10-Q 1 d10q.txt PALMETTO BANCSHARES FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q __X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 0-26016 PALMETTO BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) South Carolina 74-2235055 --------------------------- ----------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 301 Hillcrest Drive Laurens, South Carolina 29360 -------------------------------------------- (Address of principal executive offices) (Zip Code) (864) 984-4551 -------------------------------------------------- ( Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 2, 2001 ----------------------- ---------------------- Common stock, $5.00 par value 6,262,734 PALMETTO BANCSHARES, INC. Quarterly Report on Form 10-Q For the Quarter Ended June 30, 2001
INDEX Page No. ----- -------- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 1 Consolidated Income Statements for the Three Months Ended June 30, 2001 and 2000 2 Consolidated Income Statements for the Six Months Ended June 30, 2001 and 2000 3 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the Six Months Ended June 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 5 Notes to the Consolidated Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14-15 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands, except per share data)
June 30, 2001 December 31, 2000 ----------------------------------- Assets (unaudited) Cash and due from banks $ 32,783 $ 36,305 Federal funds sold 2,426 1,879 Federal Home Loan Bank stock, at cost 1,733 1,733 Investment securities available for sale (amortized cost of $87,498 and $99,030, in 2001 and 2000, respectively) 88,202 98,601 Loans held for sale 11,202 611 Loans 543,392 498,242 Less allowance for loan losses (5,760) (5,446) -------------------------- Loans, net 537,632 492,796 Premises and equipment, net 17,422 16,481 Accrued interest 5,074 5,229 Other assets 10,272 9,755 -------------------------- Total assets $ 706,746 $ 663,390 ========================== Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest-bearing 105,490 96,097 Interest-bearing 512,299 476,569 -------------------------- Total deposits 617,789 572,666 Securities sold under agreements to repurchase 13,578 19,923 Commercial paper (Master note) 11,857 15,359 Other liabilities 7,720 2,849 -------------------------- Total liabilities 650,944 610,797 -------------------------- Shareholders' Equity: Common stock-$5.00 par value. Authorized 10,000,000 shares; 6,262,734 issued and outstanding in 2001; and 6,255,734 issued and outstanding in 2000 31,314 31,279 Capital surplus 40 23 Retained earnings 24,063 21,555 Accumulated other comprehensive income (loss) 385 (264) -------------------------- Total shareholders' equity 55,802 52,593 -------------------------- Total liabilities and shareholders' equity $ 706,746 $ 663,390 ==========================
See accompanying notes to consolidated interim financial statements. 1 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Income Statements (Unaudited) For the three months ended June 30, 2001 and 2000 (Dollars in thousands, except per share data)
2001 2000 ------------------------- Interest income: Interest and fees on loans $ 11,177 $ 9,888 Interest and dividends on investment securities available for sale: U.S. Treasury and U.S. Government agencies 151 386 State and municipal 674 793 Mortgage-backed securities 310 420 Interest on federal funds sold 75 55 Dividends on FHLB stock 32 35 ------------------------- Total interest income 12,419 11,577 ------------------------- Interest expense: Interest on deposits 4,833 4,184 Interest on securities sold under agreements to repurchase 138 227 Interest on federal funds purchased 28 178 Interest on commercial paper (Master note) 98 202 ------------------------- Total interest expense 5,097 4,791 ------------------------- Net interest income 7,322 6,786 Provision for loan losses 1,388 1,610 ------------------------- Net interest income after provision for loan losses 5,934 5,176 Non-interest income: Service charges on deposit accounts 2,099 1,132 Fees for trust services 446 577 Gains on sales of loans 141 10 Investment securities gains - - Other income 791 688 ------------------------- Total non-interest income 3,477 2,407 Non-interest expense: Salaries and other personnel 3,161 2,666 Net occupancy 478 479 Furniture and equipment 584 534 FDIC assessment 27 28 Postage and supplies 339 272 Marketing and advertising 288 220 Telephone 182 183 Cardholder processing expense 123 120 Sales finance losses (6) - Other expense 1,229 935 ------------------------- Total non-interest expense 6,405 5,437 ------------------------- Income before income taxes 3,006 2,146 ------------------------- Income tax provision 916 605 ------------------------- Net income $ 2,090 $ 1,541 ========================= Net income per share-basic $ 0.33 $ 0.25 Net income per share-dilutive $ 0.32 $ 0.24 Cash dividends declared per share $ 0.10 $ 0.09
See accompanying notes to consolidated interim financial statements. PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Income Statements (Unaudited) For the six months ended June 30, 2001 and 2000 (Dollars in thousands, except per share data)
