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U. S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2004
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to
__________
Commission file number 0-26016
PALMETTO BANCSHARES, INC. South Carolina 74-2235055
(State or other jurisdiction of incorporation
or organization)
(IRS Employer Identification No.)
301 Hillcrest Drive, Laurens, South Carolina
29360
(Address of principal executive offices)
(Zip Code)
(864) 984-4551
palmettobank.com
(Registrant's telephone number)
(Registrant's web site) 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 whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes X No __ Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at May 3, 2004
-------------------------------
Common stock, $5.00 par value
6,265,490
PALMETTO
BANCSHARES, INC.
Table of
Contents
Page No. PART I. FINANCIAL INFORMATION
3 Item 1.
3 Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
13 Item 3.
35 Item 4.
37 PART II. OTHER INFORMATION
38 Item 1.
38 Item 2.
38 Item 3.
38 Item 4.
38 Item 5.
38 Item 6.
38
39 2
Consolidated Balance Sheets
(in thousands, except share data)
March 31,
December 31,
2004
2003
2003
(unaudited)
ASSETS Cash and due from banks $ 26,406 32,953 32,309 Federal funds sold 10,090 14,479 930 Cash and cash equivalents 36,496 47,432 33,239 Federal Home Loan Bank (FHLB)
stock, at cost 2,122 1,868
1,868 Investment securities
available for sale at fair value 106,373 113,138
128,930 Loans held for sale
6,353 11,093
6,399 Loans 706,999 646,628
693,213 Less allowance for loan
losses (7,692) (6,771)
(7,463) Loans, net 699,307 639,857 685,750 Premises and equipment,
net 21,927 19,805
21,724 Accrued interest
receivable 3,784 4,114
4,083 Other assets 17,331 15,792
16,086 Total assets $ 893,693 853,099 898,079 LIABILITIES AND
SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $122,247
116,615 115,982 Interest-bearing 656,554
622,144
655,766 Total deposits 778,801 738,759
771,748 Securities sold under
agreements to repurchase 18,126
16,261
13,525 Commercial paper (Master
notes) 16,339
16,965
16,170 Federal funds purchased -
- 18,000 Other liabilities 5,772
11,358
6,647 Total liabilities 819,038
783,343
826,090 Shareholders' equity Common stock - par value
$5.00 per share; authorized 31,327
31,650
31,316 Capital surplus 268 89 250 Retained earnings 41,607 36,314
39,454 Accumulated other
comprehensive income, net of tax 1,453
1,703
969 Total shareholders'
equity 74,655
69,756
71,989 Total liabilities and
shareholders' equity $ 893,693
853,099 898,079
See accompanying notes to consolidated interim financial statements. 3
Consolidated Statements of Income
(in thousands, except share data)
For the three months ended March 31,
2004
2003
(unaudited) Interest income Interest and fees on loans $ 11,271 11,543 Interest and dividends on investment securities available for sale U.S. Treasury and U.S. Government agencies 108 415 State and municipal 510 382 Mortgage-backed securities 338 209 Interest on federal funds sold 15 35 Dividends on FHLB stock 19 23 Total interest income 12,261 12,607 Interest expense Interest on deposits, including retail repurchase agreements 2,480 2,804 Interest on other borrowings 19 4 Interest on commercial paper (Master notes) 23 23 Total interest expense 2,522 2,831 Net interest income 9,739 9,776 Provision for loan losses 750 900 Net interest income after provision for loan losses 8,989 8,876 Noninterest income Service charges on deposit accounts 2,083 2,004 Net fees for trust and brokerage services 670 598 Mortgage banking income 165 100 Investment securities gains 108 95 Other 696 637 Total noninterest income 3,722 3,434 Noninterest expense Salaries and other personnel 4,636 4,491 Occupancy 591 567 Furniture and equipment 883 813 Postage and supplies 321 396 Marketing and advertising 214 184 Telephone 182 184 Professional services 186 157 Other 1,233 1,218 Total noninterest expense 8,246
8,010 Income before income taxes 4,465 4,300 Provision for income taxes 1,435 1,398 Net income $ 3,030 2,902 Share Data: Net income - basic $ 0.48 0.46 Net income - diluted 0.48 0.45 Book value 11.92 11.02 Weighted average common shares outstanding - basic 6,264,069 6,326,698 Weighted average common shares outstanding - diluted 6,365,180 6,482,699
See accompanying notes to consolidated interim financial statements. 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
(in thousands, except share data) (unaudited)
Accumulated
Shares of
other
common
Common
Capital
Retained
comprehensive
stock
stock
surplus
earnings
income, net
Total Balance at December 31, 2002 6,324,659 $ 31,623 50 34,173 1,675 67,521 Net income 2,902 2,902 Other comprehensive income, net of tax: Net unrealized holding gains (losses) arising during period, net of tax effect of $54 86 Less: reclassification adjustment for gains included in net income, net of tax effect of $37 (58) Net unrealized gains on securities 28 Comprehensive income 2,930 Cash dividend declared and paid ($0.12 per share) (761) (761) Stock option activity 5,250
27 39 66 Balance at March 31, 2003 6,329,909 $ 31,650 89 36,314 1,703 69,756 Balance at December 31, 2003 6,263,210 $ 31,316 250 39,454 969 71,989 Net income 3,030 3,030 Other comprehensive income, net of tax: Net unrealized holding gains (losses) arising during period, net of tax effect of $344 550 Less: reclassification adjustment for gains included in net income, net of tax effect of $42 (66) Net unrealized gains on securities 484 Comprehensive income 3,514 Cash dividend declared and paid ($0.14 per share) (877) (877) Stock option activity 2,230 11 18 29 Balance at March 31, 2004 6,265,440 $ 31,327 268 41,607 1,453 74,655
See accompanying notes to consolidated interim financial statements. 5
Consolidated Statements of Cash Flows
(in thousands)
For the three months ended March 31,
2004
2003
(unaudited) Cash flows from operating activities Net income $ 3,030 2,902 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 1,031 249 Gain on sale of investment securities (108) (95) Provision for loan losses 750 900 Origination of loans held for sale (13,545) (36,773) Proceeds from sale of loans held for sale 13,756
37,870 Gain on sale of loans (165)
(339) Change in accrued interest receivable
299
32 Change in other assets
(394)
(21) Change in other liabilities, net
(1,177)
3,531 Net cash provided by operating activities
3,477
8,256 Cash flows from investing activities Purchase of investment securities available for sale (3,035) (15,327) Proceeds from maturities of investment securities available for sale 5,838 4,335 Proceeds from sale and calls of investment securities available for sale 15,335 9,114 Principal paydowns on mortgage-backed securities available for sale 5,031
3,744 Purchase of Federal Home Loan Bank stock (254)
(135) Net increase in loans outstanding (15,433) (21,750) Purchases of premises and equipment, net (677) (527) Net cash provided by (used in) investing activities 6,805 (20,546) Cash flows from financing activities Net increase in deposit accounts
7,053 16,768 Net increase in securities sold under agreements to repurchase
4,601 3,430 Net increase in commercial paper
169 2,126 Net decrease in federal funds purchased (18,000) - Proceeds from stock option activity 29 66 Dividends paid (877) (761) Net cash provided by (used in) financing activities
(7,025) 21,629 Net increase in cash and cash equivalents
3,257
9,339 Cash and cash equivalents at beginning of quarter
33,239 38,093 Cash and cash equivalents at end of quarter $ 36,496 47,432 Supplemental Information Cash paid during the period for: Interest expense $ 2,603 2,926 Income taxes
692 962 Supplemental schedule of non-cash investing and financing transactions Change in unrealized gain on investment securities available for sale, pre-tax $ 786 45 Loans transferred to other real estate owned
1,126 133 Loans charged -off
569 588
See accompanying notes to consolidated interim financial statements. 6 PALMETTO BANCSHARES, INC. 1. GENERAL Nature of Operations The industry
in which the Bank operates exists primarily to provide an intermediary service
to the general public with funds to deposit and, by using these funds, to
originate loans in the markets served. The Bank provides a full range of
banking activities, including such services as checking, savings, money market,
and other time deposits for a wide range of consumer and commercial depositors;
loans for business, real estate, and personal uses; safe deposit box rental;
various electronic funds transfer services; telephone banking; and bank card
services. The Bank's indirect lending department establishes relationships with
Upstate automobile dealers to provide customer financing on qualifying
automobile purchases, and the Bank's mortgage banking operation meets a range
of its customers' financial service needs by originating, selling, and
servicing mortgage loans. The Bank also offers both individual and commercial
trust services through an active trust department. Palmetto Capital, the brokerage
subsidiary of the Bank, offers customers stocks, treasury and municipal bonds,
mutual funds, and insurance annuities, as well as college and retirement
planning. The Company's
primary market area is the Upstate of South Carolina. Principles of Consolidation and Basis of Presentation The consolidated financial statements presented herein are prepared in
accordance with the instructions for Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included. The statements should be
read in conjunction with the financial statements and footnotes thereto
included in Palmetto Bancshares, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2003. Reclassifications Accounting
Estimates and Assumptions 7 Website Availability of Reports Filed with the Securities
and Exchange Commission Summary of Significant Accounting Policies 2. MORTGAGE
SERVICING RIGHTS The Bank makes
both fixed rate and adjustable rate mortgage loans with terms generally ranging
from 10 to 30 years and generally retains servicing on loans originated. Real
estate lending is generally considered to be collateral-based lending with loan
amounts based on predetermined loan to collateral values, and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Effective in
the third quarter 2003, the Company began utilizing the expertise of a third
party to determine the value of mortgage-servicing rights ("MSRs") as well as
the related amortization and impairment of such rights. The external valuation
utilizes estimates for the amount and timing of mortgage loan repayments,
estimated prepayment rates, credit loss experience, costs to service loans, and
discount rates to determine an estimate of the fair value of the Company's
mortgage-servicing rights asset. Management believes that the modeling
techniques and assumptions used in conjunction with the valuation are
reasonable. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 140, the third
party evaluator stratified mortgage-servicing assets based on predominant risk
factors in order to evaluate impairment. Management noted that assets are
stratified by interest rates and investor. The Company recognizes impairment as
reported by the third party evaluator through a valuation allowance. Impairment
reported by the third party evaluator is the difference between the period end
book value and the market value at the same time. Gross
mortgage-servicing rights totaled approximately $2.5 million and $2.1 million
at March 31, 2004 and 2003, respectively, and are included in other assets on
the consolidated balance sheets. A valuation allowance of $90 thousand and $159
thousand existed at March 31, 2004 and 2003, respectively. Gross
mortgage-servicing rights totaled approximately $2.6 million at December 31,
2003. At the same time, a valuation allowance of $40 thousand was required.
8 Amortization expense is based on
current information regarding loan payments and prepayments. Amortization
expense could change in future periods based on changes in the volume of
prepayments and other environmental factors. Prepayments could increase as a
result of any further decline in market interest rates, leading to an increase
in amortization expense. Amortization expense for MSRs was booked totaling $189
thousand and $420 thousand for the three months ended March 31, 2004 and 2003,
respectively. Amortization expense for MSRs for the twelve months ended
December 31, 2003 totaled $1.1 million. The table set
forth below summarizes the changes in mortgage-servicing rights, net of
valuation allowance, for the quarters ended March 31 (in thousands).
