-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S5DuSsKdaj/quQgkNQilFBG9wCEIP0IFFgv+Mm6IX9PS1u6GjxJSWjN2dPft3fe2 Fb5ZdcwyXqv7RRS82CbHQw== 0000950168-97-000811.txt : 19970401 0000950168-97-000811.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950168-97-000811 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALMETTO BANCSHARES INC CENTRAL INDEX KEY: 0000706874 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742235055 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26016 FILM NUMBER: 97570340 BUSINESS ADDRESS: STREET 1: 301 HILLCREST DR STREET 2: P O BOX 49 CITY: LAURENS STATE: SC ZIP: 29360 BUSINESS PHONE: 8649844551 10-K405 1 PALMETTO BANK 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 For the fiscal year ended December 31, 1996 ( ) 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. X The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 11, 1997, was $47,339,640, based on the most recent sales price of $20.00 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. 3,041,952 as of March 11, 1997. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report 1996, mailed to shareholders on March 14, 1997: Incorporated by reference in Part II of this Form 10-K. The Company's Supplemental Annual Report 1996, mailed to shareholders on March 14, 1997: Incorporated by reference in Parts I and II of this Form 10-K. The Company's Proxy Statement dated March 14, 1997 with respect to an Annual Meeting of Shareholders to be held April 15, 1997: 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, 1996 TABLE OF CONTENTS
PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K
PART I 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 24 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. At December 31, 1996, Bancshares had total assets of $468.4 million, loans outstanding of $333.0 million and deposits of $412.4 million. This compares with total assets of $376.2 million, loans outstanding of $255.2 million and deposits of $329.7 million, at December 31, 1995; and with total assets of $312.1 million, loans outstanding of $215.4 million and deposits of $274.5 million, at December 31, 1994. 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. 1 Growth On April 15, 1996, the Bank acquired three existing branches of First Union National Bank of South Carolina. These branches are located in Gaffney and Blacksburg in Cherokee County and Ninety-Six in Greenwood County. The bank assumed deposits of approximately $54 million, but assumed no loans. The Bank is leasing the Gaffney branch building. For additional information concerning the branch acquisition, see page 2 of the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. 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 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 September 1995, the Bank successfully completed a conversion of their data processing software. This software enables the Bank to deliver more sophisticated user friendly financial services to its customers. The Bank incurred conversion costs of approximately $1 million. Employees At December 31, 1996, the Bank had 257 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's 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 2 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 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, Inc. 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 3 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 above the stated minimum. At December 31, 1996, 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, 1996, 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 pages 8 through 9 of the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. 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 $2,000 annual fee) due to the fact that it was "well capitalized." Because the Bank is now "adequately capitalized," it will pay insurance premiums in 1997, ranging from 0.00% to 0.27% of the average assessment base. Under the recently enacted 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-based capital ratio 4 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 CAMEL 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 CAMEL 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%. Bancshares and the Bank each currently meet the definition of adequately 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. 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. 5 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. 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-four 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, Simpsonville, Anderson (2), Greenville (4), Pendleton, Spartanburg (3), Inman, Blacksburg and Gaffney. The Bank has automatic teller machines at the following branches: Church Street (Laurens), Clinton, Montague Street (Greenwood), Ninety-Six, Fountain Inn, Simpsonville, Haywood Road (Greenville), Howell Road (Greenville), Grove Road (Greenville), Blackstock Road (Spartanburg), Fernwood Drive (Spartanburg), Duncan, Blacksburg, Gaffney, Pendleton, Anderson and North Anderson branches. The Bank also has ATM's at two non-branch locations: the Flour Daniel office complex (Greenville) and the Clemson University campus (Clemson). 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 $1,400 to $99,100: East North Street, Haywood Road, East North Street at Howell Road offices - Greenville Spartan Centre, Blackstock Road, Fernwood Drive 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 the current year totalling approximately $700,000. Because of the renovations, this location now 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 engaged in any 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. 6 Item 4. Submission of Matters to a Vote of Security Holders At a Special Meeting of Shareholders held on October 15, 1996, the holders of the Company's Common Stock, $5.00 par value (the "Common Stock"), approved a proposal to adopt an amendment to the Company's Articles of Incorporation to increase the number of authorized shares of the Common Stock from 2,000,000 to 10,000,000 shares, as follows: Votes For Against Abstain Broker Non-Votes 885,585 shares 0 shares 8,470 shares 0 shares The proposal was adopted principally to permit a three-for-one stock split effected in the form of a 200% stock dividend to each holder of Common Stock on September 12, 1996 (the "Stock Split"), which was conditioned upon shareholder approval of the proposal to amend the Company's Articles of Incorporation. Prior to such amendment, the number of shares of Common Stock authorized and available for issuance was insufficient to permit the Company to effect the Stock Split. 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 $20 per share on March 11, 1997. Bancshares, or its predecessor, the Bank, has paid regular dividends on common stock since 1909. For the years ended December 31, 1996, 1995, and 1994, Bancshares paid total cash dividends per share of $0.28, $0.22, and $0.18, respectively. Certain other information concerning dividends and historical trading prices is set forth on page 43 of the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. 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 state regulatory authorities for primary capital to asset ratios. The South Carolina Board of Financial Institutions guideline suggests a ratio of at least seven percent (7%). As of December 31, 1996, the Bank's primary capital to asset ratio was 7.35%. As of December 31, 1996, approximately $1,643,000 was available for payment of dividends by the Bank. 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. As of December 31, 1996, there were 540 shareholders of record. Item 6. Selected Financial Data The information required by this item is set forth on page 5 of the Company's Annual Report 1996, which is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain information required by this item is set forth on pages 2 through 11 of the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. 7 Distribution of Assets and Liabilities (Table 1 goes here) Table 1 Distribution of Assets and Liabilities (DOLLARS IN THOUSANDS)
Years Ended December 31, 1996 1996 1995 1995 1994 1994 1993 1993 Average % of Average % of Average % of Average % of ASSETS Balance Total Balance Total Balance Total Balance Total Cash and due from banks $23,743 5.51% 21,724 6.35% 16,629 5.45% 14,996 5.39% Federal funds sold 1,758 0.41% 3,684 1.08% 5,016 1.65% 12,709 4.56% Taxable investment securities 56,145 7.08% 47,618 13.91% 44,500 14.60% 40,018 14.37% Non-taxable investment securities 30,510 13.04% 25,777 7.53% 22,864 7.50% 21,046 7.56% Loans, net of unearned discount 301,839 70.08% 230,908 67.44% 204,959 67.23% 180,880 64.97% Less: allowance for loan losses (4,088) -0.95% (3,247) -0.95% (2,766) -0.91% (2,125) -0.76% ------------------------------------------------------------------------- Net loans 297,751 69.13% 227,661 66.49% 202,193 66.32% 178,755 64.21% Premises and equipment, net 11,670 2.71% 10,275 3.00% 9,011 2.96% 6,080 2.18% Accrued Interest 3,260 0.76% 2,495 0.73% 2,247 0.74% 2,001 0.72% Other assets 5,881 1.37% 3,140 0.92% 2,423 0.79% 2,796 1.00% ------------------------------------------------------------------------- Total assets $430,718 100.00% 342,374 100.00% 304,883 100.00% 278,401 100.00% ========================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Non-interest-bearing deposits 58,440 13.57% 44,299 12.94% 42,080 13.80% 34,594 12.43% Interest-bearing demand 115,674 26.86% 100,236 29.28% 100,708 33.03% 87,298 31.36% Savings 26,331 6.11% 21,518 6.28% 23,305 7.64% 23,156 8.32% Time 172,799 40.12% 128,555 37.55% 98,692 32.37% 94,189 33.83% ------------------------------------------------------------------------- Total deposits 373,244 86.66% 294,608 86.05% 264,785 86.85% 239,237 85.93% Federal funds purchased and securities sold under agreements to repurchase 17,668 4.10% 12,020 3.51% 8,964 2.94% 10,239 3.68% Commercial paper 8,075 1.87% 8,017 2.34% 6,312 2.07% 5,424 1.95% Debt of the Employee Stock Ownership Plan 0 0.00% 0 0.00% 0 0.00% 200 0.07% Note payable to a bank 0 0.00% 107 0.03% 630 0.21% 933 0.34% Other liabilities 2,600 0.60% 1,480 0.43% 1,324 0.43% 1,160 0.42% ------------------------------------------------------------------------- Total liabilities 401,587 93.24% 316,232 92.36% 282,015 92.50% 257,193 92.38% Shareholders equity: Common stock - $5.00 par value 15,165 3.52% 15,163 4.43% 15,003 4.92% 15,126 5.43% Additional paid-in capital 334 0.08% 333 0.10% 423 0.14% 0 0.00% Retained earnings 13,671 3.17% 10,615 3.10% 7,724 2.53% 6,338 2.28% Less debt in connection with funds used to acquire company shares by Employee Stock Ownership Plan 0 0.00% 0 0.00% 0 0.00% (200) -0.07% Less treasury stock (312) -0.07% (239) -0.07% (282) -0.09% (56) -0.02% Unrealized gain (loss) on investment securities 273 0.06% 270 8.00% 0 0.00% 0 0.00% ------------------------------------------------------------------------- Total shareholders' equity 29,131 6.76% 26,142 7.64% 22,868 7.50% 21,208 7.62% ------------------------------------------------------------------------- Total liabilities and shareholders' equity $430,718 100.00% 342,374 100.00% 304,883 100.00% 278,401 100.00% =========================================================================
8 INVESTMENT PORTFOLIO The following table shows, as of December 31, 1996, 1995 and 1994, the book value and market values of investments in obligations of (i) the U.S. Government and its agencies, (ii) states, counties, and municipalities, and (iii) mortgage-backed securities. TABLE 2 Investment Portfolio (Dollars in Thousands) INVESTMENTS HELD TO MATURITY
1996 1995 1994 Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value U.S. Treasury and U.S. Government agencies $ 16,006 15,891 15,033 15,176 30,537 29,908 State and municipals 25,450 26,491 22,593 23,183 24,168 23,999 Mortgage-backed securities 24,751 24,388 6,163 6,190 - - -------- --------- --------- --------- --------- -------- Total $ 66,207 66,770 43,789 44,549 54,705 53,907 ======== ========= ========= ========= ========= ========= INVESTMENTS AVAILABLE FOR SALE 1996 1995 1994 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value U.S. Treasury and U.S. Government agencies $ 8,993 9,035 29,996 30,686 9,467 9,204 State and municipals 6,977 7,205 8,584 8,929 - - -------- --------- --------- --------- --------- -------- Total $ 15,970 16,240 38,580 39,615 9,467 9,204 ======== ========= ========= ========= ========= =========
The following table indicates the maturities and respective yields by investment category as of December 31, 1996. Yields on tax exempt securities are stated on a tax equivalent basis using a federal tax rate of 34%. TABLE 3 Investment Portfolio Maturity Schedule (Par Value -- Dollars in Thousands) December 31, 1996 INVESTMENTS HELD TO MATURITY
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 and U.S. Government agencies $ - - 15,000 6.30% 1,000 7.28% - - State and municipals - - 2,740 8.65 16,470 7.85 6,085 7.69 Mortgage-backed securities - - 5,344 6.24 12,958 6.51 6,311 6.29 ------- ------- -------- ------ -------- ------- ------- ------ Total $ - - 23,084 6.58% 30,428 7.25% 12,396 6.98% ======= ======= ======== ====== ======== ======= ======= ======
9 INVESTMENTS AVAILABLE FOR SALE
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 and U.S. Government agencies $ 1,500 8.12% 7,500 6.03% - - - - State and municipals 1,350 10.36 5,590 9.15 - - - - ------- ------- -------- ------ -------- ------- ------- ----- Total $ 2,850 9.21% 13,090 7.35% - - - - ======= ======= ======== ====== ======== ======= ======= =====
LOAN PORTFOLIO Management of the Company believes that the loan portfolio is adequately diversified. The table below summarizes loans by classification for the five year period ended December 31, 1996. TABLE 4 Loan Portfolio Composition (Dollars in Thousands)
December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Commercial, financial and agricultural $ 68,617 45,377 32,672 31,107 26,486 Real estate-construction 9,598 5,453 1,941 1,156 732 Real-estate-mortgage 181,775 149,017 134,789 121,884 113,442 Installment loans to individuals 72,996 55,340 46,006 37,344 31,304 --------- --------- --------- --------- --------- Total $ 332,986 255,187 215,408 191,491 171,964 ========= ========= ========= ========= =========
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, 1996, total loans, net of unearned discounts, were 79% of total earning assets. Loans secured by real estate accounted for 58% of total loans as of December 31, 1996. Most of the loans classified as real estate-mortgage are commercial loans where real estate provides additional collateral. The table below shows the amounts of loans at December 31, 1996, except for real estate mortgage and installment loans to individuals, due to mature and available for repricing within the time period stated. TABLE 5 Maturities and Sensitivity of Loans to Changes in Interest Rates (Dollars in Thousands)
After 1 Year 1 Year Through After 5 or Less Five Years Years Total Commercial, financial and agricultural $ 27,722 32,770 8,125 68,617 Real estate-construction 5,251 3,852 495 9,598 --------- --------- -------- -------- Total $ 32,973 36,622 8,620 78,215 ========= ========= ======== ========
10 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, 1996 Predetermined interest rate $ 45,242 Floating or adjustable interest rate - Total $ 45,242 ======== Thirty-two percent of total loans are repricable within one year. 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. The following table 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, 1992 through December 31, 1996. In addition to the non-performing loans disclosed below, the Company had approximately $193,000 in impaired loans at December 31, 1995. During 1995, the average recorded investment in impaired loans was approximately $211,000. Included in the allowance for loan losses at December 31, 1995 is approximately $97,000 related to these impaired loans. 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 $76,000, and there is no allowance for loan losses related to impaired loans at December 31, 1996. 11 TABLE 6 Nonperforming Loans (Dollars in Thousands) [zz]
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, 1996: Commercial, financial and agricultural $ 139 - 68,617 0.20% 4 Real estate - construction - - 9,598 0.00 - Real estate - mortgage 429 - 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 ========= ======= ========= ======== ========= December 31, 1993: Commercial, financial and agricultural 44 - 31,107 0.14 3 Real estate - construction - - 1,156 0.00 - Real estate - mortgage 204 - 121,884 0.17 16 Installment loans to individuals 306 - 37,344 0.82 24 --------- ------- --------- -------- --------- Total $ 554 - 191,491 0.29% 43 ========= ======= ========= ======== ========= December 31, 1992: Commercial, financial and agricultural 748 - 26,486 2.82 33 Real estate - construction - - 732 0.00 - Real estate - mortgage - - 113,442 0.00 - Installment loans to individuals 573 - 31,304 1.83 25 --------- ------- --------- -------- --------- Total $ 1,321 - 171,964 0.77% 58 ========= ======= ========= ======== =========
12 TABLE 7 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. In addition, based on past experience, an unallocated portion of the reserve is established which does not relate to any specific loan or category of loans. 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:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Average loans, net of unearned discount $ 301,839 230,908 204,959 180,880 168,265 ========== ========== ========== ========== ======== Allowance for loan losses: Beginning balance $ 3,700 3,016 2,394 2,064 1,671 Add provision for loan losses 1,450 1,140 819 1,172 1,543 Loan charge-offs: Commercial, financial and agricultural 131 262 100 521 663 Real estate - construction - - - - - Real estate - mortgage 92 14 - - - Installment loans to individuals 487 337 357 469 679 ---------- ---------- ---------- ---------- -------- Total loan charge-offs 710 613 457 990 1,342 Recoveries of loans previously charged-off: Commercial, financial and agricultural 42 60 123 42 102 Real estate - construction - - - - - Real estate - mortgage 65 33 - - - Installment loans to individuals 182 64 137 106 90 ---------- ---------- ---------- ---------- -------- Total recoveries of loans previously charged off 289 157 260 148 192 ---------- ---------- ---------- ---------- -------- Net charge-offs 421 456 197 842 1,150 ---------- ---------- ---------- ---------- -------- Ending balance $ 4,729 3,700 3,016 2,394 2,064 ========== ========== ========== ========== ======== Net charge-offs to average loans, net 0.14% 0.20% 0.10% 0.47% 0.68% Allowance for loan losses to average loans, net 1.57 1.60 1.47 1.32 1.23 Allowance for loan losses to total loans at period-end 1.42 1.45 1.40 1.25 1.20
Losses and recoveries are charged or credited to the allowance at the time realized. 13 The following table summarizes the allocation of the allowance for loan losses at December 31:
1996 1995 1994 1993 1992 % of % of % of % of % of Total Total Total Total Total Total Total Total Total Total Balance applicable to: Commercial, financial and agricultural $ 974 20.61% 658 17.78% 457 15.15% 190 7.94% 1,020 49.42% Real estate - construction 136 2.88 79 2.14 27 0.90 - - - - Real estate - mortgage 2,582 54.59 2,161 58.40 1,887 62.60 882 36.84 - - Installment loans to individuals 1,037 21.92 802 21.68 644 21.35 1,322 55.22 1,044 50.58 ------ ------- ------- -------- ------- ------- ----- -------- ------ ------ Total $ 4,729 100.00% 3,700 100.00% 3,016 100.00% 2,394 100.00% 2,064 100.00% ====== ======= ======= ======== ======= ======= ===== ======== ====== ======
14 DEPOSITS The following table presents average balances and average rates paid by category of deposit for the years ended December 31, 1996, 1995 and 1994:
TABLE 8 Deposits (Dollars in Thousands) 1996 1995 1994 -------------------------------- -------------------------------- ----------------------------- Average Average Average Average Interest Rate Average Interest Rate Average Interest Rate Balance Expense Paid Balance Expense Paid Balance Expense Paid Non-interest bearing demand $ 58,440 - - $ 44,299 - - $ 42,080 - - Interest-bearing demand 115,674 2,693 2.33% 100,236 2,480 2.47% 100,708 2,519 2.50% Savings 26,331 652 2.48 21,518 600 2.79 23,305 598 2.57% Time 172,799 9,379 5.43 128,555 6,907 5.37 98,692 3,634 3.68% --------- ------- ------- -------- ------- ------ -------- ----- ------- Total deposits $ 373,244 12,724 3.41% $ 294,608 9,987 3.39% $ 264,785 6,751 2.55% ========= ======= ======= ======== ======= ====== ======== ===== =======
The following table sets forth, by time remaining to maturity, domestic certificates of deposit over $100,000 as of December 31, 1996, 1995 and 1994.
