-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
GZloYMeeDcTDMoTVWCi18lTpxjNduzRh3NIZNfRc9OLiXK8un7XKRGMQSY0vwYVy
a3Im5f3S+0ySBBdqUAmyIQ==
U. S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended September 30, 2007
OR
( )
For the transition period from __________ to __________
Commission file number 0-26016
PALMETTO BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
74-2235055
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
301 Hillcrest Drive, Laurens, South Carolina
(Address of principal executive offices)
(Zip Code)
(864) 9844551
www.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 a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
-------------------------------
Common stock, $5.00 par value
6,400,260
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1.
3
Item 2.
Management's Discussion and Analysis of Financial Condition and
23
Results of Operations
Item 3.
51
Item 4.
52
PART II - OTHER INFORMATION
Item 1.
53
54
2 PART I - FINANCIAL INFORMATION
PALMETTO
BANCSHARES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(dollars in
thousands, except common and per share data)
September 30,
December 31,
2007
2006 (unaudited) Assets
Cash and cash equivalents
Cash and due from banks
$ 31,076
43,084
Federal funds sold
4,188
3,582
Total cash and cash equivalents
35,264
46,666
Federal Home Loan Bank ("FHLB") stock, at cost
3,157
2,599
Investment securities available for sale, at fair market
value 96,287
116,567
Mortgage loans held for sale
1,435
1,675
Loans
1,005,872
945,913
Less: allowance for loan losses
(8,280)
(8,527)
Loans, net
997,592
937,386
Premises and equipment, net
24,476
24,494
Goodwill
3,691
3,691
Other intangible assets
90
126
Accrued interest receivable
6,421
6,421
Other
20,437
13,511
Total assets
$ 1,188,850
1,153,136
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing
$ 136,990
133,623
Interest-bearing
859,505
859,958
Total deposits
996,495
993,581
Retail repurchase agreements
10,130
14,427
Commercial paper (Master notes)
30,636
20,988
Other short-term borrowings
33,000
6,000
Long-term borrowings
-
10,000
Accrued interest payable
1,518
1,584
Other
8,140
6,180
Total liabilities
1,079,919
1,052,760
Commitments and contingencies (Note 14)
Shareholders' Equity
Common stock - par value $5.00 per share; authorized
10,000,000
shares; issued and outstanding 6,400,260 and 6,367,450
at September 30, 2007 and December 31, 2006, respectively 32,001
31,837
Capital surplus
1,527
1,102
Retained earnings
76,211
68,132
Accumulated other comprehensive loss, net of tax
(808)
(695)
Total shareholders' equity
108,931
100,376
Total liabilities and shareholders' equity $ 1,188,850
1,153,136
See Notes to
Consolidated Interim Financial Statements.
3
PALMETTO
BANCSHARES, INC. AND SUBSIDIARY
Consolidated
Statements of Income
(dollars in
thousands, except common and per share data)
For the three
month periods ended September 30,
2007
2006
(unaudited)
Interest income
Interest and fees on loans
$ 20,012
18,033
Interest on investment securities available for sale:
Government-sponsored enterprises (taxable) 322
458
State and municipal (nontaxable)
464
512
Mortgage-backed securities (taxable) 299
212
Interest on federal funds sold
149
317
Dividends on FHLB stock
47
45
Total interest income
21,293
19,577
Interest expense
Interest on deposits
7,663
6,680
Interest on retail repurchase agreements
149
213
Interest on commercial paper
312
247
Interest on other short-term borrowings
414
5
Interest on long-term borrowings
-
97
Total interest expense
8,538
7,242
Net interest income
12,755
12,335
Provision for loan losses
400
275
Net interest income after provision for loan losses 12,355
12,060
Noninterest income
Service charges on deposit accounts
2,001
1,995
Fees for trust and brokerage services
736
817
Mortgage-banking income
468
182
Investment securities gains
-
-
Other
1,407
810
Total noninterest income
4,612
3,804
Noninterest expense
Salaries and other personnel
7,040
5,772
Occupancy
375
398
Premises, furniture, and equipment leases and rentals 321
341
Premises, furniture, and equipment depreciation 492
506
Other furniture and equipment
482
473
Loss on disposition of premises, furniture, and equipment
346
-
Marketing
208
479
Amortization of core deposit intangibles
12
12
Other
2,115
2,044
Total noninterest expense
11,391
10,025
Net income before provision for income taxes 5,576
5,839
Provision for income taxes
1,680
2,038
Net income
$ 3,896
3,801
Common and per share data
Net income - basic
$ 0.61
0.60
Net income - diluted
0.60
0.59
Cash dividends
0.19
0.18
Book value
17.02
15.29
Weighted average common shares outstanding - basic 6,392,721
6,356,656
Weighted average common shares outstanding - diluted 6,500,962
6,432,546
See Notes to
Consolidated Interim Financial Statements. 4
PALMETTO BANCSHARES,
INC. AND SUBSIDIARY
Consolidated
Statements of Income
(dollars in
thousands, except common and per share data)
For the nine
month periods ended September 30,
2007
2006
(unaudited) Interest income
Interest and fees on loans
$ 58,079
51,601
Interest on investment securities available for sale:
Government-sponsored enterprises (taxable) 1,138
1,497
State and municipal (nontaxable)
1,340
1,505
Mortgage-backed securities (taxable) 908
644
Interest on federal funds sold
600
903
Dividends on FHLB stock
122
144
Total interest income
62,187
56,294
Interest expense
Interest on deposits
22,327
17,943
Interest on retail repurchase agreements
425
564
Interest on commercial paper
839
591
Interest on other short-term borrowings
497
119
Interest on long-term borrowings
173
479
Total interest expense
24,261
19,696
Net interest income
37,926
36,598
Provision for loan losses
1,200
1,325
Net interest income after provision for loan losses 36,726
35,273
Noninterest income
Service charges on deposit accounts
5,900
6,023
Fees for trust and brokerage services
2,258
2,445
Mortgage-banking income
987
679
Investment securities gains
-
3
Other
3,164
2,533
Total noninterest income
12,309
11,683
Noninterest expense
Salaries and other personnel
19,234
17,256
Occupancy
1,124
1,152
Premises, furniture, and equipment leases and rentals 946
987
Premises, furniture, and equipment depreciation 1,478
1,528
Other furniture and equipment
1,385
1,408
Loss on disposition of premises, furniture, and equipment
346
-
Marketing
695
1,217
Amortization of core deposit intangibles
36
36
Other
6,160
6,592
Total noninterest expense
31,404
30,176
Net income before provision for income taxes 17,631
16,780
Provision for income taxes
5,909
5,598
Net income
$ 11,722
11,182
Common and per share data
Net income - basic
$ 1.84
1.76
Net income - diluted
1.81
1.74
Cash dividends
0.57
0.54
Book value
17.02
15.29
Weighted average common shares outstanding - basic 6,385,625
6,351,646
Weighted average common shares outstanding - diluted 6,484,293
6,427,536
See Notes to
Consolidated Interim Financial Statements.
5
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income
(dollars in thousands, except common and per share
data)
(unaudited)
Accumulated
Shares of
other
common
Common
Capital
Retained
comprehensive
stock
stock
surplus
earnings
gain(loss), net
Total
Balance at December 31, 2005
6,331,335
$
31,656
$
659
$
57,532
$
(906)
$
88,941
Net income
11,182
11,182
Other comprehensive income,
net of tax:
Unrealized holding gains
arising during period, net
of tax effect of
$26
42
Plus: reclassification
adjustment included
in net income, net
of tax effect of $1
(2)
Net unrealized gains on
securities
40
Comprehensive income
11,222
Cash dividend declared and
paid ($0.54 per share)
(3,431)
(3,431)
Compensation expense related
to stock options
99
99
Exercise of stock options
25,450
128
228
356
Balance at September 30,
2006
6,356,785
$
31,784
$
986
$
65,283
$
(866)
$
97,187
Balance at December 31, 2006
6,367,450
$
31,837
$
1,102
$
68,132
$
(695)
$
100,376
Net income
11,722
11,722
Other comprehensive income,
net of tax:
Unrealized holding losses arising during period, net
of tax effect of
$71
(113)
Plus: reclassification
adjustment included
in net income, net
of tax effect of $0
-
Net unrealized losses on
securities
(113)
Comprehensive income
11,609
Cash dividend declared and
paid ($0.57 per share)
(3,643)
(3,643)
Compensation expense related
to stock options
99
99
Exercise of stock options
32,810
164
326
490
Balance at September 30,
2007
6,400,260
$
32,001
$
1,527
$
76,211
$
(808)
$
108,931
See Notes to Consolidated Interim Financial
Statements.
6
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
For the nine month periods ended September 30,
2007
2006
(unaudited)
Cash flows from operating
activities
Net income
$
11,722
11,182
Adjustments to reconcile net
income to net cash
provided by operating
activities
Depreciation, amortization,
and accretion, net
1,687
1,562
Investment securities gains
-
(3)
Provision for loan losses
1,200
1,325
Origination of mortgage
loans held for sale
(48,991)
(28,721)
Proceeds from sale of
mortgage loans held for sale
49,832
32,578
Gain on sale of mortgage
loans
(614)
(370)
Compensation expense related
to stock options granted
99
99
Loss on disposition of
premises and equipment
346
-
Loss on disposition of real estate acquired in
settlement of loans
545
1,337
Increase of other assets,
net
(982)
(962)
Increase (decrease) of other
liabilities, net
1,965
(642)
Net cash provided by
operating activities
16,809
17,385
Cash flows from investing
activities
Purchase of investment
securities available for sale
(23,979)
(14,832)
Maturities, redemption,
calls, and principal repayment of investment securities available for sale
43,902
17,223
Proceeds from sales of
investment securities available for sale
-
4,131
Redemption of FHLB stock
72
1,345
Purchase of FHLB stock
(630)
(158)
Origination of loans, net
(67,508)
(65,210)
Proceeds on sale of real estate acquired in
settlement of loans
(374)
(1,150)
Purchases of premises and
equipment
(1,806)
(3,183)
Net cash used in investing
activities
(50,323)
(61,834)
Cash flows from financing
activities
Deposits, net
2,914
76,274
(Decrease) increase of
retail repurchase agreements, net
(4,297)
740
Increase in commercial
paper, net
9,648
3,972
Increase (decrease) of other
short-term borrowings, net
27,000
(17,900)
Repayment of long-term
borrowings
(10,000)
(13,000)
Other common stock activity
490
356
Cash dividends paid on
common stock
(3,643)
(3,431)
Net cash provided by
financing activities
22,112
47,011
Net increase (decrease) of
cash and cash equivalents
(11,402)
2,562
Cash and cash equivalents,
beginning of the period
46,666
37,976
Cash and cash equivalents,
end of the period
$
35,264
40,538
Supplemental Cash Flow Data
Cash paid during the period
for:
Interest expense
$
24,327
19,457
Income taxes
6,018
5,925
Significant noncash
investing and financing activities
(Decrease) increase of
unrealized loss on investment securities available for sale, pretax
$
184
(67)
Loans transferred to real estate acquired in
settlement of loans, at fair market value
6,115
154
See Notes to Consolidated Interim Financial
Statements.
7
PALMETTO
BANCSHARES, INC. AND SUBSIDIARY
Notes To Consolidated
Interim Financial Statements
(unaudited)
1. Summary
of Significant Accounting Policies The significant accounting policies followed by the Company
for interim financial reporting are consistent with the accounting policies
followed for annual financial reporting. The unaudited Consolidated
Interim Financial Statements and footnotes are presented in accordance with the
instructions for the Quarterly Report on Form 10-Q. The information
contained in the footnotes included in the Companys latest Annual Report on
Form 10-K should be referred to in connection with the reading of these
unaudited Consolidated Interim Financial Statements.
Principles of Consolidation
The accompanying Consolidated
Financial Statements include the accounts of Palmetto Bancshares, Inc. (the
Company), which includes its wholly owned subsidiary, The Palmetto Bank (the
Bank), and the Bank's wholly owned subsidiary, Palmetto Capital, Inc.
("Palmetto Capital"). In managements opinion, all significant intercompany accounts and
transactions have been eliminated in consolidation, and all adjustments
necessary for a fair presentation of the financial condition and results of
operations for periods presented have been included. Any such adjustments are
of a normal and recurring nature. Assets held by the Company or its
subsidiary in a fiduciary or agency capacity for customers are not included in
the Companys Consolidated Financial
Statements as such items do not represent assets of the Company or its
subsidiary.
Use of Estimates
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, the Companys
management makes estimates and assumptions that impact the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the Consolidated Financial Statements for the periods
presented. Actual results could differ from these estimates and
assumptions. As such, the results of operations for the three and nine month
periods ended September 30, 2007 are not necessarily indicative of the results
of operations that may be expected in future periods. Reclassifications
Certain amounts previously presented in the Companys Consolidated Financial Statements for
prior periods have been reclassified to conform to current classifications.
All such reclassifications had no impact on prior period net income or retained
earnings as previously reported. During the second half of 2006, the Company made the
following reclassifications in the Consolidated Statements of Income: 8 The following table summarizes the Companys Consolidated Statements
of Income for the three and nine month periods ended September 30, 2006 as
reported prior to these reclassifications (in thousands).
For the three
For the nine
month period ended
month period ended
9/30/2006
9/30/2006 Noninterest income Service charges on deposit accounts $ 2,228 6,333 Fees for trust and brokerage services 817 2,445 Mortgage-banking income 182 679 Investment securities gains - 3 Other 909 2,738 Total noninterest income 4,136 12,198 Noninterest expense Salaries and other personnel 5,772 17,256 Net occupancy 733 2,124 Furniture and equipment 986 2,952 Marketing and advertising 488 1,284 Postage and supplies 350 1,086 Telephone 180 575 Professional services 210 690 Other 1,638 4,724 Total noninterest expense 10,357 30,691 Net noninterest expense $ 6,221 18,493
Intangible Assets
Intangible assets, included in Other Assets on the Consolidated
Balance Sheets, include goodwill and other identifiable assets, such as
customer lists, resulting from acquisitions. Goodwill, in this context, is the
excess of the purchase price in an acquisition transaction over the fair market
value of the net assets acquired. Customer list intangibles are amortized on a
hybrid double-declining, straight-line basis over such assets estimated useful
life. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill is not amortized but is tested annually for impairment or at any time
an event occurs, or circumstances change, that may trigger a decline in the
value of the reporting unit. Such impairment testing calculations include
estimates. Furthermore, the determination of which intangible assets have
finite lives is subjective as is the determination of the amortization period
for such intangible assets. The Company tests for goodwill impairment by
determining the fair market value for each reporting unit and comparing the
fair market value to the carrying amount of the applicable reporting unit. If
the carrying amount exceeds fair market value, the potential for impairment
exists, and a second step of impairment testing is performed. In the second
step, the fair market value of the reporting units goodwill is determined by
allocating the reporting units fair market 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 market value of reporting unit goodwill is less than its carrying
amount, goodwill is impaired and is written-down to its fair market value. The
loss recognized is limited to the carrying amount of goodwill. Once an
impairment loss is recognized, future increases in fair market value will not
result in the reversal of previously recognized losses. The Company performs
its annual impairment testing as of June 30 by applying the above process to
its reportable operating segment of banking. The Companys impairment testing
as of June 30, 2007 indicated that no impairment charge was required as of that
date. See Note 7 for further discussion regarding the Companys
intangible assets.
Recently Issued Accounting Pronouncements
The Company is aware of no
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that are applicable to the Companys business.
Recently Adopted Accounting Pronouncements
Accounting standards issued by the FASB or other
standards-setting bodies may have become effective during the period covered by
this report but were determined not to be applicable to the Companys business
and, therefore, did not have a material impact on the Companys financial
position, results of operations or cash flows.
9
2. Cash and Cash
Equivalents The following table summarizes the composition of cash and cash
equivalents at the dates indicated (in thousands).
September 30,
December 31,
2007
2006 Cash working funds $ 7,994 9,190 Noninterest-earning demand deposits in other banks 14,842 23,511 In-transit funds 8,240 10,383 Interest-earning federal funds sold 4,188 3,582 Total cash and cash equivalents $ 35,264 46,666 The following table summarizes
federal funds sold information, all of which were obtained through the
correspondent banks, at and for the
periods indicated (dollars in thousands).
At and for the three month
At and for the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Interest-earning federal funds sold Amount outstanding at period end $ 4,188 6,662 4,188 6,662 Average amount outstanding during period 10,117 23,083 15,517 23,941 Maximum amount outstanding at any period end 10,254 29,571 33,840 29,571 Rate paid at period end 4.64 % 5.34 4.64 5.34 Weighted average rate paid during the period 5.84 5.45 5.17 5.04 The Company is required to maintain average reserve balances computed by applying prescribed percentages to its various types of deposits. At September 30, 2007, the Federal Reserve required that the Company maintain $9.6 million in reserve balances. Due to the Companys levels of vault cash, no reserves were required to be maintained with Bank of America, however, $1.0 million was required to be maintained with the Federal Reserve Bank of Richmond.
3. Investment
Securities Available for Sale The following tables summarize the amortized cost, gross unrealized
gains, gross unrealized losses, and fair market values of investment securities
available for sale at the dates indicated (in thousands).
September 30, 2007
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
market
value Government-sponsored enterprises $ 20,702 60 (20) 20,742 State and municipal 52,763 18 (1,029) 51,752 Mortgage-backed 24,136 16 (359) 23,793 Total investment securities available for sale $ 97,601 94 (1,408) 96,287
December 31, 2006
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
market
value Government-sponsored enterprises $ 42,554 - (171) 42,383 State and municipal 48,780 56 (822) 48,014 Mortgage-backed 26,362 72 (264) 26,170 Total investment securities available for sale $ 117,696 128 (1,257) 116,567
10
The following table summarizes the gross unrealized losses, fair market value,
and the number of securities in each category of investment securities available
for sale, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at September 30,
2007 and December 31, 2006 (dollars in thousands)
September 30, 2007
Less than 12 months
12 months or longer
Total
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
Government-sponsored enterprises
-
$
-
$
-
1
3,469
20
1
3,469
20
State and municipal
22
8,038
120
101
39,078
909
123
47,116
1,029
Mortgage-backed
3
6,949
85
22
12,389
274
25
19,338
359
Total investment securities
available for sale
25
$
14,987
$
205
124
54,936
1,203
149
69,923
1,408
December 31, 2006
Less than 12 months
12 months or longer
Total
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
Government-sponsored enterprises
3
$
2,980
$
3
10
39,402
168
13
42,382
171
State and municipal
10
4,898
52
91
34,437
770
101
39,335
822
Mortgage-backed
-
-
-
30
16,327
264
30
16,327
264
Total investment securities
available for sale
13
$
7,878
$
55
131
90,166
1,202
144
98,044
1,257 Management believes that the above summarized unrealized
losses are due to interest rate changes, rather than credit quality, on
investments that the Company classifies to indicate that sale is a possibility
but also for which the Company has the ability to hold until maturity. If
liquidity is needed, the Company does not automatically chose an impaired or
the most impaired security to sell to provide needed liquidity, but rather
considers many factors including, but not limited to, asset liability
management. Since the Company has the ability and intent to hold these
investments until a market price recovery or maturity, management does not
consider these investments to be other-than-temporarily impaired. The following table summarizes the percentage of the
applicable investment segments of the investment securities available for sale
by Moodys credit ratings based on fair market value at September 30, 2007.