For the
quarters ended March 31,
2004
2003 Mortgage-servicing rights, net of
valuation
$ 2,566
1,957 Capitalized mortgage-servicing
rights
150
478 Amortization
(189)
(420) Change in valuation allowance
(50)
(46) Total mortgage-servicing rights, net
of valuation allowance, end of period
$ 2,477
1,969 The table set
forth below summarizes the activity impacting the valuation allowance for
impairment of mortgage-servicing rights for the quarters ended March 31 (in
thousands).
For the
quarters ended March 31,
2004
2003 Valuation allowance, beginning of
period
$ 40
113 Aggregate additions charged and
reductions
50
46 Valuation allowance, end of period
$ 90
159 3. INTANGIBLE ASSETS The Company's intangible assets with
infinite lives are included in other assets on the consolidated balance
sheets. These assets totaled $3.7 million at March 31, 2004, December 31,
2003, and March 31, 2003. The Company
tests for impairment in accordance with SFAS No. 142. Potential impairment of
goodwill exists when the carrying amount of a reporting unit exceeds its
implied fair value. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and the reporting unit's goodwill is estimated by allocating the
reporting unit's fair value to all of its assets (recognized and unrecognized)
and liabilities as if the reporting unit had been acquired in a business
combination at the date of the impairment test. If the implied fair value of
the reporting unit's goodwill is lower that its carrying amount, goodwill is
impaired and is written down to the implied fair value. The loss recognized is
limited to the carrying amount of goodwill. Once an impairment loss is
recognized, future increases in fair value will not result in the reversal of
previously recognized losses. Based on the Company's impairment analysis
performed during 2003, the carrying amount of reporting units does not exceed
implied fair value. Therefore, no impairment loss was recorded during the
twelve-month period ended December 31, 2003. The Company will retest intangible assets with infinite
lives for impairment during the second quarter of 2004 to determine whether or
not an impairment loss is required to be booked in accordance with SFAS No.
142.
9 The table set forth below illustrates the activity of
intangible assets with finite lives, which are comprised of customer list
intangibles, included in other assets on the consolidated balance sheets, and the related amortization,
included in other noninterest expense on the consolidated statements of income,
for the quarters ended March 31 (in thousands).
For the
quarters ended March 31,
2004
2003 Balance, beginning of period
$ 464
608 Amortization
36
34 Balance, end of period
$ 428
574 Amortization of intangible assets with finite lives totaled
$144 thousand for the year ended December 31, 2003. The Company expects to record amortization expense related
to intangibles of $144 thousand for fiscal years 2004 and 2005, $48 thousand
for fiscal years 2006 and 2007, $45 thousand for fiscal year 2008, and $33
thousand for fiscal year 2009. 4. NET INCOME PER COMMON SHARE Basic and diluted earnings per share have been computed
based on net income presented in the accompanying consolidated statements of
income divided by the weighted average common shares outstanding or assumed to
be outstanding as summarized below: For the quarters ended March
31, Option shares are excluded from the calculation of diluted
earnings when the exercise price is greater than the average market price of
the common shares. At March 31, 2004, there were no option shares that were
excluded from the calculation of diluted earnings due to the exercise price
being greater than the average market price of the common shares as of that
date, based on information available to the Company at that time. 5. EMPLOYEE BENEFIT
PLANS Postretirement Benefits
10 The following
information has been prepared to present the components of net period benefit cost for the
quarters ended March 31 (in thousands).
For the
quarters ended March 31,
2004
2003 Service cost
$ 148
136 Interest cost
163
152 Expected return on plan assets
(214)
(200) Amortization of prior service cost
2
2 Amortization of the
net loss
20
29 Net periodic benefit cost
$ 119
119 The Company
previously disclosed in its Annual Report on Form 10-K for the year ended
December 31, 2003, that it expected to contribute $1.3 million to its
noncontributory defined benefit pension plan during 2004. During the quarter
ended March 31, 2004, $335 thousand was contributed. Stock Option Plan In December
2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123." This Statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition and disclosure
provisions were required for financial statements for fiscal periods ending
after December 15, 2002. The Company adopted this standard effective December
31, 2002 and has included the required interim disclosures herein. The table set forth below illustrates the impact on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the quarters ended March 31 (in thousands, except share data).
compensation expense determined under fair value-based methods for all awards, net of related tax effects
11 The fair value of each option
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during 2004 and 2003, respectively: dividend yield of 2.7% and 2.6%,
expected volatility of 18% for grants during both years, average risk-free
interest rate of 4% for grants during both years, expected lives of 10 years,
and a vesting period of five years. The weighted average fair value of options
granted approximated $4.58 in 2004 and $4.38 in 2003. For purposes of the pro
forma calculation, compensation expense is recognized on a straight line basis
over the vesting period. In November 2003, the FASB issued a
tentative decision related to fair value accounting of stock options requiring
that all unvested options begin being expensed in companies' 2005 financial
statements, which included guidance on how equity-based awards will be valued,
expensed, and classified. The Company anticipates that the adoption of such
decisions will have an impact on the Company's financial position or results of
operations although such impact cannot be determined at this time.
12
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations The
following discussion and analysis is presented to assist in understanding the
financial condition and results of operations of Palmetto Bancshares, Inc.
This discussion should be read in conjunction with the consolidated financial
statements and related notes and other financial data appearing in this report
as well as in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. Results of operations for the three months ended March 31, 2004
are not necessarily indicative of results that may be attained for any other
period. Percentage calculations contained herein have been calculated based
upon actual, not rounded, results. COMPANY OVERVIEW Palmetto Bancshares ("Bancshares") is a bank holding company
headquartered in Laurens, South Carolina and 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"), (collectively Palmetto Bancshares, Inc. or the "Company"), the
Company engages in the general banking business through 30 retail branch
offices in the Upstate South Carolina markets of Laurens, Greenville,
Spartanburg, Greenwood, Anderson, Cherokee, Abbeville, and Oconee counties (the
"Upstate"). The Bank was organized and chartered under South Carolina law in
1906. The industry in which the Bank
operates exists primarily to provide an intermediary service to the general
public with funds to deposit and, by using these funds, to originate loans in
the markets served. The Bank provides a full range of banking activities,
including such services as checking, savings, money market, and other time
deposits for a wide range of consumer and commercial depositors; loans for
business, real estate, and personal uses; safe deposit box rental; various
electronic funds transfer services; telephone banking; and bank card services.
The Bank's indirect lending department establishes relationships with Upstate
automobile dealers to provide customer financing on qualifying automobile
purchases, and the Bank's mortgage banking operation meets a range of its
customers' financial service needs by originating, selling, and servicing
mortgage loans. The Bank also offers both individual and commercial trust
services through an active trust department. Palmetto Capital, the brokerage
subsidiary of the Bank, offers customers stocks, treasury and municipal bonds,
mutual funds, and insurance annuities, as well as college and retirement
planning. The Company's
primary market area is the Upstate of South Carolina. FORWARD-LOOKING
STATEMENTS The Company makes forward-looking
statements (as defined
in the Private Securities Litigation Reform Act of 1995) in this report
and in other reports and proxy statements filed with the Securities and
Exchange Commission (the "SEC"). In addition, the Company's management may make
forward-looking statements orally. Broadly speaking, forward-looking statements
include, but are not limited to, projections of the Company's revenues, income,
earnings per share, capital expenditures, dividends, capital structure, or
other financial items, descriptions of plans or objectives of the Company for
future operations, products or services, forecasts of the Company's future
economic performance, and descriptions of assumptions underlying or relating to
any of the foregoing. Forward-looking statements discuss
matters that are not historical facts. Because they discuss future events or
conditions, forward-looking statements often include words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project,"
"target," "can," "could," "may," "should," "will," "would," or similar
expressions. Do not unduly rely on forward-looking statements. Such statements
give management's expectations about the Company's future and are not
guarantees. Forward-looking statements speak only as of the date they are made,
and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made to
reflect the occurrence of unanticipated events. In addition, certain statements
included in future filings of the Company with the SEC, in press releases, and
/ or in oral and written statements made by or with the approval of the
Company, which are not statements of historical fact, constitute
forward-looking statements. 13
There are several factors, many beyond
the Company's control, that could cause results to differ from expectations.
Some of these factors include, but are not limited to, Many of these factors, as well as
other factors, such as credit, market, operational, liquidity, interest rate,
and other risks, are discussed in more detail in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003. Any factor described in this
Quarterly Report on Form 10-Q or in the Company's Annual Report on Form 10-K
could by itself, or together with one or more factors, adversely affect the
Company's business, financial condition, and / or results of operations.
Additionally, there are factors that may not be described in this report that
could also cause actual results to differ from expectations. CRITICAL ACCOUNTING POLICIES The Company's accounting and financial
reporting policies are in conformity with generally accepted accounting
principles. The preparation of financial statements in conformity with such
principles requires management to make estimates and assumptions that impact
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. During
the annual financial reporting process, management, in conjunction with the
Company's independent auditors, discusses the development and selection of the
critical accounting estimates with the Audit Committee of the Company's Board
of Directors. Additionally, the Audit Committee reviews the Company's related
disclosures. The Company's significant accounting
policies are discussed in Item 7 and Note 1 of Notes to Consolidated Financial
Statements of the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. Of these significant accounting policies, the Company
considers its policies regarding the accounting for its allowance for loan
losses, pension plan, mortgage-servicing rights, and income taxes, to be its
most critical accounting policies due to the valuation techniques used and the
sensitivity of these financial statement amounts to the methods, assumptions,
and estimates underlying these balances. Accounting for these critical areas
requires a significant degree of management judgment that could be subject to
revision as current information becomes available. In order to assist in the
determination of critical accounting policies, management considers whether the
accounting estimate requires assumptions about matters that were highly
uncertain at the time the accounting estimate was made and whether different
estimates that reasonably could have been used in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, would have a material impact on the Company's financial
condition or results of operations. 14 Based on a critical assessment of its
accounting policies and the underlying judgments and uncertainties impacting
the application of these policies, management believes that the Company's
consolidated financial statements provide a meaningful and fair perspective of
the Company. This is not to suggest that other general risk factors, some of
which are described in Forward-Looking Statements, could not adversely impact
the Company's financial position and results of operations. FIRST QUARTER HIGHLIGHTS At March 31, 2004, the Company's
assets totaled $893.7 million, a decrease of $4.4 million or 0.5% from December
31, 2003. Contributing to the decrease in total assets at March 31, 2004
compared with December 31, 2003 was an increase in total loans of $13.7 million
more than offset by a decline in the investment securities available for sale
portfolio, which declined $22.6 million over the same periods. Total
liabilities decreased $7.1 million, or 0.9%, at March 31, 2004 over December
31, 2003, to a balance of $819.0 million. This decrease resulted from an
increase in traditional deposits of $7.1 million, or 0.9%, which was more than
offset by a decline in the Company's federal funds purchased position, which
declined $18.0 million to a balance of zero over the same periods. Total
deposits and other borrowings were $813.3 million at March 31, 2004 down from
$819.4 million at December 31, 2003. Total shareholders' equity at March 31,
2004 totaled $74.7 million, an increase of $2.7 million, or 3.7%, over December
31, 2003. Net income for the quarter ended March 31, 2004 increased
4.4% to $3.0 million from $2.9 million in the comparable quarter of 2003. Basic
earnings per common share increased 4.3% to $0.48 per common share for the
current quarter compared to the March 2003 quarter. On a diluted basis, earnings
per common share increased to $0.48 from $0.45 in the comparable 2003 quarter.
