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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 0-26016
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PALMETTO BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 74-2235055
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
301 Hillcrest Drive, Laurens, South Carolina 29360
(Address of principal executive offices) (Zip Code)
(864) 984-4551 palmettobank.com
Registrant's telephone number (Registrant's subsidiary's web site)
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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)
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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 09, 2001, $134,927,450--based on the most recent
sales price of $25.00 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. 6,259,734 -
February 09, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement dated March 16, 2001 with respect to an
Annual Meeting of Shareholders to be held April 17, 2001: Incorporated by
reference in Part III of this Form 10-K.
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PALMETTO BANCSHARES, INC.
AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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PART I
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 8. Financial Statements and Supplementary Data............................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 52
Item 11. Executive Compensation.................................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 52
Item 13. Certain Relationships and Related Transactions.......................... 52
PART IV
Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K...... 53
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. There are 28 full service branch
offices in addition to the headquarters located in Laurens, South Carolina.
The Bank performs a full range of banking activities, including such
services as checking, savings, money market, and other time deposits of
various types of consumer and commercial depositors; loans for business, real
estate, and personal uses; safe deposit box rental and various electronic
funds transfer services. The Bank also offers both individual and commercial
trust services through an active trust department. Palmetto Capital is a
brokerage subsidiary of the Bank, which offers customers stocks, treasury and
municipal bonds, mutual funds and insurance annuities, as well as college and
retirement planning. The Bank's 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.
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 Bank plans to begin construction early
in 2001 and hopes to open the branch for business in first quarter 2002.
3
On September 14, 1999, the Palmetto Bank opened its 27th office in
Abbeville, South Carolina. This retail location was acquired from Carolina
First and added approximately $14 million in deposits and $1.8 million in
loans to the Bank's balance sheet. On November 15, 1999, the Bank opened its
28th office in Greer, South Carolina as a de novo branch.
Management continually reviews opportunities to expand in the Upstate that
it believes to be in the best interest of the Bank and its customers.
Systems
On July 7, 1999, the Bank introduced Internet banking services to its
customers. Reached through the Bank's web site at www.palmettobank.com, the
Bank's customers can obtain balances, review account histories, transfer money
between accounts and pay bills via the Internet banking service. This Internet
banking system brings together a combination of security technologies to
protect data for the Bank and its customers. It features password-controlled
system entry, a VeriSign-issued Digital ID for the Bank's server, Secure
Sockets Layer protocol for data encryption, and a router loaded with a
firewall to regulate the inflow and outflow of server traffic. Currently,
approximately 4,200 customers use the Bank's Internet services.
In 1999, the Company also installed a wide area network to enhance the
Company's ability to manage its complex data communications with its branch
system and user departments.
Employees
At December 31, 2000, the Bank had 341 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.
4
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 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. In particular, the Bank must receive the approval of the
South Carolina Commissioner of Banking prior to paying dividends to
Bancshares. 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
5
capital," principally consisting of common shareholders' equity, noncumulative
preferred stock, a limited amount of cumulative perpetual preferred stock and
minority interest in the equity accounts of consolidated subsidiaries, less
certain goodwill items. The remainder (Tier 2 capital) may consist of a
limited amount of subordinated debt and intermediate-term preferred stock,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted
a minimum Tier 1 (leverage) capital ratio under which a bank holding company
must maintain a minimum level of Tier 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, 2000, 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, 2000, 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 17 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, 2000. 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 most of
1998, the Bank was "adequately capitalized," but during 1998, the Bank
returned to the "well capitalized" category and the FDIC insurance premium
decreased from $206 in 1998 to $132 in 1999. For the year ended December 31,
2000, the Bank paid FDIC insurance premiums totaling $111. 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
2000 was 2.02 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, 2000, 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 to $153:
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
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.
8
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 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 plans to file counterclaims
against M. Snyder's based on M. Snyder's breach of contract. The Bank does not
believe that M. Snyder's claims are well-founded and is vigorously pursuing
its counterclaims and its defenses against the claim.
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 $25.00 per share on February 09,
2001. As of February 09, 2001, the Company had 932 shareholders with 6,259,734
shares outstanding.
Bancshares, or its predecessor, the Bank, has paid regular dividends on
common stock since 1909. For the years ended December 31, 2000, 1999 and 1998,
Bancshares paid cash dividends of $2,310 or $0.37 per share, $1,956 or $0.32
per share, and $1,544 or $0.25 per share, respectively. These dollars equate
to dividend payout ratios (dividends declared divided by net income) of
32.96%, 24.24% and 22.54% in 2000, 1999 and 1998, 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, 2000, there were 921
shareholders of record.
Sales Prices by Quarter
Fiscal Year 2000 High Low
---------------- ------ ------
First Quarter.................................................. $24.50 $22.50
Second Quarter................................................. $24.50 $23.50
Third Quarter.................................................. $25.00 $24.50
Fourth Quarter................................................. $25.00 $25.00
Fiscal Year 1999
----------------
First Quarter.................................................. $20.00 $18.50
Second Quarter................................................. $21.00 $20.00
Third Quarter.................................................. $22.50 $21.00
Fourth Quarter................................................. $22.50 $20.00
Dividends Paid Per Share
Fiscal Year 2000
- ----------------
March 31................ $.09
June 30................. $.09
September 29............ $.09
December 27............. $.10
Fiscal Year 1999
- ----------------
March 30................ $.07
June 29................. $.08
September 30............ $.08
December 27............. $.09
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 Banks current total risk-based capital ratio is 10.69%.
At December 31, 2000, the Bank had $10.2 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
-----------------------------------------------------
For the Year 2000 1999 1998 1997 1996
- ------------ --------- --------- --------- --------- ---------
Total interest income... $ 46,873 43,142 40,829 36,969 32,191
Total interest expense.. 20,383 16,399 16,440 15,841 13,810
Net interest income..... 26,490 26,743 24,389 21,128 18,381
Provision for loan
losses................. 3,880 2,431 1,877 1,331 1,450
Total non-interest
income................. 9,551 8,069 6,468 5,628 5,018
Total non-interest
expense................ 22,549 21,274 19,130 17,085 15,544
Income before income
taxes.................. 9,612 11,107 9,850 8,340 6,405
Income tax provision.... 2,637 3,038 3,000 2,415 1,652
Net income.............. 6,975 8,069 6,850 5,925 4,753
- -------------------------------------------------------------------------------
Per Common Share
- ----------------
Net income per share-
basic, not subject to
put/call............... $ 1.12 1.30 1.05 0.98 0.77
Net income per share-
dilutive, not subject
to put/call............ 1.09 1.26 1.02 0.97 0.76
Cash dividends
declared............... 0.37 0.32 0.25 0.19 0.14
Book value at year end
(1).................... 8.41 7.33 6.79 5.93 5.20
Average common shares
outstanding (1)........ 6,241,775 6,208,750 6,178,318 6,109,754 6,015,322
- -------------------------------------------------------------------------------
At Year End
- -----------
Total assets............ $ 663,390 625,835 578,196 514,170 469,621
Investment securities... 98,601 106,772 112,542 97,731 82,447
Loans................... 498,242 445,757 413,266 367,585 332,986
Total deposits.......... 572,666 538,324 500,469 450,353 413,630
Total shareholders'
equity (2)............. 52,593 45,627 42,085 36,616 31,438
Total shareholders'
equity................. 52,593 45,627 37,353 32,832 28,124
Common shares
outstanding............ 6,255,734 6,226,834 6,199,390 6,179,104 6,047,682
Full-time equivalent
employees.............. 341 327 306 281 257
- -------------------------------------------------------------------------------
Average Balances
- ----------------
Assets.................. $ 636,289 595,678 541,799 493,737 430,718
Investment securities... 108,591 110,546 102,635 97,136 86,655
Loans................... 470,381 430,960 390,776 350,493 301,839
Deposits................ 542,259 512,405 467,749 432,031 373,244
Total shareholders'
equity (2)............. 48,906 45,094 39,552 33,858 29,131
- -------------------------------------------------------------------------------
Key Ratios (1)
- --------------
Return on average
assets................. 1.10% 1.35% 1.26% 1.20% 1.10%
Return on average
equity................. 14.26% 17.89% 17.32% 17.50% 16.32%
Primary capital to
assets at year end..... 8.68% 8.22% 8.21% 8.06% 7.65%
Net interest margin
(fully tax-
equivalent)............ 4.73% 5.09% 5.07% 4.80% 4.88%
Allowance for loan
losses to total loans.. 1.09% 1.43% 1.40% 1.40% 1.42%
Nonperforming assets to
total assets........... 0.64% 0.49% 0.33% 0.25% 0.24%
Net charge-offs to
average loans.......... 1.02% 0.43% 0.32% 0.26% 0.14%
Average equity to
average assets ratio... 7.69% 7.57% 7.30% 6.86% 6.76%
- --------
(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 consolidated financial statements and notes thereto. The consolidated
financial statements of Palmetto Bancshares, Inc. and subsidiaries (the
"Company"), represent account balances for Palmetto Bancshares, Inc., (the
"Parent Company"), and its wholly-owned subsidiary, The Palmetto Bank, (the
"Bank"), and the Bank's wholly-owned subsidiary, Palmetto Capital, Inc.
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.
General
With net income of $7 million in 2000, the Bank had its second best year
ever in its 94-year history, even after a significant decrease in its net
interest margin and suffering material losses in its sales finance portfolio.
The Bank recorded charge-offs of $5.0 million during 2000, 2 1/2 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 has 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 a
result, there were increased levels of charge-offs arising from these loans in
1999 and 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. In 2001, management expects to have
further charge-offs and losses on the sales of repossessed automobiles as it
continues to clean up this portfolio, but these losses are anticipated to be
less than in 2000. New management in the sales finance department seems to
have a better control over underwriting standards, collection processes and
repossessed car evaluation.
