Interest expense
Interest on deposits, including retail repurchase
agreements 2,641 2,946 8,134 9,289
Interest on federal funds purchased 8 - 19 1
Interest on commercial paper (Master notes) 28 44 80 115
-------- ------- -------- --------
Total interest expense 2,677 2,990 8,233 9,405
-------- ------- -------- --------
Net interest income 8,711 8,683 26,632 25,473
Provision for loan losses 900 1,200 2,700 3,100
-------- ------- -------- --------
Net interest income after provision for
loan losses 7,811 7,483 23,932 22,373
Noninterest income
Service charges on deposit accounts 2,196 2,052 6,417 5,859
Fees for trust and brokerage services 701 576 2,053 1,839
Mortgage banking income 219 85 305 457
Gains on sales of investment securities 81 114 362 349
Other 673 615 1,996 1,864
-------- ------- -------- --------
Total noninterest income 3,870 3,442 11,133 10,368
Noninterest expense
Salaries and other personnel 3,992 3,854 11,794 11,210
Net occupancy 582 563 1,691 1,672
Furniture and equipment 884 698 2,536 2,002
Postage and supplies 318 397 1,123 1,107
Marketing and advertising 195 180 632 710
Telephone 186 204 557 594
Cardholder processing 138 132 412 420
Other 1,294 1,384 3,932 4,179
-------- ------- -------- --------
Total noninterest expense 7,589 7,412 22,677 21,894
-------- ------- -------- --------
Income before income taxes 4,092 3,513 12,388 10,847
Income tax provision 1,235 1,184 3,921 3,578
-------- ------- -------- --------
Net income $ 2,857 2,329 $ 8,467 7,269
======== ======= ======== ========
Share Data
Net income - Basic $ 0.46 0.37 $ 1.34 1.15
Net income - Diluted 0.45 0.36 1.32 1.12
Cash dividends 0.12 0.11 0.36 0.33
Book value 11.25 10.49 11.25 10.49
Weighted average common shares outstanding-Basic 6,273,780 6,301,974 6,315,334 6,294,386
Weighted average common shares outstanding-Diluted 6,370,340 6,469,441 6,410,952 6,464,048
[Palmetto Bancshares, Inc. Logo Omitted]
3RD QUARTER REPORT 2003
Selected Financial Ratios
For the nine months
ended September 30,
2003 2002
---- ----
(unaudited)
Significant Operating Ratios Based on Earnings
Return on average assets 1.33 % 1.28
Return on average equity 16.08 15.42
Net interest margin 4.50 4.85
Efficiency ratio 59.76 60.17
Significant Capital Ratios
Average equity to average assets 8.27 % 8.28
Equity to assets at year end 7.98 8.17
Tier 1 risk based capital 9.32 9.90
Total risk based capital 10.36 10.93
Tier 1 leverage ratio 7.50 7.79
Significant Credit Quality Ratios
Nonaccrual loans to total assets 0.59 % 0.44
Net charge-offs to average loans
less mortgage loans held for sale 0.38 0.59
BANK NOTES
- --------------------------------------------------------------------------------
- - Leon Patterson, chairman and chief executive officer of The Palmetto Bank, has
announced the graduation of five officers from this year's South Carolina
Bankers School.
This year's graduates included Randall Traynham, who was awarded the Lillie H.
Magalis Award, presented to the graduating third-year student with the highest
cumulative grade average for the three-year period. Scott Tollison, who served
as the 2003 class president, Liz Avery, whose bank simulation team received the
top honor of achievement, Marty Cobb and Panessa Dean.