Net income during the March 31, 2004 quarter increased as a
result of several factors. First, on a comparative basis, the provision for
loan losses declined by $150 thousand between the quarters ended March 31, 2003
and March 31, 2004. Secondly, noninterest income increased by a total of $288
thousand as a result of increases in several components within this financial
statement line item. Services charges on deposit accounts increased $79
thousand over the quarters presented, net fees for trust and brokerage services
increased $72 thousand, and mortgage banking income increased $65 thousand over
the same periods. Although market interest rates continue to be well below historical
rates, during the first quarter of 2004, demand for new commitments related to
residential lending was substantially lower and pricing in the markets has
become more competitive, which resulted in reduced gains on sales totaling $210
thousand for the quarter ended March 31, 2004 from $339 thousand for the
quarter ended March 31, 2003. Also contributing to the Company's increased net
income for the quarter ended March 31, 2004 over the quarter ended March 31,
2003 was the Company's emphasis on the management of operating costs, which
increased only $236 thousand over the periods presented. On a comparative basis, net interest income fully taxable
equivalent increased by $15 thousand between the quarters ended March 31, 2004
and March 31, 2003. The Company's net interest margin for the first quarter of
2004 quarter declined to 4.85% compared with 5.26% during the quarter ended
March 31, 2003. Management's goal is to maintain a reasonable balance relating
to its exposure to interest rate fluctuations and resulting earnings. As such,
the Company has balanced declining yields with asset growth. 15
BALANCE
SHEET REVIEW
Securities At
March 31, 2004, the Company's investment securities available for sale
portfolio totaled $106.4 million compared with $128.9 million at December 31,
2003, a decrease of 17.5%. The composition of the investment portfolio at March
31, 2004 was as follows: agencies 10%, municipalities 51%, and mortgage-backed
securities and other securities 39%. During the first three months of 2004,
the portfolio balance was reduced supplying liquidity
to the balance sheet allowing the repayment of federal funds outstanding.
As was the case during the year ended
December 31, 2003, investment securities previously held within the agency and
treasury portfolios have continued to be realigned into the municipalities and
mortgage-backed security portfolios in order to meet interest-earning asset
growth objectives, to provide additional interest income to offset lower loan
originations, and to replace loan portfolio runoff. As a result of the recent
interest rate environment in which the Company has operated, prepayments in the
mortgage-backed securities portfolio have experienced an increasing trend. The
continued shift within the investment portfolio during the three-month period
ended March 31, 2004 also reflected the Company's goal of having a portfolio
concentrated on total return as mortgage-backed and municipals are expected to
outperform on a total return basis in a rising rate environment. Loan Portfolio At March
31, 2004, the Company had total loans outstanding, including mortgage loans
held for sale, of $713.4 million, which equaled 88% of total deposits,
including retail repurchase agreements and commercial paper, and 80% of total
assets. Total loans outstanding at December 31, 2003 totaled $699.6 million. 16 Mortgage loans held for sale were $6.4 million at March 31,
2004 compared with $6.4 million at December 31, 2003. The Bank
makes both fixed rate and adjustable rate mortgage loans with terms generally
ranging from 10 to 30 years and generally retains servicing on loans
originated. Real estate loan originations have been higher in recent years primarily due
to record low market interest rates resulting in increased refinancing
activity, although the Company has seen a decline in mortgage loan held for
sale originations in recent months. The following table reflects
the composition of the loan portfolio by loan type at March 31, 2004 and December
31, 2003 (dollars in thousands). At March 31, 2004 At December 31, 2003 Commercial
Business $ 90,418
12.9
$ 87,950
12.8 Commercial
Real Estate 433,548
62.0 420,470
61.4 Installment 20,485
2.9 22,169
3.2 Installment
Real Estate 48,152
6.9 47,560
6.9 Indirect 15,201
2.2 15,644
2.3 Credit
Line 2,043
0.3 2,071
0.3 Prime
Access 35,621
5.1 33,014
4.8 Mortgage 44,785
6.4 46,155
6.7 Bankcards 9,572
1.4 9,996
1.5 Business
Manager 2,173
0.3 2,200
0.3 Other 1,148
0.2 1,092
0.2 Gross
Loans 703,146
100.6 688,321
100.4 Allowance
for Loan Losses (7,692) -1.1 (7,463) -1.1 Loans in
Process 3,039
0.4 4,086
0.6 Deferred
Loans Fees and 814
0.1 806
0.1 Loans, net $ 699,307
100.0
$ 685,750
100.0 As reflected in the table above,
there were no significant fluctuations in the mix of the loan portfolio when
comparing balances at December 31, 2003 with those at March 31, 2004.
Management has continued its emphasis on loans secured by real estate during
the first quarter of 2004 due to the reduced amount of inherent risk within
such loans compared with those secured by collateral other than real estate or
loans that are unsecured. Additionally, as was the case during the year ended
December 31, 2003, the Company has continued to see an increase in prime access
loans over the periods presented primarily resulting from the Company's no
closing costs promotional offering for such loans. 17 At March 31, 2004 and December
31, 2003, the Bank serviced mortgage loans for others with principal balances
totaling $272.1 million and $269.9 million, respectively. Credit
Quality. A willingness to take credit risk is inherent in the
decision to grant credit. Prudent risk-taking requires a credit risk management
system based on sound policies and control processes that ensure compliance
with those policies. The Company believes it maintains a conservative
philosophy regarding its lending mix, and adherence to underwriting standards
is managed through a multi-layered credit approval process and review of loans
approved by lenders. Through loan review, reviews of exception reports, and
ongoing analysis of asset quality trends, compliance with loan policies is
managed. A loan grade classification
system is used for the Company's loan portfolio. Under this classification
system, loans graded "1" represent loans of superior quality. Loans graded "2"
represent loans of high quality. Loans graded "3" represent loans that are
satisfactory. Loans graded "4" represent loans that are considered marginal.
Problem assets are classified as "special mention," "substandard," "doubtful,"
or "loss," depending on the presence of certain characteristics. Assets determined to be problem
assets are reserved at a higher percentage in accordance with the Company's
Allowance model than assets graded superior quality, high quality,
satisfactory, or marginal, all for which general reserves are provided. General
allowances represent loss allowances, which have been established to recognize
the inherent risks associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets. At December 31, 2003, there were $4.2 million of loans
designated "special mention," $12.1 million of loans designated as
"substandard," $1.1 million of loans designated as "doubtful," and $213
thousand of loans designated as "loss." At March 31, 2004, there were $5.6
million of loans designated "special mention," $13.0 million of loans designated
as "substandard," $1.0 million of loans designated as "doubtful," and $240
thousand of loans designated as "loss." Overall, classified assets
increased $2.3 million from December 31, 2003 to March 31, 2004. Material
increases were seen in the commercial, financial, and agricultural portfolio as
well as the real estate portfolio offset slightly by a decline in the general
consumer portfolio. The 2003 calendar year was a year of considerable economic
uncertainty, nationally and in Upstate South Carolina, due in large part to the
continued uncertainty following the terrorist attacks of September 11, 2001 and
the United States' presence in Iraq. Across the Company's market, unemployment
numbers rose as businesses reacted to a weakened manufacturing sector.
Management believes that, although the economy has begun to show signs of
improvement, the residual impact of both the weakened manufacturing sector and
the increased job losses and personal bankruptcies of recent years continued to
impact the classified assets balances within both the commercial, financial,
and agricultural portfolio and the real estate portfolio during the first
quarter of 2004. The slight decline in classified assets within the general
consumer portfolio is contributed to the loan quality within the current
portfolio believed by management to contain higher-quality indirect loans than
the portfolio has seen in recent years. Management periodically reviews
its loan portfolio and has, in the opinion of management, appropriately classified
and established Allowances against all assets requiring classification under
the regulation. See Allowance for Loan Losses for additional discussion
regarding established Allowances. 18 The following table illustrates
trends in problem assets and other asset quality indicators at the dates
indicated (dollars in thousands). The quarter ended March 31, 2003 is included
as a comparison for 2004 non-annualized amounts. (1) Substantially all of these loans are credit card loans. Although the Company experienced a
decline in nonperforming loans from December 31, 2003 to March 31, 2004, there
was relatively little change in the mix. At December 31, 2003, nonperforming loans were comprised
of 71.0% of loans secured by real estate, 17.7% of commercial and industrial
loans, and 11.3% of loans to individuals for household, family, and other
personal expenditures. At March 31, 2004, nonperforming loans were comprised of
65.0% of loans secured by real estate, 24.4% of commercial and industrial loans,
and 10.6% of loans to individuals for household, family, and other personal
expenditures. Management believes the decreases of nonperforming loans over the
time periods noted are a reflection of management's more aggressive approach to
managing loans. Prior
to recent times that have experienced increased bankruptcies and job losses,
more flexibility was given for borrowers to make payments when they became
delinquent. However, in response to the current economic times in which the
Company operates, the Company has applied more strict collection policies to
such loans. When the probability of future collectibility on
nonaccrual loans declines from possible to probable, the Bank proceeds with
measures to remedy the default, including commencing foreclosure action, if
necessary. As such, synonymous with the decrease in nonaccrual loans at March
31, 2004 from December 31, 2003 is the increase in other real estate owned over
the same periods. As the probability of future collectibility on nonaccrual
loans declined from possible to probable during the first quarter of 2004, the
Bank proceeded with measures to remedy the default, through commencing
foreclosure action. Real estate and personal property acquired by the Bank as a
result of repossession, foreclosure, or by deed in lieu of foreclosure is
classified within other assets on the consolidated balance sheet until such
time that it is sold. See Other Assets for a complete discussion of this
portfolio. Of the $1.2 million added to the real estate acquired in the
settlement of loans portfolio during the first three months of 2004, $928
thousand was concentrated within two commercial real estate properties. In
accordance with the Company's policy, appraisals were obtained on both
properties at the time that they were transferred into the real estate
portfolio. Based on current information available to management at March 31,
2004, it is believed that both properties were recorded at the lower of cost or
estimated fair market value less cost to sell. Until sectors of the economy improve (employment, consumer
spending, etc.), credit quality indicators will remain volatile. While current
economic data seems to be signaling improvement, the outlook remains
uncertain. The Allowance model and the inputs required are discussed in
Allowance for Loan Losses. Assessing the adequacy of the Allowance requires
considerable judgment. Management's judgments are based on numerous assumptions
about current events, which management believes to be reasonable based on the information
available to them at the time such assumptions are made. Management believes,
however, that, although the Company has seen an increase in both nonperforming
and classified assets at March 31, 2004 from December 31, 2003, loss exposure
in the Company's loan portfolio is identified, adequately reserved in a timely
manner, and closely monitored to ensure that changes are promptly addressed in
its analysis of Allowance adequacy. Accordingly, management believes the
Allowance as of March 31, 2004 is adequate based on its assessment of probable
losses and available facts and circumstances then prevailing. Additionally,
management believes that there will always remain a core level of delinquent
loans, nonperforming assets, and classified assets from normal lending
operations. To this end, long-term Bank goals include the management of
problem assets. 19 Allowance for Loan Losses The fair value of mortgage loans
held for sale is based on prices for outstanding commitments to sell these
loans. Typically, the carrying amount approximates fair value due to the
short-term nature of these instruments. Likewise, such instruments are not
included in the assumptions related to the Allowance model. The methodology for assessing
the adequacy of the Allowance establishes both an allocated and unallocated
component. The allocated component is based principally on current loan grades
and historical loss rates. The unallocated component estimates probable losses
in the portfolio that are not fully captured in the allocated Allowance. These
analyses include, but are not necessarily limited to, industry concentrations,
model imprecision, and the estimated impact of current economic conditions on
historical loss rates. On a continual basis, management monitors trends within
the portfolio, both quantitative and qualitative, in order to assess the
reasonableness of the unallocated component. The Allowance is subject to
examination and adequacy testing by regulatory agencies. In addition, such
regulatory agencies could require Allowance adjustments based on information
available to them at the time of their examination. The Allowance totaled $7.7
million and $7.5 million, and $6.8 million, at March 31, 2004, December 31,
2003 and March 31, 2003, respectively representing 1.09%, 1.08%, and 1.05% of
total loans, less mortgage loans held for sale, for the same periods. 20 The following table sets forth
the activity in the Allowance at and for the dates indicated (dollars in
thousands). The quarter ended March 31, 2003 is included as a comparison for
2004 non-annualized amounts. Please note that losses and recoveries are charged
or credited to the Allowance at the time realized. At and for the quarters At and for the year $ $ 697,478 706,999 Total net loan charge-offs
decreased slightly to $521 thousand for the three months ended March 31, 2004
from $531 thousand for the same three month period of 2003. The decline in
charge-offs over these periods was the result of declines in net charge offs
within the one to four family residential portfolio and the commercial and
industrial portfolio offset by increases in the nonresidential mortgage
portfolio and the credit card and other consumer loan portfolios. Annualized
quarter ended March 31, 2004 net charge-offs total $2.1 million compared with
net charge-offs for the year ended December 31, 2003 of $2.5 million. When
comparing these periods decreases were experienced within the commercial and
industrial and real
estate loans secured by first liens offset by increases in other consumer net charge-offs
(other than credit cards). These fluctuations can be attributed to the low
interest rates environment, which has led to increased consumer debt incurrence
and refinancing, and the recent indication that the economy is beginning to
recover from recent uncertain times which in turn impacts job opportunities
within our communities making consumers better able to service their debt.