State and
Mortgage-
municipal
backed A1 1 % A3 2 - Aa1 4 - Aaa 77 100 Not rated 16 - Total 100 % 100 Of the state and municipal investment securities not rated
by Moodys at September 30, 2007, 97% of the securities were rated AAA by
Standard and Poors while 3% were rated AA+. The following tables summarize the gross realized gains and losses of
investment securities available for sale at the dates indicated (in thousands).
For the three month
For the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Realized gains $ - - - 25 Realized losses - - - (22) Net unrealized gains (losses) $ - - - 3 Public funds are bank deposits
of state and local municipalities and typically require that the Bank pledge
investment grade securities to the accounts to ensure repayment. Approximately
82% of the investment securities portfolio was pledged to secure public
deposits as of September 30, 2007 as compared with 62% at December 31, 2006 and
60% at September 30, 2006.
Concentrations of Credit Risk. The Companys investment portfolio consists principally of
securities issued by government-sponsored enterprises, and securities issued by
states and municipalities within the United States. The Company has
concentrations in securities issued by government-sponsored enterprises,
defined as securities of issuers
that, in the aggregate, exceed ten percent of shareholders equity, at
September 30, 2007. Although most government sponsored enterprises
securities are not backed by the full faith and credit of the federal
government, the Company believes that such securities have negligible credit
risk. Because of the importance of the agencies in promoting public policy, the
Company believes that the federal government would prevent a government
sponsored enterprises from defaulting on its debt obligations. As a result,
management believes that such securities provide enjoy what is commonly
described as an implied guarantee.
11
4. Loans
The following table summarizes
loans, by loan purpose, excluding those mortgage loans held for sale, by
classification at the dates indicated (dollars in thousands).
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Commercial business $ 130,292 13.0 % 112,264 12.0 Commercial real estate 626,555 62.7 593,377 63.2 Installment 24,213 2.4 22,139 2.4 Installment real estate 71,679 7.2 66,161 7.0 Indirect 41,824 4.2 43,634 4.6 Credit line 1,943 0.2 1,982 0.2 Prime access 51,906 5.2 53,883 5.7 Residential mortgage 39,956 4.0 35,252 3.7 Bankcards 11,841 1.2 11,813 1.3 Business manager 336 - 370 - Other 1,607 0.2 1,793 0.2 Loans, unadjusted gross 1,002,152 100.3 942,668 100.3 Loans in process 2,922 0.3 2,587 0.3 Deferred loans fees and costs 798 0.1 658 0.1 Loans, adjusted gross 1,005,872 100.7 945,913 100.7 Mortgage loans held for sale 1,435 0.1 1,675 0.2 Total loans, gross 1,007,307 100.8 947,588 100.9 Allowance for loan losses (8,280) (0.8) (8,527) (0.9) Total loans, net $ 999,027 100.0 % 939,061 100.0 Loans included in the table are
net of participations sold and mortgage loans sold and serviced for others.
Mortgage loans serviced for the benefit of others amounted to $339.4 million,
$325.1 million, and $310.0 million at September 30, 2007, December 31, 2006,
and September 30, 2006, respectively. See
Note 6 for further discussion regarding the Companys mortgage-servicing rights portfolio. Net
gains on the sale of mortgage loans included in Mortgage Banking Income in the
Companys Consolidated Statements of Income totaled $279 thousand and $80
thousand for the three month periods ended September 30, 2007 and 2006,
respectively. Net gains on the sale of mortgage loans totaled $614 thousand and
$370 thousand for the nine month periods ended September 30, 2007 and 2006,
respectively. The following table summarizes nonaccrual loans and loans past due 90
days and still accruing interest at the dates indicated (in thousands).
September 30,
December 31,
September 30,
2007
2006
2006 Nonaccrual loans $ 7,043 6,999 6,921 Loans past due 90 days and still accruing (1) 210 260 94 $ 7,253 7,259 7,015 (1) Substantially all of these loans are bankcard loans
12 The following table summarizes the activity impacting the
allowance for loan losses (Allowance) for the periods indicated (in
thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Allowance, beginning of period $ 8,515 8,879 8,527 8,431 Provision for loan losses 400 275 1,200 1,325 Loans charged-off (706) (454) (1,696) (1,166) Loan recoveries 71 24 249 134 Net loans charged-off (635) (430) (1,447) (1,032) Allowance, end of period $ 8,280 8,724 8,280 8,724 Troubled debt restructurings entered into by the Company
during the three month periods ended September 30, 2007 were reviewed by the
Company to ensure loan classifications were in accordance with applicable
regulations. Any specific allocations identified during the review based on
probable losses have been included in the Companys Allowance for the
applicable period. The Company makes contractual
commitments to extend credit that are legally binding agreements to lend money
to customers at predetermined interest rates for a specific period of time.
The Company also provides standby letters of credit. See Note 14 for further discussion regarding the Companys
commitments. At September 30, 2007, of its approximately $95.3 million
qualifying loans available to serve as collateral against borrowings and
letters of credit from the FHLB, the Company pledged as collateral $93.0
million.
5. Premises
and Equipment, Net
The following table summarizes the Companys premises and
equipment balances at the dates indicated (in thousands).
September 30,
December 31,
2007
2006 Land $ 6,761 6,305 Buildings 17,809 17,124 Leasehold improvements 2,156 2,847 Furniture and equipment 17,799 17,762 Software 3,260 3,194 Bank automobiles 909 859 Premises and equipment, gross 48,694 48,091 Accumulated depreciation and amortization (24,218) (23,597) Premises and equipment, net $ 24,476 24,494 At September 30, 2007, the Company had thirty-two
full-service banking offices in the Upstate region of South Carolina in the
following counties: Laurens County (4), Greenville County (10), Spartanburg
County (6), Greenwood County (5), Anderson County (3), Cherokee County (2),
Pickens County (1), and Oconee County (1) in addition to two Palmetto Capital
offices independent of banking office locations, 39 automatic teller machine
(ATM) locations (including nine in nonbanking office locations), and five
limited service banking offices located in retirement centers in the Upstate.
One principal banking office is located in each of the following counties:
Laurens, Greenville, Spartanburg, Greenwood, and Anderson. During the first nine months of 2007, the Bank completed its
purchase of real estate on which to construct and relocate its existing
Pendleton banking office in Anderson County. Ground was broken on this site in
July 2007. Additionally, during the first nine months of 2007, the Bank
completed the renovation of its Montague banking office in Greenwood County,
completed the upfit of, and relocated to, its temporary downtown Greenville
banking office to be used during the construction of the Companys new
corporate headquarters, added a new nonbanking office ATM location at Batesville
Plaza Shopping Center in Greenville County, and executed a ground lease
contract for a nonretail office ATM location at Woodmont Village Shopping
Center on Highway 25 in Moonville, South Carolina. The Company plans to have
this location in service by January 2008.
13 The table set forth below summarizes the activity impacting
accumulated depreciation for the periods indicated (in thousands). Depreciation
balances were impacted during the period by the activity discussed herein.
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Accumulated depreciation, beginning of period $ 24,510 22,710 23,597 21,759 Depreciation Buildings 141 111 361 344 Leasehold improvements 26 42 99 124 Furniture and equipment 234 247 717 743 Software 47 62 163 197 Bank automobiles 44 44 138 120 Total depreciation 492 506 1,478 1,528 Disposals (784) (119) (857) (190) Accumulated depreciation, end of period $ 24,218 23,097 24,218 23,097 The table set forth below summarizes the premises and
equipment written-off during the third quarter (in thousands) in conjunction
with the demolition of the current downtown Greenville banking office.
For the three and nine
month periods ended
September 30, 2007 Assets written-off, gross Leasehold improvements $ 715 Furniture and equipment 396 Total assets written-off, gross 1,111 Accumulated depreciation
written-off Leasehold improvements (384) Furniture and equipment (381) Total accumulated depreciation
written-off (765) Loss on disposition of premises, furniture, and equipment $ 346 6. Mortgage-Servicing Rights The Company sells a portion of its originated fixed-rate and
adjustable-rate mortgage loans servicing retained. All of the Companys loan
sales have been without recourse. Mortgage loans serviced for the benefit of
others amounted to $339.4 million, $325.1 million, and $310.0 million at
September 30, 2007, December 31, 2006, and September 30, 2006, respectively.
Mortgage loans serviced for the benefit of others are held by the Company or
its subsidiary in a fiduciary or agency capacity for customers and, as such,
are not included in the Companys Consolidated
Financial Statements as such items do not represent assets of the
Company or its subsidiary.
14
The following table summarizes
the changes in the Companys mortgage-servicing rights portfolio for the
periods indicated (dollars in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Mortgage-servicing rights portfolio, net of valuation allowance, beginning of period $ 2,722 2,673 2,648 2,626 Capitalized mortgage-servicing rights 252 68 662 387 Mortgage-servicing rights portfolio amortization (61) (165) (398) (570) Change in mortgage-servicing rights portfolio valuation allowance 1 9 2 142 Mortgage-servicing rights portfolio, net of valuation allowance, end of period $ 2,914 2,585 2,914 2,585 Mortgage-servicing rights
amortization and valuation allowances are included in Mortgage-Banking Income
on the Consolidated Statements of Income.
The
aggregate fair market value of the Companys mortgage-servicing rights
portfolio at September 30, 2007, December 31, 2006, and September 30, 2006 was
$4.0 million, $3.6 million, and
$3.5 million , respectively. The following table summarizes the activity impacting the
valuation allowance for impairment of the mortgage-servicing rights portfolio
for the periods indicated (in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Valuation allowance, beginning of period $ 3 15 4 148 Aggregate additions charged and reductions credited to operations (1) (9) (2) (142) Valuation allowance, end of period $ 2 6 2 6 See Consolidated Statements of Cash Flows for a further discussion of the
activity impacting the Companys mortgage-servicing rights portfolio.
7. Intangible
Assets
The following table summarizes intangible assets,
which are included in Other Assets on the Consolidated Balance Sheets, net of
accumulated amortization, at the dates indicated (in thousands).
September 30,
December 31,
2007
2006 Goodwill $ 3,691 3,691 Customer list intangibles 90 126 Total intagible assets $ 3,781 3,817 The
following table summarizes the
activity of intangible assets with finite lives, which are comprised of
customer list intangibles, and the related amortization, which is included in
Other Noninterest Expense in the Consolidated Statements of Income, for the
periods indicated (in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Balance, at beginning of period $ 102 151 126 175 Less: amortization (12) (12) (36) (36) Balance, at end of period $ 90 139 90 139 The
following table summarizes the
gross carrying amount and accumulated amortization of intangible assets with
finite lives at the dates indicated (in thousands).
September 30,
December 31,
September 30,
2007
2006
2006 Customer list intangibles, gross $ 1,779 1,779 1,779 Less: accumulated amortization (1,689) (1,653) (1,640) Customer list intangibles, net $ 90 126 139
15 In its Annual Report on Form
10-K for the year ended December 31, 2006, the
Company estimated amortization expense related to intangible assets with finite lives of $48
thousand for the year ended December 31, 2007, $45 thousand for the year ended
December 31, 2008, and $34 thousand for the year ended December 31, 2009. Management
is aware of no material events or uncertainties that would cause amortization
expense related to the Companys intangible
assets with finite lives not to be indicative of future financial
condition or results of operations or that would cause future financial
condition or results of operations to differ materially from these projections.
The Companys intangible assets with infinite lives (goodwill) are subject to periodic impairment tests that are
performed by the Company as of June 30 annually, or more often, if events or
circumstances indicate that there may be impairment. The valuation as of June
30, 2007 indicated that no impairment charge was required as of that date. Management
is aware of no material events or uncertainties that have occurred since September 30, 2007 that would indicate that there
might be impairment.
8. Real
Estate and Personal Property Acquired in Settlement of Loans The following table summarizes real estate and
personal property acquired in settlement of loans for the periods indicated (in thousands).
2007
2006
2006 Real estate acquired in settlement of loans $ 6,170 600 771 Repossessed automobiles acquired in settlement of loans 295 319 347 Total property acquired in settlement of loans $ 6,465 919 1,118 The following table summarizes the changes in the
Companys real estate acquired in settlement of loans, including the balance at
the beginning and end of each period, provision charged to expense, and losses
charged to the Allowance related to the Companys real estate acquired in
settlement of loans for the periods indicated (in thousands).
At and for the three month
At and for the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Real estate acquired in settlement of loans, beginning of period $ 717 728 600 1,954 Add: New real estate acquired in settlement of loans 5,533 72 6,115 154 Less: Sales / recoveries of real estate acquired in settlement of loans (80) (29) (374) (1,150) Less: Provision charged to expense - - (171) (187) Real estate acquired in settlement of loans, end of period $ 6,170 771 6,170 771 Based on the Companys regular
review of fair market values of real estate acquired in settlement of loans and
writedowns taken as a result of those reviews, management believes that the
properties within the portfolio were properly valued at September 30, 2007.
9. Deposits
The
following table summarizes
the Companys deposit composition at the dates indicated (in thousands).
September 30,
December 31,
2007
2006 Transaction deposit accounts $ 518,492 447,236 Money market deposit accounts 115,470 124,874 Savings deposit accounts 39,380 41,887 Time deposit accounts 323,153 379,584 Total deposit accounts $ 996,495 993,581 At September 30, 2007, $625 thousand of overdrawn
transaction deposit accounts had been reclassified as loan balances compared
with $606 thousand at December 31, 2006.
16 The table set forth below summarizes the Companys interest
expense on deposit accounts costs for the periods indicated (in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Transaction and money market deposit accounts $ 3,861 2,684 10,488 6,429 Savings deposit accounts 36 39 106 112 Time deposit accounts 3,766 3,957 11,733 11,402 Total interest expense on deposit accounts $ 7,663 6,680 22,327 17,943
10. Short-Term
Borrowings The following table
summarizes the Companys borrowings composition at the dates indicated (dollars
in thousands). Borrowings as a percentage of total liabilities were
approximately 6.8% and 4.9% at September 30, 2007 and December 31, 2006,
respectively.
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Retail repurchase agreements $ 10,130
13.7 % 14,427 34.8 Commercial paper 30,636 41.5 20,988 50.7 Other short-term borrowings 33,000 44.8 6,000 14.5 Total borrowings $ 73,766 100.0 % 41,415 100.0 If needed, funding sources have been arranged through
federal funds lines at correspondent banks, the Federal Reserve Discount
Window, and the FHLB. At September 30, 2007, the Company had additional funding
sources at correspondent banks totaling $50 million that were accessible at the
Companys option of which $9.0 million had been utilized. Due to the maturity
terms of such sources, utilized borrowed funds are considered to be short-term.
During April 2007, Nexity Bank extended the Bank a federal funds accommodation
in the amount of $10 million for a period beginning on April 25, 2007 and
ending April 30, 2008 subject to specified terms and conditions. Advances under
this accommodation are advances of federal funds with a maturity of the next
Banking Day (the next day other than Saturday or Sunday on which banking
business is conducted in South Carolina). This additional federal funds
accommodation in the amount of $10 million increased the Companys accessible
funding sources from $40 million to $50 million. At September 30, 2007, of its approximately $95.3 million
available credit based on qualifying loans to serve as collateral against
borrowings and letters of credit from the FHLB, the Company employed $24.0
million in borrowings, all of which was determined to be short-term when employed,
and employed $69.0 million in a letter of credit used to secure public deposits
as required or permitted by law. FHLB letters of credit provide an attractive
alternative to using traditional collateral for various transactions.
Advantages of FHLB letters of credit include enhancing member liquidity
(substituting letter of credit for securities as collateralization of public
unit deposits) and utilization of residential mortgage loans as collateral for
the letters of credit. However, the utilization of FHLB letters of credit
reduces the Companys available credit based on qualifying loans to serve as
collateral. The Company uses the FHLB letter of credit for collateralization
of public deposits. At September 30, 2007, the Company had approximately $2.3
million available credit based on qualifying loans to serve as collateral
against short-term borrowings, long-term borrowings, and / or letters of credit
from the FHLB.
11. Long-Term
Borrowings
Long-term borrowings are those having maturities greater than
one year when executed. The Companys remaining $10.0 million in long-term FHLB
borrowings matured on June 14, 2007. These $10.0 million in long-term FHLB
borrowings were outstanding at December 31, 2006. As noted above with regard to short-term borrowings, at
September 30, 2007, of its approximately $95.3 million available credit based
on qualifying loans to serve as collateral against borrowings and letters of
credit from the FHLB, the Company employed $24.0 million in borrowings, all of
which was determined to be short-term when employed, and employed $69.0 million
in a letter of credit used to secure public deposits as required or permitted
by law. At September 30, 2007, the Company had approximately $2.3 million
available credit based on qualifying loans to serve as collateral against
short-term borrowings, long-term borrowings, and / or letters of credit from
the FHLB.
17
12. Employee
Benefit Plans
Postretirement Benefits
Current Cost of Benefit Plan. The following table summarizes the combined net postretirement
benefit expense components for the Companys defined benefit pension plan,
which is included in Salaries and Other Personnel Expense on the Consolidated
Statements of Income, at and for the periods indicated (in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Service cost $ 195 141 585 423 Interest cost 229 165 686 495 Expected return on plan assets (318) (229) (953) (687) Amortization of prior service cost 4 3 12 9 Amortization of loss 28 20 83 60 Postretirement benefit expense, net $ 138 100 413 300
Plan
Assets. In September 2006, the FASB
issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, which amends SFAS No. 87 and SFAS No. 106 to
require recognition of the overfunded or underfunded status of pension and
other postretirement benefit plans on the balance sheet. Under SFAS No. 158,
gains and losses, prior service costs and credits, and any remaining transition
amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized
through net periodic benefit cost will be recognized in accumulated other
comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date the date at which the
benefit obligation and plan assets are measured is required to be the
companys fiscal year end. The recognition and disclosure provisions of SFAS
No. 158 differ for an employer that is an
issuer of publicly traded equity securities (as defined by the Standard)
and an employer that is not. As the
Company does not meet the definition of an
issuer of publicly traded equity securities (as defined by SFAS No. 158) for purposes of this Standard, the Company was not required to recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures until the end of
the fiscal year ending after June 15, 2007
with the exception of the provisions for the measurement date which are
effective for fiscal years ending after December 15, 2008. Management estimates
the adjustment to the Consolidated Balance Sheets during the fourth quarter of
2007 to properly reflect the funded status at December 31, 2006 to be $6.5
million. Management does not currently have an estimate of the adjustment
necessary to properly reflect any fluctuations in this funded status during the
year ended December 31, 2007.
