-----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, GOIujtBmNnL8FV3QRD8z9NQDfLCA/cHaNlR3JPwFC7ePn63Ub6bMYn0zvdbK3kqw xUhWSF6ughxvvoYgSlRfuQ== 0001021408-02-003631.txt : 20020415 0001021408-02-003631.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-003631 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALMETTO BANCSHARES INC CENTRAL INDEX KEY: 0000706874 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742235055 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26016 FILM NUMBER: 02575723 BUSINESS ADDRESS: STREET 1: 301 HILLCREST DR STREET 2: P O BOX 49 CITY: LAURENS STATE: SC ZIP: 29360 BUSINESS PHONE: 8649844551 10-K 1 d10k.txt PALMETTO BANK ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [_] 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 of incorporation or (IRS Employer organization) Identification No.)
301 Hillcrest Drive, Laurens, South Carolina 29360 (Address of principal executive offices) (Zip Code) Registrant's telephone number--(864) palmettobank.com 984-4551 (Registrant's subsidiary's web site) ----------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $5.00 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of February 19, 2002, $147,924,846--based on the most recent sales price of $27.00 per share. There is no established public trading market for the shares. See Part II, Item 5. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 6,284,623 - February 19, 2002. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement dated March 16, 2002 with respect to an Annual Meeting of Shareholders to be held April 16, 2002: Incorporated by reference in Part III of this Form 10-K. ================================================================================ PALMETTO BANCSHARES, INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 TABLE OF CONTENTS PART I
Page No. -------- Item 1. Business....................................................... 3 Item 2. Properties..................................................... 8 Item 3. Legal Proceedings.............................................. 9 PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters............................................ 10 Item 6. Selected Financial Data........................................ 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 Item 7a. Quantitative and Qualitative Disclosures about Market Risk..... 30 Item 8. Financial Statements and Supplementary Data.................... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 30 PART III Item 10. Directors and Executive Officers of the Registrant............. 59 Item 11. Executive Compensation......................................... 59 Item 12. Security Ownership of Certain Beneficial Owners and Management. 59 Item 13. Certain Relationships and Related Transactions................. 59 PART IV Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K............................................................ 59
2 Part I (Dollars in thousands, except share and per share data, throughout document) Item 1. Business Palmetto Bancshares, Inc. ("Bancshares" or the "Company") is a bank holding company organized in 1982 under the laws of South Carolina. Through its wholly-owned subsidiary, The Palmetto Bank (the "Bank"), and the Bank's wholly-owned subsidiary, Palmetto Capital, Inc. ("Palmetto Capital"), Bancshares engages in the general banking business in the upstate South Carolina market of Laurens, Greenville, Spartanburg, Greenwood, Anderson, Cherokee and Abbeville counties (the "Upstate"). The Bank was organized and chartered under South Carolina law in 1906. The Bank performs a full range of banking activities, including such services as checking, savings, money market, and other time deposits of various types of consumer and commercial depositors; loans for business, real estate, and personal uses; safe deposit box rental and various electronic funds transfer services. The Bank also offers both individual and commercial trust services through an active trust department. Palmetto Capital is a brokerage subsidiary of the Bank, which offers customers stocks, treasury and municipal bonds, mutual funds and insurance annuities, as well as college and retirement planning. The Bank's sales finance department establishes relationships with Upstate automobile dealers to provide customer financing of automobile purchases. The Bank's mortgage banking operation continues to meet a broader range of its customers' financial service needs by originating, selling, and servicing mortgage loans. Financial Information See Item 8, "Financial Statements and Supplementary Data." Competition The Upstate is a highly competitive banking market in which all of the largest financial institutions in the state are represented. The competition among the various financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of service rendered and the convenience of banking facilities. The Bank believes it competes effectively in its market. South Carolina legislation permits banks and bank holding companies in certain southern states to acquire banks in South Carolina to the extent that such other states have reciprocal legislation applicable to South Carolina banks and bank holding companies. As a result, a number of the Bank's competitor banks continue to be purchased by large, out-of-state bank holding companies. Size gives the larger banks certain advantages in competing for business from larger corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and the region. As a result, the Bank does not generally attempt to compete for the banking relationships of larger corporations, but concentrates its efforts on small and medium-size businesses and individuals. The Bank believes it competes effectively in this market segment by offering quality, personalized service. It is management's intention to remain a locally based, independent, South Carolina Bank. Customers The majority of the Bank's customers are individuals and small to medium-sized businesses headquartered within its service area. The Bank is not dependent upon a single or a very few customers, the loss of which would have a material adverse effect on the Bank. No customer accounts for more than 5% of the Bank's total deposits at any time. Management does not believe that the Bank's loan portfolio is dependent on a single customer or group of customers concentrated in a particular industry whose loss or insolvency would have a material adverse effect on the Bank. 3 Growth Late in 2000, the South Carolina State Board of Financial Institutions approved the Bank's application to open a branch in Travelers Rest in Greenville County, South Carolina. The Company opened its new Travelers Rest office on January 14, 2002. During 2001, the Company began making plans to enter Oconee County, a new market area. The Bank has purchased a building in Seneca in Oconee County, South Carolina with plans to open a de novo branch in the Spring of 2002. Management continually reviews opportunities to expand in the Upstate that it believes to be in the best interest of the Bank, its customers and its shareholders. Employees At December 31, 2001, the Bank had 366 full-time equivalent employees, none of whom are subject to a collective bargaining agreement. Management believes its relationship with its employees is excellent. Monetary Policy The results of operations of Bancshares and the Bank are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Bancshares and the Bank. Regulatory Environment General Bancshares and its subsidiaries are extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws may have a material effect on the business and prospects of Bancshares. The operations of Bancshares may be affected by possible legislative and regulatory changes and by the monetary policies of the United States. Bancshares. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), Bancshares is subject to regulation and supervision by the Federal Reserve. Under the BHCA, Bancshares' activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity that the Federal Reserve determines to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. The BHCA also restricts the ability of Bancshares to acquire ownership or control of more than 5% of the outstanding voting stock of any bank or certain other nonbanking businesses. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation ("FDIC") insurance funds in the event the depository institution becomes in danger of defaulting or in default under its obligations to repay deposits. For example, under current federal law, to reduce the likelihood of receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured 4 depository institution subsidiary that may become "undercapitalized:" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. As a bank holding company registered under the South Carolina Bank Holding Company Act, Bancshares also is subject to regulation by the South Carolina State Board of Financial Institutions ("State Board"). Bancshares must file with the State Board periodic reports with respect to its financial condition and operations, management and intercompany relationships between Bancshares and its subsidiaries. The Bank. The Bank is a FDIC-insured, South Carolina-chartered banking corporation and is subject to various statutory requirements, rules and regulations promulgated and enforced primarily by the State Board and the FDIC. These statutes, rules and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the business of the Bank. The FDIC has broad authority to prohibit the Bank from engaging in what it determines to be unsafe or unsound banking practices. In addition, federal law imposes a number of restrictions on state-chartered, FDIC-insured banks and their subsidiaries. These restrictions range from prohibitions against engaging as a principal in certain activities to the requirement of prior notification of branch closings. The Bank also is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit and fair credit reporting laws. The Bank is not a member of the Federal Reserve System. Dividends. The holders of Bancshares common stock are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available therefor. Bancshares is a legal entity separate and distinct from the Bank and Palmetto Capital and depends for its revenues on the payment of dividends from the Bank. Current federal law would prohibit, except under certain circumstances and with prior regulatory approval, an insured depository institution, such as the Bank, from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered "undercapitalized," as that term is defined in applicable regulations. In addition, as a South Carolina-chartered bank, the Bank is subject to legal limitations on the amount of dividends it is permitted to pay. Please see page 10 for the amount currently available for the payment of dividends. Capital Adequacy Bancshares. The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. Under these guidelines, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier 1 capital," principally consisting of common shareholders' equity, noncumulative preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, 5 less certain goodwill items. The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier 1 (leverage) capital ratio under which a bank holding company must maintain a minimum level of Tier 1 capital (as determined under applicable rules) to average total consolidated assets of at least 3% in the case of bank holding companies which have the highest regulatory examination ratios and are not contemplating significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 100 to 200 basis points above the stated minimum. At December 31, 2001, Bancshares was in compliance with both the risk-based capital guidelines and the minimum leverage capital ratio. The Bank. As a state-chartered, FDIC-insured institution that is not a member of the Federal Reserve System, the Bank is subject to capital requirements imposed by the FDIC. The FDIC requires state-chartered nonmember banks to comply with risk-based capital standards substantially similar to those required by the Federal Reserve, as described above. The FDIC also requires state-chartered nonmember banks to maintain a minimum leverage ratio similar to that adopted by the Federal Reserve. Under the FDIC's leverage capital requirement, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth are required to maintain a minimum leverage ratio of 3% of Tier 1 capital to total assets; all other banks are required to maintain a minimum leverage ratio of not less than 4%. As of December 31, 2001, the Bank was in compliance with both the risk-based capital guidelines and the minimum leverage capital ratio. For further discussion on the Bank's current capital rating, see note 16 to consolidated financial statements. Insurance As a FDIC-insured institution, the Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by insured institutions shall be as specified in a schedule required to be issued by the FDIC that specifies, at semiannual intervals, target reserve ratios designed to increase the FDIC insurance fund's reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC may determine in accordance with the statute) in 15 years. Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Department of the Treasury (the "Treasury Department"). The FDIC uses a risk-based assessment schedule, having assessments ranging from 0.00% to 0.27% of an institution's average assessment base as of December 31, 2001. The actual assessment to be paid by each FDIC-insured institution is based on the institution's assessment risk classification, which is determined based on whether the institution is considered "well capitalized," "adequately capitalized" or "undercapitalized," as such terms have been defined in applicable federal regulations adopted to implement the prompt corrective action provisions of the Federal Deposit Insurance Corporation Insurance Act ("FDICIA") (see "Other Safety and Soundness Regulations--Prompt Corrective Action" below), and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. For the years ended December 31, 2001, 2000 and 1999, the Bank maintained a status of "well capitalized". Premiums paid for FDIC insurance during each of those years amounted to $110,000, $111,000 and $132,000, respectively. This further decrease in the Bank's premium is due to the Bank's FICO assessment as described below. Under the Deposit Insurance Fund Act, BIF-assessable deposits are subject to assessment for payment on the $780 million annual Financing Corporation ("FICO") bond obligation at 1/5 the rate of Savings Association Insurance Fund-assessable deposits. Accordingly, the FDIC has estimated that the annual FICO rate will be 1.30 basis points per $100 of BIF-assessable deposits in the years 1997 - 1999. Starting in the year 2000 until the FICO bonds are retired, banks and thrifts will pay the assessment on a pro rata basis (estimated at 2.5 basis points for banks). The Bank's actual assessment for 2001 was 1.82 basis points. 6 Other Safety and Soundness Regulations Prompt Corrective Action. Current law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A CAMELS rating is a score given to a financial institution by its primary regulator which represents a composite rating of the various areas examined: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. A bank is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3%, or (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2001, Bancshares and the Bank each currently meet the definition of "well capitalized." Brokered Deposits. Current federal law also regulates the acceptance of brokered deposits by insured depository institutions to permit only a "well capitalized" depository institution to accept brokered deposits without prior regulatory approval. Under FDIC regulations, "well capitalized" insured depository institutions may accept brokered deposits without restriction, "adequately capitalized" insured depository institutions may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions on payments of interest rates), while "undercapitalized" insured depository institutions may not accept brokered deposits. The regulations provide that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" are the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of FDICIA (as described in the previous paragraph). Bancshares does not believe that these regulations will have a material adverse effect on its current operations. Other FDICIA Regulations. To facilitate the early identification of problems, FDICIA required the federal banking agencies to prescribe more stringent reporting requirements. The FDIC final regulations implementing those provisions, among other things, require that management report on the institution's responsibility for preparing financial statements and establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness, and that independent auditors attest to and report separately on assertions in management's reports concerning compliance with such laws and regulations, using FDIC approved audit procedures. These regulations apply to financial institutions with greater than $500 million in assets at the beginning of their fiscal year. Accordingly, the Bank is subject to these regulations. Community Reinvestment Act The Bank is subject to the requirements of the Community Reinvestment Act ("CRA"). The CRA requires that financial institutions have an affirmative and ongoing obligation to meet the credit needs of their local communities, including low-income and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs are evaluated as part of the examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The Bank received an "outstanding" rating in its most recent evaluation dated May 3, 1999. 7 Transactions between Bancshares, Its Subsidiaries and Affiliates Bancshares' subsidiaries are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Aggregate limitations on extensions of credit also may apply. Bancshares' subsidiaries also are subject to certain lending limits and restrictions on overdrafts to such persons. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its nonbank subsidiary, on investments in their securities and on the use of their securities as collateral for loans to any borrower. Such restrictions may limit Bancshares' ability to obtain funds from its bank subsidiary for its cash needs, including funds for acquisitions, interest and operating expenses. In addition, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, a subsidiary may not generally require a customer to obtain other services from any other subsidiary or Bancshares, and may not require the customer to promise not to obtain other services from a competitor, as a condition to an extension of credit to the customer. Item 2. Properties The corporate headquarters, the telephone banking center, and the finance, operations, data processing, trust, human resources, loan administration, internal audit and marketing departments are located in a facility at 301 Hillcrest Drive, Laurens, South Carolina ("Corporate Center"). The main office of the Bank is located in a facility at 101 West Main Street, Laurens, South Carolina, which also contains a three lane drive-in facility. The Bank has twenty-eight full-service branches in the Upstate region of South Carolina in the following locations: Laurens (3), Duncan, Clinton, Greenwood (2), Ninety-Six, Fountain Inn, Hodges, Mauldin, Simpsonville, Anderson (2), Greenville (5), Pendleton, Spartanburg (3), Inman, Blacksburg, Gaffney, Abbeville and Greer. The Bank has automatic teller machines at the following branches: Church Street (Laurens), Clinton, Montague Avenue (Greenwood), South Main (Greenwood), Ninety-Six, Abbeville, Fountain Inn, Mauldin, Simpsonville, Woodruff Road (Greenville), Haywood Road (Greenville), East North Street at Howell Road (Greenville), Grove Road (Greenville), Blackstock Road (Spartanburg), Hillcrest (Spartanburg), Duncan, Inman, Greer, Blacksburg, Gaffney, Pendleton, Anderson and North Anderson branches. The Bank also has ATM's at three non-branch locations: the Flour Daniel office complex (Greenville), the Cato Corners Shopping Center (Laurens) and the Westwood Plaza Shopping Center (Greenwood). In addition, the Bank owns five limited service branches in various retirement centers located in the Upstate. The Bank owns all of its facilities except the following leased facilities, which have annual rental expenses from $1 dollar to $173 thousand: East North Street, Haywood Road, East North Street at Howell Road, Woodruff Road, Greer offices--Greenville Spartan Centre, Blackstock Road, Hillcrest offices--Spartanburg Gaffney office--Gaffney South Main Street and Ninety-Six offices--Greenwood North Anderson office--Anderson 8 Offices range in size from branch locations of approximately 800 to 10,000 square feet, to the Corporate Center location of approximately 55,000 square feet. All facilities are protected by alarm and security systems that meet or exceed regulatory standards. Each facility is in good condition and capable of handling increased volume. All of the locations are considered suitable and adequate for their intended purposes. Item 3. Legal Proceedings 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 case is still in the discovery stage. While the Bank does not anticipate a negative result from this lawsuit, based on the apparent claims being asserted by the plaintiff, there can be no assurance that a negative result might not have a material adverse effect on the Company's financial condition. Bancshares 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 Bancshares or the Bank. 9 Part II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters There is no public market for the common stock of Bancshares or the Bank. The last known selling price of Bancshares' common stock, based on information available to Bancshares' management, was $27.00 per share on February 19, 2002. As of February 19, 2002, the Company had 1,034 shareholders with 6,284,623 shares outstanding. Bancshares, or its predecessor, the Bank, has paid regular dividends on common stock since 1909. For the years ended December 31, 2001, 2000 and 1999, Bancshares paid cash dividends of $2.6 million or $0.41 per share, $2.3 million or $0.37 per share, and $2.0 million or $0.32 per share, respectively. These dollars equate to dividend payout ratios (dividends declared divided by net income) of 30.58%, 32.96% and 24.24% in 2001, 2000 and 1999, respectively. Certain other information concerning dividends and historical trading prices is set forth below. Quarterly Common Stock Data Set forth below is information concerning high and low sales prices by quarter for each of the last two fiscal years and dividend information for the last two fiscal years. The Company's common stock is not traded on any established public trading market. The Company acts as its own transfer agent, and the information concerning sales prices set forth below is derived from the Company's stock transfer records. As of December 31, 2001, there were 1,030 shareholders of record. Sales Prices by Quarter