Based on the current economic
environment and other factors that impact the assessment of the Company's
allowance for loan losses as discussed above, management believes that the
Allowance at March 31, 2004 was maintained at a level adequate to provide for
estimated probable losses in the loan portfolio. See Loan Portfolio for
discussions of factors impacting management's assessment of the allowance for
loan losses. Although increases were experienced in both nonperforming assets
and classified assets from December 31, 2003 to March 31, 2004, management believes that loss
exposure in the Company's loan portfolio is identified, adequately reserved in
a timely manner, and closely monitored to ensure that changes are promptly
addressed in its analysis of Allowance adequacy. Accordingly, management
believes the Allowance at March 31, 2004 is adequate based on its assessment of
probable losses and available facts and circumstances then prevailing. Management's
judgments regarding Allowance model inputs, which are believed to be
reasonable, may or may not prove valid in the future. Thus, there can be no
assurance that loan losses in future periods will not exceed the current
Allowance allocation or that future increases in the Allowance will not be
required, adversely impacting the operating results of the Company. Other Assets 21 At March
31, 2004, major components of other assets included the Travelers Express
reserve totaling $1.9 million, net mortgage-servicing rights totaling $2.5
million, pension plan assets totaling $2.9 million, other real estate owned
totaling $3.2 million, and $4.1 million of intangible assets. At December
31, 2003, major components of other assets included the Travelers Express
reserve totaling $1.9 million, net mortgage-servicing rights which totaled $2.6
million, pension plan assets totaling $2.6 million, other real estate owned
totaling $2.2 million, and $4.2 million of intangible assets. In August
2002, the Bank established a reserve account with Travelers Express, its third
party official check vendor. Prior to that time, Travelers Express paid checks
and the Bank remitted the forwarded balance the following day, which resulted
in payment of one day's interest to Travelers Express on the forwarded funds.
The Company established this reserve account in order to eliminate the need for
forwarded funds thereby eliminating interest payments to Travelers Express.
See Note 2
of Notes to Consolidated Financial Statements contained herein for discussion
of the Company's mortgage-servicing rights asset. See Note 5
of Notes to Consolidated Financial Statements contained herein for discussion
of the Company's noncontributory defined benefit pension plan. Real estate acquired by the Bank
as a result of repossession, foreclosure, or by deed in lieu of foreclosure is
classified within other assets on the consolidated balance sheet until such
time that it is sold. When property is acquired, it is recorded at the lower of
cost or estimated fair market value less cost to sell at the date of
acquisition, with any resulting write downs being taken through the Allowance.
Any subsequent write downs are taken through the consolidated statement of
income. Costs relating to the development and improvement of such property are
capitalized, and costs relating to holding the property are charged to expense.
Generally, any interest accrual on such loans would have ceased when the loan
became 90 days delinquent as discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. The following table summarizes the
changes in the Bank's real estate acquired in settlement of loans portfolio, including the
balance at the beginning and end of each period, provision charged to income,
and losses charged to the Allowance (in thousands). The
quarter ended March 31, 2003 is included as a comparison for 2004
non-annualized amounts. Due to the relatively low volume of properties within the
other real estate owned portfolio, the foreclosure of new property or the sale
of an existing property can cause the balance to fluctuate substantially on a
quarterly basis. Fluctuations of these balances relate primarily to
current economic conditions, which directly impact the borrower's ability to
service their debt. Of the $1.2 million added to the real estate acquired in
the settlement of loans portfolio during the first three months of 2004, $928
thousand was concentrated within two commercial real estate properties. In accordance
with the Company's policy, appraisals were obtained on both properties at the
time that they were transferred into the real estate portfolio. Based on
current information available to management at March 31, 2004, it is believed
that both properties were recorded at the lower of cost or estimated fair
market value less cost to sell. 22 See Note 3
of Notes to Consolidated Financial Statements contained herein for discussion
of the Company's finite and infinite life intangible assets. Deposits The Company's traditional deposit
accounts increased $7.1 million during the first three months of 2004.
Management believes that conditions in fiscal 2004, 2003, and 2002 were
favorable for deposit growth as a result of factors such as the low returns on
investments and mutual funds that may have increased traditional deposit
inflows. Such favorable conditions were greater in 2002 in the wake of the 2001
terrorist attacks. As the economy started to show signs of improvement in 2003
coupled with the low interest rates offered on many deposit accounts, investors
began to regain some confidence, which is reflected by the slowing growth in
the deposit portfolio when comparing with the growth during the first three
months of 2004 to the growth during the first three months of 2003. The
Company's average cost of these traditional deposits for the quarter ended
March 31, 2004 was 1.50% compared with 1.85% for the quarter ended March 31,
2003. The average cost of traditional deposits for the year ended December 31,
2003 was 1.70%. Core deposits, which include checking accounts, money market
accounts, and savings accounts, grew by $15.6 million during the first three
months of 2004, or 3.7%, while higher costing time balances decreased by $8.5
million, or 2.4%. The decline in time balances is the result of increased
consumer confidence, which often results in consumers reallocating investments
to less conservative investment options. At March 31, 2004, total traditional
deposits as a percentage of liabilities were 95.1% compared with 93.4% at
December 31, 2003. Contributing to this increase was the decline during the
first three months of 2004 in the Company's federal funds purchased position.
See Borrowings for further discussion of this decline. The composition of the traditional deposit portfolio at
March 31, 2004 follows: time accounts 44.6%, checking accounts 38.2%, money
market accounts 11.3%, and savings accounts 5.9%. Although the
Company saw growth within the traditional deposit portfolio from December 31,
2003 to March 31, 2004, there was relatively little change in the mix of these
deposit accounts. Borrowings
Borrowings decreased $13.2 million
during the first three months of 2004 primarily resulting from the Company's
reduction of its federal funds purchase position made possible by the
liquidation of a portion of the Company's investment security portfolio. 23 Other Liabilities The
decrease in other liabilities at March 31, 2004 compared with December 31, 2003
of $875 thousand results from fluctuations in several accounts. Accrued income taxes, including both
current and deferred income taxes, increased approximately $743 thousand at
March 31, 2004 compared to December 31, 2003 based on the timing of tax
payments over the two periods. Taxes relating to the unrealized gain on investment securities available
for sale increased approximately $303 thousand due to an increase in the
unrealized gain on available for sale securities at March 31, 2004 from
December 31, 2003. Offsetting these increases was a decline in expenses accrued
but unpaid of $1.3 million between December 31, 2003 and March 31, 2004
resulting primarily from the payment of officer bonuses that were accrued at
December 31, 2003 and paid in January 2004. The majority of the remaining
fluctuation in other liabilities between December 31, 2003 and March 31, 2004
relates to decreases in mortgage lending related accounts, primarily the
mortgage-servicing clearing account, which decreased $804 thousand at March 31,
2004 from December 31, 2003. The volume of mortgage loans held for sale and
the timing of funding loans sold impact this account. Capital Resources and
Dividends During the first quarter of
2004, the dividend payout ratio was 28.9% compared with a payout ratio of 26.2%
during the same period of 2003. For the year ended December 31, 2003 the
dividend payout ratio was 29.5%. Cash dividends per share for the first quarter
of 2004 totaled $0.14, an increase of 16.7% over dividends per share for the
same quarter of 2003 of $0.12. The amount of dividends per share declared is
dependent on the Company's earnings, financial condition, capital position, and
such other factors, as the Board may deem relevant. The Company and the Bank are subject
to certain regulatory restrictions on the amount of dividends they are
permitted to pay as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
The ability of the
Company to pay dividends depends primarily on the ability of the Bank to pay
dividends to Bancshares. Palmetto
Bancshares Inc.'s book value per share was $11.92 at March 31, 2004 compared
with $11.49 at December 31, 2003 and $11.02 at March 31, 2003. Regulatory
Capital Requirements 24 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 (as defined in the regulation) to risk-weighted assets (as defined in
the regulation) and to average assets. At March 31, 2004, the Company and the
Bank were each categorized as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well 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 following table (dollars in
thousands). There have been no conditions or events of which management is
aware since March 31, 2004 that would change the Company's or Bank's
classification. For further discussion of the Bank's
and Bancshares' capital regulatory requirements, see Supervision and
Regulations contained in Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2003. Derivatives
and Hedging Activities Derivative
transactions may be used by the Company to better manage its interest rate
sensitivity to reduce risks associated with its lending, deposit taking, and
borrowing activities. The Company recognizes any derivatives as either assets
or liabilities on the consolidated balance sheets and reports these instruments
at fair value with realized and unrealized gains and losses included in either
earnings or in other comprehensive income, depending on the purpose for which
the derivative is used and whether the derivative qualifies for hedge
accounting in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative
instruments expose a Company to credit and market risk. Credit risk, the risk
that the counterparty to a derivative instrument will fail to perform, is equal
to the extent of the fair value gain in a derivative. Credit risk is created
when the fair value of a derivative contract is positive since this generally
indicates that the counterparty owes the Company. When the fair value of the
derivative contract is negative no credit risk exists since the Company would
owe the counterparty. Credit risk in derivative instruments can be minimized by
entering into transactions with high-quality counterparties as evaluated by
management. Market risk is the adverse impact on the value of a financial
instrument from a change in interest rates or implied volatility of interest
rates. Establishing and monitoring limits as to the types and degree of risk
that may be undertaken can manage market risk associated with interest rate
contracts. Any market risk associated with derivatives used for interest rate
risk management is fully incorporated into the Company's interest rate
sensitivity analysis. The only
derivative activity in which the Company engages is commitments to originate
fixed rate mortgage loans held for sale where the purchasing party undertakes
the interest rate lock risk. Accordingly, no interest rate risk is involved in
such transactions. Commitments are generally recorded at their fair value at
the date of contract. The fee collected for such commitments determines such
fair values. 25 The
Company's accounting policies related to derivative and hedging activities are
discussed in Note 1 of Notes to Consolidated Financial Statements contained
within the Company's Annual Report on Form 10-K for the year ended December 31,
2003. Off-Balance
Sheet Arrangements In the normal course of
business, the Company engages in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in
the financial statements or are recorded in amounts that differ from the
notional amounts. These transactions involve elements of credit, interest rate,
and liquidity risk. The Company uses such transactions for general corporate
purposes or for customer needs. Corporate purpose transactions are those used
to manage customers' requests for funding. The Company's off-balance sheet arrangements, which
principally include lending commitments, are described below. At March 31, 2004,
the Company had no interests in non-consolidated special purpose entities. Neither Bancshares nor the Bank is
involved in other off-balance sheet contractual relationships (other than those
discussed herein), unconsolidated related entities that have off-balance sheet
arrangements, or transactions that could result in liquidity needs. 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. The Company provides these
lending commitments to customers in the normal course of business and applies
essentially the same credit policies and standards as it does in the lending
process when making these commitments. For commercial customers, loan
