UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-26016
PALMETTO BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 74-2235055
--------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
301 Hillcrest Drive
Laurens, South Carolina
29360
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 984-4551
--------------------------------------------------
( Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 2, 2001
----------------------------- -------------------------
Common stock, $5.00 par value 6,260,734
PALMETTO BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2001
INDEX Page No.
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 1
Consolidated Income Statements for the Three Months
Ended Mach 31, 2001 and 2000 2
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the Three Months Ended
March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000 4
Notes to the Consolidated Interim Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION 13
- ---------------------------
SIGNATURES 14
- ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, 2001 December 31, 2000
---------------------------------------------
Assets (unaudited)
Cash and due from banks $ 38,399 $ 36,305
Federal funds sold 6,872 1,879
Federal Home Loan Bank stock, at cost 1,733 1,733
Investment securities available for sale (amortized cost of $95,520
and $99,030, in 2001 and 2000, respectively) 96,609 98,601
Loans held for sale 4,479 611
Loans 515,451 498,242
Less allowance for loan losses (5,584) (5,446)
---------------------------------------------
Loans, net 509,867 492,796
Premises and equipment, net 17,204 16,481
Accrued interest 4,943 5,229
Other assets 10,261 9,755
---------------------------------------------
Total assets $ 690,367 $ 663,390
=============================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing 97,851 96,097
Interest-bearing 500,441 476,569
---------------------------------------------
Total deposits 598,292 572,666
Securities sold under agreements to repurchase 21,521 19,923
Commercial paper (Master notes) 12,102 15,359
Other liabilities 3,846 2,849
---------------------------------------------
Total liabilities 635,761 610,797
---------------------------------------------
Shareholders' Equity:
Common stock-$5.00 par value. Authorized 10,000,000 shares;
6,259,734 issued and outstanding in 2001; and
6,255,734 issued and outstanding in 2000 31,299 31,279
Capital surplus 38 23
Retained earnings 22,599 21,555
Accumulated other comprehensive income (loss) 670 (264)
---------------------------------------------
Total shareholders' equity 54,606 52,593
---------------------------------------------
Total liabilities and shareholders' equity $ 690,367 $ 663,390
=============================================
See accompanying notes to consolidated interim financial statements.
1
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements (Unaudited)
For the three months ended March 31, 2001 and 2000
(Dollars in thousands, except per share data)
2001 2000
-------------------------------
Interest income:
Interest and fees on loans $ 10,832 $ 9,497
Interest and dividends on investment securities available for sale:
U.S. Treasury and U.S. Government agencies 272 224
State and municipal 691 810
Mortgage-backed securities 345 437
Interest on federal funds sold 142 79
Dividends on FHLB stock 35 34
-------------------------------
Total interest income 12,317 11,081
-------------------------------
Interest expense:
Interest on deposits 5,099 4,187
Interest on securities sold under agreements to repurchase 282 231
Interest on federal funds purchased 15 36
Interest on commercial paper (Master notes) 136 147
-------------------------------
Total interest expense 5,532 4,601
-------------------------------
Net interest income 6,785 6,480
Provision for loan losses 850 525
-------------------------------
Net interest income after provision for loan losses 5,935 5,955
Non-interest income:
Service charges on deposit accounts 1,412 1,016
Fees for trust services 499 532
Gains on sales of loans 58 10
Other income 633 619
-------------------------------
Total non-interest income 2,602 2,177
Non-interest expense:
Salaries and other personnel 3,074 2,663
Net occupancy 551 488
Furniture and equipment 570 580
FDIC assessment 27 28
Postage and supplies 354 322
Marketing and advertising 225 186
Telephone 189 200
Cardholder processing expense 152 138
Sales finance losses 20 -
Other expense 1,035 889
-------------------------------
Total non-interest expense 6,197 5,494
-------------------------------
Income before income taxes 2,340 2,638
-------------------------------
Income tax provision 670 743
-------------------------------
Net income $ 1,670 $ 1,895
===============================
Net income per share-basic $ 0.27 $ 0.30
Net income per share-dilutive $ 0.26 $ 0.30
Cash dividends declared per share $ 0.10 $ 0.09
See accompanying notes to consolidated interim financial statements.