Fiscal Year 2001 High Low ---------------- ------ ------ First Quarter........................................ $25.50 $25.00 Second Quarter....................................... $26.00 $26.00 Third Quarter........................................ $26.00 $26.00 Fourth Quarter....................................... $27.00 $26.00 Fiscal Year 2000 ---------------- First Quarter........................................ $24.50 $22.50 Second Quarter....................................... $24.50 $23.50 Third Quarter........................................ $25.00 $24.50 Fourth Quarter....................................... $25.00 $25.00
Dividends Paid Per Share
Fiscal Year 2001 Fiscal Year 2000 - ---------------- ---------------- March 31.......................... $.10 March 31.......................... $.09 June 29........................... $.10 June 30........................... $.09 September 28...................... $.10 September 29...................... $.09 December 28....................... $.11 December 27....................... $.10
The ability of Bancshares to pay dividends depends upon the amount of dividends that is received from 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 10.72%. At December 31, 2001, the Bank had $11.7 million of excess retained earnings available to pay out for dividends and still be considered "well-capitalized." The Bank plans to continue its quarterly dividend payments. 10 Item 6. Selected Financial Data (Dollars in thousands)
5 Year Summary ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- --------- --------- --------- --------- For the Year Total interest income................................. $ 49,271 46,873 43,142 40,829 36,969 Total interest expense................................ 19,549 20,383 16,399 16,440 15,841 Net interest income................................... 29,722 26,490 26,743 24,389 21,128 Provision for loan losses............................. 4,038 3,880 2,431 1,877 1,331 Total non-interest income............................. 12,869 9,551 8,069 6,468 5,628 Total non-interest expense............................ 26,553 22,549 21,274 19,130 17,085 Income before income taxes............................ 12,000 9,612 11,107 9,850 8,340 Income tax provision.................................. 3,600 2,637 3,038 3,000 2,415 Net income............................................ 8,400 6,975 8,069 6,850 5,925 Per Common Share Net income per share-basic, not subject to put/call... $ 1.34 1.12 1.30 1.05 0.98 Net income per share-dilutive, not subject to put/call 1.31 1.09 1.26 1.02 0.97 Cash dividends declared............................... 0.41 0.37 0.32 0.25 0.19 Book value at year end (1)............................ 9.40 8.41 7.33 6.79 5.93 Average common shares outstanding--basic (1).......... 6,263,031 6,241,775 6,208,750 6,178,318 6,109,754 At Year End Total assets.......................................... $ 735,279 663,390 625,835 578,196 514,170 Investment securities................................. 95,095 98,601 106,772 112,542 97,731 Total Loans........................................... 553,821 498,242 445,757 413,266 367,585 Total deposits........................................ 645,300 572,666 538,324 500,469 450,353 Total shareholders' equity (2)........................ 59,068 52,593 45,627 42,085 36,616 Total shareholders' equity............................ 59,068 52,593 45,627 37,353 32,832 Common shares outstanding............................. 6,283,623 6,255,734 6,226,834 6,199,390 6,179,104 Full-time equivalent employees........................ 366 341 327 306 281 Average Balances Assets................................................ $ 698,600 636,289 595,678 541,799 493,737 Investment securities................................. 94,796 108,591 110,546 102,635 97,136 Loans................................................. 542,024 470,381 430,960 390,776 350,493 Deposits.............................................. 603,187 542,259 512,405 467,749 432,031 Total shareholders' equity (2)........................ 56,696 48,906 45,094 39,552 33,858 Key Ratios (1) Return on average assets.............................. 1.20% 1.10% 1.35% 1.26% 1.20% Return on average equity.............................. 14.82% 14.26% 17.89% 17.32% 17.50% Primary capital to assets at year end................. 8.74% 8.68% 8.22% 8.21% 8.06% Net interest margin (fully tax-equivalent)............ 4.75% 4.73% 5.09% 5.07% 4.80% Allowance for loan losses to total loans.............. 1.02% 1.09% 1.43% 1.40% 1.40% Nonperforming assets to total assets.................. 0.66% 0.64% 0.49% 0.33% 0.25% Net charge-offs to average loans...................... 0.71% 1.02% 0.43% 0.32% 0.26% Average equity to average assets ratio................ 8.12% 7.69% 7.57% 7.30% 6.86%
- -------- (1) These numbers are calculated using balances and shares of total common stock outstanding excluding reclassification of ESOP stock, for which Bancshares had issued a put option, totaling $4,732, and $3,784 at December 31, 1998 and 1997, respectively. This put option expired in 1999. (2) Excluding reclassification of ESOP stock, for which Bancshares had issued a put option, totaling $4,732, and $3,784 at December 31, 1998 and 1997, respectively. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data in Item 6 of this report and the Consolidated Financial Statements and accompanying notes in Item 8 of this report. The consolidated financial statements of Palmetto Bancshares, Inc. and subsidiaries (the "Company"), represent account balances for Palmetto Bancshares, Inc., (the "Parent Company"), and its wholly-owned subsidiary, The Palmetto Bank, (the "Bank"), and the Bank's wholly-owned subsidiary, Palmetto Capital, Inc. Significant accounting policies are disclosed throughout management's discussion and analysis and may involve uncertainties. 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 deposit decline rates, 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 the 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. Off-Balance Sheet Risk and Contractual Obligations The Company, through the operations of the Bank, makes contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers of the Bank at predetermined interest rates for a specified period of time. At December 31, 2001, the Bank had issued commitments to extend credit of $92.3 million through various types of lending arrangements, described further in the table below. Home equity loans.............................................. $12,162 Credit cards................................................... 32,471 Commercial real estate development............................. 19,086 Other unused lines of credit................................... 28,601 ------- $92,320 =======
All unused loan commitments are at adjustable rates that fluctuate with prime rate, or are at fixed rates that approximate market rates. The current amounts of these commitments approximate their fair value. Most of the commercial loan commitments expire in one year or less. Other commitments, including consumer loans and credit cards, typically have a maturity of more than one year. Past experience indicates that many of these commitments to extend credit will expire unused. However, as described in "Liquidity and Asset and Liability Management", the Company believes that is has adequate sources of liquidity to fund commitments that are drawn upon by the borrower. In addition to commitments to extend credit, the Bank also issues standby letters of credit which are assurances to a third party that they will not suffer a loss if the Bank's customer fails to meet its contractual obligation to the third party. Standby letters of credit totaled $2.1 million at December 31, 2001. Past experience 12 indicates that many of these standby letters of credit will expire unused. However, through its various sources of liquidity, the Bank believes that it will have the necessary resources to meet these obligations should the need arise. Neither the Company nor its subsidiaries is involved in other off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments or significantly impact earnings. Obligations under noncancelable operating lease agreements totaled $3.5 million at December 31, 2001. These obligations are payable over several years as shown in Note 13 to the Company's consolidated financial statements. General Palmetto Bancshares achieved record earnings in 2001 of $8.4 million, increasing 20% from $7.0 million in 2000. Basic and dilutive earnings per share in 2001 improved to $1.34 and $1.31, respectively, compared with $1.12 and $1.09, respectively in 2000. Net income was $8.1 million in 1999. Basic and dilutive earnings per share totaled $1.30 and $1.26 in 1999, respectively. Net earnings resulted in a return on average assets of 1.20% in 2001, 1.10% in 2000, and 1.35% in 1999. The return on average equity for the three years ended December 31, 2001 was 14.82%, 14.26%, and 17.89%, respectively. The Company's earnings accelerated during 2001 principally as a result of growth in net interest income. The Company's net interest margin improved from 4.53% in 2000 to 4.60% in 2001. Another important highlight in 2001 was the 35% increase in non-interest income over 2000 principally due to the increase in service charges on deposit accounts. During 2001, non-interest expense increased by 18% due principally to the increase in salaries and other personnel expenses. Provision for loan losses increased slightly from 2000 to 2001, as expected. There were significant charge-offs during 2001 that related to the sales finance portfolio, as was also the case in 2000. (see further discussion below) In 2001, a total of $4.0 million of loans was charged off, 56% of which were sales finance loans. Management has continued to reduce the sales finance portfolio, which decreased 31% from $23.1 million in 2000 to $15.9 million in 2001. During 2000, net income decreased to $7.0 million from $8.1 in 1999. The decrease was principally due to the decrease in the net interest margin and the increase in the provision for loan losses. The net interest margin decreased 34 basis points, from 4.87% in 1999 to 4.53% in 2000. The Bank recorded charge-offs of $5.0 million during 2000, 21/2 times that of the previous year. Approximately 76% of those charge-offs related to sales finance loans. The sales finance portfolio naturally includes loans with more inherent risk than the loans in the Bank's direct lending portfolio. During mid 1999, management noted deterioration in the performance of the portfolio which resulted in the Bank 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. Management reduced the sales finance portfolio from $36.8 million to $23.1 million at December 31, 1999 and 2000, respectively. Management also made certain organizational changes in the sales finance department to improve the asset quality. As the lower quality loans seasoned, the level of charge-offs arising from these loans increased in 2000, as expected. In addition to the increased charge-offs on the sales finance loans, the Bank also experienced increased losses on the sale of the automobiles repossessed in conjunction with the defaulted loans due to the high volume of cars to be sold at auction. 13 Financial Condition As of December 31, 2001, 2000 and 1999 At December 31, 2001, Bancshares had total assets of $735.3 million, increasing by $71.9 million or 11% from December 31, 2000. Asset growth was principally attributable to a $16.1 million increase in federal funds sold, a $55.4 million increase in net loans and a $9.4 million increase in loans held for sale. An $8.6 million decrease in cash and due from banks and a $3.5 million decrease in investment securities available for sale offset these increases. Average assets increased by approximately 10% during the year while average interest earning assets increased by almost 11%. During 2001, total deposits increased $72.6 million principally in the transaction deposit accounts and other time deposit accounts. Securities sold under repurchase agreements and commercial paper decreased by $8.9 million as a result of lower rates paid on these instruments. At December 31, 2000, Bancshares had assets that totaled $663.4 million, increasing by $37.6 million or 6% from December 31, 1999. Asset growth was principally attributed to growth in net loans, which increased by $53.4 million during 2000, offset by a decrease in cash and due from banks of $6.1 million and a decrease in investment securities available for sale of $8.2 million. The table on the following page shows the average balances and distributions of the Company's assets and liabilities for each of the last four years. 14 TABLE 1 Distribution of Assets and Liabilities (Dollars in Thousands)
Years Ended December 31, ---------------------------------------------------------------------- 2001 2001 2000 2000 1999 1999 1998 1998 -------- ------ -------- ------ -------- ------ -------- ------ Average % of Average % of Average % of Average % of Balance Total Balance Total Balance Total Balance Total -------- ------ -------- ------ -------- ------ -------- ------ ASSETS Cash and due from banks............... $ 24,974 3.57% $ 24,688 3.88% $ 25,416 4.27% $ 22,244 4.11% Federal funds sold.................... 7,192 1.03% 3,340 0.52% 5,287 0.89% 3,876 0.72% Federal Home Loan Bank stock.......... 1,733 0.25% 1,733 0.27% 1,691 0.28% 1,520 0.28% Taxable investment securities......... 57,786 8.27% 44,770 7.04% 40,596 6.82% 53,756 9.92% Non-taxable investment securities..... 37,010 5.30% 63,821 10.03% 69,950 11.74% 48,879 9.02% Loans, net of unearned discount....... 542,024 77.59% 470,381 73.93% 430,960 72.35% 390,776 72.13% Less: allowance for loan losses.... (5,527) -0.79% (5,921) -0.93% (6,085) -1.02% (5,393) -1.00% -------- ------ -------- ------ -------- ------ -------- ------ Net loans...................... 536,497 76.80% 464,460 73.00% 424,875 71.33% 385,383 71.13% Premises and equipment, net........... 17,791 2.55% 16,641 2.62% 15,230 2.56% 14,255 2.63% Accrued Interest...................... 4,846 0.69% 4,657 0.73% 4,344 0.73% 4,065 0.75% Other assets.......................... 10,771 1.54% 12,179 1.91% 8,289 1.39% 7,821 1.44% -------- ------ -------- ------ -------- ------ -------- ------ Total assets................... $698,600 100.00% $636,289 100.00% $595,678 100.00% $541,799 100.00% ======== ====== ======== ====== ======== ====== ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Non-interest-bearing deposits...... 92,792 13.28% 89,107 14.00% 82,921 13.92% 73,266 13.52% Interest-bearing demand............ 204,983 29.34% 183,194 28.79% 165,370 27.76% 147,580 27.24% Savings............................ 32,593 4.67% 32,578 5.12% 31,308 5.26% 28,718 5.30% Time............................... 272,818 39.05% 237,380 37.31% 232,806 39.08% 218,185 40.27% -------- ------ -------- ------ -------- ------ -------- ------ Total deposits................. 603,186 86.34% 542,259 85.22% 512,405 86.02% 467,749 86.33% Federal funds purchased and securities sold under agreements to repurchase....................... 18,520 2.65% 26,396 4.15% 19,295 3.24% 18,747 3.46% Commercial paper...................... 13,310 1.91% 15,945 2.51% 15,273 2.56% 12,668 2.34% Other liabilities..................... 6,888 0.99% 2,783 0.44% 3,611 0.61% 3,083 0.57% -------- ------ -------- ------ -------- ------ -------- ------ Total liabilities.............. 641,904 91.88% 587,383 92.31% 550,584 92.43% 502,247 92.70% Shareholders equity: Common stock--$5.00 par value............................ 31,315 4.48% 31,123 4.89% 31,042 5.21% 30,890 5.70% Capital surplus.................... 40 -- 19 -- -- -- 19 -- Retained earnings.................. 24,705 3.54% 19,898 3.13% 14,277 2.40% 8,385 1.55% Less: Treasury stock............... -- -- -- -- -- -- -- -- Accumulated other comprehensive income (loss)...... 636 0.09% (2,134) -0.34% (225) -0.04% 258 0.05% -------- ------ -------- ------ -------- ------ -------- ------ Total shareholders' equity..... 56,696 8.12% 48,906 7.69% 45,094 7.57% 39,552 7.30% -------- ------ -------- ------ -------- ------ -------- ------ Total liabilities and shareholders' equity......... $698,600 100.00% $636,289 100.00% $595,678 100.00% $541,799 100.00% ======== ====== ======== ====== ======== ====== ======== ======
15 Loans and Asset Quality Management of the Company believes that the loan portfolio is adequately diversified. Commercial loans are spread through numerous types of businesses with no particular industry concentrations. Loans to individuals are made primarily to finance consumer goods purchased. At December 31, 2001, total loans, net of unearned discounts, were 82% of total earning assets. Loans secured by real estate accounted for 60% of total loans as of December 31, 2001. Most of the loans classified as real estate-mortgage are commercial loans where real estate provides additional collateral. At December 31, 2001, the sales finance portfolio was $15.9 million compared to $23.1 million at December 31, 2000. The sales finance portfolio includes loans with more inherent risk than the loans in the Bank's direct lending portfolio. During mid 1999, management noted deterioration in the performance of the portfolio that resulted in increased charge-offs during 2000 and 2001. In estimating the allowance for loan losses at December 31, 2001 and in allocating portions of the allowance to specific portions of the loan portfolio, management has taken these factors into consideration and has allocated what it believes to be an adequate portion of the allowance to the sales finance portfolio. Non-accrual loans are those loans which management, through its continuing evaluation of loans, has determined offer a more than normal risk of collectability of future interest. Interest income on non-accrual loans is recognized only as received. Interest on past due loans continues to accrue until such time that the loans are either charged-off or placed on non-accrual status. The non-accrual loan policy provides that it is the responsibility of the chief credit officer to administer the placing of loans on non-accrual status. Loans that become ninety days past due will be placed on non-accrual. Loans on which bankruptcy notices are received will also be placed on non-accrual. In addition, other loans on which repayment appears doubtful may be placed on non-accrual at the discretion of the chief credit officer. Non-performing loans (which consist of loans on non-accrual and loans greater than 90 days, but still accruing) for 2001, 2000 and 1999 were approximately $4.0 million or 0.73% (of total loans), $3.2 million or 0.65% and $1.6 million or 0.37%, respectively. For information on impaired loans, please see footnote number 4. Table 2 on page 17 sets forth, for each loan category, the amounts of total loans 90 days or more past due and on non-accrual, the amounts of total loans 90 days or more past due and accruing, total loans outstanding, the percentage of each type of loan 90 days or more past due and the amount of foregone interest income for each of the five years for December 31, 1997 through December 31, 2001. 16 TABLE 2 Nonperforming Loans (Dollars in Thousands)
90 Days or Foregone More Past Percentage Interest Due and not 90 Days or Income Non- on Total Loans More Past From Accrual Non-Accrual Outstanding Due Non-Accrual ------- ----------- ----------- ---------- ----------- December 31, 2001: Commercial, financial and agricultural. $ 811 139 154,069 0.62% $ 48 Real estate - construction............. -- -- 22,836 0.00 -- Real estate - mortgage................. 2,074 -- 310,981 0.67 171 Installment loans to individuals....... 514 491 65,935 1.52 106 ------ --- ------- ---- ---- Total.............................. $3,399 630 553,821 0.73% $325 ====== === ======= ==== ==== December 31, 2000: Commercial, financial and agricultural. $ 873 -- 123,727 0.71% $ 68 Real estate - construction............. -- -- 14,321 0.00 -- Real estate - mortgage................. 1,103 -- 283,541 0.39 140 Installment loans to individuals....... 1,055 193 76,653 1.63 176 ------ --- ------- ---- ---- Total.............................. $3,031 193 498,242 0.65% $384 ====== === ======= ==== ==== December 31, 1999: Commercial, financial and agricultural. $ 805 -- 107,934 0.75% $ 98 Real estate - construction............. -- -- 13,373 0.00 -- Real estate - mortgage................. 329 -- 231,637 0.14 21 Installment loans to individuals....... 387 109 92,813 0.53 121 ------ --- ------- ---- ---- Total.............................. $1,521 109 445,757 0.37% $240 ====== === ======= ==== ==== December 31, 1998: Commercial, financial and agricultural. $ 223 -- 93,343 0.24% $ 26 Real estate - construction............. -- -- 10,341 0.00 -- Real estate - mortgage................. 445 -- 215,709 0.21 22 Installment loans to individuals....... 817 87 93,873 0.96 82 ------ --- ------- ---- ---- Total.............................. $1,485 87 413,266 0.38% $130 ====== === ======= ==== ==== December 31, 1997: Commercial, financial and agricultural. $ 63 -- 81,678 0.08 $ 2 Real estate - construction............. -- -- 8,799 0.00 -- Real estate - mortgage................. 256 -- 195,462 0.13 26 Installment loans to individuals....... 399 144 81,646 0.67 38 ------ --- ------- ---- ---- Total.............................. $ 718 144 367,585 0.23% $ 66 ====== === ======= ==== ====
17 Allowance for Loan Losses Management maintains an allowance for loan losses, which it believes is adequate to cover inherent losses in the loan portfolio. The allowance for loan losses is comprised of the allowance needed for specific loans and specific loan portfolios. The Company performs periodic reviews of its loan portfolios to identify and assess the overall risk in the portfolios. Homogeneous portions of the loan portfolio, including residential mortgage loans, consumer loans, credit card receivables and sales finance loans, are generally evaluated as a group based on loan type. A risk factor is determined for each loan type based on historical loss levels, delinquency data, economic trends, market conditions and concentrations of credit. The allowance for the commercial loan portfolio is based on loan grades. All loans in the commercial loan portfolio are graded at inception and are reviewed on a periodic basis on performance, size and other factors. Commercial loans are then assigned a risk factor based on the loan grade, economic trends and other factors determined by management. The risk factors are applied to the individual loans and loan portfolios in order to provide a basis for establishing an adequate level of allowance for loan losses. The allowance for loan losses is all allocated. The following table sets forth the breakdown of the Company's allowance for loan losses by loan category at the dates indicated. Management believes that the allowance for loan losses 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 any category.