During 2000, the Bank concentrated its efforts on strengthening its
relationships with current customers. One example of this strategy was the
establishment of the Corporate Services department to handle cash management,
Internet banking and wire transfer sales and support for its commercial
customers. Currently, the Bank is working on some new products to offer its
customers, including an enhanced sweep account for its commercial customers.
On the consumer side, the Bank now offers on-line mortgage application
services at its web site at www.palmettobank.com. Customers can finance a new
home or refinance an existing home on real estate within
12
South Carolina. Web users can check current rates and analyze their financial
fitness before deciding to fill out an application. If customers cannot
complete their application at one sitting, they can return to the web site and
finish it later. The Bank guarantees approval notification within 24 hours and
closing within 21 days.
In January 2001, the Bank introduced the Palmetto Index account, which
combines the interest rates of a money fund with the security, flexibility and
privileges of a premier checking account. Palmetto Index account is a premier
full-service checking account tied to a tiered interest rate, based on minimum
deposit balances. Rates are guaranteed and indexed directly to the Money Fund
Report(TM) all taxable, 7-day, simple yield average as published weekly in the
Wall Street Journal.
The Company's assets grew $37,555, or 6%, total loans grew $52,485, or 12%,
and deposits grew $34,342, or 6% in 2000 as a result of growth in all
geographic markets. In 1999, total assets grew $47,639, or 8%, total loans
grew $32,491, or 8%, and deposits grew $37,855, or 8% in 1999 as a result of
expansion, acquisition and general growth in all geographic markets.
Results of Operations
Three Years Ended December 31, 2000, 1999 and 1998
Net income for 2000 was $6,975, a decrease of 14% from the $8,069 reported
in 1999. Net income in 1999 increased 18% from the $6,850 reported in 1998.
Net income per common share-basic, not subject to put/call was $1.12 in 2000,
compared with $1.30 in 1999, and $1.05 in 1998. Net income per common share-
dilutive, not subject to put/call was $1.09 in 2000, compared with $1.26 in
1999, and $1.02 in 1998. Return on average assets was 1.10% in 2000 compared
with 1.35% in 1999 and 1.26% in 1998.
Net Interest Income
The largest component of the Company's net income is the Bank's net
interest income, defined as the difference between gross interest and fees on
earning assets (primarily loans and investment securities), and interest paid
on deposits and borrowed funds. Net interest income is affected by the
interest rate earned or paid and by volume changes in loans, securities,
deposits and borrowed funds.
In 2000, net interest income was $26,490, which represented a 1% decrease
from the $26,743 earned in 1999. This decrease is due to a decrease in the net
interest margin offset by increases in the volume of earning assets. In 1999,
net interest income increased $2,354 or 10%, over the $24,389 earned in 1998.
During 2000, the average tax equivalent yield on all interest-earning
assets was 8.21%, up from 8.08% and down from 8.37% in 1999 and 1998,
respectively. The average prime interest rate was 9.23% for 2000, compared to
an average prime rate of 8.00% and 8.25% for 1999 and 1998, respectively. The
Bank's average effective rate paid on all interest-bearing liabilities
increased in 2000 to 4.11%, from 3.53% and 3.86% in 1999 and 1998,
respectively. The Bank's net tax equivalent yield on interest-earning assets
(net interest margin) was 4.73%, 5.09% and 5.07% in 2000, 1999 and 1998,
respectively. The Company manages its net interest margin through strategic
asset-liability management as discussed in "Asset-Liability Management and
Market Risk Sensitivity" below.
Interest and fees on loans increased $3,648, or 10% from 1999 to 2000, and
increased $2,159 or 6% from 1998 to 1999 due to loan growth of 12% in 2000 and
8% in 1999. Interest on investment securities increased $111 or 2% from 1999
to 2000 due to an increase in the fully tax-equivalent weighted-average rate
on the security portfolio from 6.49% in 1999 to 6.86% in 2000, offset by a
decrease in the amount invested. Interest on investment securities increased
$75 or 1% from 1998 to 1999 due to an increase in the average balances
outstanding during the year, offset by a decrease in the fully tax-equivalent
weighted average rate on the security portfolio from 6.59% in 1998 to 6.49% in
1999. Interest income on federal funds sold decreased $29 or 11% from 1999 to
2000 due to lower average balances invested. This compares to an increase of
$58, or 27%, from 1998 to 1999 due to higher average balances invested.
13
Total interest expense increased 24% or $3,984 from 1999 to 2000 and
decreased 0.25% or $41 from 1998 to 1999. The largest component of total
interest expense is interest expense on deposits, which increased $2,883 or
19% from 1999 to 2000 due to higher rates paid and a 6% growth in deposits.
Interest expense on deposits decreased $6 or 0.04% from 1998 to 1999 due to
effective management of the cost of deposits, offset by an 8% growth in
deposits. The average cost of deposits was 3.33%, 2.96% and 3.24% in 2000,
1999 and 1998, respectively.
Interest on securities sold under agreements to repurchase increased $547,
or 97% from 1999 to 2000 due to an increase in the average balances
outstanding, and an increase in the average rate paid from 3.40% to 5.55%.
This compares to a decrease of $75, or 12% from 1998 to 1999 due to maintained
average balances outstanding, offset by a decrease in the average rate paid
from 3.86% to 3.40%. Interest on commercial paper (Master notes) increased
$263, or 50%, from 1999 to 2000 due to an increase in the average rate paid
from 3.44% to 4.95%, and an increase in the average balances outstanding
during the year. This compares to an increase of $5, or 1%, from 1998 to 1999
due to a decrease in the average rate paid from 4.11% to 3.44%, offset by an
increase in the average balances outstanding during the year. For more
information on short-term borrowings, please see notes to consolidated
financial statements number 9.
14
Rate/Volume Analysis
Table 1 includes, for the years ended December 31, 2000, 1999 and 1998
interest income on earning assets and related average yields, as well as
interest expense on liabilities and related average rates paid. Also shown are
the dollar amounts of change due to rate and volume variances. The effect of
the combination of rate and volume change has been divided equally between the
rate change and volume change.
TABLE 1
Rate Volume Analysis
2000 1999
---------------------------------------- ---------------------------------------
Average Yield/ Volume Rate Average Income/ Volume Rate
Balances Interest Rate Change Change Balances Expense Yield Change Change
-------- -------- ------ ------ ------ -------- ------- ----- ------ ------
Assets:
Interest-earning
deposits $ 82 $ 5 6.10% $ (7) $ 1 $ 211 $ 11 5.21% $ 6 $ 0
Federal funds sold 3,340 240 7.19% (119) 90 5,287 269 5.09% 74 (16)
Federal Home Loan
Bank stock 1,733 135 7.79% 3 4 1,691 128 7.57% 13 2
Taxable investment
securities 44,770 2,920 6.52% 268 79 40,596 2,573 6.34% (828) 44
Non-taxable
investment
securities (1) 63,821 4,242 6.65% (403) 87 69,950 4,559 6.52% 1,421 (270)
Non-taxable loans
(2) 1,952 147 7.53% (37) (1) 2,442 185 7.57% 12 (2)
Taxable Loans, net
of unearned
discount (3) 468,429 40,297 8.60% 3,422 254 428,518 36,621 8.55% 3,486 (1.334)
--------------------------------------- ---------------------------------------
Total earning
assets 584,127 47,986 8.21% 3,127 514 548,695 44,346 8.08% 4,184 (1,577)
Cash and due from
banks 24,606 25,205
Allowance for loan
losses (5,921) (6,085)
Premises and
equipment, net 16,641 15,230
Accrued Interest 4,657 4,344
Other assets 12,179 8,289
-------- --------
Total assets $636,289 $595,678
======== ========
1998
---------------------------------------
Average Income/ Volume Rate
Balances Expense Yield Change Change
--------- ------- ------ ------- ------
Assets:
Interest-earning
deposits $ 99 $ 5 5.05% $ 3 $ 3
Federal funds sold 3,876 211 5.44% (86) 6
Federal Home Loan
Bank stock 1,520 113 7.43% 54 3
Taxable investment
securities 53,756 3,357 6.24% (452) (85)
Non-taxable
investment
securities (1) 48,879 3,408 6.97% 902 (131)
Non-taxable loans
(2) 2,287 176 7.68% 36 (2)
Taxable Loans, net
of unearned
discount (3) 388,489 34,469 8.87% 3,515 291
---------------------------------------
Total earning
assets 498,906 41,739 8.37% 3,972 85
Cash and due from
banks 22,145
Allowance for loan
losses (5,393)
Premises and
equipment, net 14,255
Accrued Interest 4,065
Other assets 7,821
---------
Total assets $541,799
=========
Liabilities and
Shareholders'
Equity:
Interest-bearing
demand deposits 183,194 4,103 2.24% 366 658 165,370 3,079 1.86% 334 (43)
Savings deposits 32,578 638 1.96% 25 (2) 31,308 615 1.96% 55 (103)
Time deposits 237,380 13,293 5.60% 241 1,595 232,806 11,457 4.92% 752 (1,001)
Federal funds
purchased and
securities sold
under agreements
to repurchase 26,396 1,560 5.91% 343 495 19,295 722 3.74% 21 (61)
Commercial paper
(Master notes) 15,945 789 4.95% 28 235 15,273 526 3.44% 98 (93)
--------------------------------------- ---------------------------------------
Total interest-
bearing
liabilities 495,493 20,383 4.11% 1,002 2,982 464,052 16,399 3.53% 1,261 (1,302)
Non-interest
bearing demand
deposits 89,107 82,921
Other liabilities 2,783 3,611
Shareholders'
equity 48,906 45,094
-------- --------
Total liabilities
and
shareholders'
equity $636,289 $595,678
======== ========
Net interest income on a fully
taxable equivalent basis (1)/
Net yield on interest-
earning assets (FTE) 27,603 4.73% 27,947 5.09%
Liabilities and
Shareholders'
Equity:
Interest-bearing
demand deposits 147,580 2,788 1.89% 392 (334)
Savings deposits 28,718 663 2.31% 26 (39)
Time deposits 218,185 11,706 5.37% 444 (148)
Federal funds
purchased and
securities sold
under agreements
to repurchase 18,747 762 4.06% 144 (26)
Commercial paper
(Master notes) 12,668 521 4.11% 134 6
---------------------------------------
Total interest-
bearing
liabilities 425,898 16,440 3.86% 1,140 (541)
Non-interest
bearing demand
deposits 73,266
Other liabilities 3,083
Shareholders'
equity 39,552
---------
Total liabilities
and
shareholders'
equity $541,799
=========
Net interest income on a fully
taxable equivalent basis (1)/
Net yield on interest-
earning assets (FTE) 25,299 5.07%
- ----
(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 $1,076, $1,157 and $865 for 2000, 1999 and 1998, 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
$37, $47 and $45 for 2000, 1999 and 1998, 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.