1996 1995 1994 ---- ---- ---- Maturities: 3 months or less $ 18,082 17,598 3,609 3 through 6 months 8,569 11,722 10,828 6 through 12 months 11,286 6,512 6,608 Over 12 months 4,163 3,798 2,526 ------------- ------------- ------------- $ 42,100 39,630 23,571 ============= ============= =============
The company has no foreign deposits. 16 RETURN ON EQUITY AND ASSETS The table below illustrates the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), dividend payout ratio (dividends declared divided by net income), and average equity to average assets ratio (average equity divided by average total assets) for the years indicated: TABLE 9 Return on Equity and Assets (Dollars in thousands, except per share data)
Years Ended December 31, 1996 1995 1994 Net income $ 4,753 $ 3,602 $ 2,760 Average shareholders' equity (1) $ 29,131 $ 26,142 $ 22,868 Average total assets $ 430,718 $ 342,374 $304,883 Dividends declared $ 842 $ 652 $ 530 Dividends per share (2) $ 0.28 $ 0.22 $ 0.18 Net income per share (2) (3) $ 1.54 $ 1.20 $ 0.92 Return on average assets 1.10% 1.05% 0.91% Return on average equity 16.32% 13.78% 12.07% Dividend payout ratio 17.72% 18.10% 19.20% Average equity to average asset ratio 6.76% 7.64% 7.50%
(1) Excluding an accounting reclassification for shares held as ESOP stock of $3,313,474 and $2,770,528 at December 31, 1996 and 1995, respectively. (2) These numbers have been restated to reflect the three-for-one stock split in 1996. (3) Based on weighted average shares outstanding not subject to put call of 2,732,305; 3,010,320 and 3,000,690 for 1996, 1995 and 1994, respectively. 16 SHORT - TERM BORROWINGS The following table sets forth certain information regarding short term borrowings at December 31: TABLE 10 Short-Term Borrowings (Dollars in thousands) 1996 1995 1994 ---- ---- ---- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Amount outstanding at year-end $ 11,636 7,546 5,252 Average amount outstanding during year 11,601 10,228 8,596 Maximum amount outstanding at any month end 12,694 11,680 9,551 Weighted average rate paid at year end 4.44% 3.05% 2.85% Weighted average rate paid during the year 3.84% 4.31% 2.58% FEDERAL FUNDS PURCHASED Amount outstanding at year end $ 3,000 2,900 - Average amount outstanding during year 5,746 2,380 369 Maximum amount outstanding at any month end 17,500 3,000 - Weighted average rate at year end 7.75% 5.50% - Weighted average rate paid during the year 5.45% 5.68% 5.33% COMMERCIAL PAPER Amount outstanding at year end $ 7,435 6,187 6,914 Average amount outstanding during year 8,075 8,017 6,312 Maximum amount outstanding at any month end 9,168 9,370 7,601 Weighted average rate paid at year end 4.69% 3.30% 3.10% Weighted average rate paid during the year 3.88% 4.28% 2.72% RATE / VOLUME ANALYSIS The following table includes, for the years ended December 31, 1996, 1995 and 1994 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. 17
TABLE 11 Rate Volume Analysis 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Average Income/ Volume Rate Assets Balances Expense Yield Change Change Cash and due from banks $23,743,056 Federal funds sold 1,758,025 93,193 5.30% (150,312) (136,341) Taxable investment securities 56,145,024 3,317,945 5.91% 531,645 (337,346) Non-taxable investment securities 30,509,807 1,927,916 6.32% 336,105 (440,631) Loans, net of unearned discount 301,839,222 26,851,766 8.90% 6,445,479 (1,016,949) Less: allowance for loan losses (4,088,156) ------------------------ Net loans 297,751,066 Premises an equipment, net 11,669,967 Accrued Interest 3,259,887 Other assets 5,880,932 ------------------------ Total assets $430,717,764 ======================== Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest bearing demand 58,440,278 Interest-bearing demand 115,674,106 2,692,646 2.33% 370,632 (157,441) Savings 26,330,970 652,637 2.48% 126,786 (74,569) Time 172,798,905 9,378,688 5.43% 2,389,289 82,171 ------------------------ Total deposits 373,244,259 12,723,971 3.41% 2,673,251 63,617 Federal funds purchased and securities sold under agreements to repurchase 17,667,519 772,481 4.37% 241,152 30,469 Commercial paper 8,075,339 313,092 3.88% 2,362 (29,982) Debt of the Employee Stock Ownership Plan 0 Note payable to a bank 0 Other liabilities 2,600,118 ------------------------ Total liabilities 401,587,235 Shareholders' equity: Common stock - $5.00 par value 15,164,760 Additional Paid-in Capital 334,095 Retained earnings 13,671,083 Less debt in connection with Employee Stock Ownership Plan 0 Less treasury stock (312,301) Unrealized gain (loss) on investment securities 272,892 ------------------------ Total shareholders' equity 29,130,529 ------------------------ Total liabilities and shareholders' equity $430,717,764 ======================== Average yield on all interest - earning assets 8.25% Average effective rate paid on all interest-bearing liabilities 3.46% Net yield on interest-earning assets 4.71%
Yields on nontaxable 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 $655,491, $691,030, and $702,961 for 1996, 1995 and 1994, respectively. The effect of foregone interest income as a result of loans on non-accrual was not considered in the above analysis. 18 TABLE 11 (CONTINUED)
1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Average Income/ Volume Rate Average Income/ Volume Rate Balances Expense Yield Change Change Balances Expense Yield Change Change $21,723,557 16,629,235 3,683,473 379,846 10.31% (94,788) 278,062 5,015,564 196,572 3.92% (264,220) 85,918 47,617,846 3,123,646 6.56% 37,873 743,900 44,500,029 2,341,872 5.26% 247,250 (214,199) 25,777,154 2,032,442 7.88% 264,319 (299,410) 22,864,228 2,067,533 9.04% 167,724 (79,418) 230,907,962 21,423,236 9.28% 2,508,177 1,525,505 204,958,651 17,389,554 8.48% 2,055,905 (208,367) (3,246,805) (2,765,847) - -------------- ---------------- 227,661,157 202,192,804 10,275,067 9,010,820 2,495,231 2,246,628 3,140,023 2,423,656 - -------------- ---------------- $342,373,508 304,882,964 ============== ================ 44,298,731 42,079,852 100,235,638 2,479,455 2.47% 100,708,482 2,518,900 2.50% 329,649 80,717 21,518,313 600,420 2.79% 23,304,780 597,900 2.57% 4,092 (81,119) 128,554,854 6,907,228 5.37% 98,691,592 3,633,909 3.68% 168,757 (127,589) - -------------- ---------------- 294,607,536 9,987,103 3.39% 953,413 2,282,982 264,784,706 6,750,709 2.55% 666,124 (291,617) 12,019,526 500,860 4.17% 30,627 226,176 8,963,863 244,057 2.72% (27,254) 112,383 8,017,222 340,712 4.25% 54,700 114,077 6,311,701 171,935 2.72% 18,430 75,945 0 0 0 0 107,136 13,389 12.50% (49,779) 21,977 630,209 41,191 6.54% (18,563) 6,247 1,480,125 1,324,637 - -------------- ---------------- 316,231,545 282,015,116 15,163,260 15,003,450 333,243 423,183 10,614,534 7,723,615 0 0 (238,727) (282,400) 269,653 0 - -------------- ---------------- 26,141,963 22,867,848 - -------------- ---------------- 342,373,508 304,882,964 ============== ================ 8.75% 7.93% 3.44% 2.57% 5.23% 5.33%
19 TABLE 12 Interest Rate Sensitivity (Dollars in Thousands) At December 31, 1996
2 Days to 3 3-6 6-12 1-5 Over 1 Day Months Months Months Years 5 Years Total ----- ------ ------ ------ ----- ------- ----- Assets: Federal funds sold $ 1,951 - - - - - 1,951 Investment securities - 4,795 1,257 1,387 36,528 38,480 82,447 Total loans 59,835 33,914 21,409 30,226 162,393 25,209 332,986 --------- -------- --------- --------- --------- -------- ------- Total interest-earning assets $ 61,786 38,709 22,666 31,613 198,921 63,689 417,384 ========= ======= ========= ========= ========= ======== ======== Liabilities and Shareholders Equity Interest checking 78,392 - - - - - 78,392 Retail repurchase agreements 11,636 - - - - - 11,636 Insured money markets 42,609 - - - - - 42,609 Savings deposits 26,357 - - - - - 26,357 Time deposits over $100,000 - 18,082 8,569 11,286 4,163 - 42,100 Other time deposits - 54,224 48,308 28,042 20,984 21 151,579 Commercial paper 7,435 - - - - - 7,435 Federal funds purchased 3,000 - - - - - 3,000 --------- -------- --------- --------- --------- -------- -------- Total interest-bearing liabilities $ 169,429 72,306 56,877 39,328 25,147 21 363,108 ========= ======== ========= ========= ========= ========= ======== Interest rate sensitivity gap $ (107,643) (33,597) (34,211) (7,715) 173,774 63,668 54,276 ========== ======== ========== ========== ========= ======== ======== Cumulative interest rate sensitivity gap $ (107,643) (141,240) (175,451) (183,166) 9,392 54,276 - ========= ======== ========= ========== ========= ======== ======= Cumulative interest rate sensitivity gap as a % of total interest-bearing assets (25.79)% (33.84)% (42.04)% (43.88)% 2.25% 13.00% - % ======= ======== ======== ========= ========= ======== =======
Notes to Interest Rate Sensitivity table: (bullet)Interest-earning assets are included in the period in which the balances are expected to be repaid and/or repriced as a result of scheduled rate adjustments and contractual maturities. (bullet)Loans receivable includes non-performing loans and unamortized deferred loan costs, and is reduced by unamortized discounts. (bullet)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. (bullet)The interest rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing liabilities. 20 An important aspect of achieving satisfactory net interest income is the composition and maturities of rate sensitive assets and liabilities. The preceding table generally reflects that in periods of rising interest rates, rate sensitive liabilities will reprice slightly 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. For further discussion, please see "Net Interest Income" section of Management's Discussion and Analysis in the Company's Supplemental Annual Report 1996 (pages 3 through 5), which is incorporated herein by reference. NON - INTEREST INCOME Non-interest income increases have primarily resulted from increased volume and selected fee increases in deposit accounts and trust services. Service charges on deposit accounts were responsible for 55% of other operating income in 1996, as compared to 56% in both 1995 and 1994. The following table sets forth the components of other operating income: TABLE 13 Non-Interest Income (Dollars in thousands) Years Ended December 31, 1996 1995 1994 Service charges on deposit accounts $ 2,863 2,494 2,254 Fees for trust services 861 773 670 Gains on sales of loans 148 - - Investment securities gains (losses) 21 (93) (13) Merchant discount income 345 384 325 Other 1,000 905 793 ----------- ---------- ----------- Total non-interest income $ 5,238 4,463 4,029 =========== ========== =========== NON - INTEREST EXPENSES Non-interest expense increases have primarily resulted from expenses associated with the acquisition of additional branches and renovations to the Corporate Center. This includes increased salary and other personnel expenses as a result of additional staff and annual pay increases as well as increased depreciation expenses as a result of additional buildings being purchased. Salaries and other personnel expenses account for approximately 48% of total non-interest expenses in 1996, as compared to 53% in 1994, and 54% in 1993. The following table sets forth the components of non-interest expense: TABLE 14 Non-Interest Expenses (Dollars in thousands)
Years Ended December 31, 1996 1995 1994 Salaries and other personnel expense $ 7,536 7,399 7,340 Net occupancy expense 1,453 1,219 1,126 Furniture and equipment expense 1,549 1,092 1,037 FDIC assessment 2 320 584 Postage and supplies expense 873 702 599 Advertising expense 737 570 556 Telephone expense 473 407 384 Other expense 3,141 2,191 1,999 ----- ----- ----- Total non-interest expense $ 15,764 13,900 13,625 =========== =========== ===========
21 Item 8. Financial Statements and Supplementary Data The information required by this item is set forth in the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 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 1997 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 14 in the definitive Proxy Statement of the Company filed in connection with its 1997 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 13 through 14 in the definitive Proxy Statement of the Company filed in connection with its 1997 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 15 in the definitive Proxy Statement of the Company filed in connection with its 1997 Annual Meeting of Shareholders, which is incorporated herein by reference. 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following are filed as a part of this report on Form 10-K: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Report of Independent Certified Public Accountant: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Consolidated Balance Sheets as of December 31, 1996 and 1995: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1996, 1995 and 1994: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. Notes to Consolidated Financial Statements: Incorporated by reference to the Company's Supplemental Annual Report 1996, which is incorporated herein by reference. (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 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 23 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. 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 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 10.1* Palmetto Bancshares, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10(a) 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 13.1.1^ Page 5 of the Company's Annual Report 1996, mailed to shareholders on March 14, 1997. 13.1.2^ The Company's Supplemental Annual Report 1996, mailed to shareholders on March 14, 1997. 20.1 The Company's Proxy Statement dated March 14, 1997, with respect to an Annual Meeting of Shareholders as filed with the Commission on March 14, 1997. 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, 1996. (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. 24 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 (Chief Accounting Officer) Date: March 18, 1997 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 March 18, 1997 /s/ Paul W. Stringer Paul W. Stringer Director March 18, 1997 /s/ James A. Cannon James A. Cannon Director March 18, 1997 /s/ W. Fred Davis, Jr. W. Fred Davis, Jr. Director March 18, 1997 /s/ Michael D. Glenn Michael D. Glenn Director March 18, 1997 25 Signature Title Date /s/ David P. George, Jr. David P. George, Jr. Director March 18, 1997 /s/ John T. Gramling, II John T. Gramling, II Director March 18, 1997 /s/ James M. Shoemaker, Jr. James M. Shoemaker, Jr. Director March 18, 1997 J. David Wasson, Jr. Director March 18, 1997
26 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. 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 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 10.1 Palmetto Bancshares, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10(a) 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 13.1.1^ Page 5 of the Company's Annual Report 1996, mailed to shareholders on March 14, 1997. 13.1.2^ The Company's Supplemental Annual Report 1996, mailed to shareholders on March 14, 1997. 20.1 The Company's Proxy Statement dated March 14, 1997, with respect to an Annual Meeting of Shareholders as filed with the Commission on March 14, 1997. 21.1^ List of Subsidiaries of the Registrant 27.1^ Financial Data Schedule ^ Filed herewith. EX-3.(I) 2 EXHIBIT 3.2.1 Exhibit 3.2.1 BYLAWS OF PALMETTO BANCSHARES, INC. A South Carolina Corporation TABLE OF CONTENTS BYLAWS OF PALMETTO BANCSHARES, INC. Article I. Offices ss.1.1 Business Office 1 ss.1.2 Registered Office 1 Article II. Shareholders ss.2.1 Annual Meeting 1 ss.2.2 Special Meetings 2 ss.2.3 Place of Meeting 2 ss.2.4 Notice of Meeting 2 (a) Required Notice 2 (b) Adjourned Meeting 2 (c) Waiver of Notice 3 (d) Contents of Notice 3 ss.2.5 Fixing of Record Date 4 ss.2.6 Shareholder List 5 ss.2.7 Quorum and Voting Requirements 5 ss.2.8 Increasing Either Quorum or Voting Requirements 5 ss.2.9 Proxies 6 ss.2.10 Voting of Shares 6 ss.2.11 Corporation's Acceptance of Votes 7 ss.2.12 Informal Action by Shareholders 8 ss.2.13 Voting for Directors 8 (a) General provision 8 (b) Notice of Cumulative Voting 8 (c) Recess 9 (d) Plurality Requirement 9 ss.2.14 Shareholder's Rights to Inspect Corporate Records 9 (a) Minutes and Accounting Records 9 (b) Absolute Inspection Rights of Records Required at Principal Office 9 (c) Conditional Inspection Rights 10 (d) Copy Costs 11 ss.2.15 Financial Statements Shall be Furnished to the Shareholders 11 ss.2.16 Dissenter's Rights 12 i Article III. Board Of Directors ss.3.1 General Powers 12 ss.3.2 Number, Tenure and Qualification of Directors 12 ss.3.3 Regular Meetings 12 ss.3.4 Special Meetings 12 ss.3.5 Notice of Special Meeting 13 ss.3.6 Director Quorum 13 ss.3.7 Manner of Acting 13 (a) Required Vote 13 (b) Telephone Meeting 14 (c) Failure to Object to Action 14 ss.3.8 Establishing a "Supermajority" Quorum or Voting Requirement 14 ss.3.9 Action Without A Meeting 15 ss.3.10 Removal of a Director 15 ss.3.11 Vacancies 15 ss.3.12 Compensation 16 ss.3.13 Committees 16 (a) Creation of Committees 16 (b) Selection of Members 16 (c) Required Procedures 17 (d) Authority 17 Article IV. Officers ss.4.1 Number 17 ss.4.2 Appointment and Term of Office 18 ss.4.3 Removal 18 ss.4.4 President 18 ss.4.5 The Vice-Presidents 18 ss.4.6 The Secretary 19 ss.4.7 The Treasurer 19 ss.4.8 Assistant Secretaries and Assistant Treasurers 20 ss.4.9 Salaries 20 Article V. Indemnification of Directors, Officers, Officers, Agents, and Employees ss.5.1 Indemnification of Directors 20 (a) Determination and Authorization 20 (b) Standard of Conduct 21 (c) Indemnification in Derivative Actions Limited 21 ss.5.2 Advance Expenses for Directors 21 ss.5.3 Indemnification of Officers, Agents, and Employees Who Are Not Directors 22 ii Article VI. Certificates for Shares and Their Transfer ss.6.1 Certificates for Shares 22 (a) Content 22 (b) Legend as to Class or Series 23 (c) Shareholder List 23 (d) Transferring Shares 23 ss.6.2 Registration of the Transfer of Shares 23 ss.6.3 Restrictions on Transfer of Share 23 Permitted ss.6.4 Acquisition of Shares 24 Article VII. Distributions ss.7.1 Distributions 25 Article VIII. Corporate Seal ss.8.1 Corporate Seal 25 Article IX. Emergency Bylaws ss.9.1 Emergency Bylaws 25 (a) Notice of Board Meetings 26 (b) Temporary Directors and Quorum 26 (c) Actions Permitted to be Taken 26 Article X. Amendments ss.10.1 Amendments 27 iii BY-LAWS OF PALMETTO BANCSHARES, INC. ARTICLE I. OFFICES SS.1.1 BUSINESS OFFICE. The original principal office of the corporation shall be within the State of South Carolina and shall be located in Laurens, County of Laurens. The board of directors may change the location of the principal office. The corporation shall maintain at its principal office a copy of certain records, as specified in ss.2.14 of Article II. The corporation may have such other offices, either within or without the State of South Carolina, as the board of directors may designate or as the business of the corporation may require. SS.1.2 REGISTERED OFFICE. The registered office of the corporation, required by ss. 33-5-101, of the South Carolina Business Corporation Act of 1988 (herein after "the Act") may be, but need not be, identical with the principal office in the state of South Carolina, and the address of the registered office may be changed from time to time. ARTICLE II. SHAREHOLDERS SS.2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held on such date as may be designated by the board of directors, provided such date is no later than six months following the corporation's fiscal year end for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated herein for any annual meeting of the shareholders, or at any subsequent continuation after adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as convenient. SS.2.2 SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or pur poses, described in the meeting notice, may be called by the president, or by the board of directors, and shall be called by the president at the request of the holders of not less than one-tenth of all outstanding votes of the corporation entitled to be cast on any issue at the meeting. 