2001 2000 --------------------------- Interest income: Interest and fees on loans $ 22,009 $ 19,385 Interest and dividends on investment securities available for sale: U.S. Treasury and U.S. Government agencies 423 610 State and municipal 1,365 1,603 Mortgage-backed securities 655 857 Interest on federal funds sold 217 134 Dividends on FHLB stock 67 69 --------------------------- Total interest income 24,736 22,658 --------------------------- Interest expense: Interest on deposits 9,932 8,371 Interest on securities sold under agreements to repurchase 420 458 Interest on federal funds purchased 43 214 Interest on commercial paper (Master note) 234 349 --------------------------- Total interest expense 10,629 9,392 --------------------------- Net interest income 14,107 13,266 Provision for loan losses 2,238 2,135 --------------------------- Net interest income after provision for loan losses 11,869 11,131 Non-interest income: Service charges on deposit accounts 3,511 2,148 Fees for trust services 945 1,109 Gains on sales of loans 199 20 Other income 1,424 1,307 --------------------------- Total non-interest income 6,079 4,584 Non-interest expense: Salaries and other personnel 6,235 5,329 Net occupancy 1,029 967 Furniture and equipment 1,154 1,114 FDIC assessment 54 56 Postage and supplies 693 594 Marketing and advertising 513 406 Telephone 371 383 Cardholder processing expense 275 258 Sales finance losses 14 - Other expense 2,264 1,824 --------------------------- Total non-interest expense 12,602 10,931 --------------------------- Income before income taxes 5,346 4,784 --------------------------- Income tax provision 1,586 1,348 --------------------------- Net income $ 3,760 $ 3,436 =========================== Net income per share-basic $ 0.60 $ 0.55 Net income per share-dilutive $ 0.58 $ 0.54 Cash dividends declared per share $ 0.20 $ 0.18
See accompanying notes to consolidated interim financial statements. 3 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Unaudited) For the six months ended June 30, 2001 and 2000 (Dollars in thousands except number of shares)
Accumulated Capital Other Common Surplus Retained Comprehensive Stock (Deficit) Earnings Loss, Net Total ----- --------- -------- --------- ----- Balance at December 31, 1999 31,134 - 16,890 (2,397) 45,627 Net income 3,436 3,436 Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of tax effect of $14 23 23 ------- Comprehensive income 3,459 ------- Cash dividend declared (1,123) (1,123) Issuance of 17,200 shares in connection with stock options 86 22 108 ------------------------------------------------------------- Balance at June 30, 2000 31,220 22 19,203 (2,374) 48,071 ============================================================= Balance at December 31, 2000 31,279 23 21,555 (264) 52,593 Net income 3,760 3,760 Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of tax effect of $406 649 649 ------- Comprehensive income 4,409 ------- Cash dividend declared (1,252) (1,252) Issuance of 7,000 shares in connection with stock options 35 17 52 ------------------------------------------------------------- Balance at June 30, 2001 31,314 40 24,063 385 55,802 =============================================================
See accompanying notes to consolidated interim financial statements. PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, 2001 and 2000 (Dollars in thousands)
2001 2000 -------------------------------- Cash flows from operating activities: Net income $ 3,760 $ 3,436 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,298 1,087 Gain on sale of investment securities - - Provision for loan losses 2,238 2,135 Origination of loans held for sale (41,366) (3,440) Sale of loans held for sale 30,974 3,136 Gain on sale of loans (199) (20) Change in accrued interest receivable 155 (197) Change in other assets (641) (603) Change in other liabilities, net 4,465 (538) ----------------------------- Net cash provided by operating activities 684 4,996 Cash flows from investing activities: Purchase of investment securities available for sale (5,031) (10,000) Proceeds from maturities of investment securities available for sale 12,537 1,579 Proceeds from sale of investment securities available for sale - - Principal paydowns on mortgage-backed securities available for sale 3,925 2,457 Purchase of Federal Home Loan Bank stock - - Net increase in loans outstanding (47,450) (25,822) Purchases of premises and equipment, net (1,716) (1,217) ----------------------------- Net cash used in investing activities (37,735) (33,003) Cash flows from financing activities: Net increase in deposit accounts 45,123 7,055 Acquisition of deposits, net - - Net decrease in securities sold under agreements to repurchase (6,345) (2,967) Net increase in commercial paper (3,502) 1,716 Net increase in federal funds purchased - 13,000 Proceeds from issuance of common stock 52 108 Dividends paid (1,252) (1,123) ----------------------------- Net cash provided by financing activities 34,076 17,789 ----------------------------- Net decrease in cash and cash equivalents (2,975) (10,218) ----------------------------- Cash and cash equivalents at beginning of the period 38,184 43,817 ----------------------------- Cash and cash equivalents at end of the period $ 35,209 $ 33,599 ============================= Supplemental Information: Cash paid during the period for: Interest expense $ 10,772 $ 9,411 ============================= Income taxes 1,644 1,304 ============================= Supplemental schedule of non-cash investing and financing transactions: Change in unrealized gain (loss) on investment securities available for sale, before tax 1,055 37 ============================= Loans transferred to other real estate owned 376 - ============================= Loans charged -off 2,044 1,656 =============================