15
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, 2000, approximately 24% of
the Company's earning assets could be repriced within one year compared to
approximately 92% of its interest-bearing liabilities. This compares to 25%
and 95%, respectively, in 1999 and 27% and 92%, respectively, in 1998.
The Company's current GAP analysis reflects that in periods of increasing
interest rates, rate sensitive assets will reprice slower than rate sensitive
liabilities. The Company's GAP analysis also shows that at the interest
repricing of one year, the Company's net interest margin would be adversely
impacted. This analysis, however, does not take into account the dynamics of
the marketplace. GAP is a static measurement that assumes if the prime rate
increases by 100 basis points, all assets and liabilities that are due to
reprice will increase by 100 basis points at the next opportunity. However,
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. In the past, the
Company has not raised deposit rates as fast or as much as it has raised loan
rates. However, in 2000, the Company determined that it must raise deposit
rates faster to stay competitive in the local market. The faster repricing of
deposit rates adversely affected the Company's net interest margin. To offset
some of the impact, the Company has the ability to manage its funding costs by
choosing alternative sources of funds, as evidenced by an increase in
borrowings.
The Company's current GAP position would also be interpreted to mean that
in periods of declining interest rates, the Company's net interest margin
would benefit. However, competitive pressures in the local market may not
allow the Company to lower rates on deposits, but force the Company to lower
rates on loans.
16
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, 2000, 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 10%. 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 3% and 7%, respectively.
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 loss on the investment securities portfolio ($264
at December 31, 2000). This unrealized loss exists because the current market
rates are higher than the weighted average rate on the investment security
portfolio. The portfolio consists of longer-term securities, as well.
Currently management is looking for opportunities to shorten the duration and
increase the weighted average rate of the portfolio. Management does not
intend to liquidate the entire investment security portfolio, and therefore
the unrealized loss will not be realized. The Company has plenty of liquidity
without selling off the investment security portfolio (please see Liquidity
discussion on page 23). The Company sees the investment security portfolio as
mainly an income source, not a liquidity source.
On page 18, Table 2 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, 2000. 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.
. 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.
17
An important aspect of achieving satisfactory net interest income is the
composition and maturities of rate sensitive assets and liabilities. Table 2
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 only a snapshot picture and does not reflect the dynamics
of the market place. Therefore, management reviews simulated earnings
statements on a monthly basis to more accurately anticipate its sensitivity to
changes in interest rates.
TABLE 2
Market Risk Sensitivity Expected Maturity/Repricing/Principal Repayments at
December 31, 2000
2001
-----------------------------------------
Average 2 Days to 3 to 6 6 to 12 There- Carrying
Rate 1 Day 3 Months Months Months 2002 2003 2004 2005 after Value
------- ---------- --------- -------- -------- -------- -------- -------- -------- ------- --------
Interest-
sensitive assets:
Federal funds
sold 7.19% $ 1,879 -- -- -- -- -- -- -- -- 1,879
Federal Home
Loan Bank stock 7.79% -- -- -- -- -- 1,733 -- -- 1,733
Mortgage-backed
investment
securities 6.29% -- 2,004 201 2,458 3,345 2,958 11,846 22,812
Other investment
securities 7.01% -- 936 610 2,952 6,834 6,450 4,573 2,614 50,820 75,789
Loans receivable 8.60% 61,597 33,225 26,834 16,148 41,298 48,125 89,990 22,822 158,203 498,242
---- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total interest-
earning assets 8.21% $ 63,476 36,165 27,645 19,100 50,590 59,653 97,521 25,436 220,869 600,455
==== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Fair
Value
-------
Interest-
sensitive assets:
Federal funds
sold 1,879
Federal Home
Loan Bank stock 1,733
Mortgage-backed
investment
securities 22,812
Other investment
securities 75,789
Loans receivable 497,158
-------
Total interest-
earning assets 599,371
=======
Interest-
sensitive
liabilities:
Interest-bearing
demand 1.30% 121,969 -- -- -- -- -- -- -- -- 121,969
Insured money
markets 3.97% 66,052 -- -- -- -- -- -- -- -- 66,052
Savings deposits 1.96% 30,468 -- -- -- -- -- -- -- -- 30,468
Time deposits
over $100 406 25,781 8,553 17,859 8,361 1,023 108 1,753 -- 63,844
Other time
deposits 80 83,290 41,303 39,180 19,841 4,920 953 4,605 64 194,236
---- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total time
deposits 5.60% 486 109,071 49,856 57,039 28,202 5,943 1,061 6,358 64 258,080
==== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Interest-
sensitive
liabilities:
Interest-bearing
demand 121,969
Insured money
markets 66,052
Savings deposits 30,468
Time deposits
over $100
Other time
deposits
-------
Total time
deposits 258,185
=======
Short-term
borrowings 5.55% 35,282 -- -- -- -- -- -- -- -- 35,282
---- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total interest-
bearing
liabilities 4.11% $ 254,257 109,071 49,856 57,039 28,202 5,943 1,061 6,358 64 511,851
==== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Short-term
borrowings 35,282
-------
Total interest-
bearing
liabilities 511,956
=======
Interest rate
sensitivity gap $ (190,781) (72,906) (22,211) (37,939) 22,388 53,710 96,460 19,078 220,805 88,604
========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Interest rate
sensitivity gap
Cumulative
interest rate
sensitivity gap $ (190,781) (263,687) (285,898) (323,837) (301,449) (247,739) (151,279) (132,201) 88,604 --
========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Cumulative
interest rate
sensitivity gap
Cumulative
interest rate
sensitive gap as
a % of total
interest-earning
assets -31.77% -43.91% -47.61% -53.93% -50.20% -41.26% -25.19% -22.02% 14.76% 0.00%
========== ======== ======== ======== ======== ======== ======== ======== ======= =======
Cumulative
interest rate
sensitive gap as
a % of total
interest-earning
assets
Off-balance sheet
items:
Commitments to
extend credit* -- -- -- -- -- -- -- -- 88,763 88,763
Unused lines of
credit 9.12% -- -- -- -- -- -- -- -- 17,644 17,644
Off-balance sheet
items:
Commitments to
extend credit* 88,763
Unused lines of
credit 17,644
- ----
* There is no way to determine the rates on the commitments because they have
not been set yet. The rates will vary according to prime.
Please see Notes to Market Risk Sensitivity table on page 17.
NOTE: For information regarding how fair values were determined, please see
notes to consolidated financial statements, number 15.
18
The following table shows the amounts of loans included in Table 2, except
for real estate-mortgage and installment loans to individuals, due to mature
and available for repricing within the time period stated.
TABLE 3
Maturities and Sensitivity of Selected Loans to Changes in Interest Rates
After 1 Year
After
1 Year Through 5
or Less Five Years Years Total
-------- ---------- ------ -------
Commercial, financial and agricultural...... $ 50,768 50,683 22,276 123,727
Real estate-construction.................... 8,389 3,107 2,825 14,321
-------- ------ ------ -------
Total..................................... $ 59,157 53,790 25,101 138,048
======== ====== ====== =======
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, 2000
-----------------
Predetermined interest rate................................... $ 78,891
Floating or adjustable interest rate.......................... --
----------
Total....................................................... $ 78,891
==========
Twenty-eight percent of total loans are repricable within one year.
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 all allocated. 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 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.
19
TABLE 4
Summary of Loan Loss and Recovery Experience
(Dollars in Thousands)
The following table summarizes the activity in the allowance for loan losses
for the years indicated:
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
Average loans, net of unearned
discount....................... $470,381 430,960 390,776 350,493 301,839
======== ======= ======= ======= =======
Allowance for loan losses:
Beginning balance............. $ 6,362 5,795 5,152 4,729 3,700
Add provision for loan
losses....................... 3,880 2,431 1,877 1,331 1,450
Loan charge-offs:
Commercial, financial and
agricultural................. 390 532 344 158 131
Real estate--construction..... -- -- -- -- --
Real estate--mortgage......... -- -- -- -- 92
Installment loans to
individuals.................. 4,597 1,441 1,018 891 487
-------- ------- ------- ------- -------
Total loan charge-offs.......... 4,987 1,973 1,362 1,049 710
Recoveries of loans previously
charged-off:
Commercial, financial and
agricultural................. 15 22 5 56 42
Real estate--construction..... -- -- -- -- --
Real estate--mortgage......... -- -- -- -- 65
Installment loans to
individuals.................. 176 87 123 85 182
-------- ------- ------- ------- -------
Total recoveries of loans
previously charged-off......... 191 109 128 141 289
-------- ------- ------- ------- -------
Net charge-offs............. 4,796 1,864 1,234 908 421
-------- ------- ------- ------- -------
Ending balance.................. $ 5,446 6,362 5,795 5,152 4,729
======== ======= ======= ======= =======
Net charge-offs to average
loans, net..................... 1.02% 0.43% 0.32% 0.26% 0.14%
Allowance for loan losses to
average loans, net............. 1.16 1.48 1.48 1.47 1.57
Allowance for loan losses to
total loans at period-end...... 1.09 1.43 1.40 1.40 1.42
Losses and recoveries are charged or credited to the allowance at the time
realized.