1 SS.2.3 PLACE OF MEETING. The board of directors may designate any place as the place of meeting for any annual or special meeting of the shareholders, which may be either within or without the State of South Carolina. If no designation is made, the place of meeting shall be the principal office of the corporation in the State of South Carolina. SS.2.4 NOTICE OF MEETING. (a) Required notice. Written notice stating the place, day and hour of any annual or special shareholder meeting shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direc tion of the president, the board of directors or other persons calling the meeting, to each shareholder of record entitled to vote at such meeting and to any other share holder entitled by the Act or the articles of incorporation to receive notice of the meeting. Notice shall be deemed to be effective at the earlier of: (1) when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid, (2) on the date shown on the return receipt if sent by registered or certi fied mail, return receipt requested, and the receipt is signed by or on behalf of the addressee, (3) when received, or (4) 5 days after deposit in the United States mail, if mailed postpaid and correctly addressed to an address other than that shown in the corporation's current record of shareholders. (b) Adjourned Meeting. If any shareholder meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time or place, if the new date, time and place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is, or must be, fixed (see ss. 2.5 of this Article II) then notice must be given pursuant to the requirements of paragraph (a) of this ss. 2.4, to those persons who are shareholders as of the new record date. (c) Waiver of Notice. The shareholder may waive notice of the meeting (or any notice required by the Act, articles of incorporation, or bylaws), by a writing signed by the shareholder entitled to the notice, which is delivered to the corporation (either 2 before or after the date and time stated in the notice) for inclusion in the minutes or filing with the corporate records. A shareholder's attendance at a meeting: (1) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; (2) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. (d) Contents of Notice. The notice of each special shareholder meeting shall include a description of the purpose or purposes for which the meeting is called. Except as provided in this ss.2.4(d), or as provided in the corporation's articles, or otherwise in the Act, the notice of an annual shareholder meeting need not include a description of the purpose or purposes for which the meeting is called. If a purpose of any shareholder meeting is to consider either: (1) a proposed amendment to the articles of incorporation (including any restated articles requiring share holder approval); (2) a plan of merger or share exchange; (3) the sale, lease, exchange or other disposition of all or substantially all of the corporation's property; (4) the adoption, amendment or repeal of a bylaw; (5) dissolution of the corporation; or, (6) removal of a director, the notice must so state and be accompanied by respectively a copy or summary of the: (1) articles of amendment; (2) plan of merger or share exchange; (3) transaction for disposition of all the corporation's property; or (4) bylaw proposal. If the proposed corporation action creates dissenter's rights, the notice must state that shareholders are, or may be entitled to assert dissenter's rights, and must be accompanied by a copy of Chapter 13 of the Act. If the corporation issues, or authorizes the issuance of shares for promissory notes or for promises to render services in the future, the corporation shall report in writing to all the shareholders the number of shares authorized or issued, and the consideration received with or before the notice of the next shareholder meeting. Likewise, if the corporation indemnifies or advances expenses to a director (pursuant to ss.33-16-210 of the Act) this shall be reported to all the 3 shareholders with or before notice of the next shareholder's meeting. SS.2.5 FIXING OF RECORD DATE. For the purpose of determining shareholders of any voting group entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any distribution or dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date. Such record date shall not be more than seventy days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is so fixed by the board for the determination of shareholders entitled to notice of, or to vote at a meeting of shareholders, or shareholders entitled to receive a share dividend or distribution, the record date for determination of such shareholders shall be at the close of business on: (a) With respect to an annual shareholder meeting or any special shareholder meeting called by the board or any person specifically authorized by the board or these bylaws to call a meeting, the day before the first notice is delivered to shareholders; (b) With respect to a special shareholder's meeting demanded by the shareholders, the date the first shareholder signs the demand; (c) With respect to the payment of a share dividend, the date the board authorizes the share dividend; (d) With respect to actions taken in writing without a meeting, the date the first shareholder signs a consent; (e) And with respect to a distribution to shareholders, (other than one involving purchase or reacquisition of shares), the date the board authorizes the distribution. When a deter- mination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SS.2.6 SHAREHOLDER LIST. The officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete record of the shareholders entitled to vote at each meeting of shareholders thereof, arranged in alphabetical order, with the address of and 4 the number of shares held by each. The list must be arranged by voting group, if such exists, and within each voting group by class or series of shares. The shareholder's list must be available for inspection by any shareholder, beginning on the date on which notice of the meeting is given for which the list was prepared and continuing through the meeting. The list shall be available at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting is to be held. A shareholder, his agent or attorney is entitled on written demand to inspect, and subject to the requirements of ss. 2.14 of this Article II, to copy the list at his expense during regular business hours, and during the period it is available for inspection. The corporation shall maintain the shareholder list in written form or in another form capable of conversion into written form within a reasonable time. SS.2.7 QUORUM AND VOTING REQUIREMENTS. If the articles of incorporation or the Act provides for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the articles of incorporation, a bylaw adopted pursuant to ss. 2.8 of this Article II, or the Act provide otherwise, a majority of the votes en titled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. If the articles of incorporation or the Act provide for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group entitled to vote on the matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a bylaw adopted pursuant to ss. 2.8 of this Article II, or the Act require a greater number of affirmative votes. SS.2.8 INCREASING EITHER QUORUM OR VOTING REQUIREMENTS. For purposes of this ss. 2.8 a "supermajority" quorum is a require ment that more than a majority of the votes of the voting group be present to constitute a quorum; and a "supermajority" voting requirement is any requirement that requires the vote of more 5 than a majority of the affirmative votes of a voting group at a meeting. The shareholders, but only if specifically authorized to do so by the articles of incorporation, may adopt, amend or delete a bylaw which fixes a "supermajority" quorum or "supermajority" voting requirement. The adoption or amendment of a bylaw that adds, changes, or deletes a "supermajority" quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. A bylaw that fixes a supermajority quorum or voting requirement for shareholders may not be adopted, amended, or repealed by the board of directors. SS.2.9 PROXIES. At all meetings of shareholders, a shareholder may vote in person, or vote by proxy which is executed in writing by the shareholder or which is executed by his duly authorized attorney-in-fact. Such proxy shall be dated and filed with the secretary of the corporation or other person authorized to tabulate votes before or at the time of the meeting. Unless a time of expiration is otherwise specified, a proxy is valid for eleven months. A proxy is revocable unless executed in compliance with ss. 33-7- 220(d) of the Act, or any succeeding statute of like tenor and effect. SS.2.10 VOTING OF SHARES. Unless otherwise provided in the articles, and subject to the cumulative voting provisions of ss.2.13 of this Article II, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. Absent special circumstances, outstanding shares of the corporation are not entitled to vote if they are owned directly or indirectly by another corporation in which this corporation owns a majority of the shares entitled to vote for the election of directors of the other corporation; provided, however, this provision shall not limit the power of this corporation to vote its own shares held by it in a fiduciary capacity. Redeemable shares are not entitled to vote after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company, 6 or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. SS.2.11 CORPORATION'S ACCEPTANCE OF VOTES. (a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholders. (b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its share holder, the corporation if acting in good faith is never theless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if: (1) the shareholder is an entity as defined in the Act and the name signed purports to be that of an officer or agent of the entity; (2) the name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (3) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (4) the name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the share holder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; (5) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners. (c) The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other 7 officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. (d) The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section are not liable in damages to the shareholder for the consequences of the acceptance or rejection. (e) Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise. SS.2.12 INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if one or more consents in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof and are delivered to the corporation for inclusion in the minute book. If the act to be taken requires that notice be given to non-voting shareholders, the corporation shall give the non-voting shareholders written notice of the proposed action at least 10 days before the action is taken, which notice shall contain or be accompanied by the same material that would have been required if a formal meeting had been called to consider the action. A consent signed under this section has the effect of a meeting vote and may be described as such in any document. SS.2.13 VOTING FOR DIRECTORS. (a) General Provision. Unless otherwise provided in the articles, at each election for directors every shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, the number of votes he is entitled to cast for as many persons as there are directors to be elected and for whose election he has a right to vote, and, if notice of cumulative voting has been given either as provided in subsection (b)(1) or (b)(2), to cumulate his votes. (b) Notice of Cumulative Voting. Notice of cumulative voting shall be given either by: 8 (1) the meeting notice or proxy statement accompanying the notice, which states conspicuously that cumulative voting is authorized; or (2) a shareholder who has the right to cumulate his votes shall either (a) give written notice of his intention to the president or other officer of the corporation not less than forty-eight hours before the time fixed for the meeting, which notice must be announced in the meeting before the voting, or (b) announce his intention in the meeting before the voting for directors commences; and all shareholders entitled to vote at the meeting shall without further notice be entitled to cumulate their votes. (c) Recess. If cumulative voting is to be used, the person presiding may, or if requested by any shareholder shall, recess the meeting for a reasonable time to allow deliberation by shareholders, not to exceed two hours. (d) Plurality Requirement. Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. SS.2.14 SHAREHOLDER'S RIGHTS TO INSPECT CORPORATE RECORDS. (a) Minutes and Accounting Records. The corporation shall keep as permanent records minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation. The corporation shall maintain appropriate accounting records. (b) Absolute Inspection Rights of Records Required at Principal Office. If he gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy, a shareholder (or his agent or attorney) has the right to inspect and copy, during regular business hours any of the following records, all of which the corporation is required to keep at its principal office: 9 (1) its articles or restated articles of incorporation and all amendments to them currently in effect; (2) its bylaws or restated bylaws and all amendments to them currently in effect; (3) resolutions adopted by is board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding; (4) the minutes of all shareholders' meetings, and records of all action taken by shareholders without a meeting, for the past 10 years; (5) all written communications to shareholders generally within the past three years, including the financial statement furnished for the past three years to the shareholders; (6) a list of the names and business addresses of its current directors and officers; (7) its most recent annual report delivered to the South Carolina Tax Commission; and (8) if the shareholder owns at least one percent of any class of shares, he may inspect and copy its federal and state income tax returns for the last ten years. (c) Conditional Inspection Right. In addition, if he gives the corporation a written demand made in good faith and for a proper purpose at least five business days before the date on which he wishes to inspect and copy, he describes with reasonable particularity his purpose and the records he desires to inspect, and the records are directly connected with his purpose, a share holder of a corporation (or his agent or attorney) is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation: (1) excerpts from minutes of any meeting of the board of directors, records of any action of a committee of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or board of directors without a meeting, to the extent not subject to inspection under paragraph (a) of this ss. 2.14. 10 (2) accounting records of the corporation; and (3) the record of shareholders (compiled no earlier than the date of the shareholder's demand). (d) Copy Costs. The right to copy records includes, if reasonable, the right to receive copies made by photographic, xerographic, or other means. The corporation may impose a reasonable charge, covering the costs of labor and material, for copies of any documents provided to the shareholder. The charge may not exceed the estimated cost of production or repro- duction of the records. SS.2.15 FINANCIAL STATEMENTS SHALL BE FURNISHED TO THE SHAREHOLDERS. (a) The corporation shall furnish its shareholders annual finan cial statements, which may be consolidated or combined statements of the corporation and one or more of its sub- sidiaries, as appropriate, that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of changes in shareholders' equity for the year unless that information appears elsewhere in the financial statements. If financial statements are prepared for the corporation on the basis of generally accepted accounting principles, the annual financial statements for the shareholders also must be prepared on that basis. (b) If the annual financial statements are reported upon by a public accountant, his report must accompany them. If not, the statements must be accompanied by a statement of the president or the person responsible for the corporation's accounting records: (1) stating his reasonable belief whether the statements were prepared on the basis of generally accepted accounting principles and, if not, describing the basis of preparation; and (2) describing any respects in which the statements were not prepared on a basis of accounting consistent with the statements prepared for the preceding year. (c) A corporation shall mail the annual financial statements to each shareholder within 120 days after the close of each fiscal year. Thereafter, on written request from a share holder who was not mailed the statements, the corporation shall mail him the latest financial statements. 