2
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income (Unaudited)
For the three months ended March 31, 2001 and 2000
(Dollars in thousands except number of shares)
Accumulated
Capital Other
Common Surplus Retained Comprehensive
Stock (Deficit) Earnings Loss, Net Total
--------- --------- -------- ------------- ----------
Balance at December 31, 1999 31,134 - 16,890 (2,397) 45,627
Net income 1,895 1,895
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net
of tax effect of $44 (71)
Net unrealized losses on securities (71)
----------
Comprehensive income 1,824
----------
Cash dividend declared (561) (561)
Issuance of 12,200 shares in connection with stock options 61 15 76
----------------------------------------------------------------
Balance at March 31, 2000 31,195 15 18,224 (2,468) 46,966
================================================================
Balance at December 31, 2000 31,279 23 21,555 (264) 52,593
Net income 1,670 1,670
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $585 934
Net unrealized gains on securities 934
----------
Comprehensive income 2,604
----------
Cash dividend declared (626) (626)
Issuance of 4,000 shares in connection with stock options 20 15 35
----------------------------------------------------------------
Balance at March 31, 2001 31,299 38 22,599 670 54,606
================================================================
See accompanying notes to consolidated interim financial statements.
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2001 and 2000
(Dollars in thousands)
2001 2000
---------------------------------
Cash flows from operating activities:
Net income $ 1,670 $ 1,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 533 579
Provision for loan losses 850 525
Origination of loans held for sale (12,291) (993)
Sale of loans held for sale 8,481 2,057
Gain on sale of loans (58) (11)
Change in accrued interest receivable 286 320
Change in other assets (391) (775)
Change in other liabilities, net 412 (130)
---------------------------------
Net cash provided by (used in) operating activities (508) 3,467
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale 1,932 1,014
Principal paydowns on mortgage-backed securities available for sale 1,568 1,461
Net increase in loans outstanding (18,173) (9,963)
Purchases of premises and equipment, net (1,108) (751)
---------------------------------
Net cash used in investing activities (15,781) (8,239)
Cash flows from financing activities:
Net increase in deposit accounts 25,626 10,716
Net increase (decrease) in securities sold under agreements
to repurchase 1,598 (2,262)
Net increase in commercial paper (3,257) 2,408
Net increase (decrease) in federal funds purchased - (7,800)
Proceeds from issuance of common stock 35 76
Dividends paid (626) (561)
---------------------------------
Net cash provided by financing activities 23,376 2,577
---------------------------------
Net increase (decrease) in cash and cash equivalents 7,087 (2,195)
---------------------------------
Cash and cash equivalents at beginning of the period 38,184 43,817
---------------------------------
Cash and cash equivalents at end of the period $ 45,271 $ 41,622
=================================
Supplemental Information:
Cash paid during the period for:
Interest expense $ 5,619 $ 4,541
=================================
Income taxes 485 76
=================================
Supplemental schedule of non-cash investing and financing transactions:
Change in unrealized gain (loss) on investment securities available for
sale, before tax 1,519 (115)
=================================
Loans transferred to other real estate owned 252 -
=================================
Loans charged-off 787 769
=================================
See accompanying notes to consolidated interim financial statements.
4
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Notes To Consolidated Interim Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated interim financial statements have
been prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in Palmetto Bancshares, Inc.'s (the
"Company's") Annual Report on Form 10-K for the year ended December 31, 2000.
In the Company's opinion, all adjustments necessary for a fair presentation
of these interim statements have been included and are of a normal and recurring
nature. The results of operations for the three month period ended March 31,
2001 are not necessarily indicative of the results that may be expected for the
entire year.