The following table summarizes the allocation of the allowance for loan
losses at December 31:
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
% of % of % of % of % of
Total Total Total Total Total Total Total Total Total Total
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balance applicable to:
Commercial, financial
and agricultural...... $1,741 31.97% $2,022 31.78% $1,309 22.59% $1,145 22.22% $ 974 20.61%
Real estate--
construction.......... 32 0.59 31 0.49 145 2.50 123 2.39 136 2.88
Real estate--
mortgage.............. 1,123 20.62 778 12.23 3,025 52.20 2,739 53.17 2,582 54.59
Installment loans to
individuals........... 2,550 46.82 3,531 55.50 1,316 22.71 1,145 22.22 1,037 21.92
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............... $5,446 100.00% $6,362 100.00% $5,795 100.00% $5,152 100.00% $4,729 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provision For Loan Losses
The allowance for loan losses is established through charges to expense in
the form of a provision for loan losses. The provision for loan losses was
$3,880, $2,431 and $1,877, respectively, for the years ended
20
December 31, 2000, 1999 and 1998. The increase in the provision is due to the
increased level of losses in the sales finance portfolio in 2000 and normal
loan growth. Net charge-offs to average loans are 1.02% or $4,796 for 2000 as
compared to 0.43% or $1,864 for 1999 and 0.32% or $1,234 for 1998. The
increase in charge-offs is largely due to charge-offs in the sales finance
portfolio of $3,807. 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.
As a result of this process, sales finance loans have decreased from $36.8
million to $23.1 million at December 31, 1999 and 2000, respectively. Charge-
offs are expected to return to a more normal level when this process is
complete. The allowance for loan losses totaled $5,446, $6,362 and $5,795 at
December 31, 2000, 1999 and 1998, respectively. The level of the allowance for
loan losses to total loans outstanding is 1.09% at December 31, 2000. This
compares to 1.43% as of December 31, 1999 and 1.40% as of December 31, 1998.
Management feels the 1.09% allowance for loan losses to total loans at
December 31, 2000 is adequate because the allowance model described above
takes into account the risk grades of loans, delinquency trends, charge-off
ratios and loan growth.
Non-Interest Income
Non-interest income for 2000 increased by $1,482 or 18% over 1999, as
compared to an increase in 1999 of $1,601 or 25% over 1998. The largest
contributor to non-interest income is service charges on deposit accounts,
which increased 20% as a result of the increased collection of insufficient
funds charges associated with debit card transactions and increases in the
volume of deposit relationships. Management views deposit fee income as a
critical influence on profitability. Periodic monitoring of competitive fee
schedules and examination of alternative opportunities insure that the Company
realizes the maximum contribution to profits from this area.
There were $131, $32 and $150 of gains from sales of investment securities
during 2000, 1999 and 1998, respectively. These gains are reflective of the
stock market activity in recent years. The larger gain in 1998 was due to a
conscientious restructuring of the investment portfolio. In 1998, the Company
sold $6 million of "over-priced" U.S. Treasury notes in order to reinvest in
more economically-priced, shorter-term municipal securities.
Other income increased $774 or 39% due to increases in several
miscellaneous fees including ATM fees, mortgage servicing fees, brokerage
commissions and credit card fees. Brokerage commissions increased
approximately $150 due to the increase in volume of customers and the
increased transaction volume. Mortgage servicing income net of amortization
increased approximately $304 as a result of a partial reduction of the
valuation allowance due to the increasing rate environment through the third
quarter. Credit card income increased $188 due to an annual charge for the
Palmetto Points rewards program established in 1999. Customers were given 2
years of free membership to try the program and see if they liked it before
being accessed a membership fee.
Non-Interest Expense
Non-interest expense totaled $22,549 in 2000 as compared to $21,274 in 1999
and $19,130 in 1998. This represented a 6% increase from 1999 to 2000, and a
11% increase from 1998 to 1999. The overall increases during the year were due
to growth in all geographic markets, which is evidenced by the growth in
deposits of 6% from 1999 to 2000 and 8% from 1998 to 1999. Salaries and other
personnel expense, which comprised 47% of total non-interest expense for 2000,
were up $427 or 4% over 1999 due to normal salary increases. During 1999 and
1998, salaries and other personnel expense accounted for 48% and 49%, of total
other operating expense, respectively.
Combined net occupancy and furniture and equipment expenses increased $181,
or 5% from 1999 to 2000, as compared to an increase of $442, or 12%, in 1999.
The increase in 2000 is a result of remodeling and expansion of current
facilities. The increase in 1999 is due to the opening of two new branches.
21
Sales finance losses were $557 for the year ended December 31, 2000 due to
losses taken on the sale of the automobiles repossessed in conjunction with
defaulted loans. In previous years, such losses were immaterial due to the low
volume of cars to be sold. The Bank has an inventory of cars to be sold in
2001, but the losses are expected to be significantly less than in 2000.
Please see further discussion of this matter under "General" above.
Income Taxes
Income tax expense totaled $2,637 in 2000 as compared to $3,038 in 1999 and
$3,000 in 1998. The amounts expensed represented effective tax rates of
approximately 27%, 27% and 30% for the years ended December 31, 2000, 1999 and
1998, respectively. The changes in income tax expense for all three years were
due to changes in taxable income for each respective year. 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.
Financial Condition
As of December 31, 2000, 1999 and 1998
At December 31, 2000, Bancshares had total assets of $663.4 million, loans
outstanding of $498.2 million and deposits of $572.7 million. This compares
with total assets of $625.8 million, loans outstanding of $445.8 million and
deposits of $538.3 million, at December 31, 1999; and with total assets of
$578.2 million, loans outstanding of $413.3 million and deposits of $500.5
million, at December 31, 1998. 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.
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, 2000, total
loans, net of unearned discounts, were 83% of total earning assets. Loans
secured by real estate accounted for 60% of total loans as of December 31,
2000. Most of the loans classified as real estate-mortgage are commercial
loans where real estate provides additional collateral.
At December 31, 2000, the sales finance portfolio was $23,073 compared to
$36,760 at December 31, 1999. 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 a deterioration in the performance of the
portfolio which resulted in increased charge-offs as previously discussed. In
late 1999, management made certain organizational changes in the sales finance
department to improve the asset quality. As a result, there were increased
levels of charge-offs arising from these loans in 1999 and 2000. In estimating
the allowance for loan losses at December 31, 2000 and in allocating portions
of the allowance to specific portions of the loan portfolio, management has
taken these factors into consideration.
Non-accrual loans are those loans which management, through its continuing
evaluation of loans, has determined offer a more than normal risk of
collectability of future interest. Interest income on non-accrual loans is
recognized only as received. Interest on past due loans continues to accrue
until such time that the loans are either charged-off or placed in non-accrual
status. The non-accrual loan policy provides that it is the responsibility of
the chief credit officer to administer the placing of loans on non-accrual
status. Loans 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 2000, 1999 and 1998 were
approximately $3,224 or 0.65% (of total loans), $1,630 or 0.37% and $1,572 or
0.38%, respectively. The majority of these non-performing loans are smaller-
balance homogeneous consumer loans. For information on impaired loans, please
see footnote number 5.