11 SS.2.16 DISSENTER'S RIGHTS Each shareholder shall have the right to dissent from, and obtain payment for his shares when so authorized by the Act, articles of incorporation, these bylaws, or in a resolution of the board of directors. ARTICLE III. BOARD OF DIRECTORS SS.3.1 GENERAL POWERS. Unless the articles of incorporation have dispensed with or limited the authority of the board of directors by describing who will perform some or all of the duties of a board of directors, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of the board of directors. SS.3.2 NUMBER, TENURE AND QUALIFICATIONS OF DIRECTORS. Unless otherwise provided in the articles of incorporation, the number of directors of the corporation shall be the number designated by the directors at their initial or organizational meeting. Thereafter, the number of directors may be increased or decreased by action of the board and shareholders at any annual meeting of shareholders. Each director shall hold office until the next annual meeting of shareholders or until removed. However, if his term expires, he shall continue to serve until his successor shall have been elected and qualified or until there is a decrease in the number of directors. Directors need not be residents of the State of South Carolina or shareholders of the corporation unless so required by the articles of incorporation. SS.3.3 REGULAR MEETINGS. Unless otherwise provided in the articles, a regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. (If so permitted by ss. 3.7, any such regular meeting may be held by telephone.) SS.3.4 SPECIAL MEETINGS. Unless otherwise provided in the articles, special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or a majority of the board of directors. The person authorized to call special meetings of 12 the board of directors may fix any place, only within the County of South Carolina where this corporation has its principal office as the place for holding any special meeting of the board of directors, or if permitted by ss. 3.7, such meeting may be held by telephone. SS.3.5 NOTICE OF SPECIAL MEETING. Unless the articles of incorporation provide for a longer or shorter period, notice of any special meeting shall be given at least two days previously thereto either orally or in writing. If mailed, such notice shall be deemed to be effective at the earlier of: (1) when received; (2) 5 days after deposited in the United States mail, addressed to the director's business office, with postage thereon prepaid; or (3) the date shown on the return receipt if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the director. Any director may waive notice of any meeting. Except as provided in the next sentence, the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business and at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting, and does not thereafter vote for or assent to action taken at the meeting. SS.3.6 DIRECTOR QUORUM. A majority of the number of directors in office immediately before the meeting begins shall constitute a quorum for the transaction of business at any meeting of the board of directors, unless the articles require a greater number. Any amendment to this quorum requirement is subject to the provisions of ss. 3.8 of this Article III. SS.3.7 MANNER OF ACTING. (a) Required Vote The act of the majority of the directors present at a meet ing at which a quorum is present when the vote is taken shall be the act of the board of directors unless the arti- cles of incorporation require a greater percentage. Any amendment which changes the number of directors needed to take action, is subject to the provisions of ss. 3.8 of this Article III. 13 (b) Telephone Meeting Unless the articles of incorporation provide otherwise, any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. (c) Failure To Object To Action A director who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is deemed to have assented to the action taken unless: (1) he objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; or (2) his dissent or abstention from the action taken is entered in the minutes of the meeting; or (3) he delivers written notice of his dissent or abstention to the presiding officer of the meet ing before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. SS.3.8 ESTABLISHING A "SUPERMAJORITY" QUORUM OR VOTING REQUIREMENT. For purposes of this ss. 3.8, a "supermajority" quorum is a requirement that more than a majority of the directors in office constitute a quorum; and a "supermajority" voting requirement is any requirement that requires the vote of more than a majority of those directors present at a meeting at which a quorum is present to be the act of the directors. A bylaw that fixes a supermajority quorum or supermajority voting requirement may be amended or repealed: (1) if originally adopted by the shareholders, only by the shareholders (unless otherwise provided by the sharehold- ers); (2) if originally adopted by the board of directors, either by the shareholders or by the board of directors. A bylaw adopted or amended by the shareholders that fixes a supermajority quorum or supermajority voting requirement for the board of directors may provide that it may be amended or repealed only by a specified vote of either the shareholders or the board of directors. 14 Subject to the provisions of the preceding paragraph, action by the board of directors to adopt, amend, or repeal a bylaw that changes the quorum or voting requirement for the board of direc tors must meet the same quorum requirement and be adopted by the same vote required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. SS.3.9 ACTION WITHOUT A MEETING. Unless the articles of incorporation provide otherwise, action required or permitted by the Act to be taken at a board of directors' meeting may be taken without a meeting if the action is assented to by all members of the board. The action may be evidenced by one or more written consents describing the action taken, signed by each director, and included in the minutes or filed with the corporate records reflecting the action taken. Action evidenced by written consents under this section is effective when the last director signs the consent, unless the consent specifies a different effective date. A consent signed under this section has the effect of a meeting vote and may be described as such in any document. SS.3.10 REMOVAL OF A DIRECTOR. The shareholders may remove one or more directors at a meeting called for that purpose if notice has been given that a purpose of the meeting is such removal. The removal may be with or without cause unless the articles provide that directors may only be removed with cause. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him. If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him. SS.3.11 VACANCIES. Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including a vacancy resulting from an increase in the number of directors, the shareholders may fill the vacancy. During such time that the shareholders fail or are unable to fill such vacancies then and until the shareholders act: (a) the board of directors may fill the vacancy; or 15 (b) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the shareholders. A vacancy that will occur at a specific later date (by reason of a resignation effective at a later date) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which directors are elected. However, if his term expires, he shall continue to serve until his successor is elected and qualifies or until there is a decrease in the number of directors. SS.3.12 COMPENSATION. Unless otherwise provided in the articles, by resolution of the board of directors, each director may be paid his expenses, if any, of attendance at each meeting of the board of directors, and may be paid a stated salary as director or a fixed sum for attendance at each meeting of the board of directors or both. No such payment shall preclude any director from serving the corporation in any capacity and receiving compensation therefor. SS.3.13 COMMITTEES. (a) Creation of Committees. Unless the articles of incorporation provide otherwise, the board of directors may create one or more committees and appoint members of the board of directors to serve on them or the president, if so delegated by the board, may appoint members to serve on committees created by the board. Each committee must have two or more members, who serve at the pleasure of the board of directors. (b) Selection of Members. The creation of a committee and appointment of members to it must be approved by the greater of (1) a majority of all the directors in office when the action is taken or (2) the number of directors required by the articles of incorpora tion to take such action, (or, if not specified in the articles, the numbers required by, ss. 3.7 of this Article III to take action). 16 (c) Required Procedures. ss.ss. 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9 of this Article III, which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements of the board of directors, apply to committees and their members. (d) Authority. Unless limited by the articles of incorporation, each committee may exercise those aspects of the authority of the board of directors which the board of directors confers upon such committee in the resolution creating the committee. Provided, however, a committee may not: (1) authorize distributions; (2) approve or propose to shareholders action that the Act requires be approved by shareholders; (3) fill vacancies on the board of directors or on any of its committees; (4) amend the articles of incorporation pursuant to the authority of directors; (5) adopt, amend, or repeal bylaws; (6) approve a plan of merger not requiring shareholder approval; (7) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; or (8) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the board of directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. ARTICLE IV. OFFICERS SS.4.1 NUMBER. The officers of corporation shall be a president, a secretary, and a treasurer, each of whom shall be appointed by the board of 17 directors. Such other officers and assistant officers as may be deemed necessary, including any vice-presidents, may be appointed by the board of directors. If specifically authorized by the board of directors, an officer may appoint one or more officers or assistant officers. The same individual may simultaneously hold more than one office in the corporation. SS.4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the corporation shall be appointed by the board of directors for a term as determined by the board of directors. (The designation of a specified term grants to the officer no contract rights, and the board can remove the officer at any time prior to the termination of such term). If no term is specified, they shall hold office until they resign, die, or until they are removed in the manner provided in ss. 4.3 of this Article IV. SS.4.3 REMOVAL. Unless appointed by the shareholders, any officer or agent may be removed by the board of directors at any time, with or without cause. Any officer or agent appointed by the shareholders may be removed by the shareholders with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights. SS.4.4 PRESIDENT. The president shall be the principal executive officer of the corporation and, subject to the control of the board of directors, shall in general supervise and control all of the business and affairs of the corporation. He shall, when present, preside at all meetings of the shareholders and of the board of direc tors, unless a Chairman of the board of directors shall have been designated by the board. He may sign, with the secretary or any other proper officer of the corporation thereunto authorized by the board of directors, certificates for shares of the corpora tion and deeds, mortgages, bonds, contracts, or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the board of directors from time to time. SS.4.5 THE VICE PRESIDENTS. If appointed, in the absence of the president or in the event of his death, inability or refusal to act, the vice-president (or in 18 the event there be more than one vice-president, the vice-presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their appointment) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. (If there is no vice-president, then the treasurer shall perform such duties of the president.) Any vice-president may sign, with the secretary or an assistant secretary, certificates for shares of the corporation the issuance of which have been authorized by resolution of the board of directors; and shall perform such other duties as from time to time may be assigned to him by the president or by the board of directors. SS.4.6 THE SECRETARY. The secretary shall: (a) keep the minutes of the proceedings of the shareholders and of the board of directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of any seal of the corporation and if there is a seal of the corporation, see that it is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) when requested or required, authenticate any records of the corporation; (e) keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder; (f) sign with the president, or a vice-president, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the board of directors; (g) have general charge of the stock transfer books of the corporation; and (h) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. SS.4.7 THE TREASURER. The treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositaries as shall be selected by the board of directors; and (c) in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the president or by the board of directors. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the board of directors shall determine. 19 SS.4.8 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries, when authorized by the board of directors, may sign with the president or a vice-president certificates for shares of the corporation the issuance of which shall have been authorized by a resolution of the board of directors. The assistant treasurers shall respectively, if required by the board of directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the board of directors shall determine. The assistant secre taries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or the treasurer, respectively, or by the president or the board of directors. SS.4.9 SALARIES. The salaries of the officers shall be fixed from time to time by the board of directors. ARTICLE V. INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES SS.5.1 INDEMNIFICATION OF DIRECTORS. Unless otherwise provided in the articles, the corporation shall indemnify any individual made a party to a proceeding because he is or was a director of the company, against liability incurred in the proceeding, but only if such indemnification is both (i) permissible and (ii) authorized, as defined in subsection (a) of this ss. 5.1. (Such indemnification is further subject to the limitation specified in subsection (c).) (a) Determination and Authorization The corporation shall not indemnify a director under this ss. 5.1 of Article V unless: (1) Determination: A determination has been made in accordance with the procedures set forth in ss. 33-8-550(b) of the Act that the director met the standard of conduct set forth in subsection (b) below, and (2) Authorization: The board of directors (as specified in ss. 33-8-550(c) of the Act) authorizes payment after they have concluded that the expenses are reasonable, the corporation has the financial ability to make the payment, and that the financial resources of the company should be 20 devoted to this use rather than some other use by the corporation. (b) Standard of Conduct The individual shall demonstrate that: (1) he conducted himself in good faith; and (2) he reasonably believed: (i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and (ii) in all other cases, that his conduct was at least not opposed to its best interests; and (iii) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. The corporation shall not indemnify a director under this ss. 5.1 of Article V: (1) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (2) in connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. (c) Indemnification in Derivative Actions Limited Indemnification permitted under this ss. 5.1 of Article V in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. SS.5.2 ADVANCE EXPENSES FOR DIRECTORS If a determination is made, following the procedures of Article V ss. 5.1(a), that the director has met the following requirements; and if an authorization of payment is made, also following the procedures and standards set forth in Article V ss. 5.1(a); then unless otherwise provided in the articles of incorporation, the company shall pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding, if: 21 (a) the director furnishes the corporation a written affirmation of his good faith belief that he has met the standard of conduct described in subsection (b) of ss. 5.1 of this Article V. (b) the director furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct (which undertaking must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment); and (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under section 5.1 of this Article V or ss. 33-8-500 through ss. 33-8-580 of the Act. SS.5.3 INDEMNIFICATION OF OFFICERS, AGENTS, AND EMPLOYEES WHO ARE NOT DIRECTORS. Unless otherwise provided in the articles of incorporation, the board of directors may indemnify and advance expenses to any officer, employee, or agent of the corporation, who is not a director of the corporation, to any extent, consistent with public policy, as determined by the general or specific action of the board of directors. ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER SS.6.1 CERTIFICATES FOR SHARES. (a) Content Certificates representing shares of the corporation shall at minimum, state on their face the name of the issuing corporation and that it is formed under the laws of South Carolina; the name of the person to whom issued; and the number and class of shares and the designation of the se ries, if any, the certificate represents; and be in such form as determined by the board of directors. Such certificates shall be signed (either manually or by facsimile) by the president or a vice-president and by the secretary or an assistant secretary and may be sealed with a corporate seal or a facsimile thereof. Each certificate for shares shall be consecutively numbered or otherwise identified. 22 (b) Legend as to Class or Series. If the corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine varia tions for future series) must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corpo ration will furnish the shareholder this information on request in writing and without charge. (c) Shareholder List. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. (d) Transferring Shares. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. SS.6.2 REGISTRATION OF THE TRANSFER OF SHARES. Registration of the transfer of shares of the corporation shall be made only on the stock transfer books of the corporation. In order to register a transfer, the record owner shall surrender the shares to the corporation for cancellation, properly endorsed by the appropriate person or persons with reasonable assurances that the endorsements are genuine and effective. Subject to the provisions of ss. 33-7-300(d) of the Act (relating to shares held in a voting trust), and unless the corporation has established a procedure by which a beneficial owner of shares held by a nominee is to be recognized by the corporation as the owner, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. SS.6.3 RESTRICTIONS ON TRANSFER OF SHARES PERMITTED. The board of directors (or shareholders) may impose restrictions on the transfer or registration of transfer of shares (including 23 any security convertible into, or carrying a right to subscribe for or acquire shares). A restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction. A restriction on the transfer or registration of transfer of shares may be authorized: (a) to maintain the corporation's status when it is dependent on the number or identity of its shareholders; (b) to preserve exemptions under federal or state securities law; (c) for any other reasonable purpose. A restriction on the transfer or registration of transfer of shares may: (a) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares; (b) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares; (c) require the corporation, the holders or any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (d) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. SS.6.4 ACQUISITION OF SHARES. The corporation may acquire its own shares and unless otherwise provided in the articles of incorporation, the shares so acquired constitute authorized but unissued shares. 