2001 2000 1999 1998 1997 ------------- ------------ ------------ ------------ ------------ % of % of % of % of % of Total Total Total Total Total Total Total Total Total Total ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ Balance applicable to: Commercial, financial and agricultural... $1,266 22.38% 1,741 31.97% 2,022 31.78% 1,309 22.59% 1,145 22.22% Real estate- construction....... 130 2.30 32 0.59 31 .49 145 2.50 123 2.39 Real estate- mortgage........... 2,507 44.30 1,123 20.62 778 12.23 3,025 52.20 2,739 53.17 Installment loans to individuals........ 1,755 31.02 2,550 46.82 3,531 55.50 1,316 22.71 1,145 22.22 ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ Total............ $5,658 100.00% 5,446 100.00% 6,362 100.00% 5,795 100.00% 5,152 100.00% ====== ====== ===== ====== ===== ====== ===== ====== ===== ======
The process by which the Company determines the allowance for loan losses requires considerable judgment. Factors considered in determining the allowance for loan losses include lending trends, geographic and industry concentrations, changes in type and mix of loans originated and overall economic trends. Management's judgment is based upon a number of assumptions about future events which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. The allowance for loan losses is also 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. 18 The following table summarizes the activity in the allowance for loan losses for the years indicated. TABLE 3 Summary of Loan Loss and Recovery Experience (Dollars in Thousands)
2001 2000 1999 1998 1997 -------- ------- ------- ------- ------- Average loans, net of unearned discount............... $542,024 470,381 430,960 390,776 350,493 ======== ======= ======= ======= ======= Allowance for loan losses: Beginning balance.................................. $ 5,446 6,362 5,795 5,152 4,729 Add provision for loan losses...................... 4,038 3,880 2,431 1,877 1,331 Loan charge-offs: Commercial, financial and agricultural............. 809 390 532 344 158 Real estate-construction........................... 50 -- -- -- -- Real estate-mortgage............................... 28 -- -- -- -- Installment loans to individuals................... 3,146 4,597 1,441 1,018 891 -------- ------- ------- ------- ------- Total loan charge-offs................................ 4,033 4,987 1,973 1,362 1,049 Recoveries of loans previously charged-off: Commercial, financial and agricultural............. 8 15 22 5 56 Real estate-construction........................... 9 -- -- -- -- Real estate-mortgage............................... -- -- -- -- -- Installment loans to individuals................... 190 176 87 123 85 -------- ------- ------- ------- ------- Total recoveries of loans previously charged-off...... 207 191 109 128 141 -------- ------- ------- ------- ------- Net charge-offs................................ 3,826 4,796 1,864 1,234 908 -------- ------- ------- ------- ------- Ending balance........................................ $ 5,658 5,446 6,362 5,795 5,152 ======== ======= ======= ======= ======= Net charge-offs to average loans, net................. .71% 1.02% 0.43% 0.32% 0.26% Allowance for loan losses to average loans, net....... 1.04 1.16 1.48 1.48 1.47 Allowance for loan losses to total loans at period-end 1.02 1.09 1.43 1.40 1.40
Losses and recoveries are charged or credited to the allowance at the time realized. Deposits At December 31, 2001, the Company's total deposits increased $72.6 million or 13% from $572.7 million to $645.3 million. Management believes that market conditions in 2001 were more favorable for deposit growth. Factors such as the lower returns on investments and mutual funds and the fluctuations in the stock market may have contributed to the increase in deposits during 2001. Retail deposits have traditionally been the primary source of funds for the Company and also provide a customer base for the sale of additional financial products and services. At December 31, 2001, transaction accounts made up 39% of total deposits, while time deposits made up 45% of total deposits. Savings and other money market accounts made up the remainder of total deposits. The following table sets forth, by time remaining to maturity, domestic certificates of deposit over $100, as of December 31, 2001, 2000 and 1999. 19 TABLE 4 Maturities of Time Deposits Over $100
2001 2000 1999 ------- ------- ------- Maturities: 3 months or less.................................. $32,006 $26,187 $21,451 3 through 6 months................................ 16,755 8,553 17,901 6 through 12 months............................... 20,375 17,859 10,717 Over 12 months.................................... 7,900 11,245 3,768 ------- ------- ------- $77,036 $63,844 $53,837 ======= ======= =======
Capital Resources Average shareholder's equity was $56.7 million during 2001, or 8.12% of average assets, increasing from 7.69% during 2000. The Consolidated Statements of Shareholders' Equity and Comprehensive Income contained in Item 8 herein provide details of the changes in stockholders' equity during the year. At December 31, 2001 and 2000 the Company and the Bank were each categorized as "well capitalized," under the regulatory framework for prompt corrective action. There are no current conditions or events that management believes would change the Company's or the Bank's category. Please see notes to consolidated financial statements number 16 for the Company's and the Bank's various capital ratios at December 31, 2001. Liquidity and Asset and Liability Management 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%-25%. At December 31, 2001 and 2000, the Company's liquidity ratio was 17% and 13%, respectively. The Company's liquidity position is dependent upon its debt servicing needs and dividends declared. The Company had no outstanding debt at December 31, 2001 and 2000, respectively. The Parent Company offers commercial paper as an alternative investment tool for its commercial customers (Master note program). The commercial paper is issued only in conjunction with the automated sweep account customer agreement on deposits at the Bank level. At December 31, 2001, the Company had $11.1 million in commercial paper with a weighted average rate paid during the year of 2.70%, as compared to $15.4 million in 2000 with a weighted average paid during the year of 4.95% and $12.6 million in 1999 with a weighted average rate paid during the year of 3.44%. The Company's liquidity needs are met through the payment of dividends from the Bank. At December 31, 2001, the Bank had available retained earnings of $11.7 million for payment of dividends to remain "well capitalized." Prior approval of the Office of the Commissioner of Banking, State Board of Financial Institutions is required for any payment of dividends by a state bank. The Bank's liquidity is affected by its ability to attract deposits, the maturity of its loan portfolio, the flexibility of its investment securities, alternative sources of funds, and current earnings. Sufficient liquidity must be available to meet continuing loan demand and deposit withdrawal requirements. Competition for deposits is intense in the markets served by the Bank. However, the Bank has been able to attract deposits as needed through pricing adjustments and expansion of its geographic market area. The deposit base is comprised of diversified customer deposits with no one deposit or type of customer accounting for a significant portion. Therefore, withdrawals are not expected to fluctuate from historical levels. The loan portfolio of the Bank is a source of liquidity through maturities and repayments by existing borrowers. Loan demand has been constant and loan 20 originations can be controlled through pricing decisions. The investment securities portfolio is a source of liquidity through scheduled maturities and sales of securities, and prepayment of principal on mortgage-backed securities. Approximately 72% of the securities portfolio was pledged to secure liabilities as of December 31, 2001, as compared to 84% at December 31, 2000. If needed, alternative funding sources have been arranged through federal funds lines at correspondent banks, the FHLB, and the Federal Reserve Discount Window. At December 31, 2001, the Bank has unused short-term lines of credit totaling approximately $42 million (which are withdrawable at the lender's option). At December 31, 2001, unused borrowing capacity from the FHLB totaled $71 million. Management believes that its sources of liquidity are adequate to meet operational needs and to maintain the liquidity ratio within policy guidelines. The FHLB requires that securities, qualifying single family mortgage loans and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB ($71 million as discussed above) assumes that the Bank's $1.7 million investment in FHLB stock as well as certain securities and qualifying mortgages would be pledged to secure any future borrowings. The Bank believes that it could obtain additional borrowing capacity from the FHLB by identifying additional qualifying collateral that could be pledged. Asset-Liability Management and Market Risk Sensitivity 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, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk and 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 in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Bank's goal is to minimize interest rate risk between interest bearing assets and liabilities at various maturities through its Asset-Liability Management (ALM). ALM involves managing the mix and pricing of assets and liabilities in the face of uncertain interest rates and an uncertain economic outlook. It seeks to achieve steady growth of net interest income with an acceptable amount of interest rate risk and sufficient liquidity. The process provides a framework for determining, in conjunction with the profit planning process, which elements of the Company's profitability factors can be controlled by management. Understanding the current position and implications of past decisions is necessary in providing direction for the future financial management of the Company. The Company uses an asset-liability model to determine the appropriate strategy for current conditions. Interest sensitivity management is part of the asset-liability management process. Interest sensitivity gap (GAP) is the difference between total rate sensitive assets and rate sensitive liabilities in a given time period. The Company's rate sensitive assets are those repricing within one year and those maturing within one year. Rate sensitive liabilities include insured money market accounts, savings accounts, interest-bearing transaction accounts, time deposits and borrowings. The profitability of the Company is influenced significantly by management's ability to manage the relationship between rate sensitive assets and liabilities. At December 31, 2001, approximately 28% of the Company's earning assets could be repriced within one year compared to 21 approximately 96% of its interest-bearing liabilities. This compares to 24% and 92%, respectively, in 2000 and 25% and 95%, respectively, in 1999. The Company's current GAP analysis reflects that in periods of increasing interest rates, rate sensitive assets will reprice slower than rate sensitive liabilities and at the interest repricing of one year, the Company's net interest margin would be adversely impacted. On the flip side, the Company's current GAP position would also be interpreted to mean that in periods of declining interest rates, the Company's net interest margin would benefit. This analysis, however, does not take into account the dynamics of the marketplace. GAP is a static measurement that assumes if the prime rate increases or decreases by 100 basis points, all assets and liabilities that are due to reprice will increase or decrease by 100 basis points at the next opportunity. The Company historically has experienced a benefit from rising rates in the short term because deposit rates generally do not follow the national money market. Usually, they are controlled by the local market. Traditionally, loans do follow the money market; so when rates increase they reprice immediately, but the Company is able to better manage the deposit side. 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. At December 31, 2001, this model shows that if interest rates rose by 300 basis points over the next twelve months, net interest margin would be adversely affected by approximately 16%. This model also shows that if interest rates rose by only 100 or 200 basis points over the next twelve months, net interest margin would be adversely affected by approximately 5% and 11%, respectively. The model also shows that if interest rates dropped 300 basis points, the net interest margin would benefit by approximately 2%. Similarly, if interest rates dropped by only 100 or 200 basis points over the next twelve months, net interest margin would benefit by approximately 4% under both scenarios. The asset-liability committee meets weekly to address interest pricing issues, and this model is reviewed monthly. Management will continue to monitor its liability sensitive position in times of higher interest rates, which might adversely affect its net interest margin. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company could undertake in response to changes in interest rates. A market risk that does not directly affect net interest margin is the risk of realizing the unrealized losses in the investment securities portfolio ($823,000 at December 31, 2001). Unrealized losses exist because current market rates are higher than the weighted average rate on particular investment instruments within the investment portfolio. Management does not intend to liquidate the entire investment security portfolio, and therefore the unrealized losses are not expected be realized. The Company has sufficient liquidity without selling the investment security portfolio. The Company sees the investment security portfolio as mainly an income source, not a liquidity source. On page 24, Table 5 shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity and the instruments' fair values at December 31, 2001. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments. Notes to Market Risk Sensitivity table: . Expected maturities are contractual maturities adjusted for prepayments of principal when possible. The Company uses certain assumptions to estimate fair values and expected maturities. 22 . For loans, the Company has used contractual maturities due to the fact that the Company has no historical information on prepayment speeds. Since most of these loans are consumer and commercial loans, and since the Company's customer base is community-based, the Company feels its prepayment rates are insignificant. . For mortgage-backed securities, expected maturities are based upon contractual maturity, projected repayments and prepayment of principal. The prepayment experience herein is based on industry averages as provided by the Company's investment trustee. . Loans receivable includes non-performing loans and unamortized deferred loan costs, and is reduced by unamortized discounts. It does not include Loans Held for Sale as those are not considered to be interest-sensitive given that the Bank already has commitments to sell these loans at agreed upon rates. . Interest-bearing liabilities are included in the period in which the balances are expected to be withdrawn as a result of contractual maturities. For accounts with no stated maturities, the balances are included in the one-day category. . The interest rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing liabilities. An important aspect of achieving satisfactory net interest income is the composition and maturities of rate sensitive assets and liabilities. Table 5 generally reflects that in periods of rising interest rates, rate sensitive liabilities will reprice faster than rate sensitive assets, thus having a negative effect on net interest income. It must be understood, however, that such an analysis is as of December 31, 2001 and does not reflect the dynamics of the market place. Therefore, management reviews simulated earnings statements on a monthly basis to more accurately anticipate its sensitivity to changes in interest rates. 23 TABLE 5 Market Risk Sensitivity Expected Maturity/Repricing/Principal Repayments at December 31, 2001
2002 ----------------------------------------------- Average 2 Days to 3 to 6 6 to 12 Rate 1 Day 3 Months Months Months 2003 2004 2005 2006 ------- --------- --------- -------- -------- -------- -------- -------- -------- Interest-sensitive assets: Federal funds sold............ 4.48% $ 17,949 -- -- -- -- -- -- -- Federal Home Loan Bank stock........................ 6.87% -- -- -- -- 1,733 -- -- Mortgage-backed securities................... 6.27% -- 799 1,126 1,925 2,164 -- 2,425 Other investment securities... 5.73% -- 805 1,838 23,185 7,238 3,639 2,632 1,676 Loans receivable.............. 8.15% 98,265 10,038 25,169 6,811 51,668 44,239 126,126 27,179 ---- --------- -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets...................... 7.63% $ 116,214 11,642 28,133 29,996 62,564 50,042 128,758 31,280 ==== ========= ======== ======== ======== ======== ======== ======== ======== Interest-sensitive liabilities: Interest-bearing demand....... 1.32% 151,211 -- -- -- -- -- -- -- Insured money markets......... 2.69% 69,149 -- -- -- -- -- -- -- Savings deposits.............. 1.41% 33,294 -- -- -- -- -- -- -- Time deposits over $100....... 437 31,419 16,755 20,524 4,803 838 1,841 419 Other time deposits........... 306 85,469 53,115 55,661 9,938 2,850 3,519 974 ---- --------- -------- -------- -------- -------- -------- -------- -------- Total time deposits.......... 5.29% 743 116,888 69,870 76,185 14,741 3,688 5,360 1,393 ==== ========= ======== ======== ======== ======== ======== ======== ======== Short-term borrowings......... 3.44% 26,389 -- -- -- -- -- -- -- ---- --------- -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities................. 3.61% $ 280,786 116,888 69,870 76,185 14,741 3,688 5,360 1,393 ==== ========= ======== ======== ======== ======== ======== ======== ======== Interest rate sensitivity gap. $(164,572) (105,246) (41,737) (46,189) 47,823 46,354 123,398 29,887 ========= ======== ======== ======== ======== ======== ======== ======== Cumulative interest rate sensitivity gap.............. $(164,572) (269,818) (311,555) (357,744) (309,921) (263,567) (140,169) (110,282) ========= ======== ======== ======== ======== ======== ======== ======== Cumulative interest rate sensitive gap as a % of total interest-earning assets....................... -24.61% -40.36% -46.60% -53.51% -46.35% -39.42% -20.96% -16.49% ========= ======== ======== ======== ======== ======== ======== ======== Off-balance sheet items: Commitments to extend credit....................... * -- -- -- -- -- -- -- -- Unused lines of credit........ 5.07% -- -- -- -- -- -- -- --
There- Carrying Fair after Value Value ------- -------- ------- Interest-sensitive assets: Federal funds sold............ -- 17,949 17,949 Federal Home Loan Bank stock........................ -- 1,733 1,733 Mortgage-backed securities................... 1,375 9,814 9,814 Other investment securities... 44,268 85,281 85,281 Loans receivable.............. 164,326 553,821 552,630 ------- ------- ------- Total interest-earning assets...................... 209,969 668,598 667,407 ======= ======= ======= Interest-sensitive liabilities: Interest-bearing demand....... -- 151,211 151,211 Insured money markets......... -- 69,149 69,149 Savings deposits.............. -- 33,294 33,294 Time deposits over $100....... -- 77,036 Other time deposits........... 99 211,931 ------- ------- ------- Total time deposits.......... 99 288,967 295,986 ======= ======= ======= Short-term borrowings......... -- 26,389 26,389 ------- ------- ------- Total interest-bearing liabilities................. 99 569,010 576,029 ======= ======= ======= Interest rate sensitivity gap. 209,870 99,588 ======= ======= Cumulative interest rate sensitivity gap.............. 99,588 -- ======= ======= Cumulative interest rate sensitive gap as a % of total interest-earning assets....................... 14.90% 0.00% ======= ======= Off-balance sheet items: Commitments to extend credit....................... 92,320 92,320 92,320 Unused lines of credit........ 18,449 18,449 18,449
- -------- * These rates will vary according to prime. Please see Notes to Market Risk Sensitivity table on page 23. NOTE: For information regarding how fair values were determined, please see notes to consolidated financial statements, number 14. 24 The following table shows the amounts of loans included in Table 5, excluding real estate-mortgage and installment loans to individuals, due to mature and available for repricing within the time period stated. TABLE 6 Maturities and Sensitivity of Selected Loans to Changes in Interest Rates