Certain amounts from 2000 have been reclassified to conform to the 2001
presentation. These reclassifications have no effect on shareholders' equity or
on net income as previously reported.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, The Palmetto Bank (the "Bank"), and Palmetto
Capital, Inc., the Bank's wholly owned subsidiary. The Bank provides a full
range of banking services, including taking deposits and making loans. Palmetto
Capital, Inc. offers the brokerage of stocks, bonds, mutual funds and unit
investment trusts. Palmetto Capital, Inc. also offers advisory services and
variable rate annuities. In consolidation, all significant intercompany accounts
and transactions have been eliminated.
3. Summary of Significant Accounting Policies
------------------------------------------
The significant accounting policies used by the Company are described in
Note 1 to the Company's December 2000 Annual Report on Form 10-K. There have
been no changes in these policies subsequent to the year ended December 31,
2000.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 2000 TO MARCH 31,
2001
Forward-Looking Statements
- --------------------------
This document may contain certain "forward-looking statements," within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and rates of change in deposit
balances, the timing and amount of revenues that may be recognized by the
Company, continuation of current revenue, expense and charge-off trends, legal
and regulatory changes, and general changes in the economy. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those expected or
projected. These forward-looking statements speak only as of the date of this
document. The Company assumes no obligation to update any forward-looking
statements. Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them.
Assets
- ------
Liquid assets, which include cash, federal funds sold, and investments
available for sale, increased by $5.1 million, or 4%, for the three-month
period. The increase in liquid assets was attributable to the $2.1 million
increase in cash and due from banks and the $5.0 million increase in federal
funds sold, offset by the $2.0 million decrease in investment securities
available for sale. The decrease in investment securities available for sale is
attributed to $1.5 million in unrealized gains, offset by $1.9 million in
maturities, and $1.6 million in principal paydowns.
Loans, net, increased by $17.1 million, or 3%, during the three-month
period as a result of normal growth. The allowance for loan losses as a
percentage of total loans decreased slightly to 1.08% from 1.09% at March 31,
2001 and 2000, respectively. Management feels the allowance is adequate at March
31, 2001 because the Bank uses an allowance model that takes into account the
risk grades of loans, delinquency trends, charge-off ratios and loan growth.
Over the last 12 to 18 months the Bank has been improving its underwriting
standards, shifting its emphasis toward higher-dollar, higher-quality loans, and
charging off significant amounts of lower-quality loans.
At March 31, 2001, the Company had $4.5 million in loans held for sale with
commitments to sell these loans in April and May 2001. The mortgage servicing
rights related to the mortgage servicing department's activities were $1.1
million at March 31, 2001, which approximates their fair value. Loans serviced
for the benefit of others amounted to $134.0 million at March 31, 2001.
Other assets increased by $506,000, or 5%, from December 31, 2000 to March
31, 2001. The increase is primarily due to $252,000 in additions to other real
estate owned (four properties), an increase of $208,000 in prepaid expenses, and
an increase of $188,000 in repossessed assets. These increases were offset by a
$165,000 decrease in the deferred tax benefit related to unrealized losses on
the
6
investment securities available for sale at December 31, 2000. At March 31,
2001, there was a deferred tax liability of $419,000 related to unrealized gains
on the investment securities available for sale at March 31, 2001.
Liabilities and Shareholders' Equity
- ------------------------------------
Deposit balances increased by 4% during the three-month period, from $572.7
million to $598.2 million, due to normal growth and the introduction of a new
deposit product, the Palmetto Index Account. This account is similar to a
premier checking account, but features a competitive tiered interest rate based
on a minimum deposit balance. Approximately 26% of the deposit balance increase
is related to the Palmetto Index Account.
Securities sold under agreements to repurchase increased by $1.6 million,
or 8%, and commercial paper associated with the alternative commercial sweep
accounts (master note program) decreased by $3.2 million, or 21%. These changes
are the result of normal fluctuations in the accounts.
Total shareholders' equity increased by $2.0 million, or 4%, for the three-
month period as a result of comprehensive income of $2.6 million, less dividends
paid of $626,000. The Company also added $35,000 to equity through the issuance
of common stock as the result of stock option exercises.
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 10% and 25%. At March 31, 2001, the Company's liquidity ratio was
12.81%.