commitments generally take the form of revolving credit arrangements to finance
customers' working capital requirements. For retail customers, loan commitments
are generally lines of credit secured by residential property. Unused credit
card lines are generally used for short-term borrowings. Generally, unused loan commitments are
at adjustable rates that fluctuate with the prime rate or are at fixed rates
that approximate market rates. The table set forth below illustrates
the Company's issued commitments to extend credit loan commitments and unused
credit card lines at March 31, 2004 (in thousands). Home equity loans
32,907 Credit cards
39,433 Commercial real estate development
50,491 Other unused lines of credit
32,552 Total unused commitment and unused
credit card lines 155,383 Standby letters of credit 4,137 Outstanding commitments on mortgage
loans not yet closed, the majority of which include interest rate lock
commitments, amounted to approximately $6.1 million at March 31, 2004. These
were principally single-family loan commitments. Commitments to extend credit
are agreements to lend to borrowers as long as there is no violation of any
condition established by the commitment letter. Commitments generally have
fixed expiration dates or other termination clauses. The majority of the
commitments will be funded within a 12-month period. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral held consists of
residential properties. The Company originates and services mortgage loans. All
of the Company's loan sales within the first three months of 2004 were without
provision for recourse. 26 Standby letters of credit represent an
obligation of the Company to a third party contingent upon the failure of the
Company's customer to perform under the terms of an underlying contract with
the third party, or obligates the Company to guarantee or stand as surety for
the benefit of the third party. The underlying contract may entail either
financial or nonfinancial obligations and may involve such things as the
customer's delivery of merchandise, completion of a construction contract,
release of a lien, or repayment of an obligation. Under the terms of a standby
letter of credit, generally, drafts will be drawn only when the underlying
event fails to occur as intended. The Company can seek recovery of the amounts
paid from the borrower. However, standby letters of credit are generally not
collateralized. In recent months the Company has reflected in its policy
regarding such commitments that collateral is encouraged with exceptions
requiring approvals. Commitments under standby letters of credit are usually
for one year or less. At March 31, 2004, the Company has recorded no liability
for the current carrying amount of the obligation to perform as a guarantor and
no contingent liability is considered necessary, as the Company believes the
likelihood that it will have to perform under such contracts is not likely. The
maximum potential amount of undiscounted future payments related to standby
letters of credit at March 31, 2004 was $4.1 million. Past experience indicates
that many of these standby letters of credit will expire unused. However,
through its various sources of liquidity, the Company believes that it has the
necessary resources to meet these obligations should the need arise.
Additionally, current fair values of such guarantees are deemed immaterial at
March 31, 2004. The Company originates and services
mortgage loans. Mortgage loans serviced for the benefit of others amounted to $272.1 million at March
31, 2004. Such loans totaled $269.9 million at December 31, 2003. Liquidity Proper liquidity management is
crucial to ensure that the Company is able to take advantage of new business
opportunities as well as meet the demands of its customers. In this process,
the Company focuses on assets and liabilities and on the manner in which they
combine to provide adequate liquidity to meet the Company's needs. The Bank's liquidity is impacted
by its ability to attract and retain deposit accounts, activity in and sales
from its investment security and loan portfolios, alternative sources of funds,
and current earnings. Competition for deposits is intense in the markets served
by the Company. However, the Company has been able to attract deposits as
needed through pricing adjustments, expansion of its geographic market area,
providing quality customer service, and through the Bank's reputation among the
communities it serves. The Company's 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
significantly from historical levels. The loan portfolio of the Bank is a
source of liquidity through maturities and repayments by existing borrowers.
Loan demand has been constant, and loan originations can be controlled through
pricing decisions. The investment securities portfolio is also an avenue for
liquidity through scheduled maturities, sales of investment securities, and
prepayment of principal on mortgage-backed securities. Approximately 38% of the
investment securities portfolio was pledged to secure liabilities as of March
31, 2004 as compared with 54% at December 31,2003. The Company feels the risk
that demand for the Company's products and services would reduce the
availability of cash from operations is not significant given the industry in
which the Company operates. Although rapid technological change could present
risks in this area, the Company feels as though it stays current on such
changes. To review how these and other factors have impacted liquidity, see
consolidated statements of cash flow contained herein. 27 Due to the fact that the
Company's sources of liquidity are often subject to various uncertainties
beyond its control, as a measure of protection, the Company has alternative
funding sources that have been arranged through federal funds lines at
correspondent banks and through the Federal Reserve Discount Window. At March
31, 2004, the Bank had unused short-term lines of credit totaling of $37
million. During fiscal 1999, the Federal
Home Loan Bank (the "FHLB") instituted a general policy of limiting borrowing
capacity to a percent of assets regardless of the level of advances that could
be supported by available collateral for such advances. This new policy serves
to define an upper cap for FHLB advances of approximately $89 million at March
31, 2004 based on its current approved cap. The FHLB requires that securities,
qualifying single-family mortgage loans, and stock of the FHLB owned by the
Bank be pledged to secure any advances from the FHLB. The unused borrowing
capacity currently available from the FHLB ($89 million as discussed above)
assumes that the Bank's $2.1 million investment in FHLB stock, as well as
certain securities and qualifying mortgages, would be pledged to secure any
future borrowings. The liquidity ratio is an
indication of a company's ability to meet its short-term funding obligations.
The Company's policy is to maintain
a liquidity ratio between 10% and 25%. At March 31, 2004, the Company's
liquidity ratio was 13%. Management
believes that the Company's liquidity sources during the first three months of
2004 were adequate to meet its liquidity needs and to maintain the liquidity
ratio within policy guidelines. Management's review at December
31, 2003 (which analyzes the forward-looking twelve-month period) concluded
that its sources of liquidity appeared adequate to meet operational needs and
to maintain the liquidity ratio within policy guidelines. During the first
three months of 2004, management was aware of no conditions or events that
would change this conclusion. Bancshares'
cash needs include general operating expenses and the payment of dividends and
interest on borrowings. Bancshares declared and paid cash dividends totaling
$0.14 per share during the first three months of 2004. Although there can be
no guarantee that additional dividends will be paid in 2004, the Company plans
to continue its quarterly dividend payments. 28 EARNINGS
REVIEW - COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 2004 AND 2003 Overview Average
common shares outstanding on a diluted basis were 6,365,180 for first quarter
2004, down 1.8% from 6,482,699 for first quarter 2003. Average common shares
outstanding on a basic basis were 6,264,069 for first quarter 2004, down from
6,326,698 for first quarter 2003. The Company's earnings increased during the first three
months of 2004 as compared to the same period of 2003 due to several factors.
Although the Company's net yield on interest-earning assets, fully tax
equivalent, declined to 4.85% for the first quarter of 2004 from 5.26% for the
first quarter of 2003, net interest income, fully tax equivalent, increased
slightly over the periods. Net interest income after the provision for loan losses for the three
months ended March 31, 2004 and 2003 was $9.0 million and $8.9 million,
respectively, an increase of 1.3%. Noninterest income for the three months
ended March 31, 2004 totaled $3.7 million, up 8.4% compared with $3.4 million
for first quarter 2003. Noninterest expense for the three months ended March
31, 2004 increased $236 thousand from the three months ended March 31, 2003. For the three months ended March
31, 2004 the Company reported return on average equity of 16.44% and return on
average assets of 1.37%. Net
Interest Income The Company's net yield on
interest-earning assets may be affected by many factors. Competition for
deposit funds within the Company's markets range from many well-established
national and regional banks and large credit unions to many smaller local
banks. The general level and direction of interest rates and national monetary
policy also impact consumer deposit patterns and, thus, impact the Company's
ability to utilize retail sources of funds. The following table presents
average balance sheets and a net interest income analysis on a tax-equivalent
basis for the quarters ended March 31 (dollars in thousands). 29
For the quarters ended March 31,
2004
2003
Average
Income/
Yield/
Average
Income/
Yield/
Balance
Expense
Rate
Balance
Expense
Rate ASSETS
Interest-earnings assets Federal funds
sold $
5,838 $
15
1.03 % $ 11,559
$ 35
1.23 % Federal Home
Loan Bank stock and deposits
2,606
19
2.93
2,128
23
4.38 Nontaxable
investment securities (1) (3)
54,757
751
5.52
34,357
569
6.72 Taxable
investment securities (3)
60,540
445
2.96
77,590
625
3.27 Loans, net of
unearned (2)
703,536
11,271
6.44
642,458
11,543
7.29 Total
interest-earning assets
827,277
12,501
6.08
768,092
12,795
6.76 Noninterest-earning
assets Cash and due
from banks
27,514
29,564 Allowance for
loan losses
(7,493)
(6,540) Premises and
equipment, net
21,876
19,779 Accrued
interest
3,827
4,109 Other assets
17,084
15,777 Total
noninterest-earning assets
62,808
62,689 Total assets $890,085 $830,781 LIABILITIES AND
SHAREHOLDERS' EQUITY Liabilities
Interest-bearing liabilities Demand deposits $263,526 $
225
0.34 % $240,097 $
304
0.51 % Savings
44,207
31
0.28
39,277
39
0.40 Time
349,993
2,201
2.53
331,553
2,440
2.98 Total
interest-bearing deposits
657,726
2,457
1.50
610,927
2,783
1.85 Other
interest-bearing liabilities
40,139
65
0.65
34,073
48
0.57 Total
interest-bearing liabilities
697,865
2,522
1.45
645,000
2,831
1.78 Noninterest-bearing
liabilities Noninterest-bearing
deposits
112,755
107,944 Other
noninterest-bearing liabilities
5,528
8,640 Total
noninterest-bearing liabilities
118,283
116,584 Total
liabilities
816,148
761,584 Shareholders'
equity
73,937
69,197 Total
liabilities and shareholders' equity $890,085 $830,781 NET INTEREST
INCOME (FTE) (1) / NET YIELD ON $ 9,979
4.85 % $9,964
5.26 %
INTEREST-EARNING ASSETS (FTE) Tax-equivalent
adjustment (3) $
240 $188
(1) Yields on
nontaxable securities are stated on a fully taxable equivalent basis,
using the applicable effective tax rate of 32% and 33% for
the quarters ended March 31, 2004 and 2003, respectively. The
adjustments made to convert nontaxable investments to
a fully taxable equivalent basis were $240 and $188 for the 2004 and 2003
periods, respectively. (2) Nonaccrual
loans are included in average balances for yield computations. The
effect of foregone interest income as a result of
loans on nonaccrual was not considered in the above analysis. All
loans and deposits are domestic. (3) The average
balances for investment securities include the unrealized gain or loss
recorded for available for sale securities. 30 Fully tax-equivalent net
interest income for the quarter ended March 31, 2004 increased $15 thousand, or
0.2%, to $10.0 million from the quarter ended March 31, 2003.The fully
tax-equivalent net yield on interest-earning assets decreased to 4.85% for the
quarter ended March 31, 2004 from 5.26% for the quarter ended March 31, 2003. The fact that the fully
tax-equivalent net interest income remained relatively unchanged for the
quarter ended March 31, 2004 compared with the quarter ended March 31, 2003 was
principally a result of a continuing decline in average yields on
interest-earning assets relative to the reduction in the average cost of
interest-bearing liabilities. The Company's weighted average yield on interest-earning
assets and weighted average cost of interest-bearing liabilities shown in the
previous table are derived by dividing interest income and expense by the
weighted average balances of interest-earning assets or interest-bearing
liabilities. As short-term market interest rates have declined, the Company's
interest-sensitive liabilities repriced to an average cost of 1.45% during the
first quarter of 2004 from an average cost of 1.78% during the first quarter of
2003. Average yields on interest-earning assets declined to 6.08% from 6.76%
over the same periods. The
decline of the weighted average yield on interest-earning assets during first quarter 2004 over first
quarter 2003 was primarily the result of the decreasing yields of the loan
portfolio, which was a direct result of the interest rate environment. This
decline was only partially offset by repricing deposit accounts at lower rates.