See accompanying notes to consolidated interim financial statements. 5 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes To Consolidated Interim Financial Statements 1. Basis of Presentation --------------------- The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in Palmetto Bancshares, Inc.'s (the "Company's") Annual Report on Form 10-K for the year ended December 31, 2000. In the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the entire year. Certain amounts from 2000 have been reclassified to conform to the 2001 presentation. These reclassifications have no effect on shareholders' equity or on net income as previously reported. 2. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, The Palmetto Bank (the "Bank"), and Palmetto Capital, Inc., the Bank's wholly owned subsidiary. The Bank provides a full range of banking services, including taking deposits and making loans. Palmetto Capital, Inc. offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital, Inc. also offers advisory services and variable rate annuities. In consolidation, all significant intercompany accounts and transactions have been eliminated. 3. Summary of Significant Accounting Policies ------------------------------------------ The significant accounting policies used by the Company are described in Note 1 to the Company's December 2000 Annual Report on Form 10-K. There have been no changes in these policies subsequent to the year ended December 31, 2000. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 2000 TO JUNE 30, 2001 Forward-Looking Statements -------------------------- This document may contain certain "forward-looking statements," within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that represent the Company's expectations or beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to certain risks, uncertainties, and assumptions. Factors that could influence the matters discussed in certain forward-looking statements include the relative levels of market interest rates, loan prepayments and rates of change in deposit balances, the timing and amount of revenues that may be recognized by the Company, continuation of current revenue, expense and charge-off trends, legal and regulatory changes, and general changes in the economy. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected or projected. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation to update any forward-looking statements. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them. Assets ------ Total assets increased $43.4 million, or 7%, for the six month period ended June 30, 2001, primarily as a result of an increase in loans receivable. Liquid assets, which include cash, federal funds sold, and investments available for sale, decreased by $13.4 million, or 10%, for the six-month period. The decrease in liquid assets was attributable to the $3.5 million decrease in cash and due from banks and the $10.4 million decrease in investment securities available for sale, offset by a $.5 million increase in federal funds sold. During the first six months of 2001, the Bank purchased $5.0 million of investment securities (available for sale), $12.5 million of the investment portfolio matured, and $4.0 million was paid down on mortgage backed securities held for sale. The Bank had a $1.1 million change in pre-tax unrealized gains in its investment portfolio at June 30, 2001. Loans, net, increased by $44.8 million, or 9%, during the six-month period as a result of growth sparked by a favorable interest rate environment and increased efforts by lenders. The allowance for loan losses as a percentage of total loans decreased slightly to 1.06% from 1.09% at June 30, 2001 and 2000, respectively. Management feels the allowance is adequate at June 30, 2001 because the Bank uses an allowance model that takes into account the risk grades of loans, delinquency trends, charge-off ratios and loan growth. Over the last 12 to 18 months the Bank has been improving its underwriting standards, shifting its emphasis toward higher-dollar, higher-quality loans, and charging off significant amounts of lower-quality loans. At June 30, 2001, the Company had $11.2 million in loans held for sale with commitments to sell these loans in July and August 2001. Because the interest rate environment has been favorable for mortgage loans and refinances, the Bank has been able to make approximately $48.5 million in mortgage loans during the first six months of 2001, with over 65% being sold in the secondary market. The mortgage servicing rights related to the mortgage servicing department's activities were $1.2 million at June 30, 2001, which approximates their fair value. Loans serviced for the benefit of others amounted to $147.6 million at June 30, 2001. 