Expected Current Contributions. Contributions to the
Companys defined benefit pension plan assets totaling $1.1 million are
expected during fiscal year 2007. Contributions during the third quarter of
2007 totaled $275 thousand compared with $308 thousand during the third quarter
of 2006. Contributions during the first nine months of 2007 totaled $824
thousand compared with $925 thousand during the same period of 2006.
Stock Option Plans At September 30, 2007, there were no remaining options
available for grant under the Palmetto Bancshares, Inc. 1997 Stock Compensation
Plan.
Determining Fair Value. The following table
summarizes the stock-based awards granted by the Company, the fair market value of each award granted
as estimated on the date of grant using the Black-Scholes option-pricing model,
and the weighted average assumptions used for such grants for the grant dates
indicated.
18
Stock-based awards granted during the
nine month period ended September 30,
2007
2006 Grant Date 1/16/2007 6/20/2006 1/17/2006 Stock option awards granted 800 5,000 10,000 Option price $ 30.40 27.30 27.30 Fair market value of stock option awards $ 6.24 4.79 3.39 Expected dividend yields 2.5 % 2.7 2.7 Expected volatility 13 % 5 5 Risk-free interest rate 5 % 5 4 Expected term (years) 10 10 10 Vesting period (years) 5 5 5
Stock Option Compensation
Expense. The compensation cost related to stock options that was charged against pretax net income
during the third quarter of 2007 was $33 thousand
compared with $45 thousand during the third quarter of 2006. Expense during
the first nine months of 2007 and 2006 totaled $99 thousand. At September 30, 2007, based on
options outstanding at that time, the total compensation cost related to
nonvested stock option awards granted under the Companys stock option plans
but not yet recognized was $222 thousand. Stock option compensation expense is
recognized on a straight-line basis over the vesting period of the option. The
Company expects to recognize this cost over a remaining period ending in
December 2011.
Stock Option Activity.
The following table summarizes stock
option activity for the Palmetto Bancshares, Inc. 1997 Stock Compensation Plan
for the periods indicated.
Stock options
outstanding
Weighted-
average
exercise
price Outstanding at December 31, 2005 252,785 $ 16.63 Granted 15,000 27.30 Exercised (25,450) 13.97 Outstanding at September 30, 2006 242,335 $ 17.57 Outstanding at December 31, 2006 251,670 $ 18.67 Granted 800 30.40 Exercised (32,810) 14.92 Outstanding at September 30, 2007 219,660 $ 19.28 No stock options were forfeited
during the nine month periods ended September 30, 2007 or 2006. Cash received
from stock option exercises under the Companys stock option plan for the nine
month periods ended September 30, 2007 and 2006 was $490 thousand and $356
thousand, respectively.
401(k) Retirement Plan
Matching Contributions. During the three month
periods ended September 30, 2007 and 2006, the Company made matching
contributions to employee 401(k) retirement plans totaling $85 thousand and $73
thousand, respectively. During the nine month periods ended September 30, 2007
and 2006, the Company made matching contributions to employee 401(k) retirement
plans totaling $234 thousand, and $207 thousand, respectively.
Other. During 2007, in conjunction with the audit of
the Companys 401(k) Retirement Plan (the Plan), an administrative error was
discovered that had resulted in participants being denied the opportunity to
fully defer the appropriate amount of compensation under the plan. During the third quarter of 2007, the Company calculated and accrued
the denied deferral amount and the resulting employer match, including missed
earnings, and believes such amounts total approximately $1.3 million through December
31, 2006. As such, the Company accrued this amount within Salaries and Other
Personnel Expense on the Consolidated Statements of Income for the three and
nine month periods ended September 30, 2007. The Company is currently
calculating such amounts for the period since December 31, 2006. The Companys
management intends to contribute these amounts to each participants account
during the fourth quarter of 2007 by correcting the error under guidelines
established by the Internal Revenue Service.
19
13. Net
Income per Common Share
The following table summarizes the Companys reconciliation
of the numerators and denominators of the basic and diluted net income per
common share computations for the periods indicated.
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Weighted average common shares outstanding - basic 6,392,721 6,356,656 6,385,625 6,351,646 Dilutive impact resulting from potential common share issuances 108,241 75,890 98,668 75,890 Weighted average common shares outstanding - diluted 6,500,962 6,432,546 6,484,293 6,427,536 Per Share Data Net income - basic $ 0.61 0.60 1.84 1.76 Net income - diluted 0.60 0.59 1.81 1.74 At September 30, 2007, all outstanding options were included
in the calculation of diluted net income per common share because the exercise
price of all options was lower than the average market price as determined by
an independent valuation of common shares. The Company paid cash dividends of $0.19 and $0.18 per share
for the three month periods ended September 30, 2007 and 2006, respectively and
cash dividends of $0.57 and $0.54 per share for the nine month periods ended
September 30, 2007 and 2006, respectively. As reported in its Annual Report on Form 10-K for the year
ended December 31, 2006, historically, there has been no established public
trading market for the Companys stock. Instead, the Companys Secretary
facilitates stock trades of the Companys common stock by matching willing
buyers and sellers that contact her. However, trades can be and are made that
are not facilitated through the Secretary between willing buyers and sellers of
which the Company may have no transaction details. Additionally, the Company
believed that many of these transactions did not constitute arm's length
transactions as many of the transactions are between buyers and sellers with
relationships that may lead to a sale at a price other than fair market value.
Because of these factors, the Company did not believe that the prices at which
the trades recorded by its Secretary occurred could be considered fair market
value, and, as a result, annually, a third party fair market valuation was
performed by an external third party. During 2007, management determined that
an average trading price valuation method, based on the last five known trades
of the stock, was a more appropriate estimate of the fair value of the stock.
Management's determination was based upon the emergence of a more established,
although still limited, trading market in the stock. As a result, the Company
changed the method used to value company stock held from the annual independent
stock appraisal method to the average trading price method prospectively,
beginning in April 2007, at which time the average price of the last five known
trades of the stock was $40 per share.
14. Commitments
and Contingencies Legal Proceedings 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 impact the Company's financial condition or results of
operations. Lease Agreements During the second quarter of 2007, the Company signed a
build-to-suit lease agreement with regard to the relocation of its corporate
headquarters to Greenville, South Carolina. Under the terms of this agreement,
the Companys new headquarters will be constructed on the site of the Companys
current downtown Greenville banking office that is leased from the same lessor.
The lease provides for an initial term of fifteen
years and five options to extend the term after the initial term expiration
date, of five years each. In conjunction with the demolition of the
current downtown Greenville banking office, the Company wrote off $346 thousand
in leasehold improvements during the third quarter of 2007. The Company
anticipates construction completion during late 2008 / early 2009 and is
currently analyzing the accounting treatment of this lease agreement. The
Company filed a Current Report on Form 8-K on June 26, 2007 to announce its
entry into this material definitive agreement.
20 During the second quarter of 2007, the Company executed a
ground lease contract on which to put in service a nonretail office ATM
location at Woodmont Village Shopping Center on Highway 25 in Moonville, South
Carolina. The Company plans to have this location in service by January 2008.
Lending Commitments The Companys contractual commitments to extend credit increased
slightly from $265.8 million at December 31, 2006 to $284.4 million at
September 30, 2007. The following table summarizes the Companys contractual
commitments to extend credit, by
collateral type, at September 30, 2007 (in thousands). Commercial and industrial $ 32,873 Real estate 184,900 Credit line 7,716 Bankcards 46,654 Others 12,291 Total contractual commitments to extend credit $ 284,434
Guarantees
At
September 30, 2007, the Company recorded no liability for the current carrying
amount of the obligation to perform as a guarantor, and no contingent liability
was considered necessary as such amounts were not considered material. The
maximum potential amount of undiscounted future payments related to standby
letters of credit at September 30, 2007 was $10.3 million compared with $8.3
million at December 31, 2006. Past experience indicates that these standby
letters of credit will expire unused. However, through its various sources of
liquidity, the Company believes that it has the necessary resources available
to meet these obligations should the need arise. Additionally, the Company
does not believe that the current fair market value of such guarantees was
material at September 30, 2007.
Other Off-Balance Sheet Arrangements At September 30, 2007, the Company
engaged in no transactions, agreements, or other contractual arrangements to
which an entity unconsolidated with the Company is a party, under which the
Company has:
15. Derivative
Financial Instruments and Hedging Activities At September 30, 2007, the Companys derivative instruments
consisted of forward sales commitments relating to the Companys commitments to
originate certain residential loans held for sale.
21 Outstanding commitments on mortgage loans not yet closed
(primarily single-family loan commitments) amounted to approximately $6.6
million at September 30, 2007 compared to approximately $3.8 million at December
31, 2006. The fair market value of derivative assets related to commitments to
originate such residential loans held for sale was not significant at September
30, 2007. The fair market value of derivative assets related to forward sales
commitments did not significantly differ from the carrying amount at September
30, 2007. 16. Regulatory
Capital Requirements
At
September 30, 2007, the most recent notification from federal banking agencies
categorized the Company and the Bank as well capitalized under United States
federal banking regulations. To be categorized as well capitalized, minimum
total risk-based capital, Tier 1 capital, and Tier 1 leverage ratios
must be maintained as set forth in the following table (dollars in thousands).
Since September 30, 2007, there have been no events or conditions that
management believes would change these categories.
Actual
For capital adequacy
purposes
To be well capitalized
under prompt
corrective action
provisions
amount
ratio
amount
ratio
amount
ratio At September 30, 2007
Total capital to risk-weighted assets Company $ 113,947 10.39%
87,734 8.00 n/a n/a Bank 113,683
10.37
87,737 8.00 109,671 10.00
Tier 1 capital to risk-weighted assets Company 105,667 9.64
43,867 4.00 n/a n/a Bank 105,403 9.61
43,868 4.00 65,803 6.00
Tier 1 capital to average assets Company 105,667 8.90 47,469 4.00 n/a n/a Bank 105,403 8.89 47,407 4.00
59,258 5.00 At September 30, 2006
Total capital to risk-weighted assets Company $ 102,688 10.12% 81,137 8.00 n/a n/a Bank 101,468 10.00 81,137 8.00 101,422 10.00
Tier 1 capital to risk-weighted assets Company 93,964 9.26 40,569 4.00 n/a n/a Bank 92,744 9.14 40,569 4.00 60,853 6.00
Tier 1 capital to average assets Company 93,964 8.41 44,715 4.00 n/a n/a Bank 92,744 8.29 44,731 4.00 55,913 5.00
22
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
Discussions
of certain matters contained in this Quarterly Report on Form 10-Q may
constitute forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, and as such, may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market, and
statements regarding the Companys mission and vision. The Company cautions
readers that a number of factors could cause actual results to differ
materially from the results expressed or implied in such forward-looking
statements. For a discussion of some of the factors that might cause such a
difference, see Part 1, Item 1A in the Companys Annual Report on Form
10-K for the year ended December 31, 2006 and Part II, Item IA in this
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. The
Company does not undertake and specifically disclaims any obligation to update
such forward-looking statements to reflect occurrences or unanticipated events
or circumstances after the date of such statements except as required by law.
The following discussion and analysis is presented to assist
the reader with understanding the financial condition and results of operations
of the Company. The information presented in the following discussion results
from the activities of the Companys subsidiary, the Bank, which comprises the
majority of the consolidated net income, revenues, and assets of the Company.
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 Companys Annual Report on Form 10-K for the year ended
December 31, 2006. Results of operations for the three and nine month periods
ended September 30, 2007 are not necessarily indicative of results that may be
attained for any other period. Percentage calculations contained herein have
been calculated based on rounded results presented herein. Throughout this report, the
"Company" shall refer to Palmetto Bancshares, Inc. and its
subsidiary, The Palmetto Bank (the Bank), which includes Palmetto Capital, Inc.
Business
Strategy Overview
The Companys mission as an independent Upstate financial
institution is to achieve superior long-term shareholder value, exercise
exemplary corporate citizenship, and create an environment that promotes and
rewards employee development and the consistent delivery of quality service to
its customers. One of the Companys primary strategies employed to achieve
this mission is to increase the number of products customers buy from us and to
provide all of the financial products that fulfill customers needs. Management
believes that the Companys cross-sell strategy and diversified business
product offerings facilitate growth in strong and weak economic cycles, as
growth can be achieved by expanding the number of products current customers
have with the Company. Though the Company is striving for four or more products
per average retail banking household, currently the average retail banking
household has approximately three products with the Company at a time when the
industry average is approximately 2.3 products per average retail banking
household. The Company strives to capitalize on potential demand from existing
customers. Management believes it is
important to maintain a well-controlled environment as we continue to grow the
Company. Credit risk is managed by setting what is believed are sound credit
policies for underwriting, while continuously monitoring and reviewing the
performance of the loan portfolio. Management believes that the Company
maintains a diversified loan portfolio, measured by industry, geography and
product type. Interest rate and market risks inherent in the Companys assets
and liabilities are managed within ranges, that management believes are
prudent, while ensuring adequate liquidity and funding. Management also
believes that shareholder value has increased over time due to customer
satisfaction, strong financial results, investment in the Company, consistent
execution of the Companys business model and the management of business risks.
Financial and Operating Highlights The following tables
summarize the Companys financial highlights at and for the dates indicated
(dollars in thousands).
23
(dollars in thousands, except common and per share data)
At and for the nine month
Variance
periods ended September 30,
Variance
2007
2006
$
%
2007
2006
$
%
(unaudited)
(unaudited)
RESULTS OF OPERATIONS
Interest income
$
21,293
19,577
1,716
8.8
%
62,187
56,294
5,893
10.5
Interest expense
8,538
7,242
1,296
17.9
24,261
19,696
4,565
23.2
Net interest income
12,755
12,335
420
3.4
37,926
36,598
1,328
3.6
Provision for loan losses
400
275
125
45.5
1,200
1,325
(125)
(9.4)
Net interest income after provision for loan losses
12,355
12,060
295
2.4
36,726
35,273
1,453
4.1
Noninterest income
4,612
3,804
808
21.2
12,309
11,683
626
5.4
Noninterest expense
11,391
10,025
1,366
13.6
31,404
30,176
1,228
4.1
Income before provision for income taxes
5,576
5,839
(263)
(4.5)
17,631
16,780
851
5.1
Provision for income taxes
1,680
2,038
(358)
(17.6)
5,909
5,598
311
5.6
Net income
$
3,896
3,801
95
2.5
%
11,722
11,182
540
4.8
COMMON SHARE DATA
Net income:
Basic
$
0.61
0.60
0.01
1.7
%
1.84
1.76
0.08
4.5
Diluted
0.60
0.59
0.01
1.7
1.81
1.74
0.07
4.0
Cash dividends
0.19
0.18
0.01
5.6
0.57
0.54
0.03
5.6
Book value
17.02
15.29
1.73
11.3
17.02
15.29
1.73
11.3
Outstanding shares
6,400,260
6,356,785
43,475
0.7
6,400,260
6,356,785
43,475
0.7
Weighted average outstanding - basic
6,392,721
6,356,656
36,065
0.6
6,385,625
6,351,646
33,979
0.5
Weighted average outstanding - diluted
6,500,962
6,432,546
68,416
1.1
6,484,293
6,427,536
56,757
0.9
Dividend payout ratio
31.21
%
30.10
1.11
3.7
31.08
30.69
0.39
1.3
PERIOD-END BALANCES
Assets
$
1,188,850
1,132,732
56,118
5.0
%
1,188,850
1,132,732
56,118
5.0
Investment securities available for sale, at fair market value
96,287
119,538
(23,251)
(19.5)
96,287
119,538
(23,251)
(19.5)
Loans (1)
1,007,307
931,539
75,768
8.1
1,007,307
931,539
75,768
8.1
Deposits and borrowings
1,070,261
1,029,012
41,249
4.0
1,070,261
1,029,012
41,249
4.0
Shareholders' equity
108,931
97,187
11,744
12.1
108,931
97,187
11,744
12.1
AVERAGE BALANCES
Assets
$
1,188,923
1,121,939
66,984
6.0
%
1,170,757
1,108,037
62,720
5.7
Interest-earning assets
1,114,362
1,050,577
63,785
6.1
1,099,343
1,033,776
65,567
6.3
Investment securities available for sale, at fair market value
102,154
117,062
(14,908)
(12.7)
107,744
121,312
(13,568)
(11.2)
Loans (1)
999,044
907,834
91,210
10.0
973,358
885,480
87,878
9.9
Interest-bearing liabilities
936,439
884,765
51,674
5.8
923,192
874,566
48,626
5.6
Shareholders' equity
107,704
95,837
11,867
12.4
105,036
93,584
11,452
12.2
CREDIT QUALITY RATIOS
Classified assets as a percentage of loans (2)
1.81
%
1.86
(0.05)
(2.7)
%
1.81
1.86
(0.05)
(2.7)
Nonperforming loans as a percentage of loans (2)
0.70
0.74
(0.04)
(5.4)
0.70
0.74
(0.04)
(5.4)
Total nonperforming assets as a percentage of total assets
1.14
0.71
0.43
60.6
1.14
0.71
0.43
60.6
Net loans charged-off as a percentage of average loans (2)
0.25
0.19
0.06
31.6
0.20
0.16
0.04
25.0
Allowance for loan losses as a
percentage of ending loans (2)
0.82
0.94
(0.12)
(12.8)
0.82
0.94
(0.12)
(12.8)
Allowance for loan losses to nonperforming loans
1.18
x
1.26
(0.08)
(6.3)
1.18
1.26
(0.08)
(6.3)
SIGNIFICANT OPERATING RATIOS BASED ON EARNINGS
Return on average assets
1.30
%
1.34
(0.04)
(3.0)
%
1.34
1.35
(0.01)
(0.7)
Return on average shareholders' equity
14.35
15.74
(1.39)
(8.8)
14.92
15.98
(1.06)
(6.6)
Net interest margin
4.54
4.66
(0.12)
(2.6)
4.61
4.73
(0.12)
(2.5)
(1) Calculated using loans including mortgage loans held for sale, net of unearned, excluding the allowance for loan losses
(2) Calculated using loans excluding mortgage loans held for sale, net of unearned, excluding the allowance for loan losses Net interest income for the third quarter
of 2007 was $12.8 million, an increase of 3.4% compared to the third quarter of
2006. The following table summarizes the dollar amount of changes in interest
income and interest expense attributable to changes in volume and the amount
attributable to changes in rate when comparing the three month period ended
September 30, 2007 to the three month period ended September 30, 2006 (in
thousands).