The weighted average yield of the loan portfolio decreased from 7.29% for first
quarter 2003 to 6.44% during the first quarter of 2004. The
underlying factor for the changes in the yields and rates on interest-earning
assets and interest-bearing liabilities has been the action of the Federal
Reserve Open Market Committee during the past 39 months. From January 2001
through March 2004, the Federal Reserve cut interest rates 5.50%. Variable
rate loans typically reprice immediately following changes in interest rates by
the Federal Reserve. Average
interest-earning assets grew $59.2 million, or 7.7%, to $827.3 million for
first quarter 2004 from $768.1 million for first quarter of 2003, primarily
from the growth of loans only partially offset by a decline in the Company's
average federal funds sold. Average loans, including mortgage loans held for
sale, were $703.5 million for first quarter 2004 compared with $642.5 million
for first quarter 2003. Average interest-bearing traditional deposits increased
from $610.9 million for first quarter 2003 to $657.7 million for first quarter
2004. Average other interest-bearing liabilities increased to $40.1 million
from $34.1 million over the same periods. Fluctuations in these average
balances are typically simultaneous with fluctuations in financial statement
balances as noted in respective sections of this report. Provision
for Loan Losses 31 Net charge-offs during the first
three months of 2004 totaled $521 thousand, or 0.30% of average net loans less
mortgage loans held for sale, compared with $531 thousand during the first
three months of 2003, or 0.34% of average net loans less mortgage loans held
for sale. The decline in charge-offs over the periods presented was the result
of declines experienced in net charge offs within the one to four family
residential portfolio and the commercial and industrial portfolio offset by
increases in the nonresidential mortgage portfolio and the credit card and
other consumer loan portfolios. Management credits this decline to their
efforts over recent years toward reducing the number of lower-quality loans in
the loan portfolio. As expected, as the lower quality loans seasoned, the
level of resulting charge-offs initially increased. However, as a result of
management's efforts, charge-offs within the loan portfolio have begun to
decline, as noted above, since this time. Annualized net charge-offs at March
31, 2004 total $2.1 million compared with net charge-offs for the year ended
December 31, 2003 of $2.5 million. Resulting from this recent credit quality
initiative, management believes the loans in the current portfolio to be
higher-quality loans, although a normal balance of inherent risk remains. See
Balance Sheet Review - Allowance for Loan Losses for additional information
regarding the Company's net charge-offs and discussion of such factors and their impact on the allowance
for loan losses and provision for loan losses. In addition to decreased net
charge-offs impacting the current quarter's provision for loan losses decline,
the decline in nonperforming loans also played a role in this decline. These
factors were offset slightly by the impact of the growth within the loan
portfolio over the periods as well as the increase experienced in real estate
and personal property acquired in settlement of loans and classified assets.
Management's analysis of these factors and the impact of these factors on the
allowance for loan losses and the provision for loan losses for the quarter
ended March 31, 2004 resulted in a provision for loan losses for the first
quarter of 2004 of $750 thousand. Although this provision reflects a $150
thousand decline from that booked during the first quarter of 2003, the
Allowance as a percentage of net loans less mortgage loans held for sale
increased from 1.05% at March 31, 2003 to 1.09% at March 31, 2004. Noninterest
Income and Expense The
increase in noninterest income during the quarter ended March 31, 2004 over the
quarter ended March 31, 2003 was the result of fluctuations in several
financial statement captions. Service charges on deposit accounts increased
$79 thousand, or 3.9%, over the periods noted, while net fees for trust and
brokerage services increased $72 thousand, or 12.0%. Additionally, mortgage
banking income increased $65 thousand, or 65.0% during the first quarter 2004
over the same quarter 2003. Service charges and fees on
deposit accounts comprise a significant component of other noninterest income
comprising 56.0% of noninterest income during the first quarter of 2004. This
increase can be directly attributed to the growth of deposit accounts. Also contributing
to the significance of this financial statement caption as a percentage of
noninterest income was the introduction of an automatic overdraft product
offered to certain deposit customers beginning in 2001. In conjunction with
this product, a $29.00 fee is automatically charged to the customer's account
each time an overdrawn check is written, up to a maximum overdraft amount of
$500.00. Although management has seen an increase in charge-offs related to
overdrawn accounts, the fee income generated from this product more than
compensates for those charge-off increases. It is the Company's policy to
automatically charge-off such accounts when they become 65 days past due.
Management views deposit fee income as a critical component of profitability. Periodic
monitoring of competitive fee schedules and examination of alternative
opportunities ensure that the Company realizes the maximum contribution to
profits from this area. Net fees for trust and brokerage
services include fees earned through the Bank's subsidiary, Palmetto Capital,
and the Bank's trust department. At March 31, 2004, assets under Palmetto
Capital's management totaled $123.8 million as compared to the assets under
management at March 31, 2003 of $95.4 million. At March 31, 2004, assets under
the trust department's management totaled $264.7 million as compared to the
assets under management at March 31, 2003 of $229.1 million. The increase in
fees earned correlates to the level of assets under management. 32 Mortgage banking income includes origination income,
mortgage-servicing loss (net of the related amortization for the
mortgage-servicing rights for portfolio mortgage loans), losses and recoveries
related to the impairment of mortgage-servicing rights, and gains and losses on
sales of portfolio mortgage loans. As management projected in its
Annual Report on Form 10-K for the year ended December 31, 2003, due to the
interest rate environment, the Company has experienced lower residential
mortgage production than in recent years, resulting in reduced loan sale gains.
Gains on sales of loans totaled $210 thousand for the three months ended March
31, 2004, down $129 thousand from the three months ended March 31, 2003.
Offsetting this decline in gain on sale of loans was a decline in the amortization and impairment of
mortgage-servicing rights. Amortization of mortgage-servicing rights declined
$181 thousand to $239 thousand for the three months ended March 31, 2004 over
the three months ended March 31, 2003. An impairment of mortgage-servicing
rights of $46 thousand was required for the three months ended March 31, 2003,
while no impairment was recorded during the first three months of 2004. In the more competitive
financial services market of recent years, management has recognized the importance
of controlling noninterest expense to maintain and improve profitability.
Management also recognizes that there are operational costs that continue to
increase as a result of the present operating climate for regulated financial
institutions. The technical and operating environment for financial
institutions continues to require a well-trained and motivated staff, superior
operating systems, and sophisticated marketing efforts. The
increase within noninterest expense for the three months ended March 31, 2004
from the three months ended March 31, 2003 was the result of fluctuations in
several accounts with the majority of the change accumulated within one
financial statement line item, salaries and other personnel expense, which
increased $145 thousand over the periods noted. The increase in salaries and
other personnel expense for the three months ended March 31, 2004 compared with
the same period of 2003 is due to increased expenses related to medical
insurance benefits provided to employees, life insurance premiums for executive
officers, and the Company's defined benefit pension plan. Expenses related to
employee medical insurance benefits increased $42 thousand over the first
quarter of 2003 to $324 thousand. Miscellaneous employee benefits, which
include life insurance premiums for executive officers, increased $52 thousand
over the first quarter 2003 to $126 thousand. Additionally, expenses related to
the Company's noncontributory defined benefit pension plan increased $56
thousand during the first quarter of 2004 over the same quarter of 2003.
Full-time equivalent employees at March 31, 2003 totaled 366 compared with 372
at March 31, 2004. Income
Taxes 33 ACCOUNTING AND REPORTING MATTERS The
following is a summary of recent authoritative pronouncements that could impact
the accounting, reporting, and disclosure of financial information by the
Company. In March 2004, the FASB formally proposed
to require companies to recognize the fair value of stock options and other
stock-based compensation to employees for 2005 reporting periods, a policy
consistent with the related international standard released and with
convergence between the two sets of standards. The questions proposed at this
point are how "share based payments" (to use the IASB term adopted by the FASB)
should be valued and classified and the related implementation difficulties. The exposure
draft addresses only accounting for share-based awards to employees, including
employee-stock-purchase-plans (ESPPs). Accounting for employee-stock-ownership-plan
transactions (ESOPs) and awards to nonemployees will be taken up in a later
phase of the project. Comments on the exposure draft
are due by June 30, 2004. In April 2004, a new Consensus
of the FASB's Emerging Issues Task Force ("EITF") was released that defines a
"participating security" for purposes of determining earnings per
share and provides guidance on applying the two-class method for computing
earnings per share. Some companies that issue participating securities will
report lower earnings per share under the new guidance than under previous
requirements. The Consensus requires affected companies to retroactively
restate EPS amounts presented. The Company anticipates that this Consensus
will have no impact on the Company 's financial position or results of
operations. In April 2004, a new Consensus
of the FASB's Emerging Issues Task Force was released which requires that companies
carrying debt and equity securities at amounts higher than the securities' fair
values will have to use more detailed criteria to evaluate whether to record a
loss and will have to disclose additional information about unrealized losses.