After 1 Year ---------------------------------- 1 Year Through After 5 or Less Five Years Years Total ------- ---------- ------- ------- Commercial, financial and agricultural $56,233 80,871 16,965 154,069 Real estate-construction.............. 15,667 5,640 1,529 22,836 ------- ------ ------ ------- Total.............................. $71,900 86,511 18,494 176,905 ======= ====== ====== =======
The amounts of the preceding loans with maturity over one year, which have a predetermined interest rate or a floating, or adjustable interest rate are as follows:
December 31, 2001 ----------------- Predetermined interest rate.......................... $105,005 Floating or adjustable interest rate................. -- -------- Total............................................. $105,005 ========
Twenty-five percent of total loans are repricable within one year. Results of Operations Three Years Ended December 31, 2001, 2000 and 1999 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 totaled $29.7 million in 2001 compared with $26.5 million in 2000 and $26.7 million in 1999. Changes in interest earned on assets and interest paid on liabilities, the rate of growth of the asset and liability base, the ratio of interest-earning assets to interest-bearing liabilities and management of the balance sheet's interest rate sensitivity all factor in to changes in net interest income. The Company manages its net interest margin through strategic asset-liability management as discussed in "Asset-Liability Management and Market Risk Sensitivity" above. Net interest income increased by 12% to $29.7 million in 2001. During 2001, the Company saw the yield on average interest earning assets decrease slower than the cost of average interest-bearing liabilities. The net interest margin was favorably impacted as a result of these market dynamics. At December 31, 2000, the tax equivalent yield on average earning assets was 8.21% and the cost of average interest bearing liabilities was 4.11%. During 2001, the tax equivalent yield on average earning assets decreased by 44 basis points to 7.77%, while the cost of average interest bearing liabilities decreased by 50 basis points to 3.61%. Net interest income was relatively flat during 2000, decreasing a slight 1% from $26.7 in 1999 to $26.5 in 2000. The tax equivalent yield on interest earning assets increased from 8.08% in 1999 to 8.21% in 2000, while the average effective rate paid on all interest bearing liabilities increased from 3.53% in 1999 to 4.11% in 2000. As illustrated on Table 7 on page 26, for the year ended December 31, 2001, the tax equivalent net interest margin was 4.75%, compared to 4.73% in 2000 and 5.09% in 1999. During 2001, interest and fees on loans increased 9% from $40.4 million in 2000 to $44.1 million in 2001 primarily as a result of volume changes. Interest on investment securities decreased 23% from $6.1 million to $4.7 million in 2001 due to both a decrease in volume and a decrease in the tax equivalent weighted average rate on the security portfolio from 6.86% in 2000 to 5.81% in 2001. Interest and fees on loans increased 10% or $3.6 million from 1999 to 2000 primarily because of volume changes. Interest on investment securities increased 2%, or $111,000 from 1999 to 2000 due to an increase in the tax equivalent weighted average rate on the securities portfolio from 6.49% to 6.86%. 25 Rate/Volume Analysis Table 7 includes, for the years ended December 31, 2001, 2000 and 1999 interest income earning assets and related average yields, as well as interest expense on liabilities and related average rates paid. Also shown are the dollar amounts of change due to rate and volume variances. The effect of the combination of rate and volume change has been divided equally between the rate change and volume change. TABLE 7 Rate Volume Analysis
2001 2000 ------------------------------------------ -------------------------------------- Average Yield/ Volume Rate Average Income/ Volume Rate Balances Interest Rate Change Change Balances Expense Yield Change Change -------- -------- ------ ------- ------- -------- ------- ----- ------ ------ Assets: Interest-earning deposits............... $ 220 $ 8 3.64% $ 7 $ (4) $ 82 $ 5 6.10% $ (7) $ 1 Federal funds sold...................... 7,192 322 4.48% 225 (143) 3,340 240 7.19% (119) 90 Federal Home Loan Bank stock............ 1,733 120 6.92% -- (15) 1,733 135 7.79% 3 4 Taxable investment securities........... 57,786 2,005 3.47% 650 (1,565) 44,770 2,920 6.52% 268 79 Non-taxable investment securities (1)... 37,010 3,615 9.77% (2,201) 1,574 63,821 4,242 6.65% (404) 87 Non-taxable loans (2)................... 1,734 133 7.65% (17) 2 1,952 147 7.53% (37) (1) Taxable Loans, net of unearned discount (3).......................... 540,290 44,019 8.15% 6,018 (2,296) 468,429 40,297 8.60% 3,422 254 -------- ------- ---- ------- ------- -------- ------- ---- ------ ------ Total earning assets.............. 645,965 50,222 7.77% 4,683 (2,447) 584,127 47,986 8.21% 3,128 514 ------- ------- Cash and due from banks................. 24,754 24,606 Allowance for loan losses............... (5,527) (5,921) Premises and equipment, net............. 17,791 16,641 Accrued Interest........................ 4,846 4,657 Other assets............................ 10,771 12,179 -------- -------- Total assets...................... $698,600 $636,289 ======== ======== Liabilities and Shareholders' Equity: Interest-bearing demand deposits........ 204,983 3,584 1.75% 434 (953) 183,194 4,103 2.24% 366 658 Savings deposits........................ 32,593 458 1.41% 0 (180) 32,578 638 1.96% 25 (2) Time deposits........................... 272,818 14,536 5.33% 1,936 (693) 237,380 13,293 5.60% 241 1,595 Federal funds purchased and securities sold under agreements to repurchase.... 18,520 612 3.30% (363) (585) 26,396 1,560 5.91% 343 495 Commercial paper (Master notes)......... 13,310 359 2.70% (101) (329) 15,945 789 4.95% 28 235 Total interest-bearing liabilities... 542,224 19,549 3.61% 1,907 (2,741) 495,493 20,383 4.11% 1,003 2,981 Non-interest bearing demand deposits.... 92,792 89,107 Other liabilities....................... 6,888 2,783 Shareholders' equity.................... 56,696 48,906 -------- -------- Total liabilities and shareholders' equity.............................. $698,600 $636,289 ======== ======== Net interest income on a fully taxable equivalent basis (1)/Net yield on interest-earning assets (FTE).......... 30,673 4.75% 27,603 4.73%
1999 --------------------------------------- Average Income/ Volume Rate Balances Expense Yield Change Change -------- ------- ----- ------ ------- Assets: Interest-earning deposits............... $ 211 $ 11 5.21% $ 6 $ -- Federal funds sold...................... 5,287 269 5.09% 74 (16) Federal Home Loan Bank stock............ 1,691 128 7.57% 13 2 Taxable investment securities........... 40,596 2,573 6.34% (828) 44 Non-taxable investment securities (1)... 69,950 4,559 6.52% 1,421 (270) Non-taxable loans (2)................... 2,442 185 7.57% 12 (2) Taxable Loans, net of unearned discount (3).......................... 428,518 36,621 8.55% 3,486 (1,334) -------- ------- ---- ------ ------- Total earning assets.............. 548,695 44,346 8.08% 4,184 (1,577) Cash and due from banks................. 25,205 Allowance for loan losses............... (6,085) Premises and equipment, net............. 15,230 Accrued Interest........................ 4,344 Other assets............................ 8,289 -------- Total assets...................... $595,678 ======== Liabilities and Shareholders' Equity: Interest-bearing demand deposits........ 165,370 3,079 1.86% 334 (43) Savings deposits........................ 31,308 615 1.96% 55 (103) Time deposits........................... 232,806 11,457 4.92% 752 (1,001) Federal funds purchased and securities sold under agreements to repurchase.... 19,295 722 3.74% 21 (61) Commercial paper (Master notes)......... 15,273 526 3.44% 98 (93) Total interest-bearing liabilities... 464,052 16,399 3.53% 1,260 (1,301) Non-interest bearing demand deposits.... 82,921 Other liabilities....................... 3,611 Shareholders' equity.................... 45,094 -------- Total liabilities and shareholders' equity.............................. $595,678 ======== Net interest income on a fully taxable equivalent basis (1)/Net yield on interest-earning assets (FTE).......... 27,947 5.09%
- -------- (1) Yields on non-taxable investment securities are stated on a fully taxable equivalent basis, assuming a federal tax rate of 34% for the three years reported on. The adjustments made to convert to a fully taxable equivalent basis were $917, $1,076 and $1,157 for 2001, 2000 and 1999, respectively. (2) Yields on non-taxable loans are stated on a fully taxable equivalent basis, assuming a federal tax rate of 34% for the three years reported on. The adjustments made to convert to a fully taxable equivalent basis were $34, $37, and $47 for 2001, 2000 and 1999, respectively. (3) The effect of foregone interest income as a result of loans on non-accrual was not considered in the above analysis. All loans and deposits are domestic. 26 Total interest expense decreased 4% during 2001 from $20.4 million to $19.5 million primarily as a result of rate changes, as the cost of interest bearing liabilities adjusted downward 50 basis points during 2001. Although deposits grew substantially during 2001, the decrease in the average interest rate paid outpaced the interest expense increase due to volume. In 2000, the opposite was true, as interest expense increased 24% from $16.4 million in 1999 to $20.4 million in 2000. The cost of interest bearing liabilities increased 58 basis points during 2000, from 3.53% in 1999 to 4.11% in 2000. Provision For Loan Losses The provision for loan losses is a charge to earnings in a given period to maintain the allowance at an adequate level. The provision for loan losses was $4.0 million, $3.9 million and $2.4 million, respectively, for the years ended December 31, 2001, 2000 and 1999. The progressive increase in the provision over the last three years has been the result of higher charge-offs, particularly in the sales finance area. Net charge-offs to average loans are .71% or $3.9 million for 2001 as compared to 1.02% or $4.8 million for 2000 and 0.43% or $1.9 million for 1999. Charge offs in the sales finance portfolio accounted for $2.3 million, or 58% of net charge-offs in 2001, and $3.8 million, or 79% of net charge-offs in 2000. Sales finance losses during 1999 were minimal. During 1999, the Bank redirected its emphasis on indirect-lending in the sales finance area to purchasing higher-quality indirect loans and reducing the number of lower-quality loans in the portfolio. Activities associated with this process, as expected, contributed to the increase of charge-offs as these lower quality loans were eliminated. The allowance for loan losses totaled $5.6 million, $5.4 million and $6.4 million at December 31, 2001, 2000 and 1999, respectively. The level of the allowance for loan losses to total loans outstanding is 1.02% at December 31, 2001. This compares to 1.09% as of December 31, 2000 and 1.43% as of December 31, 1999. Management feels the 1.02% allowance for loan losses to total loans at December 31, 2001 is adequate because the allowance model described in the discussion on allowance for loan losses takes into account the risk grades of loans, delinquency trends, charge-off ratios and loan growth. Non-Interest Income Non-interest income increased by $3.3 million, or 35%, in 2001 to $12.9 million from $9.6 million in 2000. During 2000, non-interest income increased by $1.5 million, or 18%, over 1999. The largest component of non-interest income is service charges and fees on deposit accounts. Comprising 58% of total non-interest income in 2001 and 49% in 2000, service charges on deposit accounts improved to $7.4 million in 2001, from $4.6 million in 2000. The 59% increase in 2001 was directly attributable to the introduction of an automatic overdraft privilege offered to certain deposit customers. A $25.00 fee is automatically charges to the customer's account each time an overdrawn check is written, up to maximum overdraft amount of $500.00. Although management has seen an increase in charge-offs of overdrawn accounts, the fee income generated from this product more than offsets those increases. The increase in charge-offs on overdrawn accounts was expected, as it is the Company's policy to automatically charge off the account after it is 60 days past due. Management views deposit fee income as a critical influence on profitability. Periodic monitoring of competitive fee schedules and examination of alternative opportunities insure that the Company realizes the maximum contribution to profits from this area. Another principal increase during 2001 was the net gains on sales of loans, increasing from $70,000 in 2000 to $684,000 in 2001. Lower interest rates throughout the year improved fixed rate residential mortgage production. The Bank typically sells a large majority of these loans in the secondary market. Because interest rates are not expected to remain at such low levels in subsequent quarters, the Company anticipates the possibility of lower residential mortgage production and therefore smaller gains on the sales of these loans. During 2000, non-interest income increased by $1.5 million, or 18% over 1999 from $8.1 million to $9.6 million in 2000. Service charges on deposit accounts increased 20% during 2000, from $3.9 million to $4.6 million in 2000. This increase was a result of the increased collection of insufficient funds associated with debit card transactions and the increase in the volume of deposit relationships. Other income increased $774,000 or 39% due to increases in several miscellaneous fees including ATM fees, mortgage service fees, brokerage commissions and credit card fees. 27 Non-Interest Expense Total non-interest expense increased $4.0 million, or 18%, in 2001 from $22.5 million to $26.5 million. During 2000, these costs increased $1.3 million or 6%. The largest component of non-interest expense, salaries and other personnel, increased $2.9 million, or 27%, during 2001. The biggest portion of salaries and other personnel expense is salary, which accounted for the biggest increase during 2001 as a result of the increase in staff in various operation and retail areas as well as normal raises throughout the year. Higher health insurance costs were incurred as a result of the repricing of health insurance plans effective January 2001. The Company experienced a 19.75% increase in the monthly premiums for group medical/dental coverage. Also during 2001, incentive compensation was higher as a direct result of the financial performance of the Company during 2001. In 2000, salaries and other personnel expense did not have significant increases over 1999 primarily as a result of lower incentive compensation. Combined net occupancy and furniture and equipment expense increased $289,000 or 7% from 2000 to 2001 as compared to an increase of $181,000 or 5% from 1999 to 2000. These increases are primarily related to remodeling and expansion of current facilities, as well as improved technology during 2000 and 2001. Sales finance losses on repossessed were significantly higher in 2000 than 2001. The losses were only $29,000 in 2001 compared to $557,000 in 2000. Losses related to the sales finance portfolio prior to 2000 were immaterial due to the low volume of repossessed automobiles. These losses included in the income statement were a result of the sale of the repossessed autos. During 2001, the Company valued repossessed automobiles more quickly and accurately through the allowance for loan losses at the time of repossession. As a result, losses on sales of the vehicles were lower. Income Taxes Income tax expense totaled $3.6 million in 2001, compared to $2.6 million in 2000 and $3.0 million in 1999. The Company's effective tax rate was 30.0% in 2001 and 27.4% in 2000 and 1999. The effective tax rate in future periods is expected to range from 27% to 30%. Net income, income on tax-exempt investment securities and loans, and the provision for loan losses affect taxable income. For tax purposes, the Bank can recognize only actual loan losses. The Company works actively with outside tax consultants to minimize tax expense. Effect of Inflation and Changing Prices The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Virtually all of the assets and liabilities of the Bank are monetary in nature and, as a result, its operations can be significantly affected by interest rate fluctuations as discussed above. Therefore, inflation will affect the Bank only to the extent that interest rates change and according to the Bank's sensitivity to such changes. The Company attempts to manage the effects of inflation through its asset-liability management as described above in "Asset-Liability Management and Market Risk Sensitivity." Accounting and Reporting Matters Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB 133" establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, and measure those instruments at fair value. Changes in the fair value of those derivatives will be reported in earnings or other comprehensive income depending on the use of the derivative and whether the derivative 28 qualifies for hedge accounting. The Company adopted SFAS No. 133, as amended by SFAS No. 138, on January 1, 1999. The adoption was not material to the Company's consolidated financial statements except for in 1999 when the Company transferred 100% of its held-to-maturity investment securities to the available-for-sale category as allowed by the Statement. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB No. 125, " was issued in September 2000. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures but carries over most of SFAS No. 125's provisions without reconsideration. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of the provisions of SFAS No. 140 on April 1, 2001 did not have a material effect on the Company. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. The Company adopted SFAS No. 141 on July 1, 2001 and does not expect the Statement to have a material impact on the financial statements in the future as the Company has always accounted for business combinations through the purchase method. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Currently, it is the Company's understanding that SFAS No. 142 does not apply to the acquisition of a commercial bank, a savings and loan association, a mutual savings bank, a credit union, other depository institutions having assets and liabilities of the same type as those instituions, and branches of such enterprises. Intangible assets arising from these types of business combinations must conform to the guidance in SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions", and are thus exlcuded from the scope of SFAS No. 142. At December 31, 2001, the Company had unamortized goodwill relating to core deposit premiums purchased of $408,000 as well as unamortized goodwill defined in SFAS 72 as an unidentifiable intangible asset ("Statement 72" goodwill) of $4.0 million. The Company plans to continue amortizing these assets as directed in SFAS No. 72. It is the Company's understanding that the FASB has undertaken a limited scope project to reconsider part of the guidance in SFAS No. 72, particularly the provision that requires recognition and amortization of an unidentifiable intangible asset. However, the Company plans to continue amortizing the "Statement 72" goodwill until further guidance from the FASB. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This SFAS supercedes prior pronouncements associated with impairment or disposal of long-lived assets. SFAS No. 144 establishes methodologies for assessing impairment of long-lived assets, including assets to be disposed of by sale or by other means. This statement is effective for all fiscal years beginning after December 15, 2001. This SFAS is not expected to have a material impact on the Company's financial position. 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 29 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. Industry Developments On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") was signed into law. The purpose of this legislation is to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Generally, the GLBA: a. repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers; b. provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies; c. broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries; d. provides an enhanced framework for protecting the privacy of consumer information; e. adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system; f. modifies the laws governing the implementation of the Community Reinvestment Act; and g. addresses a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions. The GLBA also imposes certain obligations on financial institutions to develop privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer's request, and establish procedures and practices to protect and secure customer data. These privacy provisions were implemented by regulations that were effective on November 12, 2000. Compliance with the privacy provisions was required by July 1, 2001. The Company believes it is in compliance with these provisions. Item 7A. Quantitative and Qualitative Disclosures about Market Risk See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset-Liability Management and Market Risk Sensitivity." Item 8. Financial Statements and Supplementary Data The information that is required by this item is set forth on the following pages, 33 through 58. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The information required in Item 9 is incorporated herein by reference to the Current Report on Form 8-K filed by the Company with the Commission on April 23, 2001. 30 Independent Auditors' Report The Board of Directors Palmetto Bancshares, Inc. and subsidiary: We have audited the accompanying consolidated balance sheet of Palmetto Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2001 and the related consolidated statement of operations, changes in shareholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Palmetto Bancshares, Inc. and subsidiary as of December 31, 2001 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Elliott Davis LLP Greenville, South Carolina February 8, 2002 31 Independent Auditors' Report The Board of Directors Palmetto Bancshares, Inc. and subsidiary: We have audited the accompanying consolidated balance sheet of Palmetto Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2000, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palmetto Bancshares, Inc. and subsidiary as of December 31, 2000, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, on January 1, 1999, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." [LOGO] KPMG LLP Greenville, South Carolina February 9, 2001 32 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2001 and 2000 (Dollars in thousands, except share and per share data)