24 If the articles of incorporation prohibit the reissue of acquired shares, the number of authorized shares is reduced by the number of shares acquired, effective upon amendment of the articles of incorporation, which amendment shall be adopted by the shareholders or the board of directors without shareholder action. The article of amendment must be delivered to the Secretary of State and must set forth: (a) the name of the corporation; (b) the reduction in the number of authorized shares, itemized by class and series; and (c) the total number of authorized shares, itemized by class and series, remaining after reduction of the shares. ARTICLE VII. DISTRIBUTIONS SS.7.1 DISTRIBUTIONS. The board of directors may authorize, and the corporation may make, distributions (including dividends on its outstanding shares) in the manner and upon the terms and conditions provided by law and in the corporation's articles of incorporation. ARTICLE VIII. CORPORATE SEAL SS.8.1 CORPORATE SEAL. The board of directors may provide a corporate seal which may be circular in form and have inscribed thereon any designation including the name of the corporation, South Carolina as the state of incorporation, and the words "Corporate Seal." ARTICLE IX. EMERGENCY BYLAWS SS.9.1 EMERGENCY BYLAWS. Unless the articles of incorporation provide otherwise, the following provisions of this Article IX, ss. 9.1 "Emergency Bylaws" shall be effective during an emergency which is defined as when a quorum of the corporation's directors cannot be readily assembled because of some catastrophic event. During such emergency: 25 (a) Notice of Board Meetings Any one member of the board of directors or any one of the following officers: president, any vice-president, secretary, or treasurer, may call a meeting of the board of directors. Notice of such meeting need be given only to those directors whom it is practicable to reach, and may be given in any practical manner, including by publication and radio. Such notice shall be given at least six hours prior to commencement of the meeting. (b) Temporary Directors and Quorum One or more officers of the corporation present at the emergency board meeting, as is necessary to achieve a quorum, shall be considered to be directors for the meeting, and shall so serve in order of rank, and within the same rank, in order of seniority. In the event that less than a quorum (as determined by Article III ss. 3.6) of the directors are present (including any officers who are to serve as directors for the meeting), those directors present (including the officers serving as directors) shall constitute a quorum. (c) Actions Permitted to be taken The board may as constituted in paragraph (b), and after notice as set forth in paragraph (a): (1) Officers Powers Prescribe emergency powers to any officer of the corpo ration; (2) Delegation of any Power Delegate to any officer or director, any of the powers of the board of directors; (3) Lines of succession Designate lines of succession of officers and agents, in the event that any of them are unable to discharge their duties; (4) Relocate principal place of business Relocate the principal place of business, or designate successive or simultaneous principal places of busi- ness; 26 (5) All Other Action Take any other action, convenient, helpful, or necessary to carry on the business of the corporation. ARTICLE X. AMENDMENTS SS.10.1 AMENDMENTS. The corporation's board of directors may amend or repeal any of the corporation's bylaws unless: (a) the articles of incorporation or the Act reserve this power exclusively to the shareholders in whole or part; or (b) the shareholders in adopting, amending, or repealing a particular bylaw provide expressly that the board of direc tors may not amend or repeal that bylaw; or (3) the bylaw either establishes, amends, or deletes, a super majority shareholder quorum or voting requirement (as de fined in ss. 2.8 of Article II. Any amendment which changes the voting or quorum requirement for the board must comply with Article III ss. 3.8, and for the share holders, must comply with Article II ss. 2.8. The corporation's shareholders may amend or repeal the corporation's bylaws even though the bylaws may also be amended or repealed by its board of directors. Any notice of a meeting of shareholders at which bylaws are to be adopted, amended, or repealed shall state that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment, or repeal of bylaws and contain or be accompanied by a copy or summary of the proposal. April 10, 1990 27 EX-3.(I) 3 EXHIBIT 3.2.2 Exhibit 3.2.2 PALMETTO BANCSHARES, INC. BOARD OF DIRECTORS RESOLUTION RESPECTING AMENDMENT OF BY-LAWS OF THE CORPORATION WHEREAS, it has come to the attention of the Board that Article IV, Section 4.4 of the By-Laws of the Corporation does not accurately describe the organizational titles and responsibilities of the Chairman of the Board of Directors and President of the Corporation as they have operated in the past and currently operate; and WHEREAS, the Board desires to amend the By-Laws of the Corporation to accurately describe the organizational titles and responsibilities of such officers. NOW, THEREFORE, BE IT RESOLVED BY THE BOARD as follows: RESOLVED that, effective as of this date, Article IV, Section 4.4 of the By-Laws of the Corporation is hereby deleted and replaced as follows: ss. 4.4 (a) Chairman of the Board of Directors. The ---------------------------------- Chairman of the Board of Directors, if one is elected, shall be a director and, when present, shall preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the Corporation and, as such, shall be charged with general supervision of the management and policy of the Corporation and shall have such other powers and perform such other duties as the Board of Directors may prescribe from time to time. (b) President. The President, if one is elected, shall be the chief operating officer of the Corporation, shall exercise the powers and authority and perform all of the duties commonly incident to his office, shall in the absence of the Chairman of the Board of Directors preside at all meetings of the stockholders and of the Board of Directors if he is a director, and shall perform such other duties as the Board of Directors may specify from time to time. Adopted as of this 12th day of April, 1994. EX-13 4 EXHIBIT 13 EXHIBIT 13.1.1 PALMETTO BANCSHARES, INC. ANNUAL REPORT 1996 PAGE 5 ******************************************** FIVE-YEAR FINANCIAL SUMMARY DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 TOTAL INTEREST INCOME $ 32,191 26,268 21,293 19,532 19,842 TOTAL INTEREST EXPENSE 13,810 10,842 7,208 6,666 8,025 NET INTEREST INCOME 18,381 15,426 14,085 12,866 11,817 PROVISION FOR LOAN LOSSES 1,450 1,140 819 1,172 1,543 TOTAL NON-INTEREST INCOME 5,238 4,463 4,029 3,905 3,483 TOTAL NON-INTEREST EXPENSE 15,764 13,900 13,625 12,179 10,900 NET INCOME 4,753 3,602 2,760 2,532 2,129 PER COMMON SHARE (3) NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 1.54 1.20 0.92 0.86 0.71 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES - - - 0.02 - NET INCOME PER SHARE NOT SUBJECT TO PUT/CALL 1.54 1.20 0.92 0.84 0.71 CASH DIVIDENDS DECLARED 0.28 0.22 0.18 0.16 0.15 BOOK VALUE AT YEAR END (1) 10.45 9.27 8.07 7.38 6.63 AVERAGE COMMON SHARES OUTSTANDING (1) 3,007,661 3,010,320 3,000,690 3,019,437 3,019,482 AT YEAR END TOTAL ASSETS 468,377 376,241 312,143 286,267 262,750 INVESTMENT SECURITIES 82,447 83,404 63,909 65,887 59,478 LOANS 332,986 255,187 215,408 191,491 171,964 TOTAL DEPOSITS 412,386 329,659 274,527 249,976 226,883 TOTAL SHAREHOLDERS' EQUITY (2) 31,438 27,909 24,213 22,287 20,047 TOTAL SHAREHOLDERS' EQUITY 28,124 25,138 24,213 22,287 20,047 COMMON SHARES OUTSTANDING (3) 3,023,841 3,014,940 3,013,452 3,011,652 3,023,352 FULL-TIME EQUIVALENT EMPLOYEES 257 219 210 205 184 AVERAGE BALANCES ASSETS 430,718 342,374 304,883 270,401 260,638 INVESTMENT SECURITIES 86,654 73,395 67,364 61,063 58,389 LOANS 301,429 230,908 204,959 180,880 168,265 DEPOSITS 373,244 294,607 264,785 239,237 223,215 TOTAL SHAREHOLDERS' EQUITY (2) 29,131 26,142 22,868 21,208 19,304 KEY RATIOS (1) RETURN ON AVERAGE ASSETS 1.10% 1.05% 0.91% 0.91% 0.82% RETURN ON AVERAGE EQUITY 16.32% 13.78% 12.07% 11.94% 11.03% PRIMARY CAPITAL TO ASSETS AT YEAR END 7.65% 8.33% 8.64% 8.38% 8.35% NET INTEREST MARGIN 4.71% 4.99% 5.09% 5.31% 5.20% ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.42% 1.45% 1.40% 1.25% 1.20% NONPERFORMING ASSETS TO TOTAL ASSETS 0.24% 0.20% 0.20% 0.19% 0.50% NET CHARGE-OFFS TO AVERAGE LOANS 0.14% 0.19% 0.10% 0.47% 0.68%
(1) These numbers are calculated using balances and shares of total common stock outstanding excluding reclassification of ESOP stock for $3,313,474 and $2,770,528, at December 31, 1996 and 1995, respectively. (2) Excluding reclassification of ESOP stock for $3,313,474 and $2,770,528 at December 31, 1996 and 1995, respectively. (3) Common shares outstanding and per share information have been retroactively restated to reflect the three-for-one stock split in 1996. 5 EX-13 5 EXHIBIT 13 EXHIBIT 13.1.2 PALMETTO BANCSHARES, INC. SUPPLEMENTAL ANNUAL REPORT 1996 (Seal of The Palmetto Bank and it reads as follows: 90 YEARS 1906-1996 The Palmetto Bank) PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996, 1995 and 1994 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. In the current year, the Company commenced the origination and sale of mortgage loans through its mortgage servicing department. As a result, the Company has $4.1 million in Loans Held for Sale at December 31, 1996. Loans serviced for the benefit of others amounted to approximately $141 million at December 31, 1996. Most of these loans are serviced for the Federal Home Loan Mortgage Company (FHLMC). On April 15, 1996, the Bank acquired three existing branches of First Union National Bank of South Carolina, increasing the Bank's locations to 24 offices in 6 Upstate counties. The Bank assumed deposits of approximately $54 million, but assumed no loans. This acquisition allowed the Bank to expand its deposit base at a time when deposits are hard to come by in the local market. The acquisition also allowed the Bank to establish a significant initial presence in the Cherokee County market, while strengthening its presence in the Greenwood County market. These deposits provided a funding source for the Bank to lend out, thus increasing interest income, net interest margin, and net income beyond 1996 targets (see below). On August 13, 1996, the Board of Directors approved a three-for-one stock split effected in the form of a 200% stock dividend to each holder of Common Stock on September 12, 1996 (the "Stock Split"), contingent upon shareholder approval of an amendment to the Company's Articles of Incorporation to increase the number of authorized shares from 2 million to 10 million (the "Articles Amendment"). On October 15, 1996, the shareholders voted to approve the Articles Amendment and the Stock Split was effected. All share and per share information contained in this annual report have been retroactively restated to reflect the Stock Split. In November 1996, the Bank began operating its Telephone Banking Center (TBC), an in-house sales and service center. The TBC provides customers with more options to do their banking business and offers extended service hours. The Bank currently has four full-time telephone bankers. The telephone bankers are qualified to answer account inquiries, process transactions, and provide updated rate and service information. The Company's assets grew $92.1 million, or 24%, total loans grew $77.8 million, or 30%, and deposits grew $82.7 million, or 25% in 1996 as a result of the branch acquisitions and growth in all geographic markets. In 1995, total assets grew by approximately $64.1 million, or 21%, total loans grew $39.8 million, or 19% and deposits grew $55.1 million, or 20%. 2 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) Results of Operations Three Years Ended December 31, 1996, 1995 and 1994 Net income for 1996 was $4.8 million, an increase of 32% from the $3.6 million reported in 1995. Net income in 1995 increased 31% from the $2.8 million reported in 1994. Net income per common share not subject to put/call was $1.54 in 1996, compared with $1.20 in 1995, and $0.92 in 1994. Return on average assets before effect of the ESOP adjustment (discussed below) was 1.10% in 1996 compared with 1.05% in 1995 and .91% in 1994. 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 1996, net interest income increased $3.0 million or 19%, over the $15.4 million earned in 1995. This increase is due to increases in the volume of earning assets offset by a decline in the net interest margin. In 1995, net interest income was $15.4 million, which represented a 10% increase over the $14.1 million earned in 1994. During 1996, the average yield on all interest-earning assets was 8.25%, down from 8.48% in 1995 and up from 7.93% for 1994. The prime interest rate remained constant at 8.25% for most of 1996, compared to an average prime rate of 8.83% and 7.14% for 1995 and 1994, respectively. The Bank's average effective rate paid on all interest-bearing liabilities decreased in 1996 to 4.06%, from 4.07% in 1995 and increased from 2.57% in 1994. The Bank's net yield on interest-earning assets (net interest margin) was 4.71%, 4.99% and 5.33% in 1996, 1995 and 1994, respectively. The 1996 decrease in net interest margin is due to the increase in the average rate paid on deposits. Many financial institutions in the Company's market area have been offering above market rates on their deposits, thus creating upward pressure on the Company's cost of funds. The Company expects the competitive deposit rate environment to continue. Interest and fees on loans increased $5.4 million from 1995 to 1996, and increased $4.0 million from 1994 to 1995 due to loan growth of 30% and 19% in 1996 and 1995, respectively. Interest on investment securities increased $781,000 or 17% from 1995 to 1996 due primarily to increased average balances. Interest on investment securities increased $759,000, or 21%, from 1994 to 1995 due primarily to a $26.0 million increase in the investment securities portfolio balance. Interest income of federal funds sold decreased $287,000 or 75% due to lower average balances. This compares to an increase of $183,000, or 93%, from 1994 to 1995 due to both higher average balances invested and higher yields earned. 3 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) Total interest expense increased 27% or $3.0 million from 1995 to 1996 and 50% or $3.6 million from 1994 to 1995. The largest component of total interest expense is interest expense on deposits, which increased $2.7 million or 27% from 1995 to 1996 due to a 25% growth in deposits. This growth in deposits is largely attributable to the acquisition of the First Union branches in the second quarter of 1996. From 1994 to 1995, a 20% increase in deposits and a 33% increase in average rate paid, caused interest expense on deposits to increase $3.2 million or 48%. The average rate paid on deposits was 3.40%, 3.36%, and 2.55% in 1996, 1995 and 1994, respectively. Interest on securities sold under agreements to repurchase decreased $42,000, or 8% from 1995 to 1996 due to a decrease in the average rate paid from 4.31% to 3.84%. This compares to an increase of $256,800, or 105%, from 1994 to 1995, due to an increase in the average rate paid from 2.58% to 4.31% and an increase in average balances. Interest on commercial paper decreased $28,000, or 8%, from 1995 to 1996 due to a decrease in the average rate paid from 4.28% to 3.88%. This compares to an increase of $169,000, or 98%, from 1994 to 1995, due to higher average balances and an increase in the average rate paid from 2.72% to 4.28%. 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, 1996, approximately 28% of the Company's earning assets could be repriced within one year compared to approximately 93% of its interest bearing liabilities. This compares to 27% and 95%, respectively, in 1995 and 28% and 71%, respectively, in 1994. 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 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 4 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) 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. Furthermore, the Company can only lower rates on deposits to the extent that the floors will allow. 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, 1996, 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 11%. 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. 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. 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. The provision for loan losses was $1,450,000, $1,140,000 and $819,000, respectively, for the years ended December 31, 1996, 1995, and 1994. The provision in 1996 reflects replenishing the allowance for loan losses to cover net charge-offs of $421,000, plus providing for the 30% increase in total loans outstanding. The allowance for loan losses totaled $4.7 million, $3.7 million and $3.0 million at December 31, 1996, 1995 and 1994, respectively. The level of the allowance for loan losses to total loans outstanding is 1.42% at December 31, 1996. This compares to 1.45% and 5 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) 1.40% as of December 31, 1995 and 1994, respectively. Net charge-offs to average loans are 0.14% for 1996 as compared to 0.19% for 1995 and 0.10% for 1994. Non-performing loans for 1996, 1995, and 1994 were approximately $1,113,000 or 0.33% (of total loans), $743,000 or 0.31%, and $636,000 or 0.30%, respectively. The majority of these non-performing loans are smaller-balance homogeneous consumer loans. Non-Interest Income Non-interest income for 1996 increased by $775,000 or 17% over 1995, as compared to an increase in 1995 of $433,000 or 11% over 1994. These increases generally resulted from increased service charges on deposit accounts 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. A significant contributor to non-interest income is fees for trust services, which continued to increase in 1996 to $861,000 from $773,000 in 1995 and $670,000 in 1994. Fees for trust services increased as a result of the generation of new trust business and additional assets under management. The trust department had assets under management of $122 million, $107 million, and $89 million at December 31, 1996, 1995, and 1994, respectively. There were $21,000 of gains from sales of investment securities during 1996. These gains were in response to the market rebound in the current year. There were $93,000 and $13,000 of losses from sales of investment securities realized during 1995 and 1994, respectively. These securities were sold in response to rising interest rates and declining market value. Another contributor of non-interest income is other income which includes insurance commission income and safe deposit box rental income which increased due to loan growth and branch acquisitions, respectively. Non-Interest Expenses Non-interest expenses totaled $15.8 million in 1996 as compared to $13.9 million in 1995 and $13.6 in 1994. This represented a 13% increase from 1995 to 1996, and a 2% increase from 1994 to 1995. The overall increases during 1996 and 1995 were due to growth in all geographic markets and expenses directly related to the operation of additional branches. Deposits grew 25% from 1995 to 1996 and 20% from 1994 to 1995. Salaries and other personnel expense, which comprised 48% of total non-interest expenses for 1996, were up $137,000 or 2% over 1995. During 1995 and 1994, salaries and other personnel expenses accounted for 53% and 54%, of total other operating expenses, respectively. 