The new guidance effectively codifies the provisions of SEC Staff Accounting
Bulletin No. 59 and creates a model that calls for many judgments and
additional evidence gathering. The newly required disclosures add to those the
EITF prescribed in an earlier decision on the same issue. The impairment
accounting guidance is effective for reporting periods beginning after June 15,
2004, and the disclosure requirements for annual reporting periods ending after
June 15, 2004. The Company will comply with the requirements of this
technical literature for reporting periods and annual reporting periods ending
after June 15, 2004. Other accounting
standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the financial position or the results
of operations of the Company upon adoption. 34
Item 3. Quantitative and Qualitative
Disclosures about Market Risk Qualitative Disclosures Due to the fact that the net
interest income of any financial institution is vulnerable to fluctuations in
interest rates, the Company's management attempts to mitigate this
vulnerability through effective Asset-Liability Management. Such Asset-Liability
Management should maintain a balance between exposure to interest rate
fluctuations and earnings. The Company defines Asset-Liability Management as
the process by which the Company changes the mix, maturity, and pricing of
assets and liabilities in an attempt to reduce a materially adverse impact on
earnings resulting from the direction, frequency, and magnitude of change in
market interest rates realizing that a sudden and / or substantial fluctuation
in interest rates will impact the Company's earnings to the extent that the
interest rates on interest-earning assets and interest-bearing liabilities do
not change at the same speed, to the same extent, or on the same basis. The
Company's goal then is to minimize interest rate risk between interest-earning
assets and interest-bearing liabilities at various maturities through its
Asset-Liability Management. Through Asset-Liability Management, the Company
seeks to achieve steady growth of net interest income with an acceptable amount
of interest rate risk and sufficient liquidity. Appropriate overall balance
sheet parameters and guidelines are influenced by general economic and banking
conditions and by the Company's local market environment. Current parameters
and guidelines of the Company 's Asset-Liability Committee include maintaining
the loan to deposit ratio in a range of 75% to 90%, using an increase or
decrease of 3% in the federal funds rate over a twelve month period as a
trigger for minimizing exposure to interest rate shifts, maintaining a liquidity
ratio as defined by regulators in a range of 10% to 25%, and maintaining a
dependency ratio as defined by the regulators of 5% to 25%. It is noted that
the projected negative impact on the Company's net interest income for the
twelve-month period is not to exceed 20% although management may have to take
corrective action during a period of sharply rising or falling interest rates.
At March 31, 2004, the Company's loan to deposit ratio was 88%, which falls
within the policy's permitted range of 75% to 90%, and the Company's liquidity
ratio was 13%, which falls in the policy's permitted range of 10% to 25%. Quantitative Disclosures 35 The following table is a summary of the Company's one-year
gap (dollars in thousands): March 31, 2004 Interest-earning assets maturing or
repricing within one year Interest-bearing liabilities maturing or repricing
within one year
Cumulative gap
Gap as a percentage of total assets The above
analysis does not take i to account any prepayments on mortgages, consumer or
other loans, or securities. All maturities are stated in contractual terms. The Company's
interest-sensitive gap position, while not a complete measure of interest
sensitivity, is reviewed periodically to provide insights related to the static
repricing structure of assets and liabilities. The static gap position is
limited because it does not take into account changes in interest rates or
changes in management's expectations or intentions. Based on the Company's March 31,
2004 dynamic gap position in a one-year time period $412.6 million in
interest-earning assets will reprice and approximately $341.8 million in
interest-bearing liabilities will reprice. This current dynamic gap position
results in a positive one-year gap position of $70.8 million, or 7.92% of
assets. A negative gap indicates that cumulative interest-sensitive
liabilities exceed cumulative interest-sensitive assets and suggests that net
interest income would decline if market interest rates increased. A positive
gap suggests the reverse. This relationship is not always ensured due to the
repricing attributes of both interest-sensitive assets and interest-sensitive
liabilities. An important aspect of achieving
satisfactory net interest income is the composition and maturities of
rate-sensitive assets and liabilities. It must be understood, however, that
such an analysis is as of the date noted and does not reflect the dynamics of
the market place. Therefore, management reviews simulated earnings statements
on a monthly basis to more accurately anticipate sensitivity to changes in
interest rates. The earnings statements reviewed
monthly by management simulates the Company's consolidated balance sheets and
consolidated statements of income under several different rate scenarios over a
twelve-month period. It reports a case in which interest rates remain flat and
variations that occur when rates gradually increase and decrease in increments
of 100 basis points up to 300 basis points over the coming twelve-month period.
Computation of the possible impact of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates and loan prepayments, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Company could undertake in response to changes in interest rates. In conjunction with the annual
budgeting process for 2004, the Company projected a gradual increase in rates
rather than an immediate change. This projection was made because rates
typically change gradually over time rather than abruptly. According to the model as of the end
of the first quarter 2004, if interest rates rise by 300 basis points over the
coming twelve month period, net interest income would be adversely affected by
approximately $3.3 million, or 8.1%. This model also shows that if interest
rates rose by only 100 or 200 basis points over the coming twelve month period,
net interest income would be adversely affected by approximately $808 thousand,
or 2.0%, and $1.8 million, or 4.6%, respectively. The model also shows that if
interest rates dropped 300 basis points, net interest income would be adversely
impacted by approximately $4.1 million, or 10.1%. Similarly, if interest rates
dropped by only 100 or 200 basis points over the coming twelve month period,
net interest income would be adversely impacted by approximately $1.3 million,
or 3.1%, and $2.8 million, or 6.9%, respectively. The Asset-Liability Committee
meets weekly to address such interest-pricing issues. The projected negative
impact on the Company's net interest income for the twelve-month
period does not exceed the 20% threshold prescribed by the Asset-Liability
Committee's policy as noted previously. 36
Item 4. Controls and Procedures Evaluation of Disclosure
Controls and Procedures Changes in Internal
Controls 37
WASHINGTON, D.C. 20549
(Exact name of registrant as specified in
its charter)
Class
-----------------------------
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
10,000,000 shares; issued and
outstanding 6,265,440,
6,329,909 and 6,263,210 at March 31, 2004 and
2003
and December 31, 2003, respectively.
Notes To Consolidated Financial
Statements
Palmetto Bancshares ("Bancshares") is
a bank holding company headquartered in Laurens, South Carolina and 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"), (collectively Palmetto Bancshares,
Inc. or the "Company"), the Company engages in the general banking business
through 30 retail branch offices in the Upstate South Carolina markets of
Laurens, Greenville, Spartanburg, Greenwood, Anderson, Cherokee, Abbeville, and
Oconee counties (the "Upstate"). The Bank was organized and chartered under
South Carolina law in 1906.
The
accompanying consolidated financial statements include the accounts of Palmetto
Bancshares, Inc. In
management's opinion, all significant intercompany accounts and transactions
have been eliminated, and all adjustments necessary for a fair presentation of
the results for interim periods presented have been included. Any such
adjustments are of a normal and recurring nature. The Company
operates as one business segment, banking, which includes other financial services.
Assets held by the Company, the Bank, or Palmetto Capital in a fiduciary or
agency capacity for customers are not included in the consolidated financial
statements as such items do not represent assets of the Company, the Bank, or
Palmetto Capital.
Certain amounts previously presented in the consolidated
financial statements for
prior periods have been reclassified to conform to current classifications. All
such reclassifications had no effect on the prior years' net income or
shareholders' equity as previously reported.
The accounting and reporting policies of the Company conform
to accounting principles generally accepted in the United States of America and
to general practices within the banking industry. In preparing its consolidated
financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the dates of the consolidated balance sheets for
the periods presented. In addition, they affect the reporting amounts of income
and expense during the reporting period as of the dates of the consolidated
statements of income for the periods presented. Actual results could differ
from these estimates and assumptions. As such, the results of operations for
the three months ended March 31, 2004 are not necessarily indicative of the
results of operations that may be expected in future periods.
The Company's website, www.palmettobank.com, includes a link
to the Securities and Exchange Commission's Electronic Data Gathering,
Analysis, and Retrieval ("EDGAR") system which makes various reports filed with
the Securities and Exchange Commission, including its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Ownership
Reports filed in conjunction with Section 16, and amendments to such reports,
available, free of charge. These reports are made available as soon as
reasonably practicable after these reports are filed with, or furnished to, the
Securities and Exchange Commission. The Securities and Exchange Commission's
EDGAR database may also be accessed through its website, www.sec.gov.
The significant accounting policies used by the Company for
reporting within this quarterly report are consistent with the accounting
policies followed for annual financial reporting as described in Note 1 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
allowance, beginning of period
credited to operations
2004
2003
BASIC
Average
common shares outstanding (denominator)
DILUTED
Average
common shares outstanding
6,264,069
6,326,698
Dilutive
potential common shares
Average
diluted shares outstanding (denominator)
The Bank has a
noncontributory defined benefit pension plan that 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 or more years of service. No vesting occurs
until five years of service has been achieved. The Bank's Trust Department
administers the plan. Contributions to the plan are made as required by the
Employee Retirement Income Security Act of 1974.
At March 31, 2004, the Company had a
stock-based employee and director option plan, which are described more fully
in Note 12 of Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003. SFAS No. 123,
"Accounting for Stock-Based Compensation," allows a company to either adopt the
fair value method of valuation or continue using the intrinsic valuation method
presented under Accounting Principles Bulletin ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," to account for stock-based compensation. The
Company has elected to continue following APB Opinion 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair value-based method defined in SFAS No. 123 had
been applied. As such, no stock-based employee compensation cost has been
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the fair market value of the underlying common stock on
the date of grant.
For the quarters ended March 31,
2004
2003
Net income, as reported
3,030
2,902
Deduct: Total stock-based employee and director
Pro forma net income
Earnings per share
Basic as reported
.48
.46
Basic pro forma
.48
.45
Diluted as reported
.48
.45
Diluted pro forma
.47
.44
The primary objective of the Company
in its management of the investment portfolio is to maintain a portfolio of
high quality, highly liquid investments yielding competitive returns. These
objectives are achieved through the investment in the portfolios specifically
approved by the Board of Directors of the Company. The Company is required
under federal regulations to maintain adequate liquidity to ensure safe and
sound operations. Investment decisions are made by authorized officers of the
Company within policies established by the Company's Board of Directors. The
Company maintains investment balances based on a continuing assessment of cash
flows, the level of loan production, current interest rate risk strategies, and
the assessment of the potential future direction of market interest rate
changes. Investment securities may differ in terms of default risk, interest
risk, liquidity risk, and expected rate of return. Default risk is the risk
that an issuer will be unable to make interest payments or to repay the
principal amount on schedule. United States Government obligations are regarded
as free of default risk. The issues of most government agencies are backed by
the strength of the agency itself plus a strong implication that, in the event
of financial difficulty, the federal government would assist the agency.
General. Loans represent the most
significant component of interest-earning assets with average loans accounting
for 85.0% and 83.9% of average interest-earning assets for the three months
ended March 31, 2004 as compared with the year ended December 31, 2003. The
Bank strives to maintain a diversified loan portfolio in an effort to spread
risk and reduce exposure to economic downturns that may occur within different
segments of the economy, geographic locations, or in particular industries. The Company's loan portfolio
consists principally of commercial loans, commercial real estate loans,
consumer loans, sales finance loans, and mortgage loans. The Company
has a diversified loan portfolio, and the borrowers' ability to repay their
loans is not dependent upon any specific economic segment. The Company's
business is not dependent on any single customer or industry, or a few
customers or industries. Although the Company has the option to originate loans
outside of its home state, the Company originates the majority of its
loans in its primary market area of Upstate South Carolina. Certain risks are
inherent within any loan portfolio. For a discussion of such risks see the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
%
%
Costs
%
%
At
March 31,
At December 31,
2004
2003
2003
Nonaccrual loans
$
Total nonperforming loans
3,236
3,578
3,828
Other real estate owned
3,239
2,548
2,170
Repossessed automobiles
Total nonperforming assets
$
Loans past due 90 days and still accruing (1)
$
104
187
212
Total nonperforming loans as a percentage of
of loans (2)
0.46%
0.55
0.55
Total nonperforming assets as a percentage
of loans, other real estate owned, and repossessed
automobiles (2)
0.93
0.96
0.90
Allowance for loan losses as a
percentage of nonperforming loans
2.38x
1.89
1.95
(2) Calculated using loans, net of unearned,
excluding mortgage loans held for sale.