7 Other assets increased by $517,000, or 5%, from December 31, 2000 to June 30, 2001. Because of the increased sales of mortgage loans, mortgage servicing rights increased approximately $409,000, while $281,000 of those rights were amortized. Other real estate increased by $376,000, prepaid expenses increased $379,000, while repossessed assets were reduced by $300,000. During the first six months of 2001, the investment portfolio accumulated unrealized gains, thus eliminating the deferred tax benefit that was recorded at December 31, 2000. At June 30, 2001, there was a deferred tax liability of $241,000 related to those unrealized gains. Liabilities and Shareholders' Equity ------------------------------------ Deposit balances increased by 8% during the six-month period, from $572.7 million to $617.8 million. The Bank offered a special rate CD during the first six months of 2001 that accounted for $19.5 million of the increase. A new deposit product, the Palmetto Index Account, also contributed another $25.0 million to the increase in deposits. This account is similar to a premier checking account, but features a competitive tiered interest rate based on a minimum deposit balance. Securities sold under agreements to repurchase decreased by $6.3 million, or 32%, and commercial paper associated with the alternative commercial sweep accounts (master note program) decreased by $3.5 million, or 23%. These changes are the result of normal fluctuations in the accounts. Total shareholders' equity increased by $3.2 million, or 6%, for the six- month period as a result of comprehensive income of $4.4 million, less dividends paid of $1.2 million. The Company also added $52,000 to equity as the result of stock option exercises. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 Net Income ---------- Net income for the three months ended June 30, 2001 and 2000 was $2.1 million and $1.5 million, respectively. Net income per common share-basic for the three months ended June 30, 2001 and 2000 was $0.33 and $0.25, respectively. Net income per common share-dilutive for the same periods was $0.32 and $0.24, respectively. Net Interest Income ------------------- The largest component of the Company's net income is the Bank's net interest income, defined as the difference between gross interest and fees on earning assets, primarily loans and investment securities, and interest paid on deposits and borrowed funds. Net interest income is affected by the interest rates earned or paid and by volume changes in loans, securities, deposits and borrowed funds. For the three-month period ended June 30, 2001 and 2000, net interest income was $7.3 million and $6.8 million, respectively. This increase in net interest income was the result of a $54.1 million increase in average earning assets. Earning assets averaged $634.3 million and $580.2 million during the second quarters of 2001 and 2000, respectively. The increases in volume were primarily due to the growth of loans. The average tax-equivalent net interest margin for the 2001 period was 4.79%, compared to 4.88% for the same period in 2000. Interest and fees on loans increased 13%, from $9.9 million to $11.2 million, for the 2000 three-month period compared to the corresponding period in 2001. This increase is due to increased loan 8 volume, offset by a decrease in the average loan yield from 8.59% to 8.33% for the three-month period ended June 30, 2000 and 2001, respectively. Interest on investment securities decreased $464,000 for the 2001 three-month period compared to the corresponding period in 2000 due to a lower balance in the investment portfolio during the period ended June 30, 2001. Interest income on federal funds sold increased $20,000 due to an increase in average volume of federal funds sold for the quarter compared to the same period last year. The yield on average earning assets, which includes loans, federal funds sold and investment securities, decreased from 8.02% to 7.85% for the three months ended June 30, 2000 and 2001, respectively. Total interest expense increased by 6%, from $4.8 million to $5.1 million. Comparing the quarter ended June 30, 2001 to the same period in the prior year, total interest-bearing liabilities increased 7% from $490.6 million to $525.8 million. The total cost of average interest-bearing liabilities for the quarter ended June 30, 2001 was 3.89%, compared to 3.93% for the same quarter last year. Provision for Loan Losses ------------------------- The provision for loan losses decreased to $1.4 million from $1.6 million for the three months ended June 30, 2001 and 2000, respectively. The provision is adjusted each month to reflect loan volume growth and allow for loan charge- offs, recoveries and other factors which impact management's assessment of the adequacy of the allowance for loan losses. Management's objective is to maintain the allowance for loan losses at an adequate level to cover probable losses in the portfolio. Additions to the allowance for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, past loan loss experience, and such other factors, which in management's judgment deserve recognition in estimating loan losses. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. Loans over 90 days delinquent and on non-accrual amounted to approximately $2.8 million at June 30, 2001 and 2000. The annualized net charge-off ratio has decreased from .79% for the quarter ended June 30, 2000 to .39% for the quarter ended June 30, 2001. During 1999, the Bank began redirecting its emphasis on indirect lending in the sales finance area to purchasing higher-quality indirect loans and reducing the number of lower-quality loans in the portfolio. Activities associated with this process, as management expected, contributed to the increase of charge-offs as these lower-quality loans were eliminated. Management believes it has taken these lower quality loans into consideration in estimating the level of the allowance for loan losses, nevertheless, charge-offs are expected to remain higher than normal until this process is complete. In the sales finance portfolio, past due loans over 30 days were 7.2% at June 30, 2001 compared to 14.6% at December 31, 2000. While management uses the best information available to make evaluations, future adjustments to the allowance in the form of provisions through the income statement may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment, based upon information that is available to them at the time of their examination. Non-interest Income ------------------- Total non-interest income increased by $1.1 million, or 44%, for the three months ended June 30, 2001, as compared to the same period in 2000. The largest portion of this increase, $967,000, or 85%, can be attributed to service charges on customer deposit accounts. The increases are primarily related to a new automatic overdraft privilege offered to deposit customers and the increased collection of insufficient 9 funds charges associated with debit card transactions during the 2001 period compared to the same period in 2000. Non-interest Expense -------------------- Total non-interest expense increased by $968,000, or 18%, during the 2001 three-month period compared to the same period in 2000. The largest contributor to this increase was salaries and other personnel expense, which increased $495,000, or 19%, due to normal raises, new employees related to growth, and increased medical insurance premiums paid on behalf of employees. At June 30, 2001, the Bank had 362 full-time equivalent employees compared to 333 full-time equivalent employees at June 30, 2000. Income Taxes ------------ The Company incurred income tax expense of $916,000 for the 2001 three- month period compared to $605,000 for the same period in 2000 due to an increase in taxable income. This expense is based on an expected annual effective tax rate of approximately 29.5%. The effective tax rate for the same period in 2000 was 28.1% and the effective tax rate for the year ended December 31, 2000 was 27.4%. Net Income Per Share -------------------- The following table illustrates a reconciliation of the numerators and denominators of the basic and diluted per-share computations for net income for the three months ended June 30, 2001 and 2000 (dollars in thousands except per share numbers):
Income Shares Per-Share 2001 (Numerator) (Denominator) Amount ---- ------------------------------------- Basic EPS: --------- Net income $2,089 6,261,811 $0.33 Effect of dilutive securities: stock options -- 175,634 -- ---------------------------------- Diluted EPS: ----------- Net income plus assumed exercises of stock options $2,089 6,437,445 $0.32 ================================== Income Shares Per-Share 2000 (Numerator) (Denominator) Amount ---- ---------- ------------ --------- Basic EPS: --------- Net income $1,541 6,240,550 $0.25 Effect of dilutive securities: stock options -- 185,040 -- ---------------------------------- Diluted EPS: ---------- Net income plus assumed exercises of stock options $1,541 6,425,590 $0.24 ==================================
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 Net Income ---------- Net income for the six months ended June 30, 2001 and 2000 was $3.8 million and $3.4 million, respectively. Net income per common share-basic for the six months ended June 30, 2001 and 2000 was $0.60 and $0.55, respectively. Net income per common share-dilutive for the same periods was $0.58 and $0.54, respectively. 10 Net Interest Income ------------------- For the six-month period ended June 30, 2001 and 2000, net interest income was $14.1 million and $13.3 million, respectively. This increase in net interest income was the result of a $56.2 million increase in average earning assets. Earning assets averaged $626.3 million and $570.1 million during the first six months of 2001 and 2000, respectively. The increases in volume were primarily due to the growth of loans. The average tax-equivalent net interest margin for the six months ended June 30, 2001 was 4.70%, compared to 4.88% for the same period in 2000. Interest and fees on loans increased 14%, from $19.4 million to $22.0 million, for the 2000 six-month period compared to the corresponding period in 2001. This increase is due to increased loan volume, offset by a decrease in the average loan yield from 8.56% to 8.47% for the six-month period ended June 30, 2000 and 2001, respectively. Interest on investment securities decreased $627,000 for the 2001 six-month period compared to the corresponding period in 2000 due to a lower balance in the investment portfolio during the period ended June 30, 2001. Interest income on federal funds sold increased $83,000 due to an increase in average volume of