6 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) Combined net occupancy and furniture and equipment expenses increased $690,000, or 30% from 1995 to 1996, as compared to an increase of $148,000, or 7%, in 1995. These increases were due primarily to the increased depreciation and rental expense associated with the addition of new branches and the renovation of Laurens Center to include the corporate offices and the Telephone Banking Center. The Laurens Center facility has been renamed the Corporate Center. The largest contributor to the increase in total non-interest expense is the other expense line item which increased $950,000 or 43%. Other expenses consists of personalized deposit supplies, professional services, sundry losses, armored car expense, correspondent bank charges, credit insurance premiums, core deposit premium amortization and goodwill amortization. The foregoing expenses have increased due to the new branches, increased accounts, and increased account activity. Income Taxes Income tax expense totaled $1.7 million in 1996 as compared to $1.2 million in 1995 and $910,000 in 1994. The changes in income tax expense for all three years were due to changes in taxable income for each respective year. 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, 1996, the Company's liquidity ratio was approximately 16.5%. The Company's liquidity position is dependent upon its debt servicing needs and dividends declared. The Company had no outstanding debt at December 31, 1996 and 1995, respectively. In June 1995 the Company paid the remaining outstanding balance of the note with Trust Company Bank. During 1991 the Company began selling commercial paper as a alternative investment tool for its commercial customers. The commercial paper is issued only in conjunction with the automated sweep account customer agreement on deposits at the Bank level. At December 31, 1996, the Company had $7.4 million in commercial paper with a weighted average rate of 4.69%, as compared to $6.2 million in 1995 with a weighted average of 3.30% and $6.9 million in 1994 with a weighted average rate of 3.10%. The Parent Company has approximately $6 million in lines of credit from correspondent banks to use as additional sources of short-term liquidity. The interest rates on these lines fluctuate with the prime rate and are payable on demand. At December 31, 1996, there were no balances drawn on these lines of credit. 7 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) The Parent Company's liquidity needs are met through the payment of dividends from the Bank. At December 31, 1996 the Bank had available retained earnings of $3.1 million for payment of dividends. 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 67% of the securities portfolio was pledged to secure liabilities as of December 31, 1996, as compared to 65% at December 31, 1995. 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 $32 million, all of which are available. Loan demand has been constant and loan originations can be controlled through pricing decisions. In November 1995, the FASB issued a guide to implementation of SFAS No. 115 on accounting for certain investments in debt and equity securities which allowed for the one time transfer of certain investments classified as held for investment to available for sale. The Company transferred investment securities with an amortized cost of $29,106,899 and a related unrealized gain of $69,363 in the fourth quarter of 1995. This transfer enabled the Company to better position its balance sheet for asset/liability management. Capital Resources 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 of total and Tier 1 capital to risk-weighted 8 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) assets and to total assets. Management believes, as of December 31, 1996, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 1996 the Company and the Bank were each categorized as "adequately capitalized," under the regulatory framework for prompt corrective action. At December 31, 1995 the Company and the Bank were each categorized as "well capitalized." 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 of 8%, 4% and 4%, respectively. There are no current conditions or events that management believes would change the Company's or the Bank's category. The Company is now categorized as "adequately capitalized" due to the infusion of approximately $54 million in deposits related to the acquisition of the three branches. As a result of this change in capital adequacy, the Bank will incur higher FDIC insurance premiums in the coming year. The Company's strategic plan for controlled growth and profit improvement anticipates sufficient internally generated capital to return the risk-weighted ratios to the "well-capitalized" guidelines. Please see "Notes to Consolidated Financial Statements" footnote 16 for the Company's and the Bank's various capital ratios at December 31, 1996. 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 are subject to the put/call feature. Accordingly, 284,007 shares of ESOP stock are now recorded outside shareholders' equity at their fair value, which is determined by an independent valuation. Of the 284,007 shares, 17,938 shares were distributed during 1996, but are subject to the put/call until June 29, 1997. The Company's Board of Directors has voted to terminate the ESOP effective February 28, 1997. The shares distributed in 1997 due to the termination of the ESOP will be subject to the put/call until June 29, 1998. 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 "Net Interest Income." Accounting and Reporting Changes 9 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which is effective for financial statements issued for fiscal years beginning after December 15, 1995. SFAS No. 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used, and assets to be disposed of. The adoption of this statement did not have a material effect on the Company. In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing Rights, an Amendment of SFAS No. 65, which is effective prospectively for years beginning after December 15, 1995. The statement requires the recognition of an asset for the right to service mortgage loans for others, regardless of how those rights were acquired (either purchased or originated). Further, it amends SFAS No. 65 to require assessment of impairment based on fair value. The Company commenced the origination, purchasing, and sale of mortgage loans in the current year, and accordingly now recognizes mortgage servicing rights in accordance with these provisions. The rights are evaluated quarterly for possible impairment. The adoption of this statement did not have a material effect on the Company. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1995. SFAS No. 123 provides guidance on the valuation of compensation costs arising from both fixed and performance stock compensation plans. The adoption of this statement did not have a material effect on the Company. As allowed by SFAS No. 123, the Company elected to continue to record stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 and disclose pro forma changes in net income and earnings per share in footnotes to the financials. In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The statement is effective for transactions occurring after December 31, 1996. The Statement uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers. Under that approach, after financial assets are transferred, an entity would recognize on the balance sheet all assets it controls and liabilities it has incurred. It would remove from the balance sheet those assets it no longer controls and liabilities it has satisfied. This statement contains special provisions that deal with servicing assets and liabilities, which supersede SFAS No. 122, but this statement retains the impairment and amortization approaches contained in SFAS No. 122. The Company does not anticipate that adoption of this standard will have a material effect on the Company's financial statements in 1997. In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125, an amendment of SFAS No. 125, which is effective December 31, 1996. This statement delays the effective date of certain provisions of SFAS No. 125 until after 10 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Management's Discussion and Analysis (Continued) December 31, 1997. The amended provisions include those related to the transfers of financial assets and secured borrowings. The provisions in SFAS No. 125 related to servicing assets and liabilities are not delayed by this amendment. The Company does not anticipate that adoption of this standard will have a material effect on the Company's financial statements. 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. Among the recently enacted bills is legislation to assess BIF members with one-fifth of the assessment rate imposed upon thrifts to cover the annual $780 million Financing Corp. (FICO) bond obligation. This assessment computes to 1.3 basis points per $100 of deposits for banks 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). The Company is unable to assess the impact of other legislation on its financial condition or operations at this time. 11 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, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Greenville, South Carolina January 31, 1997 12 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 1996 and 1995
Assets 1996 1995 - ------ ---- ---- Cash and due from banks $ 28,372,885 22,921,841 Federal funds sold (note 2) 1,950,892 2,096,752 Investment securities held to maturity (market values of $66,770,040 and $44,548,986 in 1996 and 1995, respectively) (note 3) 66,207,445 43,788,656 Investment securities available for sale (note 4) 16,240,314 39,615,105 Loans held for sale (note 1) 4,075,096 - Loans (notes 5 and 12) 332,986,286 255,186,659 Less allowance for loan losses (note 5) (4,728,974) (3,700,216) ----------------- ---------------- Loans, net 328,257,312 251,486,443 ---------------- ---------------- Premises and equipment, net (notes 6 and 13) 12,323,074 10,709,912 Accrued interest 3,436,342 2,547,791 Other assets (notes 1 and 10) 7,513,791 3,074,240 ---------------- ---------------- Total assets $ 468,377,151 376,240,740 ================ ================ Liabilities and Shareholders' Equity Liabilities: Deposits (note 7): Non-interest-bearing $ 71,349,486 53,330,131 Interest-bearing 341,036,892 276,329,352 ---------------- ---------------- Total deposits 412,386,378 329,659,483 Securities sold under agreements to repurchase (note 8) 11,636,150 7,545,710 Commercial paper (note 8) 7,434,502 6,186,855 Federal funds purchased (note 8) 3,000,000 2,900,000 Other liabilities 2,482,585 2,040,011 ---------------- ---------------- Total liabilities 436,939,615 348,332,059 ---------------- ---------------- ESOP stock subject to put/call option (note 11) 3,313,474 2,770,528 Shareholders' equity (notes 9, 11 and 16): Common stock - $5.00 par value. Authorized 10,000,000 shares; issued 3,032,952 in 1996 and 3,032,652 in 1995; outstanding 3,023,841 in 1996 and 3,014,940 in 1995; 15,164,760 15,163,260 Additional paid-in capital 334,095 333,243 Retained earnings 15,893,773 12,006,058 Treasury stock (9,111 and 17,712 shares in 1996 and 1995) (121,480) (230,256) Unrealized gain on investment securities available for sale, net of income taxes 166,388 636,376 ESOP stock subject to put/call option, 284,007 shares at $11.67 per share in 1996 and 286,113 shares at $9.68 per share in 1995 (3,313,474) (2,770,528) ---------------- ---------------- Total shareholders' equity 28,124,062 25,138,153 ---------------- ---------------- Commitments and contingencies (notes 5, 11 and 13) Total liabilities and shareholders' equity $ 468,377,151 376,240,740 ================ ================
See accompanying notes to consolidated financial statements. 13 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Interest income: Interest and fees on loans $ 26,851,766 21,423,236 17,389,554 Interest and dividends on investment securities available for sale 1,907,611 1,160,076 616,766 Interest and dividends on investment securities held to maturity: U.S. Treasury and U.S. Government agencies 1,028,964 1,880,723 1,725,106 State and municipal 1,329,884 1,274,237 1,364,572 Mortgage-backed securities 979,402 150,022 - Interest on federal funds sold 93,193 379,846 196,572 ------------ ------------ ------------ Total interest income 32,190,820 26,268,140 21,292,570 Interest expense: Interest on deposits (note 7) 12,723,971 9,987,103 6,750,709 Interest on securities sold under agreements to repurchase 459,125 500,860 244,057 Interest on federal funds purchased 313,356 - - Interest on commercial paper 313,092 340,712 171,935 Interest on note payable to a bank - 13,389 41,191 ------------ ------------ ------------ Total interest expense 13,809,544 10,842,064 7,207,892 ------------ ------------ ------------ Net interest income 18,381,276 15,426,076 14,084,678 Provision for loan losses (note 5) 1,450,000 1,140,400 819,438 ------------ ------------ ------------ Net interest income after provision for loan losses 16,931,276 14,285,676 13,265,240 ------------ ------------ ------------ Non-interest income: Service charges on deposit accounts 2,862,604 2,494,288 2,253,942 Fees for trust services 861,005 772,764 670,064 Gains on sales of loans 147,528 - - Investment securities gains (losses) 21,331 (93,156) (13,404) Merchant discount income 344,987 384,056 325,275 Other income 1,000,472 904,730 793,578 ------------ ----------- ----------- Total non-interest income 5,237,927 4,462,682 4,029,455 ------------ ------------ ------------ Non-interest expense: Salaries and other personnel (note 11) 7,535,981 7,398,514 7,340,008 Net occupancy 1,452,755 1,218,842 1,126,096 Furniture and equipment 1,548,733 1,092,400 1,037,368 FDIC assessment 2,000 320,465 584,404 Postage and supplies 872,914 702,104 598,960 Advertising 737,021 570,372 556,030 Telephone 473,771 406,565 383,796 Other 3,141,020 2,191,099 1,998,247 ------------ ------------ ------------ Total non-interest expense 15,764,195 13,900,361 13,624,909 ------------ ------------ ------------ Income before income taxes 6,405,008 4,847,997 3,669,786 Income tax provision (note 10) 1,652,000 1,246,000 910,000 ------------ ------------ ------------ Net income $ 4,753,008 3,601,997 2,759,786 ============ ============ ============ Increase in fair value of ESOP stock (542,946) - - ------------- ------------ ----------- Net income on common shares not subject to put/call $ 4,210,062 3,601,997 2,759,786 ============ ============ ============ See accompanying notes to consolidated financial statements. (Continued)
14 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations (continued) Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Per share data: Net income per common share not subject to put/call $ 1.54 1.20 .92 ============ ============ ============ Cash dividends declared $ .28 .22 .18 ============ ============ ============ Weighted average shares outstanding 3,007,661 3,010,320 3,000,690 ============ ============ ============ Weighted average shares outstanding not subject to put/call 2,732,305 3,010,320 3,000,690 ============ ============ ============ See accompanying notes to consolidated financial statements.
15 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 4,753,008 3,601,997 2,759,786 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,847,330 1,071,728 978,047 Loss (gain) on sale of investment securities (21,331) 93,156 13,404 Gain on sale of loans (147,528) - - Provision for loan losses 1,450,000 1,140,400 819,438 Origination/acquisition of loans held for sale (58,238,827) - - Sale of loans held for sale 54,311,259 - - Gain on sale of premises and equipment (18,818) - 2,018 Provision (credit) for deferred taxes 309,000 (332,000) (113,000) Change in accrued interest (888,551) (105,120) (392,087) Change in other assets (2,349,554) (600,172) (175,444) Change in other liabilities, net 736,794 782,782 (6,991) -------------- -------------- -------------- Net cash provided by operating activities 1,742,782 5,652,771 3,885,171 -------------- -------------- -------------- Cash flows from investing activities: Purchase of investment securities held to maturity (23,357,266) (30,406,979) (11,529,480) Purchase of investment securities available for sale (9,991,037) (21,604,693) (1,968,769) Proceeds from maturities of investment securities held to maturity 5,153,000 11,929,340 11,932,553 Proceeds from maturities of investment securities available for sale 2,102,000 - - Proceeds from sale of investment securities available for sale 30,500,845 21,715,569 3,013,058 Principal paydowns on mortgage-backed securities 2,013,693 - - Net increase in loans outstanding (84,555,160) (40,234,988) (24,114,178) Proceeds from sale of premises and equipment 30,888 - 10,000 Purchases of premises and equipment (2,776,683) (1,997,318) (3,121,259) --------------- -------------- -------------- Net cash used in investing activities (80,879,720) (60,599,069) (25,778,075) --------------- --------------- --------------- Cash flows from financing activities: Net increase in deposits 29,246,386 55,085,700 24,503,693 Acquisition of deposits, net 50,511,814 - - Net increase (decrease) in securities sold under agreements to repurchase 4,090,440 2,293,809 (1,768,706) Net increase (decrease) in commercial paper 1,247,647 (727,145) 1,723,000 Increase in federal funds purchased 100,000 2,900,000 - Repayments on note payable to a bank - (478,959) (302,500) Proceeds from issuance of common stock 2,352 12,450 24,300 Purchase of treasury stock (121,480) (230,256) (176,700) Proceeds from sale of treasury stock 206,699 165,585 122,130 Dividends paid (841,736) (652,189) (529,784) -------------- -------------- -------------- Net cash provided by financing activities 84,442,122 58,368,995 23,595,433 -------------- -------------- -------------- Net increase in cash and cash equivalents 5,305,184 3,422,697 1,702,529 Cash and cash equivalents at beginning of year 25,018,593 21,595,896 19,893,367 -------------- -------------- -------------- Cash and cash equivalents at end of year $ 30,323,777 25,018,593 21,595,896 ============== ============== ============== See accompanying notes to consolidated financial statements. (Continued)
16 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Supplemental information: Cash paid during the year for: Interest $ 13,652,882 10,490,328 7,063,481 ============== ============== ============== Income taxes $ 1,641,000 1,279,819 1,118,000 ============== ============== ============== Supplemental schedule of non-cash investing and financing transactions: Unrealized gain (loss) on investment securities available for sale, net of income taxes $ 469,988 797,903 (273,289) ============== ============== ============== Securitization of mortgage loans $ 6,334,291 - - ============== ============== ============= Transfer of investment securities held to maturity to available for sale $ - 29,106,899 - ============== ============== ============= See accompanying notes to consolidated financial statements.