Volume
Rate
Total Total interest-earning assets $ 1,475 241 1,716 Total interest-bearing liabilities 133 1,163 1,296 Net interest income $ 1,342 (922) 420 The Federal Open Market Committees 50 basis point reduction
in the federal funds rate during September 2007 directly influences other
short-term interest rates, such as deposits, loans, credit card interest rates,
and adjustable-rate mortgages. However, because the cut occurred near the end
of the third quarter, management does not believe that the rate cut had a
material impact on third quarter results. Management believes that consumers
will start feeling, and the Companys results of operations will fully
recognize, the impact of the federal rate cut during the fourth quarter of
2007. As discussed in Item 3. Quantitative and Qualitative Disclosures about
Market Risk, managements evaluation of its net
interest income simulation prepared as of September 30, 2007 indicated that the
Companys balance sheet is liability sensitive. A liability sensitive balance
sheet suggests that in falling interest rate environment, net interest margin
would be positively impacted.
24 Asset Growth
Loans represent the most
significant component of the Companys interest-earning assets with average
loans accounting for 90.0% of average interest-earning assets during the three
month period ended September 30, 2007. Total loans, including mortgage loans
held for sale, increased $59.7 million, during the first nine months of 2007.
Management believes that this increase is primarily attributed to the Companys
introduction of business credit scoring and its emphasis on small commercial
loans partially offset by a decline in loan mix within the commercial real
estate portfolio as a result of the Companys tightened underwriting standards
in an effort to limit its exposure to commercial limited-service properties. Asset Growth Funding Deposit accounts, retail repurchase agreements, and
commercial paper increased $8.3 million, or 0.8%, during the first nine months
of 2007. The combination of increasing competition and alternative investment
options has made it increasingly difficult to grow deposits. Savers have
numerous alternatives to the retail deposit programs provided by the Bank. In
other words, there has been increasing competition for a shrinking traditional
deposit market. As expected, these factors have adversely impacted deposit,
retail repurchase agreements, and commercial paper cash flows. Over the short
run, management has employed proceeds from maturing short-term taxable
securities issued by government-sponsored enterprises to fund loan growth and
repay borrowings. Ultimately, insufficient deposit growth required
management to obtain other
funding sources such as wholesale funding. Management does not currently consider acquisitions and
building new branches to be possible solutions to correct insufficient deposit
growth, as they can be expensive and difficult to execute as funding needs
arise. Public funds are bank deposits
of state and local municipalities and typically require that the Bank pledge
investment grade securities to the accounts to ensure repayment. Approximately
82% of the investment securities portfolio was pledged to secure public
deposits as of September 30, 2007 as compared with 62% at December 31, 2006 and
60% at September 30, 2006. Of the Companys $96.3 million available for sale
investment securities balance at September 30, 2007, $17.3 million was
unpledged and, therefore, available as a liquidity source. The fluctuation in
pledged securities between these periods was the result of a diversification of
assets pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes as required or permitted by law as further discussed
in Part I, Item 1. Financial Statements, Note
10 and Note 11 contained herein and
Borrowing Activities below with regard to the
Companys borrowings from the FHLB. The Company has found wholesale funding to be a logical
answer to its insufficient deposit growth. Wholesale funding possibilities that
the Company employs and / or considers include federal funds lines and Federal
Home Loan Bank (FHLB) advances as such funding provides it with the ability to
access the exact type of funding needed, at the exact time, in the exact
quantity, and at market rates. This provides the Company with the flexibility
to tailor borrowings to its specific needs. Historically, the Company has not
considered or employed brokered certificate of deposit accounts. Due to the
insufficient deposit growth, total wholesale funding, which includes other
short-term borrowings and long-term borrowings increased $17.0 million, or
$106.3 during the first nine months of 2007. This fluctuation takes into
account the Companys remaining $10.0 million in long-term FHLB borrowings that
matured on June 14, 2007. During April 2007, Nexity
Bank extended to the Bank a federal funds accommodation in the amount of $10
million for a period beginning on April 25, 2007 and ending on April 30, 2008
subject to specified terms and conditions. Advances under this accommodation
are advances of federal funds with a maturity of the next Banking Day (the next
day other than Saturday or Sunday on which banking business is conducted in
South Carolina). This additional federal funds accommodation in the amount of
$10 million increased the Companys accessible funding sources from $40 million
to $50 million of which $9.0 million was utilized at September 30, 2007. At September 30, 2007, of
its approximately $95.3 million available credit based on qualifying loans to
serve as collateral against borrowings and letters of credit from the FHLB, the
Company employed $24.0 million in borrowings, all of which was determined to be
short-term when employed, and employed $69.0 million in a letter of credit used
to secure public deposits as required or permitted by law. At September 30,
2007, the Company had approximately $2.3 million available credit based on
qualifying loans to serve as collateral against short-term borrowings,
long-term borrowings, and / or letters of credit from the FHLB.
25
Management
believes that the correct mix of funding for the Company is between retail
deposits and wholesale funding that provides the overall lowest cost of total
funds but provides the flexibility to manage the liquidity and interest rate
position of the balance sheet. Although the Company has traditionally relied on
customer deposits to fund asset growth, with new trends of loan assets being
fixed rate for at least three to five years and depositors wanting to keep
maturities short, there is little ability for a bank to effectively manage
their interest rate risk position and net interest margins. As a result, the
Company needs the ability to acquire funding that is not only cost effective,
but also has the maturity characteristics that best meet the interest rate
characteristics of its balance sheet. Wholesale funding in the current yield
curve environment can meet these requirements. As such, management believes
that the Company will continue to employ a mix of retail deposits and wholesale
funding to fund asset growth.
Credit Quality The allowance for loan
losses (the Allowance) decreased from $8.5 million at December 31, 2006 to
$8.3 million at September 30, 2007 representing 0.90% and 0.82% of loans,
respectively, calculated using loans excluding mortgage loans held for sale and
the Allowance, net of unearned income. Management believes that the declining
trend of the Allowance as a percentage of ending loans results from several
factors including, but not limited to, managements conservative philosophy
regarding its lending mix which impacts risk grades assigned at loan
origination, the ongoing management of asset quality, and growth within the
portfolio being primarily loans secured by real estate which generally involve
less risk than other types of lending, all of which impact Allowance
allocations.
Subprime Lending Crisis. The subprime mortgage financial crisis, which has yet to be
resolved, is the result of the sharp rise in foreclosures in the subprime
mortgage market that began in the United States in 2006 and that has become a
global financial crisis in 2007. Management believes that rising interest rates,
which increased the monthly payments on newly popular adjustable rate
mortgages, together with declines in property value from the demise of the United States housing bubble, left many
homeowners unable or unwilling to meet financial commitments and lenders
without a means to recoup their losses. Many observers believe this has
resulted in a severe credit crunch, threatening the solvency of a number of
private banks and other financial institutions. Although the Company does offer adjustable rate mortgages,
the majority of such loans are sold on the secondary market. Additionally, the
Company does not participate in a subprime lending program. As such, the
Company does not anticipate a negative impact on its earnings as a result of
the subprime lending crisis. These factors, however, cannot always safeguard
the Company against fraudulent reporting by borrowers on loan applications. As
a result, the Company cannot guarantee that a negative impact on its earnings
will not occur related to such fraudulent applications. However, management
does not anticipate such losses to be material.
Net Loans Charged-Off.
During the three and nine month periods ended September 30, 2007, net loans
charged-off increased by $205 thousand and $415 thousand, respectively.
Management believes that the increase in net loans charged-off over both
periods has been largely confined to a group of residential rental
property loans in which the borrowers admitted they defrauded seven banks by
using false mortgage information. During the second quarter of 2007, the
individuals were sentenced to five years plus three months in prison and
ordered to pay restitution. Management believes that these credit losses during
the periods were a result of inherent losses associated with all normal lending
operations and / or loans where the Borrower defrauded the Bank (as noted
above). Management does not believe that losses within the loan portfolio were the result of subprime lending
practices.
Real Estate Acquired In Settlement Of Loans. Real
estate acquired in settlement of loans increased $5.6 million from December 31,
2006 to September 30, 2007 primarily as the result of two loans secured by
other real estate for which foreclosure proceedings were completed with regard
to the securing real estate collateral during July 2007. Both properties were
placed into the Banks real estate acquired in settlement of loans portfolio in
July at fair market value, approximately $5.3 million. Management expects that
the sale of the collateral securing these loans will fully cover the Companys
investment as well as a portion of the foregone interest. Excluding the impact
of these loans, virtually all other nonperforming comparisons remained
relatively unchanged from December 31, 2006 to September 30, 2007.
26 Other Highlights On September 21, 2006, the
Company announced its plan to relocate its corporate headquarters to downtown
Greenville in 2008. Project construction of the new leased facility began
during 2007 with a projected completion date in 2008. In conjunction with the
demolition of the current downtown Greenville banking office, the Company wrote
off $346 thousand in leasehold improvements during the third quarter of 2007.
During the second quarter of 2007, the Company executed a
ground lease contract for a nonretail office ATM location at Woodmont Village
Shopping Center on Highway 25 in Moonville, South Carolina. The Company plans
to have this location in service by January 2008. As reported in the Companys Annual Report on Form 10-K for
the Year Ended December 31, 2006, during February 2007, the Bank purchased real
estate in Anderson County on which to construct and relocate its existing
Pendleton banking office. Ground was broken on this site in July 2007, and
Grand Opening is planned for the first quarter of 2008. During the second quarter of 2007, the Company contracted to
purchase property at the intersection of West Wade Hampton Boulevard and
Middleton Way in Greenville County on which to construct and relocate its
existing Greer banking office. The Company expects to close on this property
during the fourth quarter of 2007.
Critical Accounting Policies
The
Companys accounting and financial reporting policies are in conformity with
generally accepted accounting principles (GAAP). 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 during the
reporting period, and the reported amounts of revenue and expense during the
reporting period. The Companys
significant accounting policies are discussed in Item 8, Note 1 to the
Consolidated Financial Statements of the Annual Report on Form 10-K for the
year ended December 31, 2006. Of
these significant accounting policies, the Company believes that the accounting
for its Allowance, pension plan, mortgage-servicing rights portfolio, past
acquisitions, and income taxes are 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 judgment
that could be subject to revision as newer information becomes available. In
order to determine the Companys critical accounting policies, management
considers if the accounting estimate
requires assumptions about matters that were highly uncertain at the time the
accounting estimate was made and if 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 presentation of financial condition, changes in financial
condition, or results of operations. In conjunction with the filing of the
Companys Annual Report on Form 10-K for the year ended December 31, 2006, management and the Companys independent registered
public accounting firm discussed the development and selection of the critical
accounting estimates discussed herein with the Audit Committee of the Companys
Board of Directors.
Other Information Impact of Inflation The Consolidated Financial Statements and
related financial data presented herein have been prepared in accordance with
generally accepted accounting principles. These principles require the
measurement of financial condition and results of operations in terms of
historical dollars without considering changes in relative purchasing power
over time due to inflation. 27
Financial Condition
The following information is
intended to supplement any information relating to the Consolidated Balance
Sheets contained within Part I, Item 1 of this Quarterly Report on Form
10-Q.
Overview
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(dollars in thousands, except common and per share data)
September 30,
December 31,
Variance
2007
2006
$
%
(unaudited) Assets Cash and cash equivalents Cash and due from banks $ 31,076 43,084 (12,008) (27.9) % Federal funds sold 4,188 3,582 606 16.9 Total cash and cash equivalents 35,264 46,666 (11,402) (24.4) Federal Home Loan Bank ("FHLB") stock, at cost 3,157 2,599 558 21.5 Investment securities available for sale, at fair market value 96,287 116,567 (20,280) (17.4) Mortgage loans held for sale 1,435 1,675 (240) (14.3) Loans 1,005,872 945,913 59,959 6.3 Less: allowance for loan losses (8,280) (8,527) 247 (2.9) Loans, net 997,592 937,386 60,206 6.4 Premises and equipment, net 24,476 24,494 (18) (0.1) Goodwill 3,691 3,691 - - Other intangible assets 90 127 (37) (29.1) Accrued interest receivable 6,421 6,421 - - Other 20,437 13,510 6,927 51.3 Total assets $ 1,188,850 1,153,136 35,714 3.1 % Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing $ 136,990 133,623 3,367 2.5 % Interest-bearing 859,505 859,958 (453) (0.1) Total deposits 996,495 993,581 2,914 0.3 Retail repurchase agreements 10,130 14,427 (4,297) (29.8) Commercial paper (Master notes) 30,636 20,988 9,648 46.0 Other short-term borrowings 33,000 6,000 27,000 450.0 Long-term borrowings - 10,000 (10,000) (100.0) Accrued interest payable 1,518 1,584 (66) (4.2) Other 8,140 6,180 1,960 31.7 Total liabilities 1,079,919 1,052,760 27,159 2.6 Shareholders' Equity Common stock 32,001 31,837 164 0.5 Capital surplus 1,527 1,102 425 38.6 Retained earnings 76,211 68,132 8,079 11.9 Accumulated other comprehensive loss, net of tax (808) (695) (113) 16.3 Total shareholders' equity 108,931 100,376 8,555 8.5 Total liabilities and shareholders' equity $ 1,188,850 1,153,136 35,714 3.1 % Lending Activities
General. Loans represent the most significant
component of the Companys interest-earning assets with average loans
accounting for 90.0% and 86.4% of average interest-earning assets during the
three month periods ended September 30, 2007 and September 30, 2006,
respectively and 88.5% and 85.7% of average interest-earning assets during the
nine month periods ended September 30, 2007 and September 30, 2006,
respectively. The following table
summarizes the Companys loan portfolio, by collateral type, at the
dates indicated (dollars in thousands).
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Commercial and industrial $ 79,287 7.9 % 126,742 13.4 Real estate - 1 - 4 family 208,339 20.7 171,828 18.1 Real estate - construction 48,166 4.8 19,959 2.1 Real estate - other 580,739 57.6 540,869 57.1 Total loans secured by real estate 837,244 83.1 732,656 77.3 General consumer 72,798 7.2 70,502 7.4 Credit line 5,062 0.5 4,868 0.5 Bankcards 11,841 1.2 11,813 1.3 Others 1,075 0.1 1,007 0.1 Total loans, gross $ 1,007,307 100.0 % 947,588 100.0 During the first nine months of
2007, in order to adequately monitor and properly report for regulatory
purposes segments of the loan portfolio, the Company reviewed its
stratifications within the loan portfolio using parameters including, but not
limited to, loan type, loan purpose, geographic distribution, and collateral,
if applicable. As a result of this process, management deemed it necessary to
adjust various stratification identifiers resulting in fluctuations within loan
outstanding balances. These reclassifications impact the comparability of 2006
and 2007 balances. Management is currently exploring ways in which to improve
the comparability of these numbers in the future.
28 The following table summarizes
loans by loan purpose at the dates indicated (dollars in thousands).
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Commercial business $ 130,292 13.0 % 112,264 12.0 Commercial real estate 626,555 62.7 593,377 63.2 Installment 24,213 2.4 22,139 2.4 Installment real estate 71,679 7.2 66,161 7.0 Indirect 41,824 4.2 43,634 4.6 Credit line 1,943 0.2 1,982 0.2 Prime access 51,906 5.2 53,883 5.7 Residential mortgage 39,956 4.0 35,252 3.7 Bankcards 11,841 1.2 11,813 1.3 Business manager 336 - 370 - Other 1,607 0.2 1,793 0.2 Loans, unadjusted gross 1,002,152 100.3 942,668 100.3 Loans in process 2,922 0.3 2,587 0.3 Deferred loans fees and costs 798 0.1 658 0.1 Loans, adjusted gross 1,005,872 100.7 945,913 100.7 Mortgage loans held for sale 1,435 0.1 1,675 0.2 Total loans, gross 1,007,307 100.8 947,588 100.9 Allowance for loan losses (8,280) (0.8) (8,527) (0.9) Total loans, net $ 999,027 100.0 % 939,061 100.0 During 2006, the Company
introduced business credit scoring and began placing an emphasis on small
commercial loans. Management believes that these changes continue to result in
increases in commercial business loans as a percentage of the total portfolio.
Management believes that the
aggressive commercial real estate building in recent years may indicate an
upcoming period of oversupply. In order to avoid an excess supply of
commercial limited-service properties, the Company has tightened underwriting
standards with regard to such loans resulting in little change in commercial
real estate loans as a percentage of the total portfolio. The increase in residential mortgage loans and the slight
decrease in mortgage loans held for sale during the first nine months was due,
in part, to the Companys decision to retain more residential loans in its
in-house portfolio during the period. See Part I, Item 1. Financial
Statements, Note 4 contained herein for further discussion regarding the
Companys loan portfolio.
29
Credit Quality. The
following table summarizes the composition of the Companys classified assets, by
collateral type, at the dates indicated (in thousands).
September 30, 2007
Special
mention
Substandard
Doubtful
Loss
Total Commercial and industrial $ 117 859 929 - 1,905 Real estate 586 14,745 659 - 15,990 General consumer 15 246 28 - 289 Credit line 4 66 1 - 71 Total classified loans $ 722 15,916 1,617 - 18,255 Total classified loans as a percentage of total loans (1) 1.8%
December 31, 2006
Special
mention
Substandard
Doubtful
Loss
Total Commercial and industrial $ 301 1,098 839 - 2,238 Real estate 1,063 12,398 942 - 14,403 General consumer 2 321 36 - 359 Credit line 6 47 1 - 54 Total classified loans $ 1,372 13,864 1,818 - 17,054 Total classified loans as a percentage of total loans (1) 1.8% (1) Calculated using loans excluding mortgage loans held for sale, net of unearned, excluding the Allowance. The following table summarizes trends in problem assets and
other asset quality indicators at the dates indicated (dollars in thousands). The
composition of nonaccrual loans is based on loan collateral type.
September 30,
December 31,
2007
2006 Commercial and industrial $ 684 549 Real estate 6,224 6,271 General consumer / credit line 135 179 Total nonaccrual loans
7,043
6,999 Real estate acquired in settlement of loans 6,170 600 Repossessed automobiles 295 319 Total nonperforming assets $
13,508
7,918 Loans past due 90 days and still accruing (1) $ 210 260 Ending loans (2) $ 1,005,872 945,913 Nonaccrual loans as a percentage of loans (2)
0.70 %
0.74 Nonperforming assets as a percentage of total assets
1.14 % 0.69 Allowance for loan losses to nonaccrual loans
1.18 x
1.22 (1) Substantially all of these loans are bankcard loans (2) Calculated using loans excluding mortgage loans held for sale, net of unearned, excluding the Allowance During July 2007, the Company completed foreclosure
proceedings with regard to the real estate collateral securing two loans that
had been previously classified as nonaccrual. Both properties, totaling $5.3
million, were placed into the Banks real estate in settlement of loans
portfolio in July at fair market value. The Company has a current contract with
regard to one of the properties and anticipates sale, fully covering its
principal investment, during December 2007. With regard to the second
property, one of the parties that submitted a Letter of Intent has requested
conversion to a contract. A copy of this proposed contract has been submitted
and is awaiting the approval of their institutional investor. If contracted
for the proposed amount, the Company should recover all principal and a portion
of the foregone interest. Management does not currently believe it is feasible
for expect a sale prior to year end. Excluding the impact of these loans,
virtually all other nonperforming comparisons remained relatively unchanged
from December 31, 2006 to September 30, 2007. In its consideration of
collectibility of nonaccrual loans, management takes into consideration, among
other factors, that 88.4% of nonaccrual loans at September 30, 2007 were
secured by real estate. In the event of foreclosure, any losses would be offset
by funds received through the liquidation of the underlying real estate
collateral.