22
Table 5
Distribution of Assets and Liabilities
(DOLLARS IN THOUSANDS)
Years Ended December 31,
----------------------------------------------------------------------
2000 2000 1999 1999 1998 1998 1997 1997
Average % of Average % of Average % of Average % of
Balance Total Balance Total Balance Total Balance Total
-------- ------ -------- ------ -------- ------ -------- ------
ASSETS
Cash and due from
banks.................. $ 24,688 3.88% $ 25,416 4.27% $ 22,244 4.11% $ 20,098 4.07%
Federal funds sold...... 3,340 0.52% 5,287 0.89% 3,876 0.72% 5,465 1.11%
Federal Home Loan Bank
stock.................. 1,733 0.27% 1,691 0.28% 1,520 0.28% 779 0.16%
Taxable investment
securities............. 44,770 7.04% 40,596 6.82% 53,756 9.92% 60,915 12.34%
Non-taxable investment
securities............. 63,821 10.03% 69,950 11.74% 48,879 9.02% 36,221 7.34%
Loans, net of unearned
discount............... 470,381 73.93% 430,960 72.35% 390,776 72.13% 350,493 70.99%
Less: allowance for
loan losses.......... (5,921) -0.93% (6,085) -1.02% (5,393) -1.00% (4,876) -0.99%
-------- ------ -------- ------ -------- ------ -------- ------
Net loans........... 464,460 73.00% 424,875 71.33% 385,383 71.13% 345,617 70.00%
Premises and equipment,
net.................... 16,641 2.62% 15,230 2.56% 14,255 2.63% 12,679 2.57%
Accrued interest........ 4,657 0.73% 4,344 0.73% 4,065 0.75% 3,563 0.72%
Other assets............ 12,179 1.91% 8,289 1.39% 7,821 1.44% 8,400 1.70%
-------- ------ -------- ------ -------- ------ -------- ------
Total assets........ $636,289 100.00% $595,678 100.00% $541,799 100.00% $493,737 100.00%
======== ====== ======== ====== ======== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing
deposits............. 89,107 14.00% 82,921 13.92% 73,266 13.52% 66,333 13,43%
Interest-bearing
demand............... 183,194 28.79% 165,370 27.76% 147,580 27.24% 128,098 25.94%
Savings............... 32,578 5.12% 31,308 5.26% 28,718 5.30% 27,639 5.60%
Time.................. 237,380 37.31% 232,806 39.08% 218,185 40.27% 209,961 42.52%
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits...... 542,259 85.22% 512,405 86.02% 467,749 86.33% 432,031 87.50%
Federal funds purchased
and securities sold
under agreements to
repurchase............. 26,396 4.15% 19,295 3.24% 18,747 3.46% 15,279 3.09%
Commercial paper........ 15,945 2.51% 15,273 2.56% 12,668 2.34% 9,382 1.90%
Other liabilities....... 2,783 0.44% 3,611 0.61% 3,083 0.57% 3,187 0.65%
-------- ------ -------- ------ -------- ------ -------- ------
Total liabilities... 587,383 92.31% 550,584 92.43% 502,247 92.70% 459,879 93.14%
Shareholders equity:
Common stock-$5.00 par
value................ 31,123 4.89% 31,042 5.21% 30,890 5.70% 30,576 6.19%
Capital surplus....... 19 -- -- -- 19 -- 206 0.04%
Retained earnings..... 19,898 3.13% 14,277 2.40% 8,385 1.55% 2,932 0.59%
Less: Treasury stock.. -- -- -- -- -- -- (37) -0.01%
Accumulated other
comprehensive income
(loss)............... (2,134) -0.34% (225) -0.04% 258 0.05% 181 0.04%
-------- ------ -------- ------ -------- ------ -------- ------
Total shareholders'
equity............. 48,906 7.69% 45,094 7.57% 39,552 7.30% 33,858 6.86%
-------- ------ -------- ------ -------- ------ -------- ------
Total liabilities
and shareholders'
equity............. $636,289 100.00% $595,678 100.00% $541,799 100.00% $493,737 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Table 6 on page 24 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, 1996 through
December 31, 2000.
23
TABLE 6
Nonperforming Loans
(Dollars in Thousands)
Foregone
90 Days or Percentage Interest
More Past Due 90 Days or Income
Non- and not on Total Loans More Past From Non-
Accrual Non-Accrual Outstanding Due Accrual
------- ------------- ----------- ---------- ---------
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
======= === ======= ==== =====
December 31, 1996:
Commercial, financial
and agricultural...... $ 140 -- 68,616 0.20 $ 4
Real estate--
construction.......... -- -- 9,598 0.00 --
Real estate--mortgage.. 428 -- 181,775 0.24 25
Installment loans to
individuals........... 545 -- 72,997 0.75 23
------- --- ------- ---- -----
Total................. $ 1,113 -- 332,986 0.33% $ 52
======= === ======= ==== =====
Deposits
For the average balances and average rates paid by category of deposit for
the years ended December 31, 2000, 1999 and 1998, please see Table 1 on page
15. The company has no foreign deposits.
24
The following table sets forth, by time remaining to maturity, domestic
certificates of deposit over $100, as of December 31, 2000, 1999 and 1998.
TABLE 7
Maturities of Time Deposits Over $100
2000 1999 1998
-------- ------ ------
Maturities:
3 months or less.................................. $ 26,187 21,451 21,467
3 through 6 months................................ 8,553 17,901 9,609
6 through 12 months............................... 17,859 10,717 8,490
Over 12 months.................................... 11,245 3,768 7,146
-------- ------ ------
$ 63,844 53,837 46,712
======== ====== ======
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, 2000 and 1999, the Company's
liquidity ratio was 13% and 18%, 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, 2000 and 1999,
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, 2000, the Company had
$15,359 in commercial paper with a weighted average rate of 4.40%, as compared
to $12,573 in 1999 with a weighted average of 2.06% and $10,859 in 1998 with a
weighted average rate of 3.06%.
The Company's liquidity needs are met through the payment of dividends from
the Bank. At December 31, 2000, the Bank had available retained earnings of
$10,317 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 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 84% of
the securities portfolio was pledged to secure liabilities as of December 31,
2000, as compared to 75% at December 31, 1999. If needed, alternative funding
sources have been arranged through federal funds lines at correspondent banks,
FHLB, and the Federal Reserve Discount Window. At December 31, 2000, the Bank
has unused short-term lines of credit totaling approximately $37 million
(which are withdrawable at the lender's option). At December 31, 2000, unused
borrowing capacity from the FHLB totaled $48 million. Management believes that
its sources of liquidity are adequate to meet operational needs and to
maintain the liquidity ratio within policy guidelines.
25
Capital Resources
At December 31, 2000 and 1999 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 17 for the Company's and the
Bank's various capital ratios at December 31, 2000.
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 Companys 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. Now that 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 now
included in shareholders' equity.
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 Changes
In September 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a replacement of FASB Statement No. 125." This statement will
become effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitizations and collateral for fiscal years ending
after December 15, 2000. In addition to replacing SFAS No. 125, this statement
will rescind SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it will carry over most of
the provisions of Statement 125 without reconsideration. The adoption of this
standard did not have a material effect on the Company.
Industry Developments
In November 1999, the Gramm-Leach-Bliley Act was signed into law. This bill
provides the Bank and the banking industry new opportunities to compete at the
local, national and international levels, allowing financial institutions to
better serve their customers' needs. The Act greatly expands the powers of
banks and bank holding companies to sell financial products and services,
including securities, insurance and financial planning and investment advice;
fully closes the so-called "unitary thrift holding company loophole," which
currently permits commercial companies to own and operate thrifts; reforms the
Federal Home Loan Bank System to significantly increase community banks'
access to loan funding; and protects banks from discriminatory state insurance
regulation. The bill also restricts financial institutions' ability to share
nonpublic personal customer information with third parties. Management is
pleased with the passage of this bill as it opens up avenues for the Bank to
offer new financial products and services to its customers
Item 8. Financial Statements and Supplementary Data
The information that is required by this item is set forth on the following
pages, 27 through 50.
26
Independent Auditors' Report
The Board of Directors
Palmetto Bancshares, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of Palmetto
Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-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 1999, and the
results of their operations and their cash flows for each of the years in the
three-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."
/s/ KPMG LLP
Greenville, South Carolina
February 9, 2001
27
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
(Dollars in thousands, except share and per share data)
Assets 2000 1999
- ------ --------- -------
Cash and due from banks......................................... $ 36,305 42,446
Federal funds sold.............................................. 1,879 1,371
Federal Home Loan Bank stock, at cost........................... 1,733 1,733
Investment securities available for sale (amortized costs of
$99,030 and $110,670 in 2000 and 1999, respectively)........... 98,601 106,772
Loans held for sale............................................. 611 1,169
Loans........................................................... 498,242 445,757
Less allowance for loan losses................................ (5,446) (6,362)
--------- -------
Loans, net.................................................. 492,796 439,395
--------- -------
Premises and equipment, net..................................... 16,481 16,319
Accrued interest................................................ 5,229 4,648
Other assets.................................................... 9,755 11,982
--------- -------
Total assets................................................ $ 663,390 625,835
========= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Non-interest-bearing........................................ $ 96,097 85,796
Interest-bearing............................................ 476,569 452,528
--------- -------
Total deposits............................................ 572,666 538,324
Securities sold under agreements to repurchase................ 19,923 19,021
Commercial paper (Master notes)............................... 15,359 12,573
Federal funds purchased....................................... -- 7,800
Other liabilities............................................. 2,849 2,490
--------- -------
Total liabilities......................................... 610,797 580,208
--------- -------
Shareholders' equity:
Common stock--$5.00 par value. Authorized 10,000,000 shares;
issued and outstanding 6,255,734 in 2000; issued and
outstanding 6,226,834 in 1999................................ 31,279 31,134
Capital surplus............................................... 23 --
Retained earnings............................................. 21,555 16,890
Accumulated other comprehensive loss.......................... (264) (2,397)
--------- -------
Total shareholders' equity................................ 52,593 45,627
--------- -------
Total liabilities and shareholders' equity................ $ 663,390 625,835
========= =======
See accompanying notes to consolidated financial statements.