17 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
Unrealized Gain (Loss) on Investment Securities Additional Available Common Paid-in Retained Treasury For Sale Net of Stock Capital Earnings Stock Income Taxes ----- ------- -------- ----- ------------ Balance at December 31, 1993 $ 15,150,760 308,993 6,850,233 (135,000) 111,762 Net income - - 2,759,786 - - Cash dividend declared - - (529,784) - - Issuance of 5,400 shares in connection with stock option 9,000 15,300 - - - Purchase of 17,100 shares treasury stock - - - (176,700) - Sale of 13,500 shares treasury stock - - (12,870) 135,000 - Change in unrealized loss on investment securities available for sale, net - - - - (273,289) ------------- ---------- --------- --------- --------- Balance at December 31, 1994 15,159,760 324,293 9,067,365 (176,700) (161,527) Net income - - 3,601,998 - - Cash dividend declared - - (652,189) - - Issuance of 2,100 shares in connection with stock options 3,500 8,950 - - - Purchase of 17,712 shares treasury stock - - - (230,256) - Sale of 17,100 shares treasury stock - - (11,115) 176,700 - Change in unrealized gain on investment securities available for sale, net - - - - 797,903 ESOP stock subject to put/call option - - - - - ------------- ---------- --------- --------- --------- Balance at December 31, 1995 15,163,260 333,243 12,006,058 (230,256) 636,376 Net income - - 4,753,008 - - Cash dividend declared - - (841,736) - - Issuance of 300 shares in connection with stock options 1,500 852 - - - Purchase of 9,111 shares treasury stock - - - (121,480) - Sale of 17,712 shares treasury stock - - (23,557) 230,256 - Change in unrealized gain on investment securities available for sale, net - - - - (469,988) ESOP stock subject to put/call option - - - - - ------------- ---------- --------- --------- --------- Balance at December 31, 1996 $ 15,164,760 334,095 15,893,773 (121,480) 166,388 ============ ======= ========== ======== =======
Common Stock Subject to Put/call Option Total Balance at December 31, 1993 - 22,286,748 Net income - 2,759,786 Cash dividend declared - (529,784) Issuance of 5,400 shares in connection with stock option - 24,300 Purchase of 17,100 shares treasury stock - (176,700) Sale of 13,500 shares treasury stock - 122,130 Change in unrealized loss on investment securities available for sale, net - (273,289) ---------- ---------- Balance at December 31, 1994 - 24,213,191 Net income - 3,601,997 Cash dividend declared - (652,189) Issuance of 2,100 shares in connection with stock options - 12,450 Purchase of 17,712 shares treasury stock - (230,256) Sale of 17,100 shares treasury stock - 165,585 Change in unrealized gain on investment securities available for sale, net - 797,903 ESOP stock subject to put/call option (2,770,528) (2,770,528) --------- ---------- Balance at December 31, 1995 (2,770,528) 25,138,153 Net income - 4,753,008 Cash dividend declared - (841,736) Issuance of 300 shares in connection with stock options - 2,352 Purchase of 9,111 shares treasury stock - (121,480) Sale of 17,712 shares treasury stock - 206,699 Change in unrealized gain on investment securities available for sale, net - (469,988) ESOP stock subject to put/call option (542,946) (542,946) ---------- ---------- Balance at December 31, 1996 (3,313,474) 28,124,062 ========== ==========
See accompanying notes to consolidated financial statements. 18 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies 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. ("Capital"), a wholly owned subsidiary of Palmetto Bank, was incorporated February 26, 1992. Capital offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. 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. On April 15, 1996, the Bank acquired three existing branches of First Union National Bank of South Carolina. The Bank assumed deposits of approximately $54 million, but assumed no loans. 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. Investment securities with original maturities of three months or less are also included here. To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances. These compensating balances are $3,849,000 and $1,600,000 at December 31, 1996 and 1995, respectively. (Continued) 19 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued Investment Securities On May 31, 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. In November 1995, the FASB issued a guide to implementation of SFAS No. 115 on accounting for certain investments in debt and equity securities which allowed for the one-time transfer of certain investments classified as held to maturity to available for sale. The Company transferred investment securities with an amortized cost of $29,106,899 and a related unrealized gain of $69,363 in the fourth quarter of 1995. SFAS No. 115 allows for the sale of held to maturity securities if the sale occurs within 90 days of the securities' maturity. The Bank sold several held to maturity securities during 1995 that met this criteria, and they are included with other maturities of held for maturity investment securities in the accompanying consolidated statements of cash flows. Loans Held for Sale In the current year, the Company commenced the origination and sale of mortgage loans through its mortgage servicing department. As a result, the Company has $4.1 million in Loans Held for Sale at December 31, 1996. The Company already has commitments to sell these loans in January and February 1997. These loans are held at the lower of cost or market, determined on an individual loan basis, with fair value exceeding cost at December 31, 1996. Cost is determined by the amount the Company paid for the loan excluding mortgage servicing rights. Loans serviced for the benefit of others amounted to approximately $141 million at December 31, 1996, of which approximately $85 million resulted from an acquisition of servicing in 1996. Most of these loans are serviced for Federal Home Loan Mortgage Company (FHLMC). (Continued) 20 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued Due to the Company's new activity in the mortgage banking area, the Bank now recognizes mortgage servicing rights (MSR's) in accordance with SFAS No. 122, Accounting for Mortgage Servicing Rights, an Amendment of SFAS No. 65, which is effective January 1, 1996. The adoption of this standard had no impact on the Company. 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 amends SFAS No. 65 to require assessment of impairment based on fair value. The Company evaluates these rights quarterly for possible impairment. There was no impairment at December 31, 1996. At December 31, 1996, the Company had net MSR's of approximately $1,735,000 related to these loans included in other assets on the consolidated balance sheet. Approximately $1,729,000 of this amount represents purchased servicing and approximately $6,000 represents originated servicing. 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. In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement contains special provisions that deal with servicing assets and liabilities, which supersede SFAS No. 122, but this statement retains the impairment and amortization approaches contained in SFAS No. 122. This portion of the statement will become effective for transactions occurring after December 31, 1996. The Company does not anticipate that adoption of this standard will have a material effect on the Company's financial statements in 1997. Loans and Interest Income Loans are carried at principal amounts outstanding reduced by unearned discount. 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. (Continued) 21 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued Impaired Loans The FASB has issued 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 loans 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. On January 1, 1995, the provisions of SFAS Nos. 114 and 118 were adopted. The adoption of the Standards required no increase to the allowance for loan losses and had no impact on net income in 1995 or 1996. 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. Although SFAS No. 114 potentially applies to all problem loans, it 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. As a practical matter, the Bank determines which loans are impaired through a loan review process. This means that a loan is not a candidate for the impaired classification until the loan goes on the Bank's "Watch List" (90 days past due). 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. 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. (Continued) 22 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued 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 $72,003 and $80,003, at December 31, 1996 and 1995, 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. (Continued) 23 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued Intangibles At December 31, 1996, deposits are shown net of premium on deposits acquired of approximately $1,244,000, net of amortization, which is being amortized principally over 10 years using the double-declining balance method. At December 31, 1996, goodwill of approximately $1 million, net of amortization, related to a 1988 acquisition, is being amortized on a straight-line basis over a 25 year period. At December 31, 1996, goodwill of approximately $2.6 million, net of amortization, related to the acquisition of three branches in 1996, 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 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. Outstanding stock options are common stock equivalents but have no material dilutive effect on income per common share. All number of common shares outstanding and per share amounts have been retroactively restated for the three-for-one stock split in 1996 as discussed in note 9. Stock Options In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1995. 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 the new fair value accounting rules. Companies that choose not to adopt the new rules 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 new fair value accounting rules to disclose pro forma net income and earnings per share under the new 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). (2) Federal Funds Sold At December 31, 1996 and 1995, the Bank had $1,950,892 and $2,096,752, respectively, outstanding in federal funds sold. The daily averages of these outstanding agreements during 1996 and 1995 were $1,758,025 and $6,598,338, respectively. The maximum amount of these outstanding agreements at any month end during 1996 and 1995 were $1,950,892 and $10,385,430, respectively. The securities underlying these agreements were maintained in safekeeping by an authorized broker. (Continued) 24 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (3) Investment Securities Held to Maturity The carrying and fair values of investment securities held to maturity as of December 31 are summarized as follows:
1996 --------------------------------------------------------------------- Carrying Unrealized Unrealized Fair Value Gains Losses Value --------------- -------------- --------------- -------------- U.S. Treasury and U.S. Government agencies $ 16,006,519 6,888 (122,117) 15,891,290 State and municipal 25,449,578 1,072,119 (30,322) 26,491,375 Mortgage-backed securities 24,751,348 12,254 (376,227) 24,387,375 --------------- -------------- --------------- -------------- $ 66,207,445 1,091,261 (528,666) 66,770,040 =============== ============== =============== ============== 1995 --------------------------------------------------------------------- Carrying Unrealized Unrealized Fair Value Gains Losses Value --------------- -------------- --------------- -------------- U.S. Treasury and U.S. Government agencies $ 15,032,602 142,998 - 15,175,600 State and municipal 22,592,824 638,510 (47,954) 23,183,380 Mortgage-backed securities 6,163,230 38,395 (11,619) 6,190,006 --------------- -------------- --------------- -------------- $ 43,788,656 819,903 (59,573) 44,548,986 =============== ============== ============== ==============
The following is a maturity distribution of investment securities held to maturity as of December 31: 1996 ----------------------------- Carrying Fair Value Value -------- ---------- Due in one year or less $ - - Due after one year through five years 23,179,078 23,141,040 Due after five years through ten years 30,648,348 31,250,000 Due after ten years 12,380,019 12,379,000 --------------- ------------- $ 66,207,445 66,770,040 =============== ============= (Continued) 25 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (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:
1996 ------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- ------------ -------------- U.S. Treasury $ 8,993,021 92,878 (51,187) 9,034,712 State and Municipal 6,976,743 228,859 - 7,205,602 -------------- --------------- ----------- -------------- $ 15,969,764 321,737 (51,187) 16,240,314 ============== ============== ============ ============== 1995 ----------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ ------------ ---------- U.S. Treasury and U.S. Government Agencies $ 29,995,691 691,613 (1,079) 30,686,225 State and Municipal 8,584,656 344,224 - 8,928,880 -------------- -------------- ----------- -------------- $ 38,580,347 1,035,837 (1,079) 39,615,105 ============== ============== =========== ==============
During the year ended December 31, 1996 the Company had realized gains of $21,331 on sales of investment securities. During the years ended December 31, 1995 and 1994 the Company had realized losses of $93,156 and $13,404, respectively, on sales of investment securities. Specific identification is the basis on which cost was determined in computing realized gains or losses. The following is a maturity distribution of investment securities available for sale at December 31: 1996 -------------------------------- Amortized Fair Cost Value --------------- ------------ Due in one year or less $ 2,850,543 2,895,102 Due after one year through five years 13,119,221 13,345,212 -------------- -------------- $ 15,969,764 16,240,314 ============== ============== (Continued) 26 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (4) Investment Securities Available for Sale Investment securities held to maturity and available for sale with an aggregate carrying value of approximately $55,628,000 and $53,694,000 at December 31, 1996 and 1995, 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: 1996 1995 ---- ---- Commercial, financial and agricultural $ 68,616,697 45,377,386 Real estate - construction 9,597,846 5,452,663 Real estate - mortgage 181,774,819 149,017,139 Installment loans to individuals 72,996,924 55,339,471 ----------- ------------- $ 332,986,286 255,186,659 =========== ============= Non accrual loans included above $ 1,112,716 743,050 =========== ============= In September 1996, the Company securitized approximately $6.3 million of real estate mortgage loans. These mortgage-backed securities are included in the Company's held to maturity investment portfolio. The following is a summary of activity affecting the allowance for loan losses for the years ended December 31: 1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 3,700,216 3,016,464 2,393,638 Provision for loan losses 1,450,000 1,140,400 819,438 Loan recoveries 288,905 156,218 260,593 Loans charged-off (710,147) (612,866) (457,205) ---------- ---------- ----------- Balance at end of year $ 4,728,974 3,700,216 3,016,464 ========= ========== =========== (Continued) 27 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (5) Loans, Continued 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 $76,000, and there is no allowance for loan losses related to impaired loans at December 31, 1996. At December 31, 1995, impaired loans amounted to approximately $193,000. During 1995, the average recorded investment in impaired loans was approximately $211,000. Included in the allowance for loan losses at December 31, 1995 is approximately $97,000 related to these impaired loans. 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, 1996, 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, 1996 as follows: Home equity loans $ 8,767,000 Credit cards 18,291,000 Commercial real estate development 18,028,000 Other unused lines of credit 19,649,000 ---------- $64,735,000 Standby letters of credit $ 2,207,000 ========== 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. At December 31, 1996, the Company had outstanding commitments to sell mortgage-backed securities of approximately $6.5 million and commitments to sell whole loans over the next twelve months of approximately $15 million. (Continued) 28 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (6) Premises and Equipment, Net A summary of premises and equipment, net, as of December 31 follows: 1996 1995 ---- ---- Land $ 1,887,786 1,792,519 Buildings and leasehold improvements 10,010,138 8,623,622 Furniture and equipment 8,713,230 7,493,914 ---------- ---------- 20,611,154 17,910,055 Less accumulated depreciation and amortization (8,288,080) (7,200,143) ---------- ---------- Premises and equipment, net $12,323,074 10,709,912 ========== ========== (7) Deposits A summary of deposits, by type, as of December 31 follows: 1996 1995 ---- ---- Transaction accounts $ 150,984,778 114,380,010 Savings deposits 26,357,332 20,261,624 Insured money market accounts 42,609,205 42,113,681 Time deposits over $100,000 42,099,990 39,629,516 Other time deposits 151,579,431 113,392,152 Premium on deposits acquired (1,244,358) (117,500) --------------- ------------ Total deposits $ 412,386,378 329,659,483 =============== ============ Interest paid on time deposits of $100,000 or more amounted to $1,969,664, $1,683,014, and $857,297 for the years ended December 31, 1996, 1995 and 1994, respectively. The following table displays the aggregate amounts of time deposits with maturities for the years following December 31, 1996: Maturing within one year $ 168,511,398 Maturing after one year through two years 17,681,336 Maturing after two years through three years 3,152,331 Maturing after three years through five years 4,313,476 Maturing after five years 20,880 --------------- Total $ 193,679,421 =============== (Continued) 29 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (8) Short-Term Borrowings At December 31, 1996, 1995 and 1994, the Bank had $11,636,150, $7,545,710 and $5,251,901, respectively, in outstanding securities sold under agreements to repurchase with weighted average interest rates of 4.44%, 3.05% and 2.85%, respectively. These borrowings were collateralized by investment securities with carrying values of $16,027,000, $17,125,000 and $12,500,000, respectively, which are maintained in safekeeping by an authorized broker. The daily averages of these agreements outstanding during 1996, 1995 and 1994 were $11,601,054, $10,228,473 and $8,596,000, respectively. The maximum amounts of these agreements outstanding at any month end during 1996, 1995 and 1994 were $12,694,229, $11,679,919 and $9,551,000, respectively. The weighted average interest rates on these borrowings were 3.84%, 4.31% and 2.58% for the years ended December 31, 1996, 1995 and 1994, respectively. 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. At December 31, 1996, 1995 and 1994, the Company had $7,434,502, $6,186,855 and $6,914,000, respectively, in commercial paper with weighted average interest rates of 4.69%, 3.30% and 3.10%, respectively. The daily averages of these borrowings outstanding during 1996, 1995 and 1994 were $8,075,342, $8,017,222 and $6,312,000, respectively. The maximum amounts of these borrowings outstanding at any month end during 1996, 1995 and 1994 were $9,167,913, $9,370,000 and $7,601,000, respectively. The weighted average interest rates on these borrowings were 3.88%, 4.28% and 2.72% for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, 1995 and 1994 the Company had $3,000,000, $2,900,000 and $0, respectively, outstanding in federal funds purchased, with weighted average interest rates of 7.75%, 5.5% and 0%, respectively. The daily averages of these borrowings outstanding during 1996, 1995 and 1994 were $5,746,344, $2,380,316 and $369,000, respectively. The maximum amounts of these borrowings outstanding at any month end during 1996, 1995 and 1994 were $17,500,000, $3,000,000 and $0, respectively. The weighted average interest rates on these borrowings were 5.45%, 5.68% and 5.33% for the years ended December 31, 1996, 1995 and 1994, respectively. (9) Stock Split On October 15, 1996, the shareholders approved that the common stock authorized be increased from 2,000,000 to 10,000,000 shares at $5 par value per share. Previously, on August 13, 1996, the Board of Directors had approved a three-for-one stock split effected in (Continued) 30 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements the form of a 200% dividend for shareholders of record on September 12, 1996, contingent on this shareholder approval. All number of common shares outstanding and per share amounts contained in this report have been retroactively adjusted to give effect to the stock split. (10) Income Taxes Components of income tax provision for the years ended December 31 are as follows: 1996 1995 1994 ---- ---- ---- Current: Federal $1,155,000 1,422,000 894,000 State 188,000 156,000 129,000 -------------- ---------- ---------- 1,343,000 1,578,000 1,023,000 -------------- ---------- ---------- Deferred: Federal 309,000 (332,000) (113,000) State - - - -------------- ---------- --------- 309,000 (332,000) (113,000) -------------- ---------- ---------- Total $1,652,000 1,246,000 910,000 ============== ========== ========== The effective tax rates for the years ended December 31 vary from the Federal statutory rates as follows: 1996 1995 1994 ------ ------ ------ U.S. Federal income tax rates 34.0% 34.0% 34.0% Changes from statutory rates resulting from: Tax-exempt interest income (9.1) (10.7) (13.4) Expenses not deductible for tax purposes .8 1.0 1.0 State taxes, net of Federal income tax benefit 2.3 2.1 2.3 Other (2.2) (.7) .9 ------ ----- ----- Effective tax rates 25.8% 25.7% 24.8% ====== ===== ===== 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. (Continued) 31 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (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.