2001 2000 -------- ------- Assets Cash and due from banks................................................................. $ 27,742 36,305 Federal funds sold...................................................................... 17,949 1,879 Federal Home Loan Bank stock, at cost................................................... 1,733 1,733 Investment securities available for sale (amortized costs of $94,708 and $99,030 in 2001 and 2000, respectively)............................................................... 95,095 98,601 Loans held for sale..................................................................... 10,054 611 Loans................................................................................... 553,821 498,242 Less allowance for loan losses....................................................... (5,658) (5,446) -------- ------- Loans, net....................................................................... 548,163 492,796 -------- ------- Premises and equipment, net............................................................. 19,175 16,481 Accrued interest........................................................................ 4,947 5,229 Other assets............................................................................ 10,421 9,755 -------- ------- Total assets..................................................................... $735,279 663,390 ======== ======= Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest-bearing............................................................... $102,679 96,097 Interest-bearing................................................................... 542,621 476,569 -------- ------- Total deposits................................................................... 645,300 572,666 Securities sold under agreements to repurchase....................................... 15,313 19,923 Commercial paper (Master note)....................................................... 11,076 15,359 Other liabilities.................................................................... 4,522 2,849 -------- ------- Total liabilities................................................................ 676,211 610,797 -------- ------- Shareholders' equity: Common stock--$5.00 par value. Authorized 10,000,000 shares; issued and outstanding 6,283,623 in 2001; issued and outstanding 6,255,734 in 2000............ 31,418 31,279 Capital surplus...................................................................... 26 23 Retained earnings.................................................................... 27,386 21,555 Accumulated other comprehensive income/ (loss)....................................... 238 (264) -------- ------- Total shareholders' equity....................................................... 59,068 52,593 -------- ------- Total liabilities and shareholders' equity....................................... $735,279 663,390 ======== =======
See accompanying notes to consolidated financial statements. 33 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except share and per share data)
2001 2000 1999 ---------- --------- --------- Interest income: Interest and fees on loans................................................ $ 44,118 40,407 36,759 Interest and dividends on investment securities available for sale: U.S. Treasury and U.S. Government agencies............................ 828 1,292 953 State and municipal................................................... 2,698 3,166 3,402 Mortgage-backed securities............................................ 1,177 1,628 1,620 Interest on federal funds sold............................................ 322 240 269 Dividends on FHLB stock................................................... 128 140 139 ---------- --------- --------- Total interest income.............................................. 49,271 46,873 43,142 ---------- --------- --------- Interest expense: Interest on deposits...................................................... 18,578 18,034 15,151 Interest on securities sold under agreements to repurchase................ 549 1,111 564 Interest on federal funds purchased....................................... 63 449 158 Interest on commercial paper (Master note)................................ 359 789 526 ---------- --------- --------- Total interest expense............................................. 19,549 20,383 16,399 ---------- --------- --------- Net interest income............................................ 29,722 26,490 26,743 Provision for loan losses.................................................... 4,038 3,880 2,431 ---------- --------- --------- Net interest income after provision for loan losses............ 25,684 22,610 24,312 ---------- --------- --------- Non-interest income: Service charges on deposit accounts....................................... 7,402 4,647 3,878 Fees for trust services................................................... 1,869 1,968 1,968 Gains on sales of loans................................................... 684 70 230 Investment securities gains............................................... 161 131 32 Other income.............................................................. 2,753 2,735 1,961 ---------- --------- --------- Total non-interest income...................................... 12,869 9,551 8,069 ---------- --------- --------- Non-interest expense: Salaries and other personnel.............................................. 13,590 10,682 10,255 Net occupancy............................................................. 2,085 1,970 1,922 Furniture and equipment................................................... 2,388 2,214 2,081 FDIC assessment........................................................... 110 111 132 Postage and supplies...................................................... 1,312 1,144 1,155 Marketing and advertising................................................. 919 719 776 Telephone................................................................. 766 754 792 Cardholder processing expense............................................. 548 563 521 Sales finance repossession losses......................................... 29 557 -- Other expense............................................................. 4,806 3,835 3,640 ---------- --------- --------- Total non-interest expense..................................... 26,553 22,549 21,274 ---------- --------- --------- Income before income taxes..................................... 12,000 9,612 11,107 Income tax provision......................................................... 3,600 2,637 3,038 ---------- --------- --------- NET INCOME..................................................... $ 8,400 6,975 8,069 ========== ========= ========= Per share data: Net income per common share-basic......................................... $ 1.34 1.12 1.30 ========== ========= ========= Net income per common share-dilutive...................................... $ 1.31 1.09 1.26 ========== ========= ========= Cash dividends declared per common share.................................. $ 0.41 0.37 0.32 ========== ========= ========= Weighted average common shares outstanding-basic.......................... 6,263,031 6,241,775 6,208,750 ========== ========= ========= Weighted average common shares outstanding-dilutive....................... 6,431,983 6,422,457 6,386,912 ========== ========= =========
See accompanying notes to consolidated financial statements. 34 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except share data)
Accumulated Common Other Stock Capital Comprehensive Subject to Common Surplus Retained Income Put/call Stock (Deficit) Earnings (Loss) Option Total ------- --------- -------- ------------- ---------- ------ Balance at December 31, 1998................... $30,997 (19) 10,777 330 (4,732) 37,353 Net income..................................... -- -- 8,069 -- -- 8,069 Other comprehensive income, net of tax: Unrealized holding losses arising during period, net of tax effect of $1,695....... -- -- -- -- -- (2,707) Less: reclassification adjustment for gains included in net income, net of tax effect of $12............................. -- -- -- -- -- (20) Net unrealized gains on investment securities................................ -- -- -- (2,727) -- -- ------ Comprehensive income........................... -- -- -- -- -- 5,342 ------ Cash dividends declared........................ -- -- (1,956) -- -- (1,956) Issuance of 27,444 shares in connection with exercise of stock options.................... 137 19 -- -- -- 156 Expiration of put/call option on common stock subject to put/call option................... -- -- -- -- 4,732 4,732 ------- --- ------ ------ ------ ------ Balance at December 31, 1999................... 31,134 -- 16,890 (2,397) -- 45,627 ------- --- ------ ------ ------ ------ Net income..................................... -- -- 6,975 -- -- 6,975 Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of tax effect of $1,386....... -- -- -- -- -- 2,214 Less: reclassification adjustment for gains included in net income, net of tax effect of $50............................. -- -- -- -- -- (81) Net unrealized gains on investment securities................................ -- -- -- 2,133 -- -- ------ Comprehensive income........................... -- -- -- -- -- 9,108 ------ Cash dividends declared........................ -- -- (2,310) -- -- (2,310) Issuance of 28,900 shares in connection with exercise of stock options.................... 145 23 -- -- -- 168 ------- --- ------ ------ ------ ------ Balance at December 31, 2000................... 31,279 23 21,555 (264) -- 52,593 ------- --- ------ ------ ------ ------ Net income..................................... -- -- 8,400 -- -- 8,400 Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of tax effect of $376......... -- -- -- -- -- 601 Less: reclassification adjustment for gains included in net income, net of tax effect of $62............................. -- -- -- -- -- (99) Net unrealized gains on investment securities................................ -- -- -- 502 -- -- ------ Comprehensive income........................... -- -- -- -- -- 8,902 ------ Cash dividends declared........................ -- -- (2,569) -- -- (2,569) Issuance of 27,899 shares in connection with exercise of stock options.................... 139 3 -- -- -- 142 ------- --- ------ ------ ------ ------ Balance at December 31, 2001................... $31,418 26 27,386 238 -- 59,068 ======= === ====== ====== ====== ======
See accompanying notes to consolidated financial statements. 35 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands)
2001 2000 1999 --------- ------- ------- Cash flows from operating activities: Net income................................................................... $ 8,400 6,975 8,069 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................ 2,877 2,284 2,580 Gain on sale of investment securities.................................... (161) (131) (32) Gain on sale of loans.................................................... (684) (70) (230) Provision for loan losses................................................ 4,038 3,880 2,431 Origination/acquisition of loans held for sale........................... (101,943) (9,303) (28,520) Sale of loans held for sale.............................................. 93,184 9,931 29,703 Provision (credit) for deferred taxes.................................... 412 392 (57) Change in accrued interest receivable.................................... 282 (581) (149) Change in other assets................................................... (1,508) 267 (3,174) Change in other liabilities.............................................. 947 (33) 1,101 --------- ------- ------- Net cash provided by operating activities............................. 5,844 13,611 11,722 --------- ------- ------- Cash flows from investing activities: Purchase of investment securities available for sale......................... (29,486) (10,000) (41,032) Proceeds from maturities of investment securities available for sale......... 17,299 7,320 12,865 Proceeds from sale of investment securities available for sale............... 8,783 8,954 21,359 Principal paydowns on mortgage-backed securities available for sale.......... 7,652 5,448 8,116 Purchase of Federal Home Loan Bank stock..................................... -- -- (192) Net increase in loans outstanding............................................ (59,616) (57,287) (34,690) Increase in premises and equipment, net...................................... (4,283) (1,767) (3,574) --------- ------- ------- Net cash used in investing activities................................. (59,651) (47,332) (37,148) --------- ------- ------- Cash flows from financing activities: Net increase in deposits..................................................... 72,634 34,342 23,463 Acquisition of deposits, net................................................. -- -- 12,636 Net increase (decrease) in securities sold under agreements to repurchase.... (4,610) 902 (2,609) Net increase (decrease) in commercial paper (Master note).................... (4,283) 2,786 1,714 Increase (decrease) in federal funds purchased............................... -- (7,800) 7,800 Proceeds from issuance of common stock....................................... 142 168 156 Dividends paid............................................................... (2,569) (2,310) (1,956) --------- ------- ------- Net cash provided by financing activities............................. 61,314 28,088 41,204 --------- ------- ------- Net increase (decrease) in cash and cash equivalents............................ 7,507 (5,633) 15,778 Cash and cash equivalents at beginning of year.................................. 38,184 43,817 28,039 --------- ------- ------- Cash and cash equivalents at end of year........................................ $ 45,691 38,184 43,817 ========= ======= ======= Supplemental information: Cash paid during the year for: Interest..................................................................... $ 19,965 20,093 16,300 ========= ======= ======= Income taxes................................................................. $ 3,028 1,714 3,423 ========= ======= ======= Supplemental schedule of non-cash investing and financing transactions: Change in unrealized gain (loss) on investment securities available for sale, before tax......................................................... $ 816 3,469 (4,434) ========= ======= ======= Transfer of investment securities held to maturity to available for sale... $ -- -- 66,455 ========= ======= ======= Loans transferred to other real estate owned............................... $ 211 6 335 ========= ======= ======= Loans charged-off.......................................................... $ 4,033 4,987 1,973 ========= ======= =======
See accompanying notes to consolidated financial statements. 36 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies (Dollars in thousands, except share and per share data, in all notes) The following is a description of the more significant accounting policies used in preparing the consolidated financial statements. The accounting and reporting policies of Palmetto Bancshares, Inc. (the "Company") conform to generally accepted accounting principles ("GAAP") in the United States of America and to general practices within the banking industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates and assumptions. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Palmetto Bank (the "Bank"). The Bank provides a full range of banking services, including the taking deposits and making loans. Palmetto Capital, Inc. ("Palmetto Capital"), a wholly owned subsidiary of the Bank, was incorporated February 26, 1992. Palmetto Capital offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital also offers advisory services and variable rate annuities. The Company's primary market area is the upstate of South Carolina. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates as one business segment. Assets held by the Company or its subsidiary in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as such items are not assets of the Company or its subsidiary. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks and federal funds sold. Generally, both cash and cash equivalents are considered to have maturities of three months or less, and accordingly, the carrying amount of such instruments is deemed to be a reasonable estimate of fair value. To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances on-hand as vault cash and/or at the Federal Reserve as compensating balances. There were no compensating balances at December 31, 2001 or 2000. Federal Home Loan Bank Stock During 1997, the Bank joined the Federal Home Loan Bank ("FHLB") of Atlanta to increase the Bank's available liquidity. As a FHLB member, the Bank is required to acquire and retain shares of capital stock in the FHLB of Atlanta in an amount equal to the greater of (1) 1.0% of the aggregate outstanding principal amount of the residential mortgage loans, home purchase contracts and similar obligations, or (2) 0.3% of total assets at the beginning of each year. The Bank is in compliance with this requirement with an investment in FHLB stock of $1,733 at December 31, 2001 and 2000. No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. The Bank has available $71,000 in lines of credit from the FHLB. There were no advances on these lines at December 31, 2001 or 2000. Investment Securities The Bank accounts for its investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 37 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) addresses the accounting and reporting for investments in equity securities that have readily determinable fair values--other than those accounted for under the equity method or as investments in consolidated subsidiaries--and all investments in debt securities. Under SFAS No. 115, investments are classified into three categories as follows: (1) Held to Maturity--debt securities that the Company has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading--debt and equity securities that are bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and (3) Available for Sale--debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of income taxes. The Company does not have any held to maturity or trading securities. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement was effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier adoption permitted, as amended by SFAS No. 137. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The statement requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS No. 133 in its entirety effective January 1, 1999. On January 1, 1999, the Company transferred 100% of its held-to-maturity investment securities, with an amortized cost of $66,455, to the available-for-sale category at fair value ($68,737) as allowed by SFAS No. 133. The unrealized gain at the time of transfer was $2,282 before tax. Such transfers from the held-to-maturity category at the date of initial adoption shall not call into question the Company's intent to hold other debt securities to maturity in the future. The Company had no embedded derivative instruments requiring separate accounting treatment. The Company has freestanding derivative instruments consisting of fixed rate conforming loan commitments. The Company does not currently engage in hedging activities. The commitments to originate fixed rate conforming loans were not material at December 31, 2001. Premiums and discounts are included in the basis of investment securities and are recognized in income using the effective interest method. Loans Held for Sale Loans held for sale are reported at the lower of cost or market value on an aggregate loan basis. Deferred net fees or costs are included as part of the Company's net investment in loans held for sale until such loans are sold. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of loans sold. At December 31, 2001 and 2000, the Company had loans held for sale of $10,054 and $611, respectively. Loans serviced for the benefit of others amounted to $190,252, $133,282 and $141,385 at December 31, 2001, 2000 and 1999, respectively. Most of these loans are serviced for Federal Home Loan Mortgage Corporation (FHLMC). Mortgage Servicing Rights SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"--a replacement of SFAS 125, was issued in September 2000. It revised the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures but carried over most of SFAS 125's provisions without reconsideration. The Company adopted the provisions of SFAS 140 effective April 1, 2001 with no material impact. 38 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) SFAS No. 140 requires the recognition of originated mortgage servicing rights ("MSR's") as assets by allocating total costs incurred between the originated loan and the servicing rights retained based on their relative fair values. SFAS 140 also requires the recognition of purchased mortgage servicing rights at fair value, which is presumed to be the price paid for the rights. Amortization of MSRs is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSRs. Projected net servicing income is in turn determined on the basis of the estimated future balance of the underlying mortgage loan portfolio, which declines over time from prepayments and scheduled loan amortization. The Company estimates future prepayment rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. SFAS No. 140 also requires that all MSRs be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. Fair values of servicing rights are determined by estimating the present value of future net servicing income considering the average interest rate and the average remaining lives of the related loans being serviced. The Company evaluates these servicing rights quarterly for possible impairment. For purposes of measuring the impairment, the Company stratifies the MSR's based on the predominant risk characteristics of the underlying loans, including interest rate, loan type, and amortization type (fixed rate or adjustable rate). To the extent that the carrying value of MSR's exceeds this fair value by individual stratum, a valuation allowance is established. The allowance may be adjusted in the future as the values of the MSR's increase or decrease. Included in other assets on the consolidated balance sheet, the Company had net MSR's of $1,640 and $1,086 at December 31, 2001 and 2000, respectively. The Company amortized $683, $167 and $488 of these MSR's during the years ended December 31, 2001, 2000 and 1999, respectively. Loans and Interest Income Loans are carried at principal amounts outstanding including unamortized costs net of unearned discounts. Interest income on all loans is recorded on an accrual basis. The accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of interest on some loans, however, may continue even though they are 90 days past due if the loans are well secured, in the process of collection, and management deems it appropriate. If non-accrual loans decrease their past due status to 60 days or less, they are reviewed individually by management to determine if they should be returned to accrual status. Impaired Loans The Bank accounts for its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that all creditors value all specifically reviewed nonhomogenous loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement at the loan's fair value. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a creditor to use existing methods for recognizing interest income on impaired loans and by requiring additional disclosures about how a creditor recognizes interest income related to impaired loans. 39 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) The Bank determines which loans are impaired through a loan review process. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. SFAS No. 114 specifically states that it need not be applied to "large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment." Thus, the Company determined that the statement does not apply to its consumer loan, credit card or residential mortgage loan portfolios, except that it may choose to apply it to certain specific larger loans determined by management. In effect, these portfolios are covered adequately in the Company's normal formula for determining the allowance for loan losses. Loan Fees and Costs Non-refundable fees and certain direct costs associated with originating or acquiring loans are recognized as a yield adjustment over the contractual life of the related loans, or if the related loan is held for resale, until the loan is sold. Recognition of deferred fees and costs is discontinued on non-accrual loans until they return to accrual status or are charged-off. Commitment fees associated with lending are deferred and if the commitment is exercised, the fee is recognized over the life of the related loan as a yield adjustment. If the commitment expires unexercised, the amount is recognized upon expiration of the commitment. Allowance for Loan Losses Additions to the allowance for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, past loan loss experience, and such other factors which, in management's judgment, deserve recognition in estimating loan losses. Loans are charged-off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment, based upon information that is available to them at the time of their examination. Premises and Equipment Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful life of the related asset as follows: buildings, 12 to 39 years; and furniture and equipment, 5 to 12 years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to operating expense as incurred. Foreclosed Properties Property acquired through foreclosure is included in other assets and amounted to $217 and $6, at December 31, 2001 and 2000, respectively. Such property is recorded at the lower of cost or fair value minus estimated selling costs. Gains and losses on the sale of foreclosed properties and write-downs resulting from periodic reevaluation are charged to other operating expenses. 40 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) Income Taxes Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Intangibles Included in other assets are certain intangibles related to various acquisitions. At December 31, 2001 and 2000, premium on deposits acquired amounted to $408 and $510, respectively, net of amortization. The premiums are being amortized principally over 10 years using the double-declining balance method. At December 31, 2001 and 2000, goodwill of approximately $4,010 and $4,346, respectively, net of amortization, related to separate acquisitions is being amortized on a straight-line basis over varying periods from 15-20 years. The Company periodically assesses the recoverability of these intangibles by evaluating whether the amortization of the remaining balance can be recovered through projected undiscounted future cash flows, which are based on historical trends. Common Stock Subject to Put/Call Option The stock in the Company's Employee Stock Ownership Plan ("ESOP") had a put and a call feature because the Company's stock is not listed on a national securities exchange. Accordingly, the shares that had been distributed from the ESOP were recorded outside of shareholders' equity at their fair value, which is determined annually by an independent valuation. The Company's Board of Directors had voted to terminate the ESOP effective February 28, 1997. Per the Plan document, the shares distributed in 1998 due to the termination of the ESOP were subject to the put/call until June 29, 1999. Since the put/call has expired, the current year balance sheet and income statements are absent the put/call effect of the ESOP. The distributed shares are included in shareholders' equity. Net Income Per Common Share Net income per common share-basic and net income per common share-dilutive are calculated based on SFAS No. 128, as discussed in Note 11. Stock Options The Company accounts for its stock options in accordance with SFAS No. 123, "Accounting for Stock-based Compensation". SFAS No. 123 introduces a preferable fair-value based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Companies that choose not to adopt the fair value method will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has chosen the latter option. SFAS No. 123 requires companies that choose not to adopt the fair value method of accounting to disclose pro forma net income and earnings per share under the fair value method. In addition, all companies with stock-based plans are required to make detailed disclosures about plan terms, exercise prices, and assumptions used in measuring the fair value of stock-based grants (see Note 10). 41 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) Comprehensive Income The Company discloses its comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires that changes in the amounts of comprehensive income items be shown in a primary financial statement. The statement defines comprehensive income as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." In accordance with SFAS No. 130, the Company elected to disclose changes in comprehensive income in its Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income. (2) Federal Funds Sold At December 31, 2001 and 2000, the Bank had $17,949 and $1,879, respectively, outstanding in federal funds sold. The daily averages of these outstanding agreements during 2001 and 2000 were $7,192 and $3,340, respectively. The maximum amount of these outstanding agreements at any month-end during 2001 and 2000 were $17,949 and $6,879, respectively. (3) Investment Securities Available for Sale The amortized cost and fair values of investment securities available for sale as of December 31 are summarized as follows:
2001 --------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- U.S. Treasury and U.S. Government agencies $ 29,269 284 (8) 29,545 State and Municipal....................... 55,798 753 (815) 55,736 Mortgage-backed securities................ 9,641 173 -- 9,814 -------- ----- ------ ------- $ 94,708 1,210 (823) 95,095 ======== ===== ====== ======= 2000 --------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- U.S. Treasury............................. $ 17,491 49 (44) 17,496 State and Municipal....................... 58,622 554 (883) 58,293 Mortgage-backed securities................ 22,917 33 (138) 22,812 -------- ----- ------ ------- $ 99,030 636 (1,065) 98,601 ======== ===== ====== ======= 1999 --------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- U.S. Treasury............................. $ 14,481 7 (399) 14,089 State and Municipal....................... 67,738 340 (3,057) 65,021 Mortgage-backed securities................ 28,451 -- (789) 27,662 -------- ----- ------ ------- $110,670 347 (4,245) 106,772 ======== ===== ====== =======
42 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) During the year ended December 31, 2001, the Company had realized gains of $161 and no realized losses on sales of investment securities available for sale; compared to realized gains of $133 and realized losses of $2 in 2000 on sales of investment securities available for sale. During 1999, the realized gains amounted to $32, with no realized losses on sales of investment securities available for sale. Specific identification is the basis on which cost was determined in computing realized gains and losses. The following is a maturity distribution of investment securities available for sale at December 31, 2001:
Due After Due After Five Due One Year Years Within Through Through Due After One Year Yield Five Years Yield Ten Years Yield Ten Years Yield -------- ----- ---------- ----- --------- ----- --------- ----- U.S. Treasury and U.S. Government Agencies..... $24,357 2.62% 5,188 5.57% -- -- % -- -- % State and municipals...... 1,647 8.71 9,821 8.15 21,578 6.84 22,689 6.74 Mortgage-backed securities 1,850 6.07 7,965 6.32 -- -- -- -- ------- ---- ------ ---- ------ ---- ------ ---- Fair value total.......... $27,854 3.19% 22,974 6.93% 21,578 6.84% 22,689 6.74% ======= ==== ====== ==== ====== ==== ====== ==== Amortized cost............ $27,715 22,292 21,501 23,200 ======= ====== ====== ======
Investment securities available for sale with an aggregate carrying value of approximately $68,266 and $82,622 at December 31, 2001 and 2000, respectively, are pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. (4) Loans A summary of loans, by classification, as of December 31 follows:
2001 2000 1999 1998 1997 -------- ------- ------- ------- ------- Commercial, financial and agricultural $154,069 123,727 107,934 93,343 81,678 Real estate-construction.............. 22,836 14,321 13,373 10,341 8,799 Real estate-mortgage.................. 310,981 283,541 231,637 215,709 195,462 Installment loans to individuals...... 65,935 76,653 92,813 93,873 81,646 -------- ------- ------- ------- ------- Total................................. $553,821 498,242 445,757 413,266 367,585 ======== ======= ======= ======= ======= Non-accrual loans included above...... $ 3,399 3,031 1,521 1,485 718 ======== ======= ======= ======= =======
The foregone interest income related to loans on non-accrual amounted to $325, $384 and $240 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest income recognized on loans on non-accrual amounted to $11, $14 and $7 for the years ended December 31, 2001, 2000 and 1999, respectively. 43 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) The following is a summary of activity affecting the allowance for loan losses for the years ended December 31:
2001 2000 1999 ------- ------ ------ Balance at beginning of year..... $ 5,446 6,362 5,795 Provision for loan losses........ 4,038 3,880 2,431 Loan recoveries.................. 207 191 109 Loans charged-off................ (4,033) (4,987) (1,973) ------- ------ ------ Balance at end of year........... $ 5,658 5,446 6,362 ======= ====== ======
At December 31, 2001, impaired loans amounted to approximately $307. During 2001, the average recorded investment in impaired loans was approximately $396, and there is $155 included in the allowance for loan losses related to impaired loans at December 31, 2001. Impaired loans are included in the non-accrual numbers above. At December 31, 2000, impaired loans amounted to approximately $481. During 2000, the average recorded investment in impaired loans was approximately $428, and there is $243 included in the allowance for loan losses related to impaired loans at December 31, 2000. At December 31, 1999, impaired loans amounted to approximately $467. During 1999, the average recorded investment in impaired loans was approximately $240, and there is $234 included in the allowance for loan losses related to impaired loans at December 31, 1999. The Bank makes contractual commitments to extend credit, which are legally binding agreements to lend money to customers at predetermined interest rates for a specific period of time. The Bank also provides standby letters of credit which are issued on behalf of customers in connection with contracts between the customers and third parties. Under a standby letter of credit the Bank assures that the third party will not suffer a loss if the customer fails to meet the contractual obligation. The Bank applies the same credit standards used in the lending process when extending these commitments, and periodically reassesses the customers' creditworthiness through ongoing credit reviews. At December 31, 2001, except for the fact that the majority of the loan portfolio is located in the Bank's immediate market area, there were no concentrations of loans in any type of industry, type of property, or to one borrower. The Bank had outstanding, unused loan commitments as of December 31, 2001 as follows: Home equity loans.......................... $12,162 Credit cards............................... 32,471 Commercial real estate development......... 19,086 Other unused lines of credit............... 28,601 ------- $92,320 ======= Standby letters of credit.................. $ 2,074 =======
All unused loan commitments are at adjustable rates that fluctuate with prime rate, or are at fixed rates that approximate market rates. The current amounts of these commitments approximate their fair value. 44 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (5) Premises and Equipment, Net A summary of premises and equipment, net, as of December 31 follows:
2001 2000 -------- ------- Land............................. $ 3,874 3,025 Buildings and leasehold improvements................... 15,051 13,336 Furniture and equipment.......... 15,320 13,750 -------- ------- 34,245 30,111 Less accumulated depreciation and amortization................... (15,070) (13,630) -------- ------- Premises and equipment, net...... $ 19,175 16,481 ======== =======
(6) Mortgage Servicing Rights The following is a summary of activity affecting the valuation allowance for impairment of mortgage servicing rights for the years ended December 31:
2001 2000 1999 ---- ---- ---- Balance at beginning of year............................ $ 1 234 229 Aggregate additions charged and reductions credited to operations............................................ 68 (233) 5 Aggregate direct writedowns charged against allowance... -- -- -- --- ---- --- Balance at end of year.................................. $69 1 234 === ==== ===
(7) Deposits A summary of deposits, by type, as of December 31 follows:
2001 2000 -------- ------- Transaction accounts............. $253,890 218,066 Savings deposits................. 33,294 30,468 Insured money market accounts.... 69,149 66,052 Time deposits over $100.......... 77,036 63,844 Other time deposits.............. 211,931 194,236 -------- ------- Total deposits................ $645,300 572,666 ======== =======
Interest paid on time deposits of $100 or more amounted to $4,163, $2,870, and $2,273 for the years ended December 31, 2001, 2000 and 1999, respectively. The following table displays the aggregate amounts of time deposits with maturities for the years following December 31, 2001: Maturing within one year............................. $263,559 Maturing after one year through two years............ 14,875 Maturing after two years through three years......... 3,688 Maturing after three years through four years........ 5,353 Maturing after four years through five years......... 1,393 Maturing after five years............................ 99 -------- Total............................................. $288,967 ========
45 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (8) Short-Term Borrowings
2001 2000 1999 ------- ------ ------ SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITH CUSTOMERS Amount outstanding at year-end................ $15,313 12,733 7,769 Average amount outstanding during year........ 15,269 13,842 15,291 Maximum amount outstanding at any month-end... 16,055 16,759 20,762 Weighted average rate paid at year-end........ 1.00% 4.15% 1.81% Weighted average rate paid during the year.... 2.63% 4.96% 3.40%
Bank of America holds the securities underlying these agreements in the Bank's name in safekeeping for the benefit of the Bank's customers.