30 Also included within nonaccrual loans at both December 31,
2006 and September 30, 2007 was a loan secured by other real estate placed in
nonaccrual during the fourth quarter of 2005. In accordance with the Banks
Lending Policy, the loan was downgraded to
substandard at that time. At both December 31, 2006 and September 30,
2007, the principal balance of this loan totaled $3.9 million. The Company
increased the loan balance specifically reserved from $878 thousand at December
31, 2006 to $1.2 million at September 30, 2007. A hearing is scheduled in the
United States Bankruptcy Court on November 14, 2007 at which time management
anticipates a sale of the property. The Company, in addition to the lead bank
and the other participants, believes it will be granted a position as a credit
bidder. Management anticipates that those parties will become owners of the
real estate allowing for preparation of the sale of the property. Troubled debt restructurings entered into by the Company
during the three month period ended September 30, 2007 were reviewed by the
Company to ensure loan classifications were in accordance with applicable
regulations. Any specific allocations identified during the review based on
probable losses have been included in the Companys Allowance for the
applicable period. As of September 30, 2007, management was aware of no other
potential problem loans that were not already categorized as nonaccrual, past
due, or restructured, or that had borrower credit problems causing management
to have serious doubt as to the ability of the borrower to comply with the
present loan repayment terms. The Company regularly reviews its loan portfolio and
management determines whether any loans require classification in accordance
with applicable regulations. The Companys
believes that its loans are appropriately classified. The following table summarizes the changes in the
Companys real estate acquired in settlement of loans, including the balance at
the beginning and end of each period, provision charged to expense, and losses
charged to the Allowance related to the Companys real estate acquired in settlement
of loans for the periods indicated (in thousands).
At and for the three month
At and for the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Real estate acquired in settlement of loans, beginning of period $ 717 728 600 1,954 Add: New real estate acquired in settlement of loans 5,533 72 6,115 154 Less: Sales / recoveries of real estate acquired in settlement of loans (80) (29) (374) (1,150) Less: Provision charged to expense - - (171) (187) Real estate acquired in settlement of loans, end of period $ 6,170 771 6,170 771 Real estate acquired in settlement of loans increased $5.4
million from December 31, 2006 to September 30, 2007 primarily as the result of
two loans secured by other real estate for which foreclosure proceedings were
completed with regard to the securing real estate collateral during July 2007.
Both properties were placed into the Banks real estate acquired in settlement
of loans portfolio in July at fair market value of approximately $5.3 million.
The Company has a current contract with regard to one of the properties and
anticipates sale, fully covering its principal investment, during December
2007. With regard to the second property, one of the parties that submitted a
Letter of Intent has requested conversion to a contract. A copy of this
proposed contract has been submitted and is awaiting the approval of their
institutional investor. If contracted for the proposed amount, the Company should
recover all principal and a portion of the foregone interest. Management does
not currently believe it is feasible for expect a sale prior to year end. Exclusive
of these two loans, the real estate acquired in settlement of loans portfolio
increased $97 thousand from December 31, 2006 to September 30, 2007.
Management believes that real estate acquired in settlement of loans is
effectively managed by the Company considering the increasing industry trends
with regard to foreclosure, but believes that there will always remain a core
level of delinquent loans and real estate and personal property acquired in
settlement of loans from normal lending operations. Sales and recoveries from
the portfolio were down over both comparison periods due primarily to the
marketability of the properties within the portfolio due to the real estate
market decline of recent years. Management does not believe that the lower
sales from the portfolio are an indication of the properties within the
portfolio but rather an indication of the current real estate market. As such,
management believes that as the market begins a rebound, compounded with other
recent positive economic indicators, sales from the portfolio will increase.
Allowance. The
Allowance totaled $8.7 million, $8.5 million, and $8.3 million at September 30,
2006, December 31, 2006, and September 30, 2007, respectively representing
0.94%, 0.90%, and 0.82% of loans, calculated using loans excluding mortgage
loans held for sale and the Allowance, net of unearned income.
31 The following table summarizes activity within the Allowance
at the dates and for the periods indicated (dollars in thousands). Losses and
recoveries are charged or credited to the Allowance at the time realized.
At and for the three month
At and for the nine month
periods ended September 30
periods ended September 30
2007
2006
2007
2006 Allowance balance, beginning of period $ 8,515 8,879 8,527 8,431 Provision for loan losses 400 275 1,200 1,325 Loans charged-off Commercial and industrial 72 104 210 318 Real estate - 1 - 4 family 149 107 361 147 Real estate - construction - - - - Real estate - other 236 44 394 144 General consumer / credit line 249 199 731 557 Total loans charged-off 706 454 1,696 1,166 Recoveries Commercial and industrial 30 2 51 31 Real estate - 1 - 4 family 2 1 35 14 Real estate - construction - - - - Real estate - other 9 2 12 5 General consumer / credit line 30 19 151 84 Total recoveries 71 24 249 134 Net loans charged-off 635 430 1,447 1,032 Allowance balance, end of period $ 8,280 8,724 8,280 8,724 Average loans (1) $ 997,301 905,222 970,999 882,357 Ending loans (1) 1,005,872 930,205 1,005,872 930,205 Net loans charged-off as
a percentage of average loans (1) 0.25 % 0.19 0.20 0.16 Allowance for loan losses as
a percentage of ending loans (1) 0.82 0.94 0.82 0.94 (1) Calculated using loans excluding mortgage loans held for sale, net of unearned income, excluding allowance for loan losses. In evaluating the adequacy of the Allowance and determining
the related provision for loan losses, if any, management considers, among
other things, historical loss experience and change in the size and mix of the
overall portfolio composition, specific allocations based on probable losses
identified during the review of the portfolio, delinquency trends in the portfolio
and the composition of nonperforming loans, including the percent of
nonperforming loans with supplemental mortgage insurance or secured by real
estate, and subjective factors, including local and general economic business
factors and trends, industry and interest rate trends, new lending products,
changes in underwriting criteria, and portfolio concentrations. Management is
currently using a five year lookback period when computing historical loss
rates to determine the allocated component of the Allowance. During the three and nine month periods ended September 30, 2007, net
loans charged-off increased by $205 thousand and $415 thousand, respectively.
Comparisons of fluctuations of net loans charged-off by collateral loan type,
as summarized by the table above, are difficult due to the tasks performed
during the first nine months of 2007 in order to comply with commercial
real estate regulatory reporting requirements, as previously discussed. These
reclassifications may impact the comparability of 2006 and 2007 balances.
Management is currently exploring ways in which to improve the comparability of
these numbers in the future. Management believes that the increase in net loans charged-off over both
periods has been largely confined to a group of residential rental
property loans in which the borrowers admitted they defrauded seven banks by
using false mortgage information. During the second quarter of 2007, the
individuals were sentenced to five years plus three months in prison and
ordered to pay restitution. Management believes that these credit losses during
the periods were a result of inherent losses associated with all normal lending
operations and / or loans where the Borrower defrauded the Bank (as noted
above). Management does not believe that losses within the loan portfolio were the result of subprime lending
practices.
32 The subprime mortgage financial crisis, which has yet to be
resolved, is the result of the sharp rise in foreclosures in the subprime
mortgage market that began in the United States in 2006 and that has become a
global financial crisis in 2007. Management believes that rising interest rates,
which increased the monthly payments on newly popular adjustable rate
mortgages, together with declines in property value from the demise of the United States housing bubble, left many
homeowners unable or unwilling to meet financial commitments and lenders
without a means to recoup their losses. Many observers believe this has
resulted in a severe credit crunch, threatening the solvency of a number of
private banks and other financial institutions. Although the Company does offer adjustable rate mortgages,
the majority of such loans are sold on the secondary market. Additionally, the
Company does not participate in a subprime lending program. As such, the
Company does not anticipate a negative impact on its earnings as a result of
the subprime lending crisis. These factors, however, cannot always safeguard
the Company against fraudulent reporting by borrowers on loan applications. As
a result, the Company cannot guarantee that a negative impact on its earnings
will not occur related to such fraudulent applications. However, management
does not anticipate such losses to be material. Management believes that
the declining trend of the Allowance as a percentage of ending loans results
from several factors including, but not limited to, managements conservative
philosophy regarding its lending mix which impacts risk grades assigned at loan
origination, the ongoing management of asset quality, and growth within the
portfolio being primarily loans secured by real estate which generally involve
less risk that other types of lending, all of which impact Allowance
allocations. The following table indicates managements breakdown of the
Allowance losses by loan category and the percentage of loans in each category
to gross loans at the dates indicated (dollars in thousands). Management
believes that the Allowance can be allocated by category only on an approximate
basis. The allocation of the Allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the Allowance to
absorb losses in other categories.
September 30,
December 31,
2007
2006
Total
allowance
% of
loans
to total
loans
Total
allowance
% of
loans
to total
loans Commercial and industrial $ 922 7.9 % 1,167 13.4 Real estate - 1 - 4 family 1,542 20.7 1,344 18.1 Real estate - construction 49 4.8 20 2.1 Real estate - other 3,190 57.6 2,745 57.1 General consumer 1,181 7.2 1,860 7.4 Credit line 166 0.5 162 0.5 Bankcards 365 1.2 382 1.3 Others 865 0.1 847 0.1 Total $ 8,280 100.0 % 8,527 100.0 As previously discussed, the
fluctuations in outstanding balances during the first nine months of 2007 were
a result of the Companys review of stratifications within the loan portfolio
and the resulting adjustments made to various stratification identifiers. These
reclassifications impact the comparability of 2006 and 2007 balances.
Management is currently exploring ways in which to improve the comparability of
these numbers in the future. The increase in allowance of the
Allowance to the loan portfolio secured by other real estate was due primarily
to an increase in classified assets over the periods presented of approximately
$1.9 million. The decrease in allocation
of the Allowance to the loan portfolio secured by general consumer collateral
was due primarily to a decrease in the historical loss percentage with regard
to this category. Based on the current
economic environment and other factors that impact the assessment of the
Companys Allowance as discussed above, management believes that the Allowance
at September 30, 2007 was maintained at a level adequate to provide for
estimated probable losses in the loan portfolio. However, assessing the
adequacy of the Allowance is a process that requires considerable judgment.
Management's judgments are based on numerous assumptions about current events
believed to be reasonable but which may or may not be valid. Thus, there can be
no assurance that loan losses in future periods will not exceed the current
Allowance or that future increases in the Allowance will not be required. No
assurance can be given that management's ongoing evaluation of the loan portfolio,
in light of changing economic conditions and other relevant circumstances, will
not require future additions to the Allowance, thus adversely impacting the
results of operations of the Company.
33
Asset
Growth Funding
Deposit Activities. Although the Bank has historically
directly competed for deposits with commercial banks and other financial
institutions, in recent years, money market, stock, and fixed income mutual
funds have attracted an increasing share of household savings. Consequently, the
Company considers these funds to be competitors of the Bank. Competition among
various financial institutions is based on interest rates offered on deposit
accounts, service charges, the quality of service rendered, and the convenience
of banking offices. The Bank feels that it sets itself apart from its
competitors by providing superior personal service and a full range of high
quality financial products and services. The following table
summarizes the Companys deposit composition at the dates indicated (dollars in thousands).
September 30,
December 31,
2007
2006
Total
% of Total
Total
% of Total Noninterest-bearing transaction deposit accounts $ 136,990 13.7 % 133,623 13.4 Interest-bearing transaction deposit accounts 381,502 38.3 313,613 31.6 Transaction deposit accounts 518,492 52.0 447,236 45.0 Money market deposit accounts 115,470 11.6 124,874 12.6 Savings deposit accounts 39,380 4.0 41,887 4.2 Time deposit accounts 323,153 32.4 379,584 38.2 Total traditional deposit accounts $ 996,495 100.0 % 993,581 100.0 The Company experienced an increase of $2.9 million in
traditional deposit accounts during the first nine months of 2007 as a result
of an increase in transaction deposit accounts totaling $71.3 million offset by
declines in money market, savings, and time deposit accounts. The increase in
transaction deposit accounts resulted from the Companys continued ability to
attract deposits through pricing adjustments, expansion of its geographic
market area, quality customer service, and reputation in the communities
served. Additionally, the Company has made efforts to enhance its deposit mix by
working to attract transaction deposit accounts which generally have a lower
cost than other traditional deposit accounts. The Company believes that the growth in traditional deposit accounts
continues to be enhanced by the introduction, continuation, and
enhancement of product programs and promotions. Money market deposit accounts decreased $9.4 million, or
7.5% during the first nine months of 2007. During 2006, the Company reported
$14 million of growth within money market deposit accounts related to temporary
public funds from one entity. During the first nine months of 2007,
approximately $8 million of the public funds were transferred from the Bank.
The decline was partially offset by an increase of money market funds of the
Banks trust department totaling $7.8 million. Also impacting the decline in
money market deposit accounts from December 31, 2006 to September 30, 2007 were
customer funds transfers primarily to the Palmetto Index account, included
within interest-bearing transaction deposit accounts summarized above. Savings deposit accounts declined slightly during the first
nine months of 2007. The combination of increasing competition and alternative
investment options has made the task of growing savings deposits difficult.
Savers have numerous alternatives to the retail deposit programs provided by
the Bank. In other words, there has been increasing competition for a shrinking
savings deposit market. As expected, these factors have adversely impacted
growth in savings deposit accounts. Time deposit accounts decreased by $56.4 million, or 14.9% during the
first nine months of 2007. Approximately $144 million in certificate of
deposit accounts offered by the Company matured during the first nine months of
2007. The Company was able to retain approximately 70% of these maturing funds
in certificate of deposit products. The remaining 30% of these maturing funds
were either withdrawn or transferred to another product, primarily the Palmetto
Index account, included within interest-bearing transaction deposit accounts
summarized above.
34 The table set forth below summarizes the Companys weighted
average deposit costs for the periods indicated.
For the three month
For the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Average cost of core deposit accounts 2.92 % 2.42 2.79 2.06 Average cost of time deposit accounts 4.47 4.07 4.39 3.89 Average cost of total traditional deposit accounts 3.52 3.18 3.45 2.94 The table set forth below summarizes the Companys interest
expense on deposit accounts costs for the periods indicated (in thousands).
For the three month periods
For the nine month periods
ended September 30,
ended September 30,
2007
2006
2007
2006 Transaction deposit accounts $ 2,804 1,584 7,536 3,557 Money market deposit accounts 1,057 1,100 2,952 2,872 Savings deposit accounts 36 39 106 112 Total interest expense on core deposit accounts 3,897 2,723 10,594 6,541 Interest expense on time deposit accounts 3,766 3,957 11,733 11,402 Total interest expense on traditional deposit accounts $ 7,663 6,680 22,327 17,943 As summarized in Earnings Review for the applicable period,
the increase in interest expense on deposit accounts when comparing both the
three and nine month periods ended September 30, 2007 over the same periods of
2006 was attributable primarily to changes in rate.
Investment Activities. Insufficient deposit growth
has necessitated going outside of current traditional deposit gathering markets
to obtain other funding sources. In recent years, management has employed
proceeds from maturing short-term taxable securities issued by
government-sponsored enterprises to fund loan growth and repay borrowings. At
December 31, 2004, 2005, and 2006, investment securities available for sale
totaled $143.7 million, $126.0 million, and $116.6 million, respectively. At
September 30, 2007, investment securities available for sale totaled $96.3
million. Utilization. The
following table summarizes the composition of the Companys investment
securities available for sale portfolio at the dates indicated (dollars in
thousands).
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Government-sponsored enterprises $ 20,742 21.6% 42,383 36.4 State and municipal 51,752 53.7 48,014 41.2 Mortgage-backed 23,793 24.7 26,170 22.4 Total investment securities available for sale $ 96,287 100.0% 116,567 100.0 At September 30, 2007, the
investment security portfolio represented 8.1% of total assets, a decline from
10.1% at December 31, 2006. The decline in the total investment securities
portfolio from December 31, 2006 to September 30, 2007 resulted primarily from
short-term taxable securities issued by government-sponsored enterprises
(GSEs) not being reinvested but instead being used to fund loan growth and
repay borrowings during the six month period ended September 30, 2007. See Part I, Item 1. Financial
Statements, Consolidated Statements of Cash Flows contained herein for further discussion regarding
how purchases of and proceeds from the sale, maturities, and / or calls
of investment securities as well as principal paydowns of mortgage-backed
securities impacted the investment securities available for sale portfolio
during the nine month period ended September 30, 2007.
35 The following tables summarize the amortized cost and fair market
values of investment securities available for sale at the dates indicated (in
thousands).
September 30, 2007
December 31, 2006
Amortized
cost
Fair
market
value
Amortized
cost
Fair
market
value Government-sponsored enterprises $ 20,702 20,742 42,554 42,383 State and municipal 52,763 51,752 48,780 48,014 Mortgage-backed 24,136 23,793 26,362 26,170 Total investment securities available for sale $ 97,601 96,287 117,696 116,567 Availability. The Company's
investment portfolio can provide liquidity through any of three ways including
the maturity of a security, the sale of securities for cash, or the use of
securities as collateral in a repurchase agreement or other borrowing. The
Company considers an investment security to be saleable if it is not
encumbered, i.e., the security cannot be sold under a repurchase agreement or
pledged or used as collateral, and it is marketable. Public funds are bank deposits
of state and local municipalities and typically require that the Bank pledge
investment grade securities to the accounts to ensure repayment. Although the
funds are usually a low-cost, relatively stable source of funding for the Bank,
availability depends on the particular government's fiscal policies and cash
flow needs. Approximately 82% of the $96.3
million investment securities portfolio was pledged to secure public deposits
as of September 30, 2007, and $17.3 million was unpledged and, therefore,
available as a liquidity source. 62% of the investment securities portfolio was
pledged to secure public deposits at December 31, 2006 compared with 60% at
September 30, 2006. The fluctuation in pledged securities between these
periods was the result of a diversification of assets pledged to secure public
deposits, securities sold under agreements to repurchase, and for other
purposes as required or permitted by law as further discussed in Part I, Item
1. Financial Statements, Note 10 and
Note 11 contained herein and
Borrowing Activities below with regard to the
Companys borrowings from the FHLB. See Part I, Item
1. Financial Statements, Note 3 contained
herein for further discussion regarding the Companys investment securities portfolio. As noted above, in the event that the Company considers the
need for liquidity provided through the investment portfolio, the security must
be considered saleable. Management believes that the portfolios unrealized
losses are due to interest rate changes, rather than credit quality, on
investments that the Company classifies to indicate that sale is a possibility
but also for which the Company has the ability to hold until maturity. If
liquidity is needed, the Company does not automatically chose an impaired or
the most impaired security to sell to provide needed liquidity, but rather
considers many factors including, but not limited to, asset liability
management. The following table summarizes the gross unrealized losses, fair
market value, and the number of securities in each category of investment
securities available for sale, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2007 (dollars in thousands).