At March 31, 2001, the Bank had unused short-term lines of credit totaling
approximately $42 million (which are withdrawable at the lender's option). At
March 31, 2001, unused borrowing capacity from the Federal Home Loan Bank
("FHLB") totaled $48 million. The Bank has pledged assets to be used as
collateral if the Bank takes advantage of the FHLB line of credit. Management
believes that these sources are adequate to meet its liquidity needs and to
maintain the liquidity ratio within policy guidelines.
The Company has certain cash needs, including general operating expenses
and the payment of dividends and interest on borrowings. The Company currently
has no debt outstanding and has declared and paid $0.10 per share in dividends
so far in 2001. There can be no guarantee that any additional dividends will be
paid in 2001. Liquidity is provided from the Company's subsidiary, the Bank. The
Company and the Bank are subject to certain regulatory restrictions on the
amount of dividends they are permitted to pay. The Bank's current total risk-
based capital ratio is 10.49%. At March 31, 2001, the Bank had $2.5 million of
excess retained earnings available to pay out dividends and still be considered
"well-capitalized." The Bank plans to continue its quarterly dividend payments.
The Bank has entered into a contract for the construction of its 29/th/
branch office located in Travelers Rest, South Carolina. The estimated cost of
construction under the contract is approximately $613,000.
7
Capital Resources
- -----------------
As of March 31, 2001, the Company and the Bank were in compliance with each
of the applicable regulatory capital requirements and met or exceeded the "well-
capitalized" regulatory guidelines. The table below sets forth various capital
ratios for the Company and the Bank:
- -----------------------------------------------------------------------------
Adequately
As of Capitalized Well-Capitalized
3/31/01 Requirement Requirement
- -----------------------------------------------------------------------------
Company:
--------
Total Risk-based Capital 10.57% 8.00% 10.00%
Tier 1 Risk-based Capital 9.49 4.00 6.00
Tier 1 Leverage Ratio 7.38 4.00 5.00
Bank:
-----
Total Risk-based Capital 10.49 8.00 10.00
Tier 1 Risk-based Capital 9.41 4.00 6.00
Tier 1 Leverage Ratio 7.32 4.00 5.00
- ----------------------------------------------------------------------------
Accounting and Reporting Matters
- --------------------------------
In September 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125". This statement will
become effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitizations and collateral for fiscal years ending
after December 15, 2000. In addition to replacing SFAS No. 125, this statement
will rescind SFAS No. 127 "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but will carry over most of the provisions of
Statement 125 without reconsideration. The Company anticipates that adoption of
the standard will not have a material effect on the Company.
8
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2001 AND 2000
Net income for the three months ended March 31, 2001 and 2000 was $1.7
million and $1.9 million, respectively. Net income per common share-basic for
the three months ended March 31, 2001 and 2000 was $0.27 and $0.30,
respectively. Net income per common share-dilutive for the same periods was
$0.26 and $0.30, respectively.
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 rates
earned or paid and by volume changes in loans, securities, deposits and borrowed
funds.
For the three-month period ended March 31, 2001 and 2000, net interest income
was $6.8 million and $6.5 million, respectively. This increase in net interest
income was the result of a $58.2 million increase in average earning assets
offset by a decrease in the average tax-equivalent net interest margin. Earning
assets averaged $618.2 million and $560.0 million during the first quarters of
2001 and 2000, respectively. The increases in volume were due to the growth of
loans and increases in federal funds sold. The average tax-equivalent net
interest margin for the 2001 period was 4.61%, compared to 4.86% for the same
period in 2000.
Interest and fees on loans increased 14%, from $9.5 million to $10.8 million,
for the 2000 three-month period compared to the corresponding period in 2001 due
to increased volume and an increase in the average loan yield from 8.44% to
8.58% for the three month period ended March 31, 2000 and 2001, respectively.