federal funds during the six months ending June 30, 2001 compared to the same period last year. The yield on average earning assets, which includes loans, federal funds sold and investment securities, decreased from 7.99% to 7.96% for the six months ended June 30, 2000 and 2001, respectively. Total interest expense increased by 13.0%, from $9.4 million to $10.6 million. For the six months ended June 30, 2001, total interest-bearing liabilities were $527.4 million compared to $486.1 million at June 30, 2000. The total cost of average interest-bearing liabilities for the six months ended June 30, 2001 was 4.06%, compared to 3.89% for the same period last year. Provision for Loan Losses ------------------------- The provision for loan losses increased to $2.2 million from $2.1 million for the six months ended June 30, 2001 and 2000, respectively. The provision is adjusted each month to reflect loan volume growth and allow for loan charge- offs, recoveries and other factors which impact management's assessment of the adequacy of the allowance for loan losses. Management's objective is to maintain the allowance for loan losses at an adequate level to cover probable losses in the portfolio. Additions to the allowance for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, past loan loss experience, and such other factors, which in management's judgment deserve recognition in estimating loan losses. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. The annualized net charge- off ratio has decreased from 1.12% for the six months ended June 30, 2000 to .74% for the six months ended June 30, 2001. During 1999, the Bank began redirecting its emphasis on indirect lending in the sales finance area to purchasing higher-quality indirect loans and reducing the number of lower- quality loans in the portfolio. Activities associated with this process, as management expected, contributed to the increase of charge-offs as these lower- quality loans were eliminated. Management believes it has taken these lower quality loans into consideration in estimating the level of the allowance for loan losses, nevertheless, charge-offs are expected to remain higher than normal until this process is complete. In the sales finance portfolio, past due loans over 30 days were 7.2% at June 30, 2001 compared to 14.6% at December 31, 2000. 11 Non-interest Income ------------------- Total non-interest income increased by $1.5 million, or 33%, for the six months ended June 30, 2001, as compared to the same period in 2000. The largest portion of this increase, $1.4 million, can be attributed to service charges on customer deposit accounts. The increases are primarily related to a new automatic overdraft privilege offered to deposit customers and the increased collection of insufficient funds charges associated with debit card transactions during the 2001 period compared to the same period in 2000. Non-interest Expense -------------------- Total non-interest expense increased by $1.7 million, or 15%, during the 2001 six-month period compared to the same period in 2000. The largest contributor to this increase was salaries and other personnel expense, which increased $906,000, or 17%, due to normal raises, new employees related to growth, and increased medical insurance premiums paid on behalf of employees. At June 30, 2001, the Bank had 362 full-time equivalent employees compared to 333 full-time equivalent employees at June 30, 2000. Knowledgeable Income Taxes ------------ The Company incurred income tax expense of $1.6 million for the 2001 six- month period compared to $1.3 million for the same period in 2000 due to an increase in taxable income. This expense is based on an expected annual effective tax rate of approximately 29.5%. The effective tax rate for the same period in 2000 was 28.1% and the effective tax rate for the year ended December 31, 2000 was 27.4%. Net Income Per Share -------------------- The following table illustrates a reconciliation of the numerators and denominators of the basic and diluted per-share computations for net income for the six-months ended June 30, 2001 and 2000 (dollars in thousands except per share numbers):
Income Shares Per-Share 2001 (Numerator) (Denominator) Amount ---- ------------------------------------- Basic EPS: ---------- Net income $3,760 6,260,425 $0.60 Effect of dilutive securities: stock options -- 172,967 -- --------------------------------- Diluted EPS: ----------- Net income plus assumed exercises of stock options $3,760 6,433,392 $0.58 ================================= Income Shares Per-Share 2000 (Numerator) (Denominator) Amount ---- -------------------------------------- Basic EPS: ---------- Net income $3,436 6,236,785 $0.55 Effect of dilutive securities: stock options -- 181,100 -- --------------------------------- Diluted EPS: ------------ Net income plus assumed exercises of stock options $3,436 6,417,885, $0.54 =================================