September 30, 2007
Less than 12 months
12 months or longer
Total
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
#
Fair
market
value
Gross
unrealized
losses
Government-sponsored enterprises
-
$
-
$
-
1
3,469
20
1
3,469
20
State and municipal
22
8,038
120
101
39,078
909
123
47,116
1,029
Mortgage-backed
3
6,949
85
22
12,389
274
25
19,338
359
Total investment securities
available for sale
25
$
14,987
$
205
124
54,936
1,203
149
69,923
1,408
Borrowing Activities. General. The Companys reliance on
liability liquidity has increased during the first nine months of 2007, as net
funds provided through traditional deposit accounts have remained relatively
unchanged. Although deposit accounts are the Companys primary funding source
for asset growth, the Company generally has ready access to borrowed funds and
generally finds that such borrowings are an economical way to meet short-term
or unanticipated loan demand or deposit withdrawals. Management believes that
by locking in term funding, liquidity risk can be reduced.
36 Utilization. In addition
to the funds employed from the decline in the investment security
portfolio and the net growth in traditional deposit accounts, borrowings
increased $22.4
million during the first nine months of 2007 primarily to fund asset
growth. Borrowings as a percentage of total liabilities were approximately 6.8%
and 4.9% at September 30, 2007 and December 31, 2006, respectively. The following table summarizes the Companys
borrowings composition at the dates indicated (dollars in thousands).
September 30, 2007
December 31, 2006
Total
% of Total
Total
% of Total Retail repurchase agreements $ 10,130 13.7 % 14,427 28.1 Commercial paper 30,636 41.5 20,988 40.8 Other short-term borrowings 33,000 44.8 6,000 11.7 Long-term borrowings - - 10,000 19.4 Total borrowings $ 73,766 100.0 % 51,415 100.0 The Company offers commercial paper as an alternative
investment tool for its commercial customers. Through a master note
arrangement between the holding company and the Bank, Palmetto Master Notes are
issued for commercial sweep accounts. These master notes are unsecured but are
backed by the full faith and credit of the holding company. The commercial
paper is issued only in conjunction with the automated sweep account customer
agreement on deposits at the Bank level. Other short-term borrowings include federal funds activities
that are the day-to-day unsecured lending of excess reserve funds between
banks. If a bank needs funds to meet either its reserve requirements or other
obligations, it can purchase the excess reserves of another bank. The primary
federal funds market is overnight, but maturities may extend a few days or
weeks. The Company has found wholesale funding to be a logical
answer to its insufficient deposit growth. Wholesale funding possibilities that
the Company employs and / or considers include federal funds lines and FHLB
advances as such funding provides it with the ability to access the exact type
of funding needed, at the exact time, in the exact quantity, and at market rates.
This provides the Company with the flexibility to tailor borrowings to its
specific needs. Wholesale funding utilization may be categorized as either
other short-term borrowings or long-term borrowings depending on maturity
terms. Long-term borrowings are those having maturities greater than one year
when executed. Short-term borrowings are those having maturities less than one
year when executed. The following table summarizes
short-term borrowing utilization at
and for the periods indicated (dollars in thousands).
At and for the three month
At and for the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Retail repurchase agreements Amount outstanding at period end $ 10,130 17,468 10,130 17,468 Average amount outstanding during period 14,187 19,059 13,502 18,492 Maximum amount outstanding at any period end 12,790 18,497 12,790 23,344 Rate paid at period end 3.13 % 3.63 3.13 3.63 Weighted average rate paid during the period 4.17 4.43 4.21 4.08 Commercial paper Amount outstanding at period end $ 30,636 21,887 30,636 21,887 Average amount outstanding during period 29,421 22,402 26,185 19,630 Maximum amount outstanding at any period end 30,636 21,887 30,636 22,104 Rate paid at period end 3.31 % 3.81 3.31 3.81 Weighted average rate paid during the period 4.21 4.37 4.28 4.03 Other short-term borrowings Amount outstanding at period end $ 33,000 - 33,000 - Average amount outstanding during period 29,885 667 11,932 3,445 Maximum amount outstanding at any period end 33,000 - 33,000 13,900 Rate paid at period end 5.49 % - 5.49 - Weighted average rate paid during the period 5.50 2.97 5.57 4.62 * Rates paid are tiered based on level of deposit. Rate presented represents the average rate for all tiers offered at year-end. Of the $33.0 million other
short-term borrowings utilized at September 30, 2007, $9.0 million was
borrowed through federal funds lines with correspondent banks and $24.0 million
was borrowed from the FHLB.
37 Long-term borrowings are those having maturities greater than
one year when executed. The Companys remaining $10.0 million in long-term FHLB
borrowings matured on June 14, 2007. The following
table summarizes long-term borrowing information, all of which were
obtained through the FHLB, at and
for the periods indicated (dollars in thousands).
At and for the three month
At and for the nine month
periods ended September 30,
periods ended September 30,
2007
2006
2007
2006 Long-term FHLB borrowings Amount outstanding at period end $ - 10,000 - 10,000 Average amount outstanding during period - 10,000 6,044 17,810 Maximum amount outstanding at any period end - 10,000 10,000 23,000 Rate paid at period end - % 3.85 - 3.85 Weighted average rate paid during the period - 3.85 3.83 3.60 Availability. If needed, funding
sources have been arranged through federal funds lines at correspondent banks,
the Federal Reserve Discount Window, and the FHLB. During April 2007, Nexity
Bank extended to the Bank a federal funds accommodation in the amount of $10
million for a period beginning on April 25, 2007 and ending on April 30, 2008
subject to specified terms and conditions. Advances under this accommodation
are advances of federal funds with a maturity of the next Banking Day (the next
day other than Saturday or Sunday on which banking business is conducted in
South Carolina). This additional federal funds accommodation in the amount of
$10 million increased the Companys accessible funding sources from $40 million
to $50 million of which $9.0 million was utilized at September 30, 2007. At September 30, 2007, of
its approximately $95.3 million available credit based on qualifying loans to
serve as collateral against borrowings and letters of credit from the FHLB, the
Company employed $24.0 million in borrowings, all of which was determined to be
short-term when employed, and employed $69.0 million in a letter of credit used
to secure public deposits as required or permitted by law. At September 30,
2007, the Company had approximately $2.3 million available credit based on
qualifying loans to serve as collateral against short-term borrowings,
long-term borrowings, and / or letters of credit from the FHLB. Federal Reserve advances,
commonly referred to as discount window borrowings, are secured borrowings
from Federal Reserve Banks. A collateralized borrowing relationship with the
Federal Reserve was in place for the Bank to meet emergency funding needs at
September 30, 2007, however, no borrowings were outstanding. The Bank has not
historically utilized discount window borrowings from the Federal Reserve and
has no plans to do so in the near term. The Bank would typically only utilize
this funding source to meet emergency funding needs.
Management
believes that the correct mix of funding for the Company is between retail
deposits and wholesale funding that provides the overall lowest cost of total
funds but provides the flexibility to manage the liquidity and interest rate
position of the balance sheet. Although the Company has traditionally relied on
customer deposits to fund asset growth, with new trends of loan assets being
fixed rate for at least three to five years and depositors wanting to keep
maturities short, there is little ability for a bank to effectively manage
their interest rate risk position and net interest margins. As a result, the
Company needs the ability to acquire funding that is not only cost effective,
but also has the maturity characteristics that best meet the interest rate
characteristics of its balance sheet. Wholesale funding in the current yield
curve environment can meet these requirements. As such, management believes
that the Company will continue to employ a mix of retail deposits and wholesale
funding to fund asset growth.
Capital Resources Average shareholders equity was $107.7 million for the
three month period ended September 30, 2007, or 9.1% of average assets,
compared with $95.8 million, or 8.5% of average assets, for the same period of
2006. For the nine month period ended September 30, 2007, average
shareholders equity was $105.0 million, or 9.0% of average assets, compared
with $93.6 million, or 8.4% of average assets, for the same period of 2006.
Total shareholders
equity increased from $100.4 million at December 31, 2006 to $108.9 million at
September 30, 2007. The Companys capital ratio of total shareholders equity
to total assets was 9.2% at September 30, 2007 compared with 8.7% at December
31, 2006. During the first nine months of 2007, shareholders equity was
increased through the retention of net income, stock option activity, and
compensation expense related to stock options granted. These increases were
offset by an increase in cash dividends and in accumulated other comprehensive
loss over the nine month period. See Part I, Item 1. Financial Statements, Consolidated Statements of Changes in
Shareholders Equity and Comprehensive Income contained herein for further discussion regarding the changes in
stockholders equity during the nine month period ended September 30, 2007.
38 Palmetto Bancshares and the Bank are required to meet
regulatory capital requirements that currently include several measures of
capital. At September 30, 2007 and 2006, both were each categorized as well
capitalized under the regulatory framework for prompt corrective regulatory
action. See Part I, Item 1. Financial Statements, Note 16 contained herein
for further discussion regarding the Banks and Palmetto Bancshares capital
regulatory requirements. At September 30, 2007, there were no
conditions or events of which management was aware that would materially change
Palmetto Bancshares or the Banks capitalization status. For the third quarter of
2007, the Companys cash dividend payout ratio was 31.21% compared with a
payout ratio of 30.1% during the same period of 2006. Cash dividends per common
share during the third quarter of 2007 totaled $0.19, an increase of 5.6% over
dividends per common share during the same period of 2006 of $0.18. For the nine
month periods ended September 30, 2007 and 2006, respectively, the Companys
cash dividend payout ratio was 31.08% and 30.69%. During the same periods,
cash dividends per common share totaled $0.57 and $0.54, an increase of 5.6%. The
amount of the dividends declared is dependent upon the Companys earnings,
financial condition, capital position, and such other factors the Board deems
relevant. South Carolina regulations restrict the amount of dividends that the
Bank can pay to the holding company and may require prior approval before
declaration and payment of any excess dividend.
Concentrations
Investment
Activities. The following table
summarizes the amortized cost and fair market value of the securities of
issuers that, in the aggregate, exceed ten percent of shareholders equity at
September 30, 2007 (dollars in thousands).
Amortized
Cost
% of
Shareholders
equity
Fair market
value
% of
Shareholders
equity Government-sponsored enterprises FHLB $ 17,724 16.3 % 17,768 16.3 FNMA 989 0.9 983 0.9 $ 18,713 17.2 % 18,751 17.2
Amortized
Cost
% of
Shareholders
equity
Fair market
value
% of
Shareholders
equity Mortgage-backed FNMA
$ 17,643 16.2 % 17,427 16.0 $ 17,643 16.2 % 17,427 16.0
Amortized
Cost
% of
Shareholders
equity
Fair market
value
% of
Shareholders
equity Total GSEs and MBSs FHLB $ 17,724 16.3 % 17,768 16.3 FNMA 18,632 17.1 18,410 16.9 $ 36,356 33.4 % 36,178 33.2 Although most government
sponsored enterprises securities are not backed by the full faith and credit
of the federal government, the Company believes that such securities have
negligible credit risk. Because of the importance of the agencies in promoting
public policy, the Company believes that the federal government would prevent a
government sponsored enterprises from defaulting on its debt obligations. As a
result, management believes that such securities provide what is commonly
described as an implied guarantee.
Lending Activities. Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
principally of loans, investment securities, federal funds sold and due from
bank balances.
39 The Company makes loans to
individuals and small to medium-sized businesses for various personal and
commercial purposes primarily in Upstate, South
Carolina. The Companys loan portfolio is not concentrated in loans to any
single borrower or a relatively small number of borrowers. Additionally,
management is not aware of any concentrations of loans to classes of borrowers
or industries that would be similarly impacted by economic conditions.
Management has identified, and the following table summarizes at the dates
indicated, concentrations of types of lending that it monitors (dollars in
thousands).
September 30, 2007
Outstanding
balance
As a percentage
of total equity
As a percentage of
total loans Loans secured by: Commercial and industrial nonmortgage instruments $ 79,287 75 % 8 % 1-4 family residential mortgage instruments 208,339 198 21 Other residential mortgage instruments 580,739 551 58 Construction mortgage instruments 48,166 46 5
December 31, 2006
Outstanding
balance
As a percentage
of total equity
As a percentage of
total loans Loans secured by: Commercial and industrial nonmortgage instruments $ 126,742 126 % 13 % 1-4 family residential mortgage instruments 171,828 171 18 Other residential mortgage instruments 540,869 539 57 Construction mortgage instruments 19,959 20 2 As previously discussed, the
fluctuations in outstanding balances during the first nine months of 2007 were
a result of the Companys review of stratifications within the loan portfolio
and the resulting adjustments made to various stratification identifiers. These
reclassifications may impact the comparability of 2006 and 2007 balances.
Management is currently exploring ways in which to improve the comparability of
these numbers in the future. Management realizes that there
are inherent risks in all loan portfolios and that there is always risk
associated with a lack of diversification. However, management believes that
risks associated with the concentration of loans secured by nonresidential
mortgage instruments are mitigated through the analysis and underwriting of the
credit requests, the retention of adequate collateral, and the oversight of
development or construction processes, where applicable. The collateral
associated with such loans ranges from income producing commercial properties
to new residential or commercial development projects. Sources of repayment are
analyzed to determine the degree of risk related to each loan during the
underwriting process. Additionally, although included in one reporting
category, loans secured by nonresidential mortgage instruments are comprised of
many types of loans to many types of borrowers located in many geographical
areas. In addition to monitoring potential concentrations of loans
to particular borrowers or groups of borrowers, industries, geographic regions,
and loan types, management monitors whether or not the Company has exposure to
credit risk from other lending practices such as loans that subject borrowers
to substantial payment increases (e.g. principal deferral periods, loans with
initial interest-only periods, etc.) and loans with high loan-to-value ratios. Management has determined that, at September 30, 2007,
the Company has no concentrations in such loans, as the Company does not
typically engage in such lending practices. Additionally, there are industry
practices that could subject the Company to increased credit risk should
economic conditions change over the course of a loans life. For example, the
Company makes adjustable-rate loans and fixed-rate principal-amortizing loans
with maturities prior to the loan being fully paid (i.e. balloon-term loans).
These loans are underwritten and monitored to manage the associated risks.
Therefore, management believes that these particular practices do not subject
the Company to unusual credit risk.
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
its 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 Companys
off-balance sheet arrangements principally include lending commitments,
guarantees, and derivatives.
40 Lending Commitments In the normal course of
business, the Company makes contractual commitments to extend credit that are
legally binding agreements to lend money to customers at predetermined interest
rates for a specific period of time. The Company also provides standby letters
of credit. The Companys credit policies and standards are applied when making
these types of commitments. These instruments are not recorded until funds are
advanced under the commitments. The
Companys contractual commitments to extend credit increased slightly
from $265.8 million at December 31, 2006 to $284.4 million at September 30,
2007 primarily within real estate and bankcard loans. The following table summarizes the Companys contractual
commitments to extend credit, by
collateral type, at September 30, 2007 (in thousands). Commercial and industrial $ 32,873 Real estate 184,900 Credit line 7,716 Bankcards 46,654 Others 12,291 Total contractual commitments to extend credit $ 284,434
Guarantees
At September
30, 2007, the Company recorded no liability for the current carrying amount of
the obligation to perform as a guarantor, and no contingent liability was
considered necessary as such amounts were not considered material. The maximum
potential amount of undiscounted future payments related to standby letters of
credit at September 30, 2007 was $10.3 million compared with $8.3 million at
December 31, 2006. Past experience indicates that these standby letters of
credit will expire unused. However, through its various sources of liquidity,
the Company believes that it has the necessary resources available to meet
these obligations should the need arise. Additionally, the Company does not
believe that the current fair market value of such guarantees was material at
September 30, 2007.
Other Off-Balance Sheet Arrangements At September 30, 2007, the
Company engaged in no transactions, agreements, or other contractual
arrangements to which an entity unconsolidated with the Company is a party,
under which the Company has: Derivatives and Hedging Activities At September 30, 2007, the Companys derivative instruments
consisted of forward sales commitments relating to the Companys commitments to
originate certain residential loans held for sale. Outstanding commitments on mortgage loans not yet closed
(primarily single-family loan commitments) amounted to approximately $6.6
million at September 30, 2007 compared to approximately $3.8 million at
December 31, 2006. The fair market value of derivative assets related to
commitments to originate such residential loans held for sale was not
significant at September 30, 2007. The fair market value of derivative assets
related to forward sales commitments did not significantly differ from the
carrying amount at September 30, 2007.
41
Earnings Review
For the Three Month
Period Ended September 30, 2007
Overview. The following information is intended to supplement
any information relating to the Consolidated Statements of Income contained
within Part I, Item 1 of this Quarterly Report on Form 10-Q.
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(dollars in thousands, except common and per share data)
For the three month periods
ended September 30,
Variance
2007
2006
$
% (unaudited) Interest income Interest and fees on loans $ 20,012 18,033 1,979 11.0 Interest on investment securities available for sale 1,085 1,182 (97) (8.2) Interest on federal funds sold 149 317 (168) (53.0) Dividends on FHLB stock 47 45 2 4.4 Total interest income 21,293 19,577 1,716 8.8 Interest expense Interest on deposits 7,663 6,680 983 14.7 Interest on retail repurchase agreements 149 213 (64) (30.0) Interest on commercial paper 312 247 65 26.3 Interest on other short-term borrowings 414 5 409 8,180.0 Interest on long-term borrowings - 97 (97) (100.0) Total interest expense 8,538 7,242 1,296 17.9 Net interest income 12,755 12,335 420 3.4 Provision for loan losses 400 275 125 45.5 Net interest income after provision for loan losses 12,355 12,060 295 2.4 Noninterest income Service charges on deposit accounts 2,001 1,995 6 0.3 Fees for trust and brokerage services 736 817 (81) (9.9) Mortgage-banking income 468 182 286 157.1 Other 1,407 810 597 73.7 Total noninterest income 4,612 3,804 808 21.2 Noninterest expense Salaries and other personnel 7,040 5,772 1,268 22.0 Occupancy 375 398 (23) (5.8) Premises,
furniture, and equipment leases and rentals 321 341 (20) (5.9) Premises,
furniture, and equipment depreciation 492 506 (14) (2.8)
Other furniture and equipment 482 473 9 1.9 Loss on disposition of premises, furniture, and equipment 346 - 346 100.0 Marketing 208 479 (271) (56.6) Amortization of core deposit intangibles 12 12 - - Other 2,115 2,044 71 3.5 Total noninterest expense 11,391 10,025 1,366 13.6 Net income before provision for income taxes 5,576 5,839 (263) (4.5) Provision for income taxes 1,680 2,038 (358) (17.6) Net income $ 3,896 3,801 95 2.5 Common and per share data Net income - basic $ 0.61 0.60 0.01 1.7 Net income - diluted 0.60 0.59 0.01 1.7 Cash dividends 0.19 0.18 0.01 5.6 Book value 17.02 15.29 1.73 11.3 Weighted average common shares outstanding - basic 6,392,721 6,356,656 Weighted average common shares outstanding - diluted 6,500,962 6,432,546
Net Interest Income. Net interest income is the difference between
interest and fees on interest-earning assets, primarily loans and investment
securities, and interest paid on interest-bearing deposits and other
interest-bearing liabilities. This measure represents the largest component of
earnings for the Company. The net interest margin measures how effectively the
Company manages the difference between the yield on interest-earning assets and
the rate paid on funds to support those assets. 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 on interest-earning
assets and interest rates paid on interest-bearing 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.