Interest on investment securities decreased $163,000 for the 2001 three-month
period compared to the corresponding period in 2000 due to a lower balance in
the investment portfolio during the period ended March 31, 2001. Interest
income on federal funds sold increased $63,000 due to an increase in average
volume of federal funds sold for the quarter compared to the same period last
year. The yield on average earning assets, which includes loans, federal funds
sold and investment securities, increased from 7.96% to 8.08% for the three
months ended March 31, 2000 and 2001, respectively.
Total interest expense increased by 20%, from $4.6 million to $5.5 million,
due to an increase in the average cost of interest-bearing liabilities from
3.86% for the quarter ended March 31, 2000 to 4.28% for the quarter ended March
31, 2001.
Market Risk
- -----------
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit, borrowing and investing activities.
Management actively monitors and manages its inherent rate risk exposure.
Although the Company manages other risks, such as credit quality and liquidity
risk, in the normal course of business, management considers interest rate risk
to be its most significant market risk. This risk 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.
9
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 or
decrease 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.
The Company's current GAP analysis reflects that in periods of increasing or
decreasing 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 by an increase in market interest rates. This analysis,
however, does not take into account the dynamics of the marketplace. GAP is a
static measurement that assumes that 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.
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 change over twelve months. The
asset/liability committee meets weekly to address interest pricing issues, and
this model is reviewed monthly. Management will continue to monitor its
liability sensitive position in times of increasing interest rates, which might
adversely affect its net interest margin. The Company does not feel that the
market risk to the Company has changed significantly since December 31, 2000.
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $850,000 from $525,000 for the
three months ended March 31, 2001 and 2000, respectively, due to loan growth and
charges against the allowance for loan losses primarily due to the increased
repossessed assets related to the sales finance area. The provision
10
is adjusted each month to reflect loan volume growth and allow for loan charge-
offs, recoveries and other factors which impact management's assessment of the
adequacy of the allowance for loan losses. Management's objective is to maintain
the allowance for loan losses at an adequate level to cover probable losses in
the portfolio. Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current economic conditions,
past loan loss experience, and such other factors, which in management's
judgment deserve recognition in estimating loan losses.
Loans are charged off when, in the opinion of management, they are deemed to
be uncollectible. Recognized losses are charged against the allowance, and
subsequent recoveries are added to the allowance. Loans over 90 days delinquent
and on non-accrual amounted to approximately $3.1 million and $2.1 million at
March 31, 2001 and 2000, respectively. The annualized net charge-off ratio has
decreased from 0.65% for the quarter ended March 31, 2000 to .57% for the
quarter ended March 31, 2001. During 1999, the Bank redirected its emphasis on
indirect lending in the sales finance area to purchasing higher-quality indirect
loans and reducing the number of lower-quality loans in the portfolio.
Activities associated with this process, as management expected, contributed to
the increase of charge-offs as these lower-quality loans were eliminated.
Management believes it has taken these lower quality loans into consideration in
estimating the level of the allowance for loan losses, nevertheless, charge-offs
are expected to remain higher than normal until this process is complete.
Delinquent loans to total loans in the sales finance portfolio were 5.7% at
March 31, 2001, compared to 14.6% at December 31, 2000.
While management uses the best information available to make evaluations,
future adjustments to the allowance in the form of provisions through the income
statement 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.
Non-interest Income
- -------------------
Total non-interest income increased by $425,000, or 20%, for the three months
ended March 30, 2001, as compared to the same period in 2000. The largest
portion of this increase, $396,000, or 39%, can be attributed to service charges
on customer deposit accounts. The increases are primarily related to a new
automatic overdraft privilege offered to qualified deposit customers and the
increased collection of insufficient funds charges associated with debit card
transactions during the 2001 period compared to the same period in 2000.
Non-interest Expense
- --------------------
Total non-interest expense increased by $703,000, or 13%, during the 2001
three-month period compared to the same period in 2000. The largest contributor
to this increase was salaries and other personnel expense, which increased
$411,000, or 15%, due to normal raises, new employees related to growth, and
increased medical insurance premiums paid on behalf of employees. At March 31,
2001, the Bank had 355 full-time equivalent employees compared to 336 full-time
equivalent employees at March 31, 2000.