28
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except share and per share data)
2000 1999 1998
--------- --------- ---------
Interest income:
Interest and fees on loans..................... $ 40,407 36,759 34,600
Interest and dividends on investment securities
available for sale:
U.S. Treasury and U.S. Government agencies... 1,292 953 682
State and municipal.......................... 3,166 3,402 591
Mortgage-backed securities................... 1,628 1,620 333
Interest and dividends on investment securities
held to maturity:
U.S. Treasury and U.S. Government agencies... -- -- 934
State and municipal.......................... -- -- 1,952
Mortgage-backed securities................... -- -- 1,408
Interest on federal funds sold............... 240 269 211
Dividends on FHLB stock...................... 140 139 118
--------- --------- ---------
Total interest income....................... 46,873 43,142 40,829
--------- --------- ---------
Interest expense:
Interest on deposits.......................... 18,034 15,151 15,157
Interest on securities sold under agreements
to repurchase................................ 1,111 564 639
Interest on federal funds purchased........... 449 158 123
Interest on commercial paper (Master notes)... 789 526 521
--------- --------- ---------
Total interest expense.................... 20,383 16,399 16,440
--------- --------- ---------
Net interest income....................... 26,490 26,743 24,389
Provision for loan losses....................... 3,880 2,431 1,877
--------- --------- ---------
Net interest income after provision for
loan losses.............................. 22,610 24,312 22,512
--------- --------- ---------
Non-interest income:
Service charges on deposit accounts........... 4,647 3,878 3,449
Fees for trust services....................... 1,968 1,968 1,343
Gains on sales of loans....................... 70 230 269
Investment securities gains................... 131 32 150
Other income.................................. 2,735 1,961 1,257
--------- --------- ---------
Total non-interest income................. 9,551 8,069 6,468
--------- --------- ---------
Non-interest expense:
Salaries and other personnel.................. 10,682 10,255 9,428
Net occupancy................................. 1,970 1,922 1,793
Furniture and equipment....................... 2,214 2,081 1,768
FDIC assessment............................... 111 132 206
Postage and supplies.......................... 1,144 1,155 1,081
Marketing and advertising..................... 719 776 720
Telephone..................................... 754 792 601
Cardholder processing expense................. 563 521 355
Sales finance losses.......................... 557 -- --
Other expense................................. 3,835 3,640 3,178
--------- --------- ---------
Total non-interest expense................ 22,549 21,274 19,130
--------- --------- ---------
Income before income taxes................ 9,612 11,107 9,850
Income tax provision........................... 2,637 3,038 3,000
--------- --------- ---------
NET INCOME................................ $ 6,975 8,069 6,850
========= ========= =========
Increase in fair value of ESOP stock...... -- -- (948)
--------- --------- ---------
Net income on common shares not subject to
put/call................................. $ 6,975 8,069 5,902
========= ========= =========
Per share data:
Net income per common share-basic, not subject
to put/call.................................. $ 1.12 1.30 1.05
========= ========= =========
Net income per common share-dilutive, not
subject to put/call.......................... $ 1.09 1.26 1.02
========= ========= =========
Cash dividends declared....................... $ 0.37 0.32 0.25
========= ========= =========
Weighted average common shares outstanding-
basic........................................ 6,241,775 6,208,750 6,178,318
========= ========= =========
Weighted average common shares outstanding-
basic, not subject to put/call............... 6,241,775 6,208,750 5,631,040
========= ========= =========
Weighted average common shares outstanding-
dilutive, not subject to put/call............ 6,422,457 6,386,912 5,776,208
========= ========= =========
See accompanying notes to consolidated financial statements.
29
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except share data)
Common
Accumulated Stock
Other Subject
Capital Comprehensive to
Common Surplus Retained Income Put/call
Stock (Deficit) Earnings (Loss), Net Option Total
-------- --------- -------- ------------- -------- ------
Balance at December 31,
1997................... $ 30,896 56 5,471 193 (3,784) 32,832
Net income.............. -- -- 6,850 -- -- 6,850
Other comprehensive
income, net of tax:
Unrealized holding
gains arising during
period, net of tax
effect of $143....... -- -- -- -- -- 229
Less: reclassification
adjustment for gains
included in net
income, net of tax
effect of $58........ -- -- -- -- -- (92)
Net unrealized gains
on investment
securities........... -- -- -- 137 -- --
------
Comprehensive income.... -- -- -- -- -- 6,987
------
Cash dividends
declared............... -- -- (1,544) -- -- (1,544)
Issuance of 29,200
shares in connection
with stock options..... 146 (42) -- -- -- 104
Retirement of 8,914
shares of common
stock.................. (45) (33) -- -- -- (78)
Change in fair value of
common stock subject to
put/call option........ -- -- -- -- (948) (948)
-------- --- ------ ------ ------ ------
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 losses
on investment
securities........... -- -- -- (2,727) -- --
------
Comprehensive income.... -- -- -- -- -- 5,342
------
Cash dividends
declared............... -- -- (1,956) -- -- (1,956)
Issuance of 27,444
shares in connection
with stock options..... 137 19 -- -- -- 156
Expiration of put/call
option on common stock
subject to put/call.... -- -- -- -- 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
loss, 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 stock options..... 145 23 -- -- -- 168
-------- --- ------ ------ ------ ------
Balance at December 31,
2000................... $ 31,279 23 21,555 (264) -- 52,593
======== === ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
30
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
-------- ------- -------
Cash flows from operating activities:
Net income....................................... $ 6,975 8,069 6,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 2,284 2,580 2,758
Gain on sale of investment securities........... (131) (32) (150)
Gain on sale of loans........................... (70) (230) (269)
Provision for loan losses....................... 3,880 2,431 1,877
Origination/acquisition of loans held for sale.. (9,303) (28,520) (33,927)
Sale of loans held for sale..................... 9,931 29,703 32,074
Provision (credit) for deferred taxes........... 392 (57) (42)
Change in accrued interest receivable........... (581) (149) (509)
Change in other assets.......................... 267 (3,174) (2,581)
Change in other liabilities, net................ (33) 1,101 921
-------- ------- -------
Net cash provided by operating activities...... 13,611 11,722 7,002
-------- ------- -------
Cash flows from investing activities:
Purchase of investment securities held to
maturity........................................ -- -- (1,559)
Purchase of investment securities available for
sale............................................ (10,000) (41,032) (38,971)
Proceeds from maturities of investment securities
held to maturity................................ -- -- 6,533
Proceeds from maturities of investment securities
available for sale.............................. 7,320 12,865 1,717
Proceeds from sale of investment securities
available for sale.............................. 8,954 21,359 8,594
Principal paydowns on mortgage-backed securities
available for sale.............................. 5,448 8,116 8,480
Principal paydowns on mortgage-backed securities
held to maturity................................ -- -- 656
Purchase of Federal Home Loan Bank stock......... -- (192) (89)
Net increase in loans outstanding................ (57,287) (34,690) (43,850)
Increase in premises and equipment, net.......... (1,767) (3,574) (2,345)
-------- ------- -------
Net cash used in investing activities.......... (47,332) (37,148) (60,834)
-------- ------- -------
Cash flows from financing activities:
Net increase in deposits......................... 34,342 23,463 47,957
Acquisition of deposits, net..................... -- 12,636 2,029
Net increase (decrease) in securities sold under
agreements to repurchase........................ 902 (2,609) 9,406
Net increase (decrease) in commercial paper
(Master notes).................................. 2,786 1,714 (430)
Increase (decrease) in federal funds purchased... (7,800) 7,800 (1,500)
Proceeds from issuance of common stock........... 168 156 104
Retirement of common stock....................... -- -- (78)
Dividends paid................................... (2,310) (1,956) (1,544)
-------- ------- -------
Net cash provided by financing activities...... 28,088 41,204 55,944
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (5,633) 15,778 2,112
Cash and cash equivalents at beginning of year..... 43,817 28,039 25,927
-------- ------- -------
Cash and cash equivalents at end of year........... $ 38,184 43,817 28,039
======== ======= =======
Supplemental information:
Cash paid during the year for:
Interest......................................... $ 20,093 16,300 16,470
======== ======= =======
Income taxes..................................... $ 1,714 3,423 2,622
======== ======= =======
Supplemental schedule of non-cash investing and
financing transactions:
Change in unrealized gain (loss) on investment
securities available for sale, before tax....... $ 3,469 (4,434) 223
======== ======= =======
Transfer of investment securities held to
maturity to available for sale.................. $ -- 66,455 --
======== ======= =======
Loans transferred to other real estate owned..... $ 6 335 189
======== ======= =======
Loans charged-off................................ $ 4,987 1,973 1,362
======== ======= =======
See accompanying notes to consolidated financial statements.
31
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") and to general practices
within the banking industry. The preparation of the financial statements in
conformity with GAAP requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements. In addition, they affect the reported
amounts of income and expense during the reporting period. Actual results
could differ from these estimates and assumptions.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Palmetto Bank (the "Bank"). The Bank provides
a full range of banking services, including the taking of deposits and the
making of loans. Palmetto Capital, Inc. ("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.
Certain amounts for prior years have been reclassified to conform to the
2000 presentation. These reclassifications have no effect on shareholders'
equity or net income as previously reported.
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, 2000 or 1999.
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, 2000 and 1999. 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 $48,000 in
lines of credit from the FHLB. There were no advances on these lines at
December 31, 2000 or 1999.
Investment Securities
The Bank accounts for its investment securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values--other than those
accounted for under the equity
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 is 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, 2000.
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, 2000 and 1999, the Company has loans held for sale of $611
and $1,169, respectively. Loans serviced for the benefit of others amounted to
$133,282, $141,385 and $141,086 at December 31, 2000, 1999 and 1998,
respectively. Most of these loans are serviced for Federal Home Loan Mortgage
Corporation (FHLMC).
The Bank recognizes mortgage servicing rights (MSR's) in accordance with
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, an Amendment of SFAS No. 122. The statement
requires the recognition of a separate asset for the right to service mortgage
loans for others, regardless of how those rights were acquired. Further, it
requires assessment of impairment based on fair value. The Company evaluates
these rights quarterly for possible impairment.
Included in other assets on the consolidated balance sheet, the Company had
net MSR's of $1,086 and $1,111 at December 31, 2000 and 1999, respectively.
The Company amortized $167, $488 and $795 of these MSR's during the years
ended December 31, 2000, 1999 and 1998, respectively. The fair value of the
mortgage servicing rights are determined considering market prices for similar
MSR's and on the discounted anticipated future net cash flows considering
market consensus, loan prepayment predictions, historical prepayment rates,
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest rates, and other economic factors. For purposes of measuring the
impairment, the Company stratifies the MSR's based on the predominant risk
characteristics of the underlying loans, including interest rate, loan type,
and amortization type (fixed rate or adjustable rate). To the extent that the
carrying value of MSR's exceeds this fair value by individual stratum, a
valuation allowance is established. The allowance may be adjusted in the
future as the values of the MSR's increase or decrease. The cost of MSR's is
amortized over the estimated period of net servicing revenues, considering
historical industry-average prepayment rates.