Liquidity --------- The liquidity ratio is an indication of a company's ability to meet its short- term funding obligations. The Company's policy is to maintain a liquidity ratio between 10% and 25%. At June 30, 2001, the Company's liquidity ratio was 13.91%. 12 At June 30, 2001, the Bank had unused short-term lines of credit totaling approximately $42 million (which are withdrawable at the lender's option). At June 30, 2001, unused borrowing capacity from the Federal Home Loan Bank ("FHLB") totaled $48 million. The Bank has pledged assets to be used as collateral if the Bank takes advantage of the FHLB line of credit. Management believes that these sources are adequate to meet its liquidity needs and to maintain the liquidity ratio within policy guidelines. The Company has certain cash needs, including general operating expenses and the payment of dividends and interest on borrowings. The Company currently has no debt outstanding and has declared and paid $0.20 per share in dividends so far in 2001. There can be no guarantee that any additional dividends will be paid in 2001. Liquidity is provided from the Company's subsidiary, the Bank. The Company and the Bank are subject to certain regulatory restrictions on the amount of dividends they are permitted to pay. The Bank's current total risk- based capital ratio is 10.29%. At June 30, 2001, the Bank had $1.6 million of excess retained earnings available to pay out dividends and still be considered "well-capitalized." The Bank plans to continue its quarterly dividend payments. The Bank has begun construction of its 29th branch office located in Travelers Rest, South Carolina. The estimated cost of construction under contract is approximately $613,000. The Bank has also received regulatory approval to open a branch office in Seneca, South Carolina. This will be the Bank's first location in Oconee County. Capital Resources ----------------- As of June 30, 2001, the Company and the Bank were in compliance with each of the applicable regulatory capital requirements and met or exceeded the "well- capitalized" regulatory guidelines. The table below sets forth various capital ratios for the Company and the Bank:
-------------------------------------------------------------------------------------------- Adequately As of Capitalized Well-Capitalized 6/30/01 Requirement Requirement -------------------------------------------------------------------------------------------- Company: -------- Total Risk-based Capital 10.37% 8.00% 10.00% Tier 1 Risk-based Capital 9.31 4.00 6.00 Tier 1 Leverage Ratio 7.46 4.00 5.00 Bank: ----- Total Risk-based Capital 10.29 8.00 10.00 Tier 1 Risk-based Capital 9.24 4.00 6.00 Tier 1 Leverage Ratio 7.39 4.00 5.00
13 Accounting and Reporting Matters -------------------------------- In September 2000, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125". This statement became effective for transfers occurring after March 31, 2001 and for disclosures relating to securitizations and collateral for fiscal years ending after December 15, 2000. In addition to replacing SFAS No. 125, this statement rescinded SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of Statement 125 without reconsideration. Adoption of the standard did not have a material effect on the Company. In July 2001, the FASB issued Statement No. 141 (SFAS 141), "Business Combinations" and Statement No. 142 (SFAS 142), "Goodwill and Other Intangible Assets". These standards will be adopted in 2002. The Company is currently evaluating the impact that these standards will have on its financial statements. Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a further date are not expected to have a material impact on the consolidated financial statements upon adoption. On July 2, 2001, The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues". SAB 102 expresses the SEC's views on the development, documentation and application of a systematic methodology for determining the allowance for loan and lease losses in accordance with Generally Accepted Accounting Principles. The Company believes that it is currently in compliance with the requirements of SAB 102. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, deposit, borrowing and investing activities. Management actively monitors and manages its inherent rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk. This risk could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in interest rates. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Bank's goal is to minimize interest rate risk between interest bearing assets and liabilities at various maturities through its Asset-Liability Management ("ALM"). ALM involves managing the mix and pricing of assets and liabilities in the face of uncertain interest rates and an uncertain economic 14 outlook. It seeks to achieve steady growth of net interest income with an acceptable amount of interest rate risk and sufficient liquidity. The process provides a framework for determining, in conjunction with the profit planning process, which elements of the Company's profitability factors can be controlled by management. Understanding the current position and implications of past decisions is necessary in providing direction for the future financial management of the Company. The Company uses an asset-liability model to determine the appropriate strategy for current conditions. Interest sensitivity management is part of the asset-liability management process. Interest sensitivity gap ("GAP") is the difference between total rate sensitive assets and rate sensitive liabilities in a given time period. The Company's rate sensitive assets are those repricing within one