The Allowance is maintained at a
level that management believes is sufficient to cover inherent losses in the
loan portfolio at a specific point in time. Assessing the adequacy of the
Allowance requires considerable judgment. The adequacy of the Allowance is
analyzed on a monthly basis using an internal analysis model. For purposes of
this analysis, adequacy is defined as a level sufficient to absorb probable
losses in the portfolio. An Allowance model is used that takes into account
factors including the composition of the loan portfolio including risk grade
classifications (based on an internally developed grading system as described
in Loan Portfolio), historical asset quality trends including, but not limited
to, previous loss experience ratios, management's assessment of current
economic conditions, and reviews of specific high risk sectors of the
portfolio. Loans are graded at inception and are reviewed on a periodic basis
to ensure that assigned risk grades continue to be proper based on the
definition of such classification. The value of underlying collateral is also
considered during this analysis. The resulting monthly Allowance model and the
related conclusions are reviewed and approved by senior management. The
analysis of Allowance adequacy includes consideration for loan impairment.
ended March 31,
ended December 31,
2004
2003
2003
Allowance at beginning of period
7,463
6,402
6,402
Net charge-offs:
Loans charged-off
569
588
2,747
Less: loans recovered
521
531
2,539
Additions to reserves through provision
Allowance at end of period
Average loans excluding mortgage
loans held for sale
630,452
659,683
Loans, net of unearned, excluding
mortgage loans held for sale
646,628
693,213
Net charge-offs as a % of average loans
excluding mortgage loans held for
sale (annualized, where applicable)
0.30%
0.34
0.38
Allowance as a % of loans, net of unearned,
excluding mortgage loans held for sale
1.09
1.05
1.08
At March
31, 2004, other assets totaled $17.3 million compared with $16.1 million at
December 31, 2003, an increase of 7.7%.
At and for the quarters
At and for the year
ended March 31,
ended December 31,
2004
2003
2003
Balance, at beginning of period
$
2,170
2,468
2,468
Add: New real estate acquired in settlement of loans
1,155
169
1,595
Less: Sales of real estate acquired in settlement of loans
37
54
1,534
Less: Losses charged to the Allowance
29
35
191
Less: Provision charged to expense
Balance, at end of period
$
Retail deposits have traditionally
been the primary source of funds for the Company and also provide a customer
base for the sale of additional financial products and services. The Company
sets strategic targets for net growth in deposit accounts annually and has
directed many efforts toward cross-selling thereby increasing the products per
banking relationship. Management believes that this is consistent with the
Company's vision to provide superior customer service. During the first three
months of 2004, the Company continued to place emphasis on the growth of core
deposits.
The Company employs additional
sources, in addition to traditional deposits, to supplement its supply of
lendable funds and assist in meeting deposit withdrawal requirements. Retail
repurchase agreements, commercial paper, and federal funds purchased serve as
the Company's primary sources of such funds. The following table reflects the Company's borrowings
composition for the periods indicated (in thousands).
At March 31,
At March 31,
At December 31,
2004
2003
2003
Retail repurchase agreements
$
18,126
16,261
13,525
Commercial paper
16,339
16,965
16,170
Federal funds purchased
Total borrowings
$
At March
31, 2004, other liabilities totaled $5.8 million compared with $6.6 million at
December 31, 2003, a decline of 13.2%.
Shareholders'
equity totaled $74.7 million and $72.0 million at March 31, 2004 and December
31, 2003, respectively. Shareholders' equity as a percentage of total assets
was 8.4% at March 31, 2004 and 8.0% at December 31, 2003. During
the first three months of 2004, shareholders' equity was impacted by the
retention of earnings, by stock option activity, and by increases in
comprehensive income. Cash dividends declared and paid during the first quarter
2004 offset these increases. The consolidated statements of changes in
shareholders' equity and comprehensive income contained herein provide detail
of the changes in stockholders' equity components during the first three months
of 2004.
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 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
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
To be well
capitalized under
For capital
prompt corrective
Actual
adequacy purposes
action provisions
amount
ratio
amount
ratio
amount
ratio
At March 31, 2004
Total capital to risk-weighted assets
Company
$
76,499
10.36%
$
59,062
8.00%
N/A
N/A
Bank
76,370
10.34
59,064
8.00
$ 73,831 10.00%
Tier 1 capital to risk-weighted assets
Company
$
68,807
9.32%
$
29,531
4.00%
N/A
N/A
Bank
68,678
9.30
29,532
4.00
$ 44,298 6.00%
Tier 1 capital to average assets
Company
$
68,807
7.77%
$
35,429
4.00%
N/A
N/A
Bank
68,678
7.75
35,439
4.00
$ 44,299 5.00%
$
$
$
The term liquidity refers to the
ability of the Company to generate adequate amounts of cash to meet Company
needs. Management determines the desired level of liquidity for the Company in
conjunction with the Company's Asset-Liability Committee. The level of
liquidity is based on management's strategic direction for the Company,
commitments to make loans, and the Committee's assessment of the Company's
ability to generate funds.
Net income
for the three months ended March 31, 2004 totaled $3.0 million, up 4.4%
compared with $2.9 million for the first quarter of 2003. Earnings per diluted
share for first quarter 2004 were $0.48, a 6.7% increase from $0.45 per diluted
share in the first quarter 2003. Earnings per basic share for the first quarter
2004 were $0.48, a 4.3% increase from $0.46 per basic share for first quarter
2003.
Net interest income is the
difference between gross interest and fees on interest-earning assets,
primarily loans and investment securities, and interest paid on deposits and
other interest-bearing liabilities and represents the largest component of
earnings for the Company. The net yield on interest-earning assets measures how
effectively a company manages the difference between the yield on
interest-earning assets and the rate paid on funds to support those assets.
Fully tax-equivalent net interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis. Balances of
interest-earning assets and successful management of the net interest margin
determine the level of net interest income. Changes in interest rates earned
and paid on assets and liabilities, the rate of growth of the asset and
liability base, the ratio of interest-earning assets to interest-bearing
liabilities, and the management of interest rate sensitivity factor into
changes in net interest income.
The provision for loan losses is
a charge to earnings in a given period in order to maintain the allowance for
loan losses at an adequate level defined by the Company's Allowance model. The
provision for loan losses is adjusted each month to reflect loan growth and to
allow for loan charge-offs, recoveries, and other factors that impact
management's assessment of the adequacy of the Allowance. Management's
objective is to maintain the Allowance at an adequate level to cover probable
losses in the portfolio. Additions to the Allowance 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 consideration in estimating loan losses. The provision for loan losses
was $750 thousand and $900 thousand for the three months ended March 31, 2004
and 2003, respectively. The Allowance at the same periods was $7.7 million and
$6.8 million and represented 1.09% and 1.05% of loans less mortgage loans held
for sale.
Noninterest
income for the three months ended March 31, 2004 totaled $3.7 million, up 8.4%
compared with $3.4 million for first quarter 2003. Noninterest expense for the
three months ended March 31, 2004 increased $236 thousand from the three months
ended March 31, 2003.
Income tax
expense attributable to income from continuing operations totaled $1.4 million
for both the first quarter 2004 and the first quarter 2003. The effective
income tax rate was 32% for first quarter 2004 and 33% for first quarter 2003.
Market risk is the risk of loss
from adverse changes in market prices and rates. The Company's market risk
arises principally from interest rate risk inherent in its lending, deposit,
borrowing, and investing activities that could potentially reduce net interest
income in future periods. This risk can also be reflected in diminished current
market values. Management actively monitors and manages its inherent rate risk
exposure. Although the Company manages other risks, such as credit and
liquidity risk, in the normal course of business, management considers interest
rate risk to be its most significant market risk. This risk could potentially
have the largest material effect on the Company's financial condition and
results of operations. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company's business activities.
One tool the Company utilizes in
assessing Asset-Liability Management is a simulation model used to analyze
interest sensitivity gap (the difference between the amount of rate sensitive
assets maturing or repricing within a specific time period and the amount of
rate sensitive liabilities maturing or repricing within the same time period). The Company's rate sensitive assets
are those repricing within one year and those maturing within one year. Rate
sensitive liabilities include insured money market accounts, savings accounts,
interest-bearing transaction accounts, time deposits and borrowings.
$ 412,619
341,819
$
70,800
7.92 %
An evaluation of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) under the Securities Exchange Act of 1934) was carried out under the
supervision and with the participation of Bancshares' Chairman and Chief
Executive Officer and the Bank's Chairman and Chief Executive Officer (Chief
Accounting Officer) and several other members of the Company's senior
management as of the end of the period covered by this Quarterly Report (the
"Evaluation Date"). Bancshares' Chairman and Chief Executive Officer and the
Bank's Chairman and Chief Executive Officer (Chief Accounting Officer)
concluded as of the Evaluation Date that the Company's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 is (i) accumulated and communicated to the
Company's management (including Bancshares' Chairman and Chief Executive
Officer and the Bank's Chairman and Chief Executive Officer (Chief Accounting
Officer)) in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
During the first quarter of
2004, the Company did not make any changes in its internal control over
financial reporting or other factors that have materially affected, or are
reasonably likely to materially affect, that control.
PART II. OTHER
INFORMATION
The Company is currently subject to various legal proceedings and claims that have arisen in the ordinary course of its business. In the opinion of management based on consultation with external legal counsel, any reasonably foreseeable outcome of such current litigation would not materially affect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
None
Item 6. Exhibits and Reports on Form 8‑K
(a) Exhibits
31.1 L. Leon Patterson's
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Paul W. Stringer's
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 13, 2004, the Company filed a Form 8-K announcing the earnings release dated January 8, 2004, which included selected financial data for the quarter ended December 31,2003 and for select other previously reported periods.
38
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PALMETTO BANCSHARES, INC.
By:
/s/ L. Leon
Patterson
L. Leon Patterson
Chairman and Chief Executive
Officer
Palmetto Bancshares, Inc.
/s/ Paul W. Stringer
Paul W. Stringer
Chairman and Chief Executive
Officer
(Chief Accounting Officer)
The Palmetto Bank
Date: May 10, 2004
39
Exhibit 31.1
CERTIFICATION
I, L. Leon Patterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Palmetto Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 10, 2004
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
Palmetto Bancshares, Inc.
Exhibit 31.2
CERTIFICATION
I, Paul W. Stringer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Palmetto Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 10, 2004
/s/ Paul W. Stringer
Paul W. Stringer
Chairman and Chief Executive Officer
(Chief Accounting Officer)
The Palmetto Bank
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER OF PALMETTO BANCSHARES, INC. PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned, as the chief executive officer and chief accounting officer of Palmetto Bancshares, Inc., certify that the Quarterly Report on Form 10-Q for the period ended March 31, 2004, which accompanies this certification, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Palmetto Bancshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and no purchaser or seller of securities or any other person shall be entitled to rely upon the foregoing certification for any purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
By:
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
Palmetto Bancshares, Inc.
/s/ Paul W. Stringer
Paul W. Stringer
Chairman and Chief Executive Officer
(Chief Accounting Officer)
The Palmetto Bank
Date: May 10, 2004