1996 1995 ---- ---- Deferred tax assets: Loan loss reserves $ 1,147,000 871,000 Basis of intangible assets for tax purposes in excess of basis for financial reporting 54,000 - ------------- ---------- Total gross deferred tax assets 1,201,000 871,000 Less valuation allowance - - ------------- ----------- Net deferred tax assets 1,201,000 871,000 ------------- ----------- Deferred tax liabilities: Fixed assets, due to depreciation differences (441,000) (277,000) Basis of intangible assets for financial reporting purposes in excess of tax basis - (42,000) Deferred loan costs deducted for tax purposes as incurred (260,000) - Deferred loan fees recognized under the principal reduction method for tax purposes (259,000) - Unrealized gain on securities available for sale (104,161) (398,382) Other (20,000) (22,000) ------------- ----------- Total gross deferred tax liabilities (1,084,161) (739,382) ------------- ----------- Net deferred tax asset $ 116,839 131,618 ============= ===========
A portion of the change in the net deferred tax asset relates to the unrealized gains and losses on securities available for sale. A current period deferred tax benefit related to the change in unrealized gain on securities available for sale of $294,221 has been recorded directly to shareholders equity. The rest of the change in the deferred tax asset results from the current period deferred tax expense of $309,000. No valuation allowance for deferred tax assets has been established at either December 31, 1996 or 1995. 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 1993 and subsequent years are subject to examination by the taxing authorities. (Continued) 32 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (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 pension expense, and the major assumptions used in determining these amounts for the years ended December 31:
1996 1995 1994 ---- ---- ---- Actuarial present value of benefit obligations: Vested benefits $ 2,227,649 1,889,979 1,375,849 Non-vested benefits 72,968 55,205 281,497 ------------- ------------ ------------ Accumulated benefit obligations $ 2,300,617 1,945,184 1,657,346 ============= ============ ============ Projected benefit obligations for services rendered to date 3,166,370 2,774,204 2,425,421 Plan assets at fair value, primarily listed stocks and U.S. government securities 3,903,557 3,412,938 2,650,722 ------------- ------------ ------------
1996 1995 1994 ---- ---- ---- Excess of assets over projected benefit obligations $ 737,187 638,734 225,301 Unrecognized prior service cost 86,105 94,652 103,199 Unrecognized net loss (gain) from past experience different from that assumed 23,819 (65,572) 86,723 Unrecognized net asset being amortized over the average remaining service period of covered employees (155,125) (180,980) (206,835) ------------- ------------ ------------ Prepaid pension cost included in other assets $ 691,986 486,834 208,388 ============= ============ ============
(Continued) 33 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (11) Employee Benefit Plans, Continued Components of pension expense: Service cost $ 204,835 185,646 167,145 Interest cost 220,620 192,883 168,447 Return on plan assets (285,641) (228,426) (195,479) Net amortization and deferral (17,308) (17,308) (17,308) ------------- ------------ ------------ Pension expense $ 122,506 132,795 122,805 ============= ============ ============ Major assumptions at year end: Discount rate 8% 8% 8% Rate of increase in compensation levels 5% 5% 5% Expected long-term rate of return on plan assets 8% 8% 8%
(b) The Company has an Employee Stock Ownership Plan (ESOP) established by its Board of Directors. The ESOP covers the same employees and has the same vesting schedule as the pension plan. Based on profits, the Company contributes annually to a trust created to acquire shares of the Company's common stock for the exclusive benefit of the participants. During 1996, 1995 and 1994, 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 charges to income for contributions to the ESOP for the years ended December 31, are as follows: 1996 1995 1994 ---- ---- ---- Repurchase of treasury stock for ESOP $ 206,699 165,585 122,130 Investment income received by ESOP (19,900) (29,467) (28,189) ---------- -------- --------- Contributions to ESOP $ 186,799 136,118 93,941 ========== ======== ========= At December 31, 1996, there were 266,069 allocated shares in the plan. The fair value of unearned (non-vested) ESOP shares at December 31, 1996 amounted to $164,332. 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 are subject to the put/call feature. Accordingly, 284,007 shares of ESOP stock are now recorded outside shareholders' equity at their fair value, which is (Continued) 34 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (11) Employee Benefit Plans, Continued determined by an independent valuation. Of the 284,007 shares, 17,938 shares were distributed during 1996, but are subject to the put/call until June 29, 1997. The Company's Board of Directors has voted to terminate the ESOP effective February 28, 1997. The shares distributed in 1997 due to the termination of the ESOP will be subject to the put/call until June 29, 1998. (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 authorizes grants of options to purchase up to 144,000 shares of authorized but unissued common stock. The Stock Option Plan expires in 1997. Stock options are granted at 100% of the fair value at the date of grant. Because the Company's stock is not traded on an established market, the fair value is determined by an annual independent actuarial valuation. All stock options have ten year terms and vest in increments over five years from the date of grant. At December 31, 1996 and 1995 there were 17,400 and 20,400 remaining shares, respectively, available for grant under the Stock Option Plan. Stock option activity is summarized below: Weighted-Average Stock Options Exercise Price ------------------------------------------------------------------ Outstanding at December 31, 1993 104,400 $5.43 Granted 9,000 9.05 Forfeited (2,400) 4.50 Exercised (12,600) 4.50 -------------------------------------------------------------- Outstanding at December 31, 1994 98,400 5.90 -------------------------------------------------------------- Granted 9,000 9.69 Exercised (2,100) 5.93 -------------------------------------------------------------- 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 ============================================================== (Continued) 35 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (11) Employee Benefit Plans, Continued The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ---------------------------------------------------------------------------------------------------- Weighted- Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/96 Life Price at 12/31/96 Price ---------------------------------------------------------------------------------------------------- $4.50 - 5.50 63,000 1.14 years $4.64 63,000 $4.64 $7.84 - 8.25 24,000 5.38 years 8.00 22,200 7.98 $9.05 - 9.69 18,000 7.50 years 9.37 9,000 9.31 $11.67 3,000 10.00 years 11.67 600 11.67 ---------------------------------------------------------------------------------------------------- Total 108,000 3.39 years $6.37 94,800 $5.91 ====================================================================================================
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 1996, 1995 and 1994. 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 1995 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 1996 and 1995 were $4.12 and $3.95, 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 6.16% and 7.74%, respectively; expected dividend yields of 1.48% and 1.50%, respectively; and expected volatility factors of 15.60% and 13.42%, 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 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would (Continued) 36 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (11) Employee Benefit Plans, Continued have been reduced by less than 0.3% and 1%, respectively. 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) 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 $2,857,573 and $2,969,021 at December 31, 1996 and 1995, respectively. From January 1 through December 31, 1996, these directors and executive officers and their related interests borrowed $477,491 and repaid $588,939. In the opinion of management, these loans do not involve more than the normal risk of collectibility and do not present other unfavorable features. (13) Commitments and Contingencies On December 31, 1996, 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: 1997 $ 351,647 1998 286,272 1999 198,389 2000 113,266 2001 88,713 Subsequent years 659,101 ------------- $ 1,697,388 Rental expense was $398,442, $335,870 and $309,839 for the years ended December 31, 1996, 1995, and 1994, 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. (Continued) 37 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (14) 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) Loans Held for Sale The fair value of loans held for sale is based on prices in outstanding commitments to sell these loans. (d) 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 cash flow analysis and assumes the rate being offered on these types of loans by the Company at December 31, 1996, 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. (Continued) 38 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (14) Disclosures Regarding Fair Value of Financial Instruments, Continued 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. (e) 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 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. (f) 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. (g) Other Assets and Other Liabilities 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:
1996 1995 ------------------------------- ------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------- ------------- ------------- ------------- Cash and due from banks $ 28,372,885 28,372,885 22,921,841 22,921,841 ============== ============= ============= ============= Federal funds sold $ 1,950,892 1,950,892 2,096,752 2,096,752 ============== ============= ============= ============= Investment securities held to maturity $ 66,207,445 66,770,040 43,788,656 44,548,986 ============== ============= ============= ============= Investment securities available for sale $ 16,240,314 16,240,314 39,615,105 39,615,105 ============== ============= ============= ============= Loans held for sale $ 4,075,096 4,079,914 - - ============== ============= ============= ============ Loans: Commercial mortgage $ 103,908,185 103,764,662 84,866,752 84,784,817 Commercial other 75,271,142 75,039,084 62,130,268 62,081,093 Real estate - mortgage 14,901,723 14,901,328 - - Installment mortgage 73,928,336 73,720,193 43,850,945 43,752,706 Installment other 64,976,900 64,625,260 64,338,694 64,210,076 -------------- ------------- ------------- ------------- $ 332,986,286 332,050,527 255,186,659 254,828,692 ============== ============= ============= ============= Deposits $ 412,386,378 412,595,419 329,659,483 330,450,035 ============== ============= ============= =============
(Continued) 39 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (14) Disclosures Regarding Fair Value of Financial Instruments, Continued Borrowings: Securities sold under agreements to repurchase $ 11,636,150 11,636,150 7,545,710 7,545,710 Commercial paper 7,434,502 7,434,502 6,186,855 6,186,855 Federal funds purchased 3,000,000 3,000,000 2,900,000 2,900,000 -------------- ------------- ------------- ------------- $ 22,070,652 22,070,652 16,632,565 16,632,565 ============== ============= ============= =============
(15) 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, 1996, the Bank had available retained earnings of approximately $3,055,000 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, 1996 and 1995, and the related condensed statements of operations data and cash flow data for the three-year period ended December 31, 1996 are as follows: Financial Condition Data Assets 1996 1995 ------ ---- ---- Cash $ 239,082 170,230 Due from subsidiary 7,667,787 6,420,139 Investment in wholly-owned bank subsidiary 29,954,909 26,433,592 Goodwill 1,010,260 1,071,575 ----------- ----------- Total assets $38,872,038 34,095,536 =========== =========== Liabilities and Shareholders' Equity Commercial paper $ 7,434,502 6,186,855 ----------- ----------- Total liabilities 7,434,502 6,186,855 ----------- ----------- ESOP stock subject to put/call 3,313,474 2,770,528 Shareholders' equity 28,124,062 25,138,153 ----------- ---------- Total liabilities and shareholders' equity $38,872,038 34,095,536 =========== ========== (Continued) 40 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (15) Palmetto Bancshares, Inc. (Parent Company), Continued
Operations Data 1996 1995 1994 ---- ---- ---- Interest income from commercial paper $ 313,092 340,712 171,935 Dividends received from Bank 841,736 1,260,445 1,041,484 Equity in undistributed earnings of subsidiary 3,991,306 2,435,006 1,837,684 Net operating expenses (393,126) (434,166) (291,317) ------------- -------------- -------------- Net income $ 4,753,008 3,601,997 2,759,786 ============= ============== ==============
Cash Flow Data 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 4,753,008 3,601,997 2,759,786 Decrease (increase) in due from subsidiary (1,247,647) 727,145 (1,723,000) Earnings retained by wholly-owned subsidiary (3,991,306) (2,435,006) (1,837,683) Amortization of goodwill 61,315 61,315 61,315 ------------- ------------- -------------- Net cash (used) provided by operating activities (424,630) 1,955,451 (739,582) ------------- ------------- -------------- Cash flows from financing activities: Net change in commercial paper 1,247,647 (727,145) 1,723,000 Proceeds from issuance of common stock 2,352 12,450 24,300 Purchase of treasury stock (121,480) (230,256) (176,700) Sale of treasury stock 206,699 165,585 122,130 Payments on note payable to a bank - (478,959) (302,500) Dividends paid (841,736) (652,189) (529,784) Net cash (used) provided by financing activities 493,482 (1,910,514) 860,446 ------------- ------------- -------------- Net increase in cash 68,852 44,937 120,864 Cash at beginning of year 170,230 125,293 4,429 ------------- ------------- -------------- Cash at end of year $ 239,082 170,230 125,293 ============= ============= ==============
(Continued) 41 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (16) 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 total assets. Management believes, as of December 31, 1996, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 1996 the Company and the Bank were each categorized as "adequately capitalized," under the regulatory framework for prompt corrective action. At December 31, 1995 the Company and the Bank were each categorized as "well capitalized." 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, 1996: TOTAL CAPITAL TO RISK-WEIGHTED ASSETS: Company $30,617,509 9.11% $26,895,440 8.00% $33,619,300 10.00% Bank $30,145,141 8.97% $26,895,440 8.00% $33,619,300 10.00% TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS: Company $26,415,096 7.86% $13,447,720 4.00% $20,171,580 6.00% Bank $25,942,728 7.72% $13,447,720 4.00% $20,171,580 6.00% TIER 1 CAPITAL TO TOTAL ASSETS: Company $26,415,096 5.60% $18,864,720 4.00% $23,580,900 5.00% Bank $25,942,728 5.50% $18,864,720 4.00% $23,580,900 5.00%
42 PALMETTO BANCSHARES, INC. AND SUBSIDIARY 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. The information below has been retroactively restated for the three-for-one stock split in 1996. As of February 3, 1997, the Company had 543 shareholders with 3,032,841 shares outstanding. SALES PRICES BY QUARTER Fiscal Year 1996 HIGH LOW ---------------- ---------------------- First Quarter $15.00 $13.33 Second Quarter $13.33 $13.33 Third Quarter $14.33 $13.33 Fourth Quarter $20.00 $16.00 Fiscal Year 1995 First Quarter $12.66 $10.66 Second Quarter - NO TRADES - Third Quarter $13.33 $13.00 Fourth Quarter $13.33 $13.00 DIVIDENDS PAID PER SHARE Fiscal Year 1996 Fiscal Year 1995 ---------------- ---------------- March 28 $.067 March 30 $.05 June 28 $.067 June 30 $.05 September 27 $.067 September 30 $.05 December 27 $.08 December 29 $.067 43 EX-21 6 EXHIBIT 21 Exhibit 21.1 SUBSIDIARIES OF PALMETTO BANCSHARES, INC. The following table sets forth the subsidiaries of Palmetto Bancshares, Inc. on December 31, 1996. The common stock of each of these subsidiaries is 100 percent owned by its parent. The financial statements of all subsidiaries are included in the consolidated statements of Palmetto Bancshares, Inc. and subsidiaries. The Palmetto Bank Palmetto Capital Inc. EX-27 7 EXHIBIT 27
9 1,000 YEAR DEC-31-1996 DEC-31-1996 28,373 0 1,951 0 16,240 66,207 66,770 332,986 4,729 468,377 412,386 22,071 2,483 0 0 0 15,165 12,959 468,377 26,852 5,246 93 32,191 12,724 13,810 18,381 1,450 21 15,764 6,405 4,753 0 0 4,753 1.54 0 4.71 1,113 0 0 0 3,700 710 289 4,729 0 0 0
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