42 The following table summarizes the Companys average balance
sheets and net interest income analysis for the periods indicated (dollars in
thousands). The Company's yield on interest-earning assets and cost of
interest-bearing liabilities shown in the table are derived by dividing
interest income and expense by the average balances of interest-earning assets
or interest-bearing liabilities. The following table does not include a
tax-equivalent adjustment to net interest income adjusting the yield for
interest-earning assets earning tax-exempt income to a comparable yield on a
taxable basis.
For the three month periods ended September 30,
2007
2006
Average
Income/
Yield/
Average
Income/
Yield/
balance
expense
rate
balance
expense
rate
Assets
Interest-earnings assets
Loans, net of unearned (1)
$
999,044
$
20,012
7.95
%
$
907,834
$
18,033
7.88
%
Investment securities available for sale, nontaxable (2)
51,393
464
3.58
56,255
512
3.61
Investment securities available for sale, taxable (2)
50,761
621
4.85
60,807
670
4.37
Federal funds sold
10,117
149
5.84
23,083
317
5.45
FHLB stock
3,047
47
6.12
2,598
45
6.87
Total interest-earning assets
1,114,362
21,293
7.58
1,050,577
19,577
7.39
Noninterest-earning assets
Cash and due from banks
31,842
32,861
Allowance for loan losses
(8,408)
(8,869)
Premises and equipment, net
24,735
24,068
Goodwill
3,688
3,688
Other intangible assets
97
148
Accrued interest receivable
6,091
5,731
Other
16,516
13,735
Total noninterest-earning assets
74,561
71,362
Total assets
$
1,188,923
$
1,121,939
Liabilities and Shareholders' Equity
Liabilities
Interest-bearing liabilities
Transaction and money market deposit accounts
$
488,384
$
3,861
3.14
%
$
401,439
$
2,684
2.65
%
Savings deposit accounts
40,440
36
0.35
45,749
39
0.34
Time deposit accounts
334,122
3,766
4.47
385,448
3,957
4.07
Total interest-bearing deposits
862,946
7,663
3.52
832,636
6,680
3.18
Retail repurchase agreements
14,187
149
4.17
19,059
213
4.43
Commercial paper (Master notes)
29,421
312
4.21
22,402
247
4.37
Other short-term borrowings
29,885
414
5.50
667
5
2.97
Long-term borrowings
-
-
-
10,000
97
3.85
Total interest-bearing liabilities
936,439
8,538
3.62
884,764
7,242
3.25
Noninterest-bearing liabilities
Noninterest-bearing deposits
135,249
134,141
Accrued interest payable
2,427
2,370
Other
7,104
4,827
Total noninterest-bearing liabilities
144,780
141,338
Total liabilities
1,081,219
1,026,102
Shareholders' equity
107,704
95,837
Total liabilities and shareholders' equity
$
1,188,923
$
1,121,939
NET INTEREST INCOME / NET YIELD ON
INTEREST-EARNING ASSETS
$
12,755
4.54
%
$
12,335
4.66
%
(1)
Calculated including mortgage loans held for sale. 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.
(2)
The average balances for investment securities include the unrealized gain or loss recorded for available for sale securities.
43
WASHINGTON, D.C. 20549
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
South Carolina
29360
Outstanding at November 6, 2007
-----------------------------
Item 6.
Exhibits
September 30,
December 31,
September 30,
At and for the three month
periods ended September 30,
During the three month period ended September 30, 2007 compared with the same
period of 2006, the Company experienced increases in both average yield on
interest-earning assets and average cost of interest-bearing liabilities. The
average yield on interest-earning assets increased 19 basis points to 7.58%
during the third quarter of 2007 from 7.39% during the same period of 2006. The
average cost of interest-bearing liabilities increased 37 basis points to 3.25%
from 3.62% when comparing the same periods. Average interest-earning assets
increased $63.8 million during the quarter ended September 30, 2007 over the
same quarter of 2006, primarily within the loan portfolio, while
interest-bearing liabilities increased $51.7 million over the same period. Rates paid during the three month period ended
September 30, 2007 increased from those paid for the three month period ended
September 30, 2006 primarily as a result of increases in the federal
funds rate by the Federal Reserve Open Market Committee.
The following rate / volume analysis summarizes the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate when comparing the three month period ended September 30, 2007 to the three month period ended September 30, 2006 (in thousands). The impact of the combination of rate and volume change has been divided equally between the rate change and volume change.
|
|
|
For the three month period ended September 30, 2007 |
|||||
|
|
|
2006 |
|
|
|||
|
|
|
Volume |
|
Rate |
|
Total |
|
Interest-earnings assets |
|
|
|
|
|
|||
|
Loans, net of unearned |
$ |
1,826 |
|
153 |
|
1,979 |
|
|
Investment securities available for sale |
(163) |
|
66 |
|
(97) |
||
|
Federal funds sold |
(193) |
|
25 |
|
(168) |
||
|
FHLB stock |
5 |
|
(3) |
|
2 |
||
|
|
Total interest-earning assets |
$ |
1,475 |
|
241 |
|
1,716 |
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|||
|
Interest-bearing deposits |
$ |
250 |
|
733 |
|
983 |
|
|
Retail repurchase agreements |
(54) |
|
(10) |
|
(64) |
||
|
Commercial paper |
74 |
|
(9) |
|
65 |
||
|
Other short-term borrowings |
187 |
|
222 |
|
409 |
||
|
Long-term borrowings |
(326) |
|
229 |
|
(97) |
||
|
|
Total interest-bearing liabilities |
$ |
131 |
|
1,165 |
|
1,296 |
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
$ |
1,344 |
|
(924) |
|
420 |
|
|
|
|
|
|
|
|
Provision for Loan Losses. The Companys process for determining an appropriate level for the Allowance is based on a comprehensive, well-documented, and consistently applied analysis of its loan portfolio. As discussed in Financial Condition, Lending Activities, all significant factors that affect the collectibility of the portfolio and support the credit losses estimated are considered during this process. Once this monthly process is completed, a provision for loan losses is charged to earnings in order to maintain the Allowance at a level deemed adequate to provide for estimated probable losses in the loan portfolio. The provision for loan losses was $400 thousand and $275 thousand for the three month periods ended September 30, 2007 and 2006. The percentage of the Allowance to ending loans was reduced to 0.82% of gross loans, excluding mortgage loans held for sale, outstanding at September 30, 2007 from 0.94% at September 30, 2006. See Financial Condition, Lending Activities, contained herein for a discussion regarding the Companys accounting policies related to, factors impacting, and methodology for analyzing, the adequacy of the Companys Allowance and the related provision for loan losses.
Noninterest Income. Noninterest income during the three month period ended September 30, 2007 increased $808 thousand, or 21.2%, to $4.6 million from $3.8 million during the three month period ended September 30, 2006 due, primarily, to increases in the mortgage-banking income and other noninterest income financial statement line items.
Service charges on deposit accounts comprise a significant component of noninterest income and comprised 52.4% of noninterest income during the three month period ended September 30, 2006 compared with 43.4% for the same period of 2007. Management believes that this declining trend in service charges on deposit accounts is primarily related to nonsufficient funds and overdraft service charge declines due to an increase in alternative transaction methods such as debit cards. The increased use of debit cards has decreased the Companys service charge opportunities, since the merchant typically decline transactions that would otherwise result in overdrafts. The Company periodically monitors competitive fee schedules and examines alternative opportunities to maximize earnings from this area.
44
The Company sells most of the residential mortgage loans it originates in the secondary market with servicing rights retained. Mortgage loans serviced for the benefit of others amounted to $339.4 million, $325.1 million, and $310.0 million at September 30, 2007, December 31, 2006, and September 30, 2006, respectively.
The following table summarizes the components of mortgage-banking income for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
||
|
|
|||
For the three month |
||||
periods ended September 30, |
||||
|
|
2007 |
2006 |
|
Mortgage-servicing fees |
$ |
204 |
193 |
|
Gain on sale of loans |
279 |
80 |
||
Mortgage-serciving right amortization, impairment, and recoveries |
(60) |
(157) |
||
Other mortgage-banking income |
45 |
66 |
||
|
Total mortgage-banking income |
$ |
468 |
182 |
|
|
|
|
The increase in mortgage-servicing fees correlates to the increase in mortgage loans serviced for others.
The increase in gain on sale of mortgage loans was caused by the increase in sales when comparing the periods noted. During the three month period ended September 30, 2007, proceeds from the sale of mortgage loans held for sale totaled $49.8 million, up from $32.6 million during the same period of 2006.
Amortization, impairment, and recoveries within the mortgage-servicing rights portfolio declined during the three month period ended September 30, 2007 as compared with the same period of 2006. As interest rates have risen, refinancing activity has slowed. As such, the component of mortgage-servicing rights amortization, impairment, and recoveries relative to refinancing activity (prepayment speeds) slowed as well thereby positively impacting the amortization, impairment, and recoveries within the Companys mortgage-servicing rights portfolio. Although the Federal Reserve Open Market Committee decreased rates during September 2007, due to the timing of the decrease, the Company did not experience any significant impacts of this decrease during the third quarter of 2007.
See Part I, Item 1. Financial Statements, Note 6 contained herein for a further discussion regarding the Companys mortgage-servicing rights portfolio.
Other noninterest income increased $597 thousand, or 73.7%, during the three month period ended September 30, 2007 over the same period of 2006 primarily as a result of the Companys sale of its MasterCard stock. During the second quarter of 2007, the Board of Directors of MasterCard Incorporated approved an amendment to its certificate of incorporation designed to facilitate an accelerated, orderly conversion of its Class B common stock into MasterCard Class A common stock for subsequent sale. Accordingly, during the third quarter of 2007, the Bank converted its shares of Class B common stock on a one-for-one basis into shares of Class A common stock for subsequent sale to public investors. This transaction resulted in pretax income, net of transaction fees, totaling $487 thousand.
Noninterest Expense. Noninterest expense during the three month period ended September 30, 2007 increased $1.4 million, or 13.6%, to $11.4 million from $10.0 million during the three month period ended September 30, 2006. This increase resulted primarily from increases in the salaries and other personnel expense and loss on disposition of premises, furniture, and equipment financial statement line items slightly offset by a decrease in the marketing financial statement line item.
Salaries and other personnel expense increased by $1.3 million to $7.0 million during the three month period ended September 30, 2007 from $5.8 million during the three month period ended September 30, 2006. The increase in salaries and other personnel expense resulted from several factors, both recurring and nonrecurring in nature.
Annual merit raises for employees and officers as well as the addition of new officer positions including those positions created in connection with the opening of the new Boiling Springs banking office during 2006 contributed to the increase in salaries and other personnel expense during the three month period ended September 30, 2007 over the same period of 2006. The Bank celebrated the grand opening of its Boiling Springs banking office on October 16, 2006.
45
The Company uses split-dollar life insurance arrangements to provide retirement and death benefits to key employees. Financial Accounting Standards Board (FASB) Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position be reported as an asset. The Company previously recorded the amount that could be realized under the insurance contract as of the date of the statement of financial position as expense in the Banks Consolidated Statement of Income. During the third quarter of 2007, the Company recorded cash surrender value of $898 thousand in Other Assets on the Consolidated Balance Sheets with an offsetting entry to income (as these amounts had been expensed in the past) with regard to these policies.
During 2007, in conjunction with the audit of the Companys 401(k) Retirement Plan (the Plan), an administrative error was discovered that had resulted in participants being denied the opportunity to fully defer the appropriate amount of compensation under the plan. During the third quarter of 2007, the Company calculated and accrued the denied deferral amount and the resulting employer match, including missed earnings, and believes such amounts total approximately $1.3 million through December 31, 2006. As such, the Company accrued this amount within Salaries and Other Personnel Expense on the Consolidated Statements of Income for the three and nine month periods ended September 30, 2007. The Company is currently calculating such amounts for the period since December 31, 2006. The Companys management intends to contribute these amounts to each participants account during the fourth quarter of 2007 by correcting the error under guidelines established by the Internal Revenue Service.
During the second quarter of 2007, the Company signed a build-to-suit lease agreement with regard to the relocation of its corporate headquarters to Greenville, South Carolina. Under the terms of this agreement, the Companys new headquarters will be constructed on the site of the Companys current downtown Greenville banking office that is leased from the same lessor. In conjunction with the demolition of the current downtown Greenville banking office, the Company wrote off $346 thousand in leasehold improvements during the third quarter of 2007. See Part I, Item 1. Financial Statements, Note 5 contained herein for further discussion regarding this write off.
Marketing and advertising expense decreased $271 thousand during the three month period ended September 30, 2007 compared with the three month period ended September 30, 2006 primarily due to marketing costs incurred during the third quarter of 2006 in conjunction with the Companys 100-year anniversary celebration.
During the second quarter of 2006, as a result of a software upgrade, the Company experienced a temporary delay in check processing and electronic check processing. At December 31, 2006, the Bank had exposure of, and reserved for in Other Noninterest Expense in the Consolidated Statements of Income, approximately $174 thousand related to items uncollected at that date. At the end of the first quarter of 2007, the Bank had collected virtually all of these items. As such, this reserve was reversed during the first quarter of 2007. As of September 30, 2007, approximately $36 thousand in check processing and electronic check processing items had been presented for which the Bank had to cover. Inclusive of these transactions, sundry losses decreased $74 thousand during the third quarter of 2007 over the same period of 2006 to a balance of $4 0 thousand. Exclusive of the first quarter reversal of the 2006 reserve, sundry losses increased $100 thousand during the third quarter of 2007 over the same period of 2006 to a balance of $214 thousand.
Provision for Income Taxes. Income tax expense totaled $1.7 million for the three month period ended September 30, 2007 compared with $2.0 million for the three month period ended September 30, 2006. The Companys effective tax rate was 30.1% during the 2007 period and 34.9% during the 2006 period. The decrease in the effective tax rate when comparing the two periods was primarily the result of the recognition of an increase in nontaxable income relative to cash surrender value of key man life insurance during the third quarter of 2007. In the Companys Annual Report on Form 10-K for the year ended December 31, 2006, the Company reported that it anticipated the effective income tax rate applicable to current taxable income to approximate between 34% and 36% for 2007. Since December 31, 2006, there have been no events or conditions that management believes would change this projection.
46
For the Nine Month Period Ended September 30, 2007
Overview. The following information is intended to supplement any information relating to the Consolidated Statements of Income contained within Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PALMETTO BANCSHARES, INC. AND SUBSIDIARY |
||||||||||||||
Consolidated Statements of Income |
||||||||||||||
(dollars in thousands, except common and per share data) |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
For the nine month periods |
|
|
|
|
||||
|
|
|
|
|
|
ended September 30, |
|
Variance |
||||||
|
|
|
|
|
|
2007 |
|
2006 |
|
$ |
|
|
% |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Interest income |
|
|
|
|
|
|
|
|
|
|||||
|
Interest and fees on loans |
|
$ |
58,079 |
|
51,601 |
|
6,478 |
|
12.6 |
||||
|
Interest on investment securities available for sale |
3,386 |
|
3,646 |
|
(260) |
|
(7.1) |
||||||
|
Interest on federal funds sold |
|
600 |
|
903 |
|
(303) |
|
(33.6) |
|||||
|
Dividends on FHLB stock |
|
122 |
|
144 |
|
(22) |
|
(15.3) |
|||||
|
|
|
Total interest income |
|
62,187 |
|
56,294 |
|
5,893 |
|
10.5 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
|
|
|
|
|||||
|
Interest on deposits |
|
22,327 |
|
17,943 |
|
4,384 |
|
24.4 |
|||||
|
Interest on retail repurchase agreements |
425 |
|
564 |
|
(139) |
|
(24.6) |
||||||
|
Interest on commercial paper |
|
839 |
|
591 |
|
248 |
|
42.0 |
|||||
|
Interest on other short-term borrowings |
497 |
|
119 |
|
378 |
|
317.6 |
||||||
|
Interest on long-term borrowings |
173 |
|
479 |
|
(306) |
|
(63.9) |
||||||
|
|
|
Total interest expense |
|
24,261 |
|
19,696 |
|
4,565 |
|
23.2 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
Net interest income |
37,926 |
|
36,598 |
|
1,328 |
|
3.6 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Provision for loan losses |
|
1,200 |
|
1,325 |
|
(125) |
|
(9.4) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
Net interest income after provision for loan losses |
36,726 |
|
35,273 |
|
1,453 |
|
4.1 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Noninterest income |
|
|
|
|
|
|
|
|
|
|||||
|
Service charges on deposit accounts |
5,900 |
|
6,023 |
|
(123) |
|
(2.0) |
||||||
|
Fees for trust and brokerage services |
2,258 |
|
2,445 |
|
(187) |
|
(7.6) |
||||||
|
Mortgage-banking income |
|
987 |
|
679 |
|
308 |
|
45.4 |
|||||
|
Investment securities gains |
|
- |
|
3 |
|
(3) |
|
(100.0) |
|||||
|
Other |
|
|
|
3,164 |
|
2,533 |
|
631 |
|
24.9 |
|||
|
|
|
Total noninterest income |
12,309 |
|
11,683 |
|
626 |
|
5.4 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Noninterest expense |
|
|
|
|
|
|
|
|
||||||
|
Salaries and other personnel |
|
19,234 |
|
17,256 |
|
1,978 |
|
11.5 |
|||||
|
Occupancy |
|
|
1,124 |
|
1,152 |
|
(28) |
|
(2.4) |
||||
|
Premises, furniture, and equipment leases and rentals |
946 |
|
987 |
|
(41) |
|
(4.2) |
||||||
|
Premises, furniture, and equipment depreciation |
1,478 |
|
1,528 |
|
(50) |
|
(3.3) |
||||||
|
Other furniture and equipment |
|
1,385 |
|
1,408 |
|
(23) |
|
(1.6) |
|||||
|
Loss on disposition of premises, furniture, and equipment |
346 |
|
- |
|
346 |
|
100.0 |
||||||
|
Marketing |
|
|
695 |
|
1,217 |
|
(522) |
|
(42.9) |
||||
|
Amortization of core deposit intangibles |
36 |
|
36 |
|
- |
|
- |
||||||
|
Other |
|
|
|
6,160 |
|
6,592 |
|
(432) |
|
(6.6) |
|||
|
|
|
Total noninterest expense |
31,404 |
|
30,176 |
|
1,228 |
|
4.1 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
Net income before provision for income taxes |
17,631 |
|
16,780 |
|
851 |
|
5.1 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Provision for income taxes |
|
5,909 |
|
5,598 |
|
311 |
|
5.6 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
Net income |
|
$ |
11,722 |
|
11,182 |
|
540 |
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Common and per share data |
|
|
|
|
|
|
|
|
||||||
|
Net income - basic |
|
$ |
1.84 |
|
1.76 |
|
0.08 |
|
4.5 |
||||
|
Net income - diluted |
|
1.81 |
|
1.74 |
|
0.07 |
|
4.0 |
|||||
|
Cash dividends |
|
0.57 |
|
0.54 |
|
0.03 |
|
5.6 |
|||||
|
Book value |
|
|
17.02 |
|
15.29 |
|
1.73 |
|
11.3 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding - basic |
6,385,625 |
|
6,351,646 |
|
|
|
|
||||||
|
Weighted average common shares outstanding - diluted |
6,484,293 |
|
6,427,536 |
|
|
|
|
47
Net Interest Income. The following table summarizes the Companys average balance sheets and net interest income analysis for the periods indicated (dollars in thousands).