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.
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. When this
doubt no longer exists, cash receipts are applied under the contractual terms
of the loan agreement first to principal and then to interest income. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries of any amounts previously
charged off.
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 loan loss reserves.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allowance for Loan Losses
Additions to the allowance for loan losses are based on management's
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, and such other factors which, in management's judgment,
deserve recognition in estimating loan losses. Loans are charged-off when, in
the opinion of management, they are deemed to be uncollectible. Recognized
losses are charged against the allowance, and subsequent recoveries are added
to the allowance. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. The allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustment, based upon
information that is available to them at the time of their examination.
Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation
and amortization. Depreciation is recorded using the straight-line method over
the estimated useful life of the related asset as follows: buildings, 12 to 39
years; and furniture and equipment, 5 to 12 years. Amortization of leasehold
improvements is recorded using the straight-line method over the lesser of the
estimated useful life of the asset or the term of the lease. Maintenance and
repairs are charged to operating expense as incurred.
Foreclosed Properties
Property acquired through foreclosure is included in other assets and
amounted to $6 and $267, at December 31, 2000 and 1999, respectively. Such
property is recorded at the lower of cost or fair value minus estimated
selling costs. Gains and losses on the sale of foreclosed properties and
write-downs resulting from periodic reevaluation are charged to other
operating expenses.
Income Taxes
Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Intangibles
Included in other assets are certain intangibles related to various
acquisitions. At December 31, 2000 and 1999, premium on deposits acquired
amounted to $510 and $637, respectively, net of amortization, which is being
amortized principally over 10 years using the double-declining balance method.
At December 31, 2000 and 1999, goodwill of approximately $4,346 and $4,682,
respectively, net of amortization, related to different 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
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Now that 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 Share
Net income per share--basic, not subject to put/call and net income per
common share--dilutive, not subject to put/call are calculated based on SFAS
No. 128, as discussed in note 12.
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 11).
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, 2000 and 1999, the Bank had $1,879 and $1,371,
respectively, outstanding in federal funds sold. The daily averages of these
outstanding agreements during 2000 and 1999 were $3,340 and $5,287,
respectively. The maximum amount of these outstanding agreements at any month-
end during 2000 and 1999 were $6,879 and $13,061, respectively.
(3) Investment Securities Held to Maturity
The amortized cost and fair values of investment securities held to
maturity as of December 31 are summarized as follows:
1998
--------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Government agencies.............. $ 10,985 44 -- 11,029
State and municipal................... 36,685 2,101 -- 38,786
Mortgage-backed securities............ 18,785 151 (14) 18,922
-------- ----- --- ------
$ 66,455 2,296 (14) 68,737
======== ===== === ======
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Investment Securities Available for Sale
The amortized cost and fair values of investment securities available for
sale as of December 31 are summarized as follows:
2000
--------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury and U.S. Government
agencies.......................... $ 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
========= === ====== =======
1998
--------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury......................... $ 6,500 205 -- 6,705
State and Municipal................... 27,436 366 (94) 27,708
Mortgage-backed securities............ 11,615 70 (11) 11,674
-------- --- ---- ------
$ 45,551 641 (105) 46,087
======== === ==== ======
During the year ended December 31, 2000, the Company had realized gains of
$133 and realized losses of $2 on sales of investment securities available for
sale; compared to realized gains of $32 and no realized losses in 1999 on
sales of investment securities available for sale. During 1998, the realized
gains amounted to $150, 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, 2000:
Due After Due After
Due One Year Five Years
Within Through Through Due After
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield
-------- ----- ---------- ----- ---------- ----- --------- -----
U.S. Treasury and U. S.
Government Agencies.... $ 2,492 5.70% 10,040 6.67% 4,964 6.22% -- --
State and municipals.... 2,825 8.60 9,714 8.31 16,761 7.10 28,993 6.76
Mortgage-backed
securities............. 696 4.86 15,527 6.37 6,589 6.22 -- --
------- ---- ------ ---- ------ ---- ------ ----
Fair value total........ $ 6,013 6.99% 35,281 6.98% 28,314 6.74% 28,993 6.76%
======= ==== ====== ==== ====== ==== ====== ====
Amortized cost.......... $ 5,999 35,027 28,397 29,607
======= ====== ====== ======
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investment securities available for sale with an aggregate carrying value
of approximately $82,622 and $80,092 at December 31, 2000 and 1999,
respectively, are pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required or permitted by
law.
(5) Loans
A summary of loans, by classification, as of December 31 follows:
December 31,
-----------------------------------------
2000 1999 1998 1997 1996
--------- ------- ------- ------- -------
Commercial, financial and
agricultural................... $ 123,727 107,934 93,343 81,678 68,616
Real estate-construction........ 14,321 13,373 10,341 8,799 9,598
Real estate-mortgage............ 283,541 231,637 215,709 195,462 181,775
Installment loans to
individuals.................... 76,653 92,813 93,873 81,646 72,997
--------- ------- ------- ------- -------
Total........................... $ 498,242 445,757 413,266 367,585 332,986
========= ======= ======= ======= =======
Non-accrual loans included
above.......................... $ 3,031 1,521 1,485 718 1,113
========= ======= ======= ======= =======
The foregone interest income related to loans on non-accrual amounted to
$384, $240 and $130 for the years ended December 31, 2000, 1999 and 1998,
respectively. Interest income recognized on loans on non-accrual amounted to
$14, $7 and $5 for the years ended December 31, 2000, 1999 and 1998,
respectively.
The following is a summary of activity affecting the allowance for loan
losses for the years ended December 31:
2000 1999 1998
------- ------ ------
Balance at beginning of year........................ $ 6,362 5,795 5,152
Provision for loan losses........................... 3,880 2,431 1,877
Loan recoveries..................................... 191 109 128
Loans charged-off................................... (4,987) (1,973) (1,362)
------- ------ ------
Balance at end of year.............................. $ 5,446 6,362 5,795
======= ====== ======
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. Impaired loans are included in the non-
accrual numbers above.
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.
At December 31, 1998, impaired loans amounted to approximately $62. During
1998, the average recorded investment in impaired loans was approximately
$115, and there is $62 included in the allowance for loan losses related to
impaired loans at December 31, 1998.
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.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, 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,
2000 as follows:
Home equity loans................................................ $10,546
Credit cards..................................................... 29,669
Commercial real estate development............................... 21,118
Other unused lines of credit..................................... 27,430
-------
$88,763
=======
Standby letters of credit........................................ $ 1,834
=======
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.
(6) Premises and Equipment, Net
A summary of premises and equipment, net, as of December 31 follows:
2000 1999
-------- -------
Land.................................................... $ 3,025 2,775
Buildings and leasehold improvements.................... 13,336 12,939
Furniture and equipment................................. 13,750 12,937
-------- -------
30,111 28,651
Less accumulated depreciation and amortization.......... (13,630) (12,332)
-------- -------
Premises and equipment, net............................. $ 16,481 16,319
======== =======
(7) 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:
2000 1999 1998
---- ---- ----
Balance at beginning of year............................ $234 229 62
Aggregate additions charged and reductions credited to
operations............................................. (233) 5 167
Aggregate direct writedowns charged against allowance... -- -- --
---- --- ---
Balance at end of year.................................. $ 1 234 229
==== === ===
(8) Deposits
A summary of deposits, by type, as of December 31 follows:
2000 1999
--------- -------
Transaction accounts.................................... $ 218,066 206,606
Savings deposits........................................ 30,468 30,975
Insured money market accounts........................... 66,052 59,768
Time deposits over $100................................. 63,844 53,837
Other time deposits..................................... 194,236 187,138
--------- -------
Total deposits........................................ $ 572,666 538,324
========= =======
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest paid on time deposits of $100 or more amounted to $2,870, $2,273,
and $2,636 for the years ended December 31, 2000, 1999 and 1998, respectively.
The following table displays the aggregate amounts of time deposits with
maturities for the years following December 31, 2000:
Maturing within one year....................................... $ 216,452
Maturing after one year through two years...................... 28,202
Maturing after two years through three years................... 5,943
Maturing after three years through four years.................. 1,061
Maturing after four years through five years................... 6,358
Maturing after five years...................................... 64
---------
Total........................................................ $ 258,080
=========
(9) Short-Term Borrowings
2000 1999 1998
------- ------ ------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
WITH CUSTOMERS
Amount outstanding at year-end...................... $12,733 7,769 11,630
Average amount outstanding during year.............. 13,842 15,291 16,112
Maximum amount outstanding at any month-end......... 16,759 20,762 18,127
Weighted average rate paid at year-end.............. 4.15% 1.81% 2.81%
Weighted average rate paid during the year.......... 4.96% 3.40% 3.97%
Bank of America holds the securities underlying these agreements in the
Bank's name in safekeeping for the benefit of the Bank's customers.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
WITH A BANK
Amount outstanding at year-end...................... $ 7,190 11,252 10,000
Average amount outstanding during year.............. 6,193 1,277 438
Maximum amount outstanding at any month-end......... 12,625 11,252 10,000
Weighted average rate paid at year-end.............. 6.65% 5.96% 5.32%
Weighted average rate paid during the year.......... 6.88% 5.96% 5.32%
The securities underlying these agreements are held in the Bank's name in
safekeeping by Sun Trust for the benefit of the Bank.