year and those maturing within one year. Rate sensitive liabilities include insured money market accounts, savings accounts, interest-bearing transaction accounts, time deposits and borrowings. The profitability of the Company is influenced significantly by management's ability to manage the relationship between rate sensitive assets and liabilities. The Company's current GAP analysis reflects that in periods of increasing or decreasing interest rates, rate sensitive assets will reprice slower than rate sensitive liabilities. The Company's GAP analysis also shows that at the interest repricing of one year, the Company's net interest margin would be adversely impacted by an increase in market interest rates. This analysis, however, does not take into account the dynamics of the marketplace. GAP is a static measurement that assumes that if the prime rate increases by 100 basis points, all assets and liabilities that are due to reprice will increase by 100 basis points at the next opportunity. During the first six months of 2001, market interest rates have steadily declined. Because the Bank's rate sensitive assets have been repricing slower than its rate sensitive liabilities during this period, the Bank has been able to maintain a strong net interest margin of 4.54%. Because the Company's management feels that GAP analysis is a static measurement, it manages its interest income through its asset/liability strategies which focus on a net interest income model based on management's projections. The Company has a targeted net interest income range of plus or minus twenty percent based on a 300 basis point change over twelve months. The asset/liability committee meets weekly to address interest pricing issues, and this model is reviewed monthly. Management will continue to monitor its liability sensitive position in times of increasing interest rates, which might adversely affect its net interest margin. The Company does not feel that the market risk to the Company has changed significantly since December 31, 2000. 15 PALMETTO BANCSHARES, INC. AND SUBSIDIARY PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- On January 19, 2001, M. Snyder's, Inc., an automobile dealership that has sold and assigned sales finance contracts to the Bank, filed suit against the Bank and Richard O. Lollis, a former employee of the Bank who was the manager of the sales finance department. The suit was filed in the Court of Common Pleas for Greenville County, South Carolina. M. Snyder's claims arise from the sales finance contracts and its business relationship with the Bank, including causes of action for alleged breach of contract, breach of fiduciary duty, fraud, negligent representation, breach of contract accompanied by fraudulent acts, unfair trade practices, negligence and negligent supervision; M. Snyder's seeks actual and consequential damages. The Bank has filed counterclaims against M. Snyder's based on, among other things, alleged breach of contract with fraudulent intent, fraud, misrepresentations, unfair trade practices, bad faith, procurement of breach of contracts by customers and conversion of assets properly belonging to the Bank. The Bank does not believe that M. Snyder's claims are well-founded and is vigorously pursuing its counterclaims and its defenses against the claims. In connection with the above lawsuit, the Bank has also filed a third party complaint against an employee of M. Snyder's, Inc. arising from his actions in dealing with sales finance contracts, including causes of action for fraud, misrepresentation and conversion. The Company is not currently engaged in legal proceedings. In addition to the matter described above, from time to time the Bank is involved in legal proceedings incidental to its normal course of business as a bank. Management believes that none of these proceedings is likely to have a materially adverse effect on the business of the Company or the Bank. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Securities Holders ----------------------------------------------------- The annual shareholders' meeting of Palmetto Bancshares, Inc. was held on April 17, 2001. At the meeting the following directors were elected for the terms specified:
Number of Votes Number of Votes FOR WITHHELD -------------------------------------------------------------- Term to expire in 2004 ---------------------- W. Fred Davis, Jr. 5,101,632 12,771 David P. George, Jr. 5,097,632 16,771 Michael D. Glenn 5,101,632 12,771 Ann B. Smith 4,834,306 280,097 Term to expire in 2003 ---------------------- Sam B. Phillips, Jr. 5,101,632 12,771
John T. Gramling, II, William S. Moore, L. Leon Patterson, James M. Shoemaker, Jr., E. Keith Snead, III, Paul W. Stringer, and J. David Wasson continued in their present terms as directors. 16 Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: The Company filed a Form 8-K dated April 24, 2001 to report a change in independent accountants. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PALMETTO BANCSHARES, INC. By: /s/ L. Leon Patterson --------------------------------------- L. Leon Patterson Chairman and Chief Executive Officer /s/ Paul W. Stringer --------------------------------------- Paul W. Stringer President and Chief Operating Officer (Chief Accounting Officer) Date: August 1, 2001 18