2001 2000 1999 ------ ------ ------ SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITH A BANK Amount outstanding at year-end................ $ -- 7,190 11,252 Average amount outstanding during year........ 1,736 6,193 1,277 Maximum amount outstanding at any month-end... 7,220 12,625 11,252 Weighted average rate paid at year-end........ -- 6.65% 5.96% Weighted average rate paid during the year.... 5.98% 6.88% 5.96%
The securities underlying these agreements are held in the Bank's name in safekeeping by Sun Trust for the benefit of the Bank.
2001 2000 1999 ------- ------ ------ FEDERAL FUNDS PURCHASED Amount outstanding at year-end................ $ -- -- 7,800 Average amount outstanding during year........ 1,515 6,361 2,727 Maximum amount outstanding at any month-end... 6,800 28,000 15,000 Weighted average rate paid at year-end........ -- -- 5.13% Weighted average rate paid during the year.... 3.92% 7.06% 5.79% 2001 2000 1999 ------- ------ ------ COMMERCIAL PAPER (MASTER NOTE) Amount outstanding at year-end................ $11,076 15,359 12,573 Average amount outstanding during year........ 13,310 15,945 15,273 Maximum amount outstanding at any month-end... 14,990 17,850 17,035 Weighted average rate paid at year-end........ 1.00% 4.40% 2.06% Weighted average rate paid during the year.... 2.70% 4.95% 3.44%
During 1991 the Company began selling commercial paper as an alternative investment tool for its commercial customers. Through a master note arrangement between the Company and the Bank, Palmetto Master Notes are issued as an alternative investment for commercial sweep accounts. These master notes are unsecured but are backed by the full faith and credit of the Company. The commercial paper of the Company is issued only in conjunction with the automated sweep account customer agreement on deposits at the Bank level. 46 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (9) Income Taxes Components of income tax provision expense/(benefit) for the years ended December 31 are as follows:
2001 2000 1999 ------ ----- ----- Current: Federal......................................... $2,795 1,909 2,724 State........................................... 393 336 371 ------ ----- ----- 3,188 2,245 3,095 ------ ----- ----- Deferred: Federal......................................... 362 392 (57) State........................................... 50 -- -- ------ ----- ----- 412 392 (57) ------ ----- ----- Total....................................... $3,600 2,637 3,038 ====== ===== =====
The effective tax rates for the years ended December 31 vary from the Federal statutory rates as follows:
2001 2000 1999 ---- ----- ---- U.S. Federal income tax rates........................ 34.0% 34.0% 34.0% Changes from statutory rates resulting from: Tax-exempt interest income........................ (6.7) (10.1) (9.7) Expenses not deductible for tax purposes.......... .7 .8 .6 State taxes, net of Federal income tax benefit.... 2.5 2.3 2.2 Other............................................. (.5) 4 3 ---- ----- ---- Effective tax rates.................................. 30.0% 27.4% 27.4% ==== ===== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, are presented below.
2001 2000 ------- ------ Deferred tax assets: Loan loss reserves.......................................... $ 2,030 1,677 Basis of intangible assets for tax purposes in excess of basis for financial reporting............................. 184 169 Unrealized loss on securities available for sale............ -- 164 Other....................................................... 155 151 ------- ------ Total gross deferred tax assets......................... 2,369 2,161 Less valuation allowance................................ -- -- ------- ------ Net deferred tax assets................................. 2,369 2,161 ------- ------ Deferred tax liabilities: Fixed assets, due to depreciation differences............... (925) (698) Deferred loan costs deducted for tax purposes as incurred... (524) (578) Deferred loan fees recognized under the principal reduction method for tax purposes................................... (672) (545) Prepaid pension expense..................................... (673) (497) Other....................................................... (297) (10) ------- ------ Total gross deferred tax liabilities.................... (3,091) (2,328) ------- ------ Net deferred tax asset (liability)...................... $ (722) (167) ======= ======
47 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) A portion of the change in the net deferred tax liability relates to the unrealized gains and losses on securities available for sale. A current period deferred tax expense related to the change in unrealized gains and losses on securities available for sale of $314 has been recorded directly to shareholders equity. The rest of the change in the deferred tax liability results from the current period deferred tax expense of $412. No valuation allowance for deferred tax assets has been established at either December 31, 2001 or 2000. Because of taxes paid in carry back periods, as well as estimates of future taxable income, it is management's belief that realization of the net deferred tax asset is more likely than not. Tax returns for 1998 and subsequent years are subject to examination by the taxing authorities. The Internal Revenue Service is currently examining the Company's federal income tax returns for the years 1997 and 1998. Although the amount of any ultimate liability with respect to such examination cannot be determined, it is the opinion of management, any such liability will not have a material impact on the Company's financial position or results of operations. (10) Employee Benefit Plans (a) The Bank has a noncontributory defined benefit pension plan which covers all full-time employees who have at least twelve months continuous service and have attained age 21. The plan is designed to produce a designated retirement benefit, and benefits are fully vested at five years or more of service. No vesting occurs with less than five years of service. The Bank's Trust Department administers the plan. Contributions to the plan are made as required by the Employee Retirement Income Security Act of 1974. The following table details the funded status of the plan, the amounts recognized in the Company's consolidated financial statements, the components of net periodic benefit cost, and the weighted-average assumptions used in determining these amounts for the years ended December 31:
2001 2000 ------ ----- Change in benefit obligation Benefit obligation at beginning of year........ $5,871 5,159 Service cost................................... 486 356 Interest cost.................................. 462 400 Actuarial loss (gain).......................... 1,440 144 Benefits paid.................................. (257) (188) ------ ----- Benefit obligation at end of year.............. $8,002 5,871 Change in plan assets Fair value of plan assets at beginning of year. 6,592 6,422 Actual return on plan assets................... 54 24 Employer contribution.......................... 625 334 Benefits paid.................................. (257) (188) ------ ----- Fair value of plan assets at end of year....... $7,014 6,592 ====== ===== Funded status..................................... (988) 721 Unrecognized prior service cost................... 43 51 Unrecognized net actuarial loss................... 2,590 747 Unrecognized transition........................... (26) (52) ------ ----- Prepaid benefit cost included in other assets..... $1,619 1,467 ====== =====
48 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued)
2001 2000 1999 ----- ---- ---- Components of net periodic benefit cost: Service cost..................................... $ 356 343 335 Interest cost.................................... 400 348 310 Expected return on plan assets................... (522) (463) (404) Amortization of transition asset................. (26) (26) (26) Amortization of prior service cost............... 9 9 9 Amortization of loss............................. -- -- 7 ----- ---- ---- Net periodic benefit cost........................ $ 217 211 231 ===== ==== ==== Weighted-average assumptions at December 31: Discount rate.................................... 6.50% 7.75% 7.75% Rate of increase in compensation levels.......... 5.00% 5.00% 5.00% Expected long-term rate of return on plan assets. 8.00% 8.00% 8.00%
(b) Since 1987, the Company has adopted several plans (Stock Option Plans) pursuant to which the Company's Board of Directors may grant incentive and non-incentive stock options to certain key employees and directors of the Company and its subsidiaries. The option price and term of the options shall be determined by the Board on grant date, but shall not be less than 100% of fair market value as of grant date and shall not be greater than 10 years, respectively. Because the Company's stock is not traded on an established market, the fair value may be determined by an annual independent actuarial valuation. As of December 31, 2001 and 2000, 589,000 and 534,000 shares, respectively, had been granted under these plans. At December 31, 2001 and 2000, there were 74,800 and 120,000 remaining shares, respectively, available for grant under the Stock Option Plans. Stock option activity for these plans is summarized in the following table:
Weighted-Average Stock Options Exercise Price ------------- ---------------- Outstanding at December 31, 1998 286,800 $ 7.55 Granted...................... 18,000 13.00 Exercised.................... (27,444) 5.76 Outstanding at December 31, 1999 277,356 7.96 Granted...................... 40,000 13.00 Forfeited.................... (28,000) 13.00 Exercised.................... (28,900) 5.81 Outstanding at December 31, 2000 260,456 8.55 Granted...................... 55,000 13.50 Forfeited.................... (9,800) 8.75 Exercised.................... (28,926) 5.87 Outstanding at December 31, 2001 276,730 $ 9.81
49 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Number Weighted-Average Number Outstanding Remaining Weighted-Average Exercisable Weighted-Average Range of Exercise Prices at 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price - ------------------------ ----------- ---------------- ---------------- ----------- ---------------- $3.92 - 4.13............ 5,730 1.00 years $ 4.13 5,730 $ 4.13 $4.52 - 4.85............ 11,500 2.00 years 4.52 11,500 4.52 $6.88 - 8.75............ 174,500 7.13 years 8.63 121,300 8.64 $13.00 - 13.50.......... 85,000 9.65 years 13.32 23,000 13.24 ------- ---------- ------ ------- ------ Total................... 276,730 7.56 years $ 9.81 161,530 $ 8.84 ======= ========== ====== ======= ======
The Company follows the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, which requires compensation expense for options to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. Accordingly, the Company has not recognized compensation expense for its options granted in 2001, 2000 and 1999. The Company accounts for its stock options in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 permits companies to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. In management's opinion, the existing stock option valuation models do not necessarily provide a reliable single measure of stock option fair value. Therefore, as permitted, the Company will continue to apply the existing accounting rules under APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The per-share weighted average fair values of stock options granted in 2001, 2000 and 1999 were $4.27, $5.15 and $4.30, respectively. The fair values were estimated as of the respective grant dates using the Black-Scholes option-pricing model. Input variables used in the model included weighted-average risk free interest rates of 4.70%, 6.41% and 5.65%, respectively; expected dividend yields of 1.50%, 1.40% and 1.30%, respectively; and expected volatility factors of 19.10%, 20.50% and 21.30%, respectively; and estimated option lives of 10 years. The pro forma impact on income assumes no options will be forfeited. Had compensation expense for the Company's Stock Option Plan been determined based on the fair value grant date for awards granted in 2001, 2000 and 1999 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been effected as shown in the following table:
2001 2000 1999 ------ ------ ------ Net income--as reported.......................... $8,400 $6,975 $8,069 Net income--pro forma............................ 8,259 6,863 7,984 Net income per common share-basic--as reported... 1.34 1.12 1.30 Net income per common share-basic--pro forma..... 1.32 1.10 1.29 Net income per common share-dilutive--as reported 1.31 1.09 1.26 Net income per common share-dilutive--pro forma.. 1.28 1.07 1.25
The pro forma effects may not be representative of the effects on reported net income for future years as most of the Company's employee stock option grants vest in cumulative increments over a period of five years. 50 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (11) Net Income per Common Share The table below illustrates a reconciliation of the numerators and denominators of the basic and diluted per-share computations for net income for the years ended December 31, 2001, 2000 and 1999:
Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 2001 Basic EPS: Income available to common stockholders.......................... $8,400 6,263,031 $1.34 Effect of dilutive securities: stock options..................... -- 168,952 -- ------ --------- ----- Diluted EPS: Income available to common stockholders plus assumed exercises of stock options.................................................. $8,400 6,431,983 $1.31 ====== ========= =====
Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 2000 Basic EPS: Income available to common stockholders.......................... $6,975 6,241,775 $1.12 Effect of dilutive securities: stock options..................... -- 180,682 -- ------ --------- ----- Diluted EPS: Income available to common stockholders plus assumed exercises of stock options.................................................. $6,975 6,422,457 $1.09 ====== ========= =====
Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 1999 Basic EPS: Income available to common stockholders.......................... $8,069 6,208,750 $1.30 Effect of dilutive securities: stock options..................... -- 178,162 -- ------ --------- ----- Diluted EPS: Income available to common stockholders plus assumed exercises of stock options.................................................. $8,069 6,386,912 $1.26 ====== ========= =====
(12) Related Party Transactions Certain of the Company's directors and executive officers are also customers of the Bank who, including their related interests, were indebted to the Bank in the approximate amounts of $5,600 and $2,524 at December 31, 2001 and 2000, respectively. From January 1 through December 31, 2001, these directors and executive officers and their related interests borrowed $7,536 and repaid $4,347. In the opinion of management, these loans do not involve more than the normal risk of collectibility and do not present other unfavorable features. 51 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (13) Commitments and Contingencies On December 31, 2001, the Bank was obligated under a number of noncancelable operating leases on certain property and equipment that have initial terms of more than one year. The minimum scheduled payments under these leases are as follows: 2002.................... $ 714 2003.................... 635 2004.................... 518 2005.................... 200 2006.................... 179 Subsequent years........ 1,227 ------ $3,473 ======
Rental expense was $786, $768 and $469 for the years ended December 31, 2001, 2000 and 1999, respectively. In 2001, the Bank became involved in a lawsuit related to the Sales Finance Department. The Bank does not believe that the claims are well founded and is vigorously pursuing its counterclaims. However, due to the current status of the case, it is difficult to predict the outcome of this litigation and its potential impact on the consolidated financial statements. In the normal course of business the Company and subsidiary are periodically involved in other legal proceedings. In the opinion of the Company's management, none of these proceedings is likely to have a materially adverse effect on the accompanying consolidated financial statements. (14) Disclosures Regarding Fair Value of Financial Instruments SFAS No. 107, Disclosure About Fair Value of Financial Instruments (Statement 107), requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, prepayments, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may or may not be realized in an immediate sale of the instrument. Under Statement 107, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 52 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) The following describes the methods and assumptions used by the Company in estimating the fair values of financial instruments: (a) Cash and Due From Banks The carrying value approximates fair value. (b) Investment Securities Available For Sale The fair values of investment securities are derived from quoted market prices. (c) Federal Home Loan Bank Stock No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. (d) Loans Held for Sale The fair value of loans held for sale is based on prices for outstanding commitments to sell these loans. (e) Loans The current value of variable-rate consumer and commercial loans or consumer and commercial loans with remaining maturities of three months or less approximates fair value. The fair value of fixed-rate consumer and commercial loans with maturities greater than three months are valued using a discounted cash flow analysis and assumes the rate being offered on these types of loans by the Company at December 31, 2001 and 2000, approximates market. For credit cards and lines of credit the carrying value approximates fair value. No value has been placed on the underlying credit card relationship rights. Unused loan commitments are at adjustable rates, which fluctuate with the prime rate or are funded within ninety days. The current amounts of these commitments approximate their fair value. Please see Note 4 for these amounts. (f) Deposits Under Statement 107, the estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, by applying interest rates currently being offered at the dates indicated on the deposit products. Under Statement 107, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposits liabilities as compared to the cost of alternative forms of funding. (g) Securities Sold Under Agreements to Repurchase, Commercial Paper (Master note), Federal Funds Sold and Federal Funds Purchased The carrying amount approximates fair value due to the short-term nature of these instruments. 53 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (14) Disclosures Regarding Fair Value of Financial Instruments, Continued The estimated fair values of the Company's financial instruments at December 31 are as follows:
2001 2000 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Cash and due from banks........................... $ 27,742 27,742 36,305 36,305 ======== ======= ======= ======= Federal funds sold................................ $ 17,949 17,949 1,879 1,879 ======== ======= ======= ======= Federal Home Loan Bank stock...................... $ 1,733 1,733 1,733 1,733 ======== ======= ======= ======= Investment securities available for sale.......... $ 95,095 95,095 98,601 98,601 ======== ======= ======= ======= Loans held for sale............................... $ 10,054 10,054 611 611 ======== ======= ======= ======= Loans: Commercial mortgage............................ $222,303 222,133 172,693 172,693 Commercial other............................... 152,460 151,761 133,245 133,120 Real estate--mortgage.......................... 49,147 49,073 48,450 48,678 Installment mortgage........................... 84,011 84,560 84,123 84,100 Installment other.............................. 45,900 45,103 59,731 58,668 -------- ------- ------- ------- Total loans, gross......................... $553,821 552,630 498,242 497,158 ======== ======= ======= ======= Deposits.......................................... $645,300 652,318 572,666 572,771 ======== ======= ======= ======= Borrowings: Securities sold under agreements to repurchase. $ 15,313 15,313 19,923 19,923 Commercial paper (Master note)................. 11,076 11,076 15,359 15,359 -------- ------- ------- ------- $ 26,389 26,389 35,282 35,282 ======== ======= ======= =======
54 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) (15) Palmetto Bancshares, Inc. (Parent Company) The Parent Company's principal source of income is dividends from the Bank. Certain regulatory requirements restrict the amount of dividends that the Bank can pay to the Parent Company. At December 31, 2001, the Bank had available retained earnings of approximately $11,698 for payment of dividends. The Parent Company's principal asset is its investment in its bank subsidiary. The Parent Company's condensed statements of financial condition as of December 31, 2001 and 2000, and the related condensed statements of operations and cash flows for the three-year period ended December 31, 2001 are as follows: Statements of Financial Condition
2001 2000 ------- ------ Assets Cash................................................. $ 508 366 Due from subsidiary.................................. 11,076 15,359 Investment in wholly-owned bank subsidiary........... 57,856 51,462 Goodwill, net........................................ 704 765 ------- ------ Total assets...................................... $70,144 67,952 ======= ====== Liabilities and Shareholders' Equity Commercial paper (Master note)....................... $11,076 15,359 ------- ------ Total liabilities................................. 11,076 15,359 ------- ------ Shareholders' equity................................. 59,068 52,593 ------- ------ Total liabilities and shareholders' equity........ $70,144 67,952 ======= ======
Statements of Operations
2001 2000 1999 ------ ----- ----- Interest income from commercial paper (Master note).. $ 359 789 526 Dividends received from Bank......................... 2,569 2,310 1,956 Equity in undistributed earnings of subsidiary....... 5,892 4,725 6,174 Interest expense on commercial paper (Master note)... (359) (789) (526) Other operating expenses............................. (61) (60) (61) ------ ----- ----- Net income........................................... $8,400 6,975 8,069 ====== ===== =====
55 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued) Statements of Cash Flows
2001 2000 1999 ------- ------ ------ Cash flows from operating activities: Net income............................................... $ 8,400 6,975 8,069 Decrease (increase) in due from subsidiary............... 4,283 (2,786) (1,714) Earnings retained by wholly owned subsidiary............. (5,892) (4,725) (6,174) Amortization of goodwill................................. 61 61 62 ------- ------ ------ Net cash provided (used) by operating activities..... 6,852 (475) 243 ------- ------ ------ Cash flows from financing activities: Net change in commercial paper (Master note)............. (4,283) 2,786 1,714 Proceeds from issuance of common stock................... 142 168 156 Dividends paid........................................... (2,569) (2,310) (1,956) ------- ------ ------ Net cash (used) provided by financing activities..... (6,710) 644 (86) ------- ------ ------ Net increase in cash........................................ 142 169 157 Cash at beginning of year................................... 366 197 40 ------- ------ ------ Cash at end of year......................................... $ 508 366 197 ======= ====== ======
(16) Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and to average assets. Management believes, as of December 31, 2001, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 2001 and 2000 the Company and the Bank were each categorized as "well capitalized," under the regulatory framework for prompt corrective action. To be categorized as "adequately capitalized," the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no current conditions or events that management believes would change the Company's or the Bank's category. 56 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued)
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------- ----------------- ----------------- As of December 31, 2001: Amount Ratio Amount Ratio Amount Ratio - ------------------------ ------- ----- ------- ----- ------- ------- Total capital to risk-weighted assets: Company............................. $60,068 10.81% $44,454 8.00% N/A N/A Bank................................ $59,561 10.72% $44,454 8.00% $55,568 10.00% Tier 1 capital to risk-weighted assets: Company............................. $54,411 9.79% $22,227 4.00% N/A N/A Bank................................ $53,904 9.70% $22,227 4.00% $33,341 6.00% Tier 1 capital to average assets: Company............................. $54,411 7.45% $29,204 4.00% N/A N/A Bank................................ $53,904 7.38% $29,209 4.00% $36,512 5.00%
As of December 31, 2000: - ------------------------ Total capital to risk-weighted assets: Company............................. $53,447 10.76% $39,719 8.00% N/A N/A Bank................................ $53,081 10.69% $39,719 8.00% $49,649 10.00% Tier 1 capital to risk-weighted assets: Company............................. $48,001 9.67% $19,860 4.00% N/A N/A Bank................................ $47,635 9.59% $19,860 4.00% $29,789 6.00% Tier 1 capital to average assets: Company............................. $48,001 7.40% $25,934 4.00% N/A N/A Bank................................ $47,635 7.35% $25,936 4.00% $32,420 5.00%
(17) Quarterly Financial Data (Unaudited) Quarterly operating data for the years ended December 31 is summarized as follows:
2001 -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ Net interest income.............................. $6,785 7,322 7,574 8,041 29,722 Provision for loan losses........................ 850 1,388 900 900 4,038 Non-interest income.............................. 2,602 3,477 3,232 3,558 12,869 Non-interest expense............................. 6,197 6,405 6,832 7,119 26,553 Income tax provision............................. 670 916 882 1,132 3,600 ------ ----- ----- ----- ------ Net income....................................... $1,670 2,090 2,192 2,448 8,400 ====== ===== ===== ===== ====== Net income per share-basic....................... $ 0.27 0.33 0.35 0.39 1.34 ====== ===== ===== ===== ====== Net income per share-dilutive.................... $ 0.26 0.32 0.35 0.38 1.31 ====== ===== ===== ===== ======
57 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements--(Continued)
2000 -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ Net interest income............... $6,480 6,786 6,616 6,608 26,490 Provision for loan losses......... 525 1,610 800 945 3,880 Non-interest income............... 2,177 2,407 2,314 2,653 9,551 Non-interest expense.............. 5,494 5,437 5,719 5,899 22,549 Income tax provision.............. 743 605 608 681 2,637 ------ ----- ----- ----- ------ Net income........................ $1,895 1,541 1,803 1,736 6,975 ====== ===== ===== ===== ====== Net income per share-basic........ $ 0.30 0.25 0.29 0.28 1.12 ====== ===== ===== ===== ====== Net income per share-dilutive..... $ 0.30 0.24 0.28 0.27 1.09 ====== ===== ===== ===== ======
58 Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is set forth under the headings "Election of Directors" and "Executive Officers" in the definitive Proxy Statement of the Company filed in connection with its 2002 Annual Meeting of the Shareholders, which is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is set forth under the headings "Compensation of Directors and Executive Officers," "Aggregated Option Exercises in Last Fiscal Year and Year-end Option Values" and "Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement of the Company filed in connection with its 2002 Annual Meeting of Shareholders, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement of the Company filed in connection with its 2002 Annual Meeting of Shareholders, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the heading "Certain Relationships and Related Transactions" in the definitive Proxy Statement of the Company filed in connection with its 2002 Annual Meeting of Shareholders, which is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (2) Additional financial statement schedules furnished pursuant to the requirements of Form 10-K All other schedules have been omitted as the required information is either inapplicable or included in the Notes to the Consolidated Financial Statements. (3) Exhibits:
Exhibit No. Description - ----------- ----------- 3.1.1 Articles of Incorporation filed on May 13, 1982 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 3 to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on December 30, 1987 3.1.2 Articles of Amendment filed on May 5, 1988 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.2 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992 3.1.3 Articles of Amendment filed on January 26, 1989 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.3 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992
59
Exhibit No. Description - ----------- ----------- 3.1.4 Articles of Amendment filed on April 23, 1990 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.4 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992 3.1.5 Articles of Amendment filed on October 16, 1996 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 3.1.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996. 3.1.6 Articles of Amendment filed on May 17, 1999 in the office of the Secretary of State of South Carolina: incorporated by reference to Exhibit 3.1.6 of the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 1999. 3.2.1 By-Laws adopted April 10, 1990. Incorporated by reference to Exhibit 3.2.1 to the Company's 1996 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 1997. 3.2.2 Amendment to By-Laws dated April 12, 1994. Incorporated by reference to Exhibit 3.2.2 to the Company's 1996 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 1997. 3.2.3 Amendment to By-Laws dated January 19, 1999. Incorporated by reference to Exhibit 3.2.3 to the Company's 1998 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 19, 1999. 4.1.1 Articles of Incorporation of the Registrant: Included in Exhibits 3.1.1-.5 4.2 Bylaws of the Registrant: Included in Exhibit 3.2.1-.3 4.3 Specimen Certificate for Common Stock: Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212, filed with the Securities and Exchange Commission on August 20, 1992 4.4 Palmetto Bancshares, Inc. 1997 Stock Compensation Plan, as amended to date. Incorporated by reference to the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 1998. 10.1* Palmetto Bancshares, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10 (a) to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on May 2, 1988. 10.2* The Palmetto Bank Pension Plan and Trust Agreement: Incorporated by reference to Exhibit 10 (c) to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on May 2, 1988. 10.3* The Palmetto Bank Officer Incentive Compensation Plan 10.4* Palmetto Bancshares, Inc. 1997 Stock Compensation Plan, as amended to date: incorporated by reference to Exhibit 10.1 to the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 1998. 21.1^ List of Subsidiaries of the Registrant
- -------- * Management contract or compensatory plan or arrangement. ^ Filed herewith. (b) Reports on Form 8-K The Registrant did not file any reports on Form 8-K during the three months ended December 31, 2001. (c) Exhibits required to be filed with this Form 10-K by Item 601 of Regulation S-K are filed herewith or incorporated by reference herein. (d) Certain additional financial statements. Not Applicable. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PALMETTO BANCSHARES, INC. By: /s/ L. LEON PATTERSON ----------------------------- L. Leon Patterson Chairman and Chief Executive Officer By: /s/ PAUL W. STRINGER ----------------------------- Paul W. Stringer President and Chief Operating Officer (Chief Accounting Officer) Date: February 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below and on the dates by the following persons on behalf of the registrant and in the capacities indicated: Signature Title Date --------- ----- ---- /s/ L. LEON PATTERSON Director February 19, 2002 - ----------------------------- L. Leon Patterson /s/ PAUL W. STRINGER Director February 19, 2002 - ----------------------------- Paul W. Stringer /s/ W. FRED DAVIS, JR. Director February 19, 2002 - ----------------------------- W. Fred Davis, Jr. /s/ DAVID P. GEORGE, JR. Director February 19, 2002 - ----------------------------- David P. George, Jr. /s/ MICHAEL D. GLENN Director February 19, 2002 - ----------------------------- Michael D. Glenn /s/ JOHN T. GRAMLING, II Director February 19, 2002 - ----------------------------- John T. Gramling, II /s/ WILLIAM S. MOORE Director February 19, 2002 - ----------------------------- William S. Moore /s/ SAM B. PHILLIPS, JR. Director February 19, 2002 - ----------------------------- Sam B. Phillips, Jr. /s/ JAMES M. SHOEMAKER, JR. Director February 19, 2002 - ----------------------------- James M. Shoemaker, Jr. /s/ ANN B. SMITH Director February 19, 2002 - ----------------------------- Ann B. Smith /s/ EDWARD KEITH SNEAD, III Director February 19, 2002 - ----------------------------- Edward Keith Snead, III /s/ J. DAVID WASSON, JR. Director February 19, 2002 - ----------------------------- J. David Wasson, Jr. 61 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1.1 Articles of Incorporation filed on May 13, 1982 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 3 to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on December 30, 1987 3.1.2 Articles of Amendment filed on May 5, 1988 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.2 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992 3.1.3 Articles of Amendment filed on January 26, 1989 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.3 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992 3.1.4 Articles of Amendment filed on April 23, 1990 in the office of the Secretary of State of South Carolina: Incorporated by reference to Exhibit 4.1.4 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212 filed with the Securities and Exchange Commission on August 20, 1992 3.1.5 Articles of Amendment filed on October 16, 1996 in the office of the Secretary of State of South Carolina: incorporated by reference to Exhibit 3.1.5 to the Company's quarterly report on Form 10-Q for the fiscal quarter ended September 30, 1996. 3.1.6 Articles of Amendment filed on May 17, 1999 in the office of the Secretary of State of South Carolina: incorporated by reference to Exhibit 3.1.6 of the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 1999. 3.2.1 By-Laws adopted April 10, 1990. Incorporated by reference to Exhibit 3.2.1 to the Company's 1996 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 1997. 3.2.2 Amendment to By-Laws dated April 12, 1994. Incorporated by reference to Exhibit 3.2.2 to the Company's 1996 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 1997. 3.2.3 Amendment to By-Laws dated January 19, 1999. Incorporated by reference to Exhibit 3.2.3 to the Company's 1998 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 19, 1999. 4.1.1 Articles of Incorporation of the Registrant: Included in Exhibits 3.1.1-.5 4.2 Bylaws of the Registrant: Included in Exhibit 3.2.1-.3 4.3 Specimen Certificate for Common Stock: Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Commission File No. 33-51212, filed with the Securities and Exchange Commission on August 20, 1992 4.4 Palmetto Bancshares, Inc. 1997 Stock Compensation Plan, as amended to date. Incorporated by reference to the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 1998. 10.1* Palmetto Bancshares, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10 (a) to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on May 2, 1988.
Exhibit No. Description - ----------- ----------- 10.2* The Palmetto Bank Pension Plan and Trust Agreement: Incorporated by reference to Exhibit 10 (c) to the Company's Registration Statement on Form S-4, Commission File No. 33-19367, filed with the Securities and Exchange Commission on May 2, 1988. 10.3* The Palmetto Bank Officer Incentive Compensation Plan 10.4* Palmetto Bancshares, Inc. 1997 Stock Compensation Plan, as amended to date: incorporated by reference to Exhibit 10.1 to the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 1998. 21.1^ List of Subsidiaries of the Registrant
- -------- * Management contract or compensatory plan or arrangement. ^ Filed herewith. EX-21.1 3 dex211.txt SUBSIDIARIES Exhibit 21.1 Subsidiaries of Palmetto Bancshares, Inc. The following table sets forth the subsidiaries of Palmetto Bancshares, Inc. on December 31, 2001. The common stock of each of these subsidiaries is 100 percent owned by its parent. The financial statements of all subsidiaries are included in the consolidated statements of Palmetto Bancshares, Inc. and subsidiaries. The Palmetto Bank Palmetto Capital Inc. -----END PRIVACY-ENHANCED MESSAGE-----