Income Taxes
- ------------
The Company incurred income tax expense of $670,000 for the 2001 three-month
period compared to $743,000 for the same period in 2000 due to a decrease in
taxable income. This expense is based on
11
an expected annual effective tax rate of approximately 28.5%. The effective tax
rate for the same period in 2000 was 28.2% and the effective tax rate for the
year ended December 31, 2000 was 27.4%.
Net Income Per Share
- --------------------
The following table illustrates a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net income for
the three-months ended March 31, 2001 and 2000 (dollars in thousands except per
share numbers):
Income Shares Per-Share
2001 (Numerator) (Denominator) Amount
- ---- -------------------------------------
Basic EPS:
- ----------
Net income $1,670 6,259,023 $0.27
Effect of dilutive securities: stock options -- 170,886 --
---------------------------------
Diluted EPS:
- ------------
Net income plus assumed exercises of stock options $1,670 6,429,909 $0.26
=================================
Income Shares Per-Share
2000 (Numerator) (Denominator) Amount
- ---- -------------------------------------
Basic EPS:
- ----------
Net income $1,895 6,233,019 $0.30
Effect of dilutive securities: stock options -- 179,645 --
---------------------------------
Diluted EPS:
- ------------
Net income plus assumed exercises of stock options $1,895 6,412,664 $0.30
=================================
INDUSTRY DEVELOPMENTS
In November 1999, the Gramm-Leach-Bliley Act was signed into law. This bill
provides the Bank and the banking industry new opportunities to compete at the
local, national and international levels, allowing financial institutions to
better serve their customers' needs. The Act greatly expands the powers of
banks and bank holding companies to sell financial products and services,
including securities, insurance and financial planning and investment advice;
fully closes the so-called "unitary thrift holding company loophole," which
currently permits commercial companies to own and operate thrifts; reforms the
Federal Home Loan Bank System to significantly increase community banks' access
to loan funding; and protects banks from discriminatory state insurance
regulation. The bill also restricts financial institutions' ability to share
nonpublic personal customer information with third parties. Management is
pleased with the passage of this bill as it opens up avenues for the Bank to
offer new financial products and services to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under "Market Risk" in the Management's Discussion and Analysis
section.
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PALMETTO BANCSHARES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On January 19, 2001, M. Snyder's, Inc., an automobile dealership that has
sold and assigned sales finance contracts to the Bank, filed suit against the
Bank and Richard O. Lollis, a former employee of the Bank who was the manager of
the sales finance department. The suit was filed in the Court of Common Pleas
for Greenville County, South Carolina. M. Snyder's claims arise from the sales
finance contracts and its business relationship with the Bank, including causes
of action for breach of contract, breach of fiduciary duty, fraud, negligent
representation, breach of contract accompanied by fraudulent acts, unfair trade
practices, negligence and negligent supervision; M. Snyder's seeks actual and
consequential damages. The Bank has filed counterclaims against M. Snyder's
based on M. Snyder's breach of contract. The Bank does not believe that M.
Snyder's claims are well-founded and is vigorously pursuing its counterclaims
and its defenses against the claims. In connection with the above lawsuit, the
Bank has also filed a third party complaint against an employee of M. Snyder's,
Inc. arising from his actions in dealing with sales finance contracts, including
causes of action for fraud, misrepresentation and conversion.
The Company is not currently engaged in legal proceedings. In addition to the
matter described above, from time to time the Bank is involved in legal
proceedings incidental to its normal course of business as a bank. Management
believes that none of these proceedings is likely to have a materially adverse
effect on the business of the Company or the Bank.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
The Company did not file a Form 8-K during the three months ended March 31,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALMETTO BANCSHARES, INC.
By:
/s/ L. Leon Patterson
- ---------------------------------------
L. Leon Patterson
Chairman and Chief Executive Officer
/s/ Paul W. Stringer
- ---------------------------------------
Paul W. Stringer
President and Chief Operating Officer
(Chief Accounting Officer)
Date: May 1, 2001
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