|
|
|
|
For the nine month periods ended September 30, |
|
||||||||||
|
|
|
|
2007 |
|
2006 |
|
||||||||
|
|
|
|
Average |
Income/ |
Yield/ |
|
Average |
Income/ |
Yield/ |
|
||||
|
|
|
|
balance |
expense |
rate |
|
balance |
expense |
rate |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|||||
Interest-earnings assets |
|
|
|
|
|
|
|
|
|||||||
|
Loans, net of unearned (1) |
$ |
973,358 |
$ |
58,079 |
7.98 |
% |
$ |
885,480 |
$ |
51,601 |
7.79 |
% |
||
|
Investment securities available for sale, nontaxable (2) |
49,973 |
1,340 |
3.59 |
|
55,409 |
1,505 |
3.63 |
|
||||||
|
Investment securities available for sale, taxable (2) |
57,771 |
2,046 |
4.74 |
|
65,903 |
2,141 |
4.34 |
|
||||||
|
Federal funds sold |
15,517 |
600 |
5.17 |
|
23,941 |
903 |
5.04 |
|
||||||
|
FHLB stock |
2,724 |
122 |
5.99 |
|
3,043 |
144 |
6.33 |
|
||||||
|
|
Total interest-earning assets |
1,099,343 |
62,187 |
7.56 |
|
1,033,776 |
56,294 |
7.28 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-earning assets |
|
|
|
|
|
|
|
|
|||||||
|
Cash and due from banks |
30,841 |
|
|
|
37,238 |
|
|
|
||||||
|
Allowance for loan losses |
(8,426) |
|
|
|
(8,716) |
|
|
|
||||||
|
Premises and equipment, net |
24,861 |
|
|
|
23,529 |
|
|
|
||||||
|
Goodwill |
3,688 |
|
|
|
3,688 |
|
|
|
||||||
|
Other intangible assets |
109 |
|
|
|
158 |
|
|
|
||||||
|
Accrued interest receivable |
5,975 |
|
|
|
5,298 |
|
|
|
||||||
|
Other |
|
14,366 |
|
|
|
13,066 |
|
|
|
|||||
|
|
Total noninterest-earning assets |
71,414 |
|
|
|
74,261 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Total assets |
$ |
1,170,757 |
|
|
|
$ |
1,108,037 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|||||||
Liabilities |
|
|
|
|
|
|
|
|
|
||||||
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|||||||
|
Transaction and money market deposit accounts |
$ |
466,518 |
$ |
10,488 |
3.01 |
% |
$ |
377,519 |
$ |
6,429 |
2.28 |
% |
||
|
Savings deposit accounts |
41,518 |
106 |
0.34 |
|
46,007 |
112 |
0.33 |
|
||||||
|
Time deposit accounts |
357,493 |
11,733 |
4.39 |
|
391,663 |
11,402 |
3.89 |
|
||||||
|
|
Total interest-bearing deposits |
865,529 |
22,327 |
3.45 |
|
815,189 |
17,943 |
2.94 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Retail repurchase agreements |
13,502 |
425 |
4.21 |
|
18,492 |
564 |
4.08 |
|
||||||
|
Commercial paper (Master notes) |
26,185 |
839 |
4.28 |
|
19,630 |
591 |
4.03 |
|
||||||
|
Other short-term borrowings |
11,932 |
497 |
5.57 |
|
3,445 |
119 |
4.62 |
|
||||||
|
Long-term borrowings |
6,044 |
173 |
3.83 |
|
17,810 |
479 |
3.60 |
|
||||||
|
|
Total interest-bearing liabilities |
923,192 |
24,261 |
3.51 |
|
874,566 |
19,696 |
3.01 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|||||||
|
Noninterest-bearing deposits |
133,663 |
|
|
|
133,317 |
|
|
|
||||||
|
Accrued interest payable |
2,455 |
|
|
|
2,189 |
|
|
|
||||||
|
Other |
|
6,411 |
|
|
|
4,381 |
|
|
|
|||||
|
|
Total noninterest-bearing liabilities |
142,529 |
|
|
|
139,887 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Total liabilities |
1,065,721 |
|
|
|
1,014,453 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shareholders' equity |
105,036 |
|
|
|
93,584 |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Total liabilities and shareholders' equity |
$ |
1,170,757 |
|
|
|
$ |
1,108,037 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
||||
NET INTEREST INCOME / NET YIELD ON |
|
|
|
|
|
|
|
|
|||||||
|
INTEREST-EARNING ASSETS |
|
$ |
37,926 |
4.61 |
% |
|
$ |
36,598 |
4.73 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1) |
Calculated including mortgage loans held for sale. 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. |
||||||||||||||
(2) |
The average balances for investment securities include the unrealized gain or loss recorded for available for sale securities. |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
48
The following rate / volume analysis summarizes the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate when comparing the nine month period ended September 30, 2007 to the nine month period ended September 30, 2006 (in thousands). The impact of the combination of rate and volume change has been divided equally between the rate change and volume change.
|
|
|
|
|
|
|
|
|
|
|
|
For the nine month period ended September 30, 2007 compared with the nine month period ended September 30, 2006 |
|||||
|
|
|
Volume |
|
Rate |
|
Total |
|
Interest-earnings assets |
|
|
|
|
|
|||
|
Loans, net of unearned |
$ |
5,220 |
|
1,258 |
|
6,478 |
|
|
Investment securities available for sale |
(439) |
|
179 |
|
(260) |
||
|
Federal funds sold |
(327) |
|
24 |
|
(303) |
||
|
FHLB stock |
(14) |
|
(8) |
|
(22) |
||
|
|
Total interest-earning assets |
$ |
4,440 |
|
1,453 |
|
5,893 |
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|||
|
Interest-bearing deposits |
$ |
1,158 |
|
3,226 |
|
4,384 |
|
|
Retail repurchase agreements |
(159) |
|
20 |
|
(139) |
||
|
Commercial paper |
208 |
|
40 |
|
248 |
||
|
Other short-term borrowings |
12 |
|
366 |
|
378 |
||
|
Long-term borrowings |
(83) |
|
(223) |
|
(306) |
||
|
|
Total interest-bearing liabilities |
$ |
1,136 |
|
3,429 |
|
4,565 |
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
$ |
3,304 |
|
(1,976) |
|
1,328 |
|
|
|
|
|
|
|
|
Provision for Loan Losses. The provision for loan losses was $1.2 million and $1.3 million for the nine month periods ended September 30, 2007 and 2006. The percentage of the Allowance to ending loans was reduced to 0.82% of gross loans, excluding mortgage loans held for sale, outstanding at September 30, 2007 from 0.94% at September 30, 2006. See Financial Condition, Lending Activities, contained herein for a discussion regarding the Companys accounting policies related to, factors impacting, and methodology for analyzing the adequacy of the Companys Allowance and the related provision for loan losses.
Noninterest Income. Noninterest income during the nine month period ended September 30, 2007 increased $626 thousand, or 5.4%, to $12.3 million from $11.7 million during the nine month period ended September 30, 2006 due, primarily, to increases in the mortgage-banking income and other noninterest income financial statement line items offset by decreases in the service charges on deposit accounts and fees for trust and brokerage services financial statement line items.
Service charges on deposit accounts comprise a significant component of noninterest income and comprised 51.6% of noninterest income during the nine month period ended September 30, 2006 compared with 47.9% for the same period of 2007. See For the Three Months Ended September 30, 2007, Noninterest Income, for discussion regarding this declining trend over these periods.
Fees for trust and brokerage services declined $187 thousand during the nine month period ended September 30, 2007 over the same period of 2006 primarily as a result of declined opportunities for estate fees. The Banks Trust Department serves as executor of its customers estates and, as such, administers the deceaseds estate based on his or her wishes. Fees are earned in conjunction with the Trust Departments services provided as executor. The opportunity for such services and the resulting fees declined from the nine month period ended September 30, 2006 to the same period of 2007.
49
The following table summarizes the components of mortgage-banking income for the periods indicated (in thousands).
For the nine month | |||||
periods ended September 30, | |||||
|
|
2007 |
2006 |
|
|
Mortgage-servicing fees |
$ |
613 |
580 |
|
|
Gain on sale of loans |
614 |
370 |
|
||
Mortgage-serciving right amortization, impairment, and recoveries |
(360) |
(429) |
|
||
Other mortgage-banking income |
120 |
158 |
|
||
|
Total mortgage-banking income |
$ |
987 |
679 |
|
|
|
|
|
|
See For the Three Months Ended September 30, 2007, Noninterest Income, for discussion regarding fluctuations in the components of mortgage-banking income for the nine month periods ended September 30, 2007 when compared with the same period of 2006.
See For the Three Months Ended September 30, 2007, Noninterest Income, for discussion regarding increase in other noninterest income for the nine month periods ended September 30, 2007 when compared with the same period of 2006.
Noninterest Expense. Noninterest expense during the nine month period ended September 30, 2007 increased $1.2 million, or 4.1%, to $31.4 million from $30.2 million during the nine month period ended September 30, 2006. This increase resulted primarily from increases in the salaries and other personnel expense and loss on disposition of premises, furniture, and equipment financial statement line items slightly offset by decreases in the marketing and other noninterest expense financial statement line items.
Salaries and other personnel expense increased by $2.0 million to $19.2 million during the nine month period ended September 30, 2007 from $17.3 million during the nine month period ended September 30, 2006 as a result of the same factors discussed above with regard to the fluctuation in this financial statement line item when comparing the three month period ended September 30, 2007 to the same period of 2006.
See For the Three Months Ended September 30, 2007, Noninterest Expense, for discussion regarding the increase in Loss on Disposition of Premises, Furniture, and Equipment for the nine month periods ended September 30, 2007 when compared with the same period of 2006.
Marketing and advertising expense decreased $522 thousand during the nine month period ended September 30, 2007 compared with the nine month period ended September 30, 2006 as a result of the same factors discussed above with regard to the fluctuation in this financial statement line item when comparing the three month period ended September 30, 2007 to the same period of 2006.
Other noninterest expense decreased $432 thousand during the nine month period ended September 30, 2007 when compared with the same period of 2006. The decrease in other noninterest expense was the result of an accumulation of changes in several accounts, none of which were determined to be material.
During the second quarter of 2006, as a result of a software upgrade, the Company experienced a temporary delay in check processing and electronic check processing. At December 31, 2006, the Bank had exposure of, and reserved for in Other Noninterest Expense in the Consolidated Statements of Income, approximately $174 thousand related to items uncollected at that date. At the end of the first quarter of 2007, the Bank had collected virtually all of these items. As such, this reserve was reversed during the first quarter of 2007. As of September 30, 2007, approximately $36 thousand in check processing and electronic check processing items had been presented for which the Bank had to cover. Inclusive of these transactions, sundry losses increased $102 thousand during the first nine months of 2007 over the same period of 2006 to a balance of $114 thousand. Exclusive of the first q uarter reversal of the 2006 reserve, sundry losses increased $276 thousand during the nine month period ended September 30, 2007 over the same period of 2006 to a balance of $288 thousand.
Provision for Income Taxes. Income tax expense totaled $5.9 million for the nine month period ended September 30, 2007 compared with $5.6 million for the nine month period ended September 30, 2006. The Companys effective tax rate was 33.5% during the 2007 period and 33.4% during the 2006 period.
Accounting and Reporting Matters
See Part I, Item 1. Financial Statements, Note 1 contained herein for further discussion regarding recently adopted and recently issued accounting pronouncements and their expected impact on the Company.
50
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has risk management policies and systems to monitor and limit exposure to interest rate risk. Specifically, the Company manages its exposure to fluctuations in interest rates through policies established by its Asset / Liability Committee and approved by its Board of Directors. The primary goal of the Asset / Liability Committee is to monitor and limit exposure to interest rate risk through implementation of various strategies. While the Asset / Liability Committee develops these strategies with the goal of ultimately positioning the balance sheet to minimize fluctuations in income associated with interest rate risk, it also monitors the Companys liquidity and capital positions to ensure that its strategies result in adequate capital positions. The Companys primary source of capital has been the retention of net income. In order to ensure adequate levels of capital, an ongoing assessment is conducted of projected sources and uses of capital in conjunction with projected increases in assets and the level of risk. Management believes it has adequate capital to meet its needs without entering capital markets.
Market risk sensitive instruments are generally defined as derivatives and other financial instruments. At September 30, 2007, the Company had not used any derivatives to alter its interest rate risk profile. The Companys financial instruments include loans, federal funds sold, FHLB stock, investment securities, deposits, and borrowings. At September 30, 2007, the Companys interest-sensitive assets totaled approximately $1.1 billion while interest-sensitive liabilities totaled approximately $933.3 million. At December 31, 2006, the Companys interest-sensitive assets totaled approximately $1.1 billion while interest-sensitive liabilities totaled approximately $911.4 million.
The yield on interest-sensitive assets and the cost of interest-sensitive liabilities for the three month period ended September 30, 2007 was 7.58% and 3.62%, respectively, compared to 7.39% and 3.25%, respectively, for the same period of 2006. The yield on interest-sensitive assets and the cost of interest-sensitive liabilities for the nine month period ended September 30, 2007 was 7.56% and 3.51%, respectively, compared to 7.28% and 3.01%, respectively, for the same period of 2006. The increase in the yield on interest-sensitive assets and the cost of interest-sensitive liabilities during both the three and nine month periods ended September 30, 2007 over the same periods of 2006 resulted primarily from increases in the federal funds rate by the Federal Reserve Open Market Committee.
The Company evaluated the results of its net interest income simulation prepared as of September 30, 2007 for interest rate risk management purposes. Overall, the model results indicate that the Companys interest rate risk sensitivity is within limits set by the Companys guidelines and the Companys balance sheet is liability sensitive. A liability sensitive balance sheet suggests that in falling interest rate environment, net interest margin would increase and during an increasing interest rate environment, net interest margin would decrease.
Net Interest Income Simulation
The following table summarizes the forecasted change in net interest income and net interest margin as of September 30, 2007 using a base market rate and the estimated change to the base scenario given upward and downward movement in interest rates of 100 basis points and 200 basis points (dollars in thousands).
|
|
|
|
|
Interest rate scenario |
Percentage change from current projection of net interest income |
|
Net interest margin change (in basis points) |
|
Up 200 basis points |
(8.01) |
% |
(0.37) |
|
Up 100 basis points |
(3.90) |
|
(0.18) |
|
BASE CASE |
- |
|
- |
|
Down 100 basis points |
3.39 |
|
0.16 |
|
Down 200 basis points |
6.68 |
|
0.31 |
|
The simulation results as of September 30, 2007, assuming all other variables remained unchanged, indicate the Companys interest rate risk position was liability sensitive as the simulated impact of a downward movement in interest rates of 100 basis points would result in a 3.39% increase in net interest income over the subsequent 12 month period while an upward movement in interest rates of 100 basis points would result in a 3.90% decrease in net interest income over the next 12 months. The simulation results indicate that a 100 basis point downward shift in interest rates would result in a 16 basis point increase in net interest margin. Conversely, a 100 basis point increase in interest rates would cause an 18 basis point decrease in net interest margin. The projected negative impact on the Companys net interest income for the twelve month period does not exceed the 20% threshold prescribed by the Asset Liability Committees policy.
51
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of the Companys Chief Executive Officer, the President and Chief Operating Officer (Principal Financial Officer) and several other members of the Companys senior management as of September 30, 2007, the last day of the period covered by this Quarterly Report. The Companys Chief Executive Officer and the President and Chief Operating Officer (Principal Financial Officer) concluded that the Companys disclosure controls and procedures were effective as of September 30, 2007 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 Companys management (including the Chief Executive Officer and the President and Chief Operating Officer (Principal Financial Officer)) in a timely manner, and is (ii) recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms.
During the third quarter of 2007, the Company did not make any changes in its internal controls over financial reporting that has materially affected or is reasonably likely to materially affect those controls.
52
PART II OTHER INFORMATION
Any item which is inapplicable or to which the answer is negative has been omitted and no reference thereto has been made in this report.
See Part I, Item 1. Financial Statements, Note 14 contained herein for a discussion of the information required by this item.
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
Exhibits 31.1, 31.2, and 32 have been filed with the Securities and Exchange Commission in conjunction with this Quarterly Report on Form 10-Q. Copies of these exhibits are available upon written request to Lauren S. Greer, The Palmetto Bank, Post Office Box 49, Laurens, South Carolina 29360.
53
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.
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
/s/ Paul W. Stringer
Paul W. Stringer
President and Chief Operating Officer
(Principal Financial Officer)
Dated: November 9, 2007
54
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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. 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
d. 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 officer(s) 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 the registrant's board of directors (or persons performing 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 registrants 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 registrants internal control over financial reporting.
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
Dated: November 9, 2007
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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. 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
d. 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 officer(s) 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 the registrant's board of directors (or persons performing 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 registrants 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 registrants internal control over financial reporting.
/s/ Paul W. Stringer
Paul W. Stringer
President and Chief Operating Officer
(Principal Financial Officer)
Dated: November 9, 2007
Exhibit 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER OF PALMETTO BANCSHARES, INC. PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned, as the chief executive officer and principal financial officer of Palmetto Bancshares, Inc., certify that the Quarterly Report on Form 10-Q for the period ended September 30, 2007, 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.
/s/ L. Leon Patterson
L. Leon Patterson
Chairman and Chief Executive Officer
/s/ Paul W. Stringer
Paul W. Stringer
President and Chief Operating Officer
Principal Financial Officer
Dated: November 9, 2007