FEDERAL FUNDS PURCHASED
Amount outstanding at year-end...................... $ -- 7,800 --
Average amount outstanding during year.............. 6,361 2,727 2,197
Maximum amount outstanding at any month-end......... 28,000 15,000 9,200
Weighted average rate paid at year-end.............. -- 5.13% --
Weighted average rate paid during the year.......... 7.06% 5.79% 5.60%
COMMERCIAL PAPER (MASTER NOTES)
Amount outstanding at year-end...................... $15,359 12,573 10,859
Average amount outstanding during year.............. 15,945 15,273 12,668
Maximum amount outstanding at any month-end......... 17,850 17,035 14,084
Weighted average rate paid at year-end.............. 4.40% 2.06% 3.06%
Weighted average rate paid during the year.......... 4.95% 3.44% 4.11%
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(10) Income Taxes
Components of income tax provision expense/(benefit) for the years ended
December 31 are as follows:
2000 1999 1998
------- ----- -----
Current:
Federal.............................................. $ 1,909 2,724 2,704
State................................................ 336 371 338
------- ----- -----
2,245 3,095 3,042
------- ----- -----
Deferred:
Federal.............................................. 392 (57) (42)
State................................................ -- -- --
------- ----- -----
392 (57) (42)
------- ----- -----
Total.............................................. $ 2,637 3,038 3,000
======= ===== =====
The effective tax rates for the years ended December 31 vary from the
Federal statutory rates as follows:
2000 1999 1998
----- ---- ----
U.S. Federal income tax rates............................. 34.0% 34.0% 34.0%
Changes from statutory rates resulting from:
Tax-exempt interest income.............................. (10.1) (9.7) (8.2)
Expenses not deductible for tax purposes................ .8 .6 .7
State taxes, net of Federal income tax benefit.......... 2.3 2.2 2.3
Other................................................... .4 .3 1.7
----- ---- ----
Effective tax rates....................................... 27.4% 27.4% 30.5%
===== ==== ====
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, are presented below.
2000 1999
------ ------
Deferred tax assets:
Loan loss reserves....................................... $1,677 1,904
Basis of intangible assets for tax purposes in excess of
basis for financial reporting........................... 169 232
Unrealized loss on securities available for sale......... 164 1,500
Other.................................................... 151 108
------ ------
Total gross deferred tax assets........................ 2,161 3,744
Less valuation allowance............................... -- --
------ ------
Net deferred tax assets................................ 2,161 3,744
------ ------
Deferred tax liabilities:
Fixed assets, due to depreciation differences............ (698) (667)
Deferred loan costs deducted for tax purposes as
incurred................................................ (578) (573)
Deferred loan fees recognized under the principal
reduction method for tax purposes....................... (545) (497)
Prepaid pension expense.................................. (497) (436)
Other.................................................... (10) (10)
------ ------
Total gross deferred tax liabilities................... (2,328) (2,183)
------ ------
Net deferred tax asset (liability)..................... $ (167) 1,561
====== ======
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 loss on securities
available for sale of $1,336 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 $392.
No valuation allowance for deferred tax assets has been established at
either December 31, 2000 or 1999. 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 1997 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.
(11) Employee Benefit Plans
(a) The Bank has a noncontributory defined benefit pension plan which
covers all full-time employees who have at least twelve months
continuous service and have attained age 21. The plan is designed to
produce a designated retirement benefit, and benefits are fully vested
at five years or more of service. No vesting occurs with less than five
years of service. The Bank's Trust Department administers the plan.
Contributions to the plan are made as required by the Employee
Retirement Income Security Act of 1974.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
2000 1999
------- -----
Change in benefit obligation
Benefit obligation at beginning of year.................. $ 5,159 5,056
Service cost............................................. 356 343
Interest cost............................................ 400 348
Actuarial loss (gain).................................... 144 (486)
Benefits paid............................................ (188) (102)
------- -----
Benefit obligation at end of year........................ $ 5,871 5,159
======= =====
Change in plan assets
Fair value of plan assets at beginning of year........... 6,422 5,539
Actual return on plan assets............................. 24 491
Employer contribution.................................... 334 494
Benefits paid............................................ (188) (102)
------- -----
Fair value of plan assets at end of year................. $ 6,592 6,422
------- -----
Funded status.............................................. 721 1,263
Unrecognized prior service cost............................ 51 60
Unrecognized net actuarial loss............................ 747 104
Unrecognized transition.................................... (52) (78)
------- -----
Prepaid benefit cost included in other assets.............. $ 1,467 1,349
======= =====
2000 1999 1998
----- ---- ----
Components of net periodic benefit cost:
Service cost.......................................... $ 343 335 237
Interest cost......................................... 348 310 249
Expected return on plan assets........................ (463) (404) (328)
Amortization of transition asset...................... (26) (26) (26)
Amortization of prior service cost.................... 9 9 9
Amortization of loss.................................. -- 7 --
----- ---- ----
Net periodic benefit cost............................. $ 211 231 141
===== ==== ====
Weighted-average assumptions at December 31:
Discount rate......................................... 7.75% 7.75% 7.00%
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%
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, 2000
and 1999, 534,000 and 494,000 shares, respectively, had been granted
under these plans.
At December 31, 2000 and 1999, there were 92,000 and 132,000 remaining
shares, respectively, available for grant under the Stock Option Plans.
Stock option activity for these plans is summarized in the following
table:
Stock Weighted-Average
Options Exercise Price
------- ----------------
Outstanding at December 31, 1997................. 116,000 $4.47
------- -----
Granted.......................................... 200,000 8.75
Exercised........................................ (29,200) 3.58
------- -----
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
------- -----
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life Price at 12/31/00 Price
--------------- ----------- ----------- --------- ----------- ---------
$3.92-4.13 17,956 1.64 years $4.05 17,956 $4.05
$4.52-4.85 17,500 3.00 years 4.52 17,500 4.52
$6.88-8.75 195,000 8.18 years 8.65 22,320 8.45
$13.00 30,000 10.00 years 13.00 6,000 13.00
------- ----------- ----- ------ -----
Total 260,456 7.59 years $8.55 63,776 $6.56
======= =========== ===== ====== =====
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 2000, 1999
and 1998.
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.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The per-share weighted average fair values of stock options granted in
2000, 1999 and 1998 were $5.15, $4.30 and $3.34, respectively. The fair
values were estimated as of the respective grant dates using the Black-
Scholes option-pricing model. Input variables used in the model
included weighted-average risk free interest rates of 6.41%, 5.65% and
5.57%, respectively; expected dividend yields of 1.40%, 1.30% and
1.40%, respectively; and expected volatility factors of 20.5%, 21.30%
and 22.20%, 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
2000, 1999 and 1998 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:
2000 1999 1998
------ ------ ------
Net income--as reported.............................. $6,975 $8,069 $6,850
Net income--pro forma................................ 6,863 7,984 6,771
Net income per common share-basic, not subject to
put/call--as reported............................... 1.12 1.30 1.05
Net income per common share-basic, not subject to
put/call--pro forma................................. 1.10 1.29 1.03
Net income per common share-dilutive, not subject to
put/call--as reported............................... 1.09 1.26 1.02
Net income per common share-dilutive, not subject to
put/call--pro forma................................. 1.07 1.25 1.01
The pro forma effects may not be representative of the effects on
reported net income for future years as most of the Company's employee
stock option grants vest in cumulative increments over a period of five
years.
(12) Earnings per 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, 2000, 1999 and 1998:
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
====== ========= =====
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
1998
Basic EPS:
Income available to common
stockholders.......................... $5,902 5,631,040 $1.05
------ --------- -----
Effect of dilutive securities: stock
options............................... -- 145,168 --
Diluted EPS:
Income available to common stockholders
plus assumed exercises of stock
options............................... $5,902 5,776,208 $1.02
====== ========= =====
(13) Related Party Transactions
Certain of the Company's directors and executive officers are also
customers of the Bank who, including their related interests, were indebted to
the Bank in the approximate amounts of $2,524 and $2,648 at December 31, 2000
and 1999, respectively. From January 1 through December 31, 2000, these
directors and executive officers and their related interests borrowed $2,042
and repaid $2,166. In the opinion of management, these loans do not involve
more than the normal risk of collectibility and do not present other
unfavorable features.
(14) Commitments and Contingencies
On December 31, 2000, 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:
2001............................................................... $ 676
2002............................................................... 674
2003............................................................... 595
2004............................................................... 462
2005............................................................... 177
Subsequent years................................................... 1,406
------
$3,990
======
Rental expense was $768, $469 and $417 for the years ended December 31,
2000, 1999 and 1998, respectively.
In the normal course of business, the Company and subsidiary are
periodically involved in legal proceedings. In the opinion of the Company's
management, none of these proceedings is likely to have a materially adverse
effect on the accompanying consolidated financial statements.
(15) 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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under Statement 107, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of the assets and liabilities that are not financial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments:
(a) Cash and Due From Banks
The carrying value approximates fair value.
(b) Investment Securities 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, 2000 and
1999, 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 5 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 notes), Federal Funds Sold and Federal Funds Purchased
The carrying amount approximates fair value due to the short-term nature
of these instruments.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2000 1999
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Cash and due from banks............ $ 36,305 36,305 42,446 42,446
======== ======= ======= =======
Federal funds sold................. $ 1,879 1,879 1,371 1,371
======== ======= ======= =======
Federal Home Loan Bank stock....... $ 1,733 1,733 1,733 1,733
======== ======= ======= =======
Investment securities available for
sale.............................. $ 98,601 98,601 106,772 106,772
======== ======= ======= =======
Loans held for sale................ $ 611 611 1,169 1,169
======== ======= ======= =======
Loans:
Commercial mortgage.............. $172,693 172,592 139,003 138,717
Commercial other................. 133,245 133,120 116,727 116,324
Real estate--mortgage............ 48,450 48,678 32,756 32,725
Installment mortgage............. 84,123 84,100 77,844 77,801
Installment other................ 59,731 58,668 79,427 78,253
-------- ------- ------- -------
Total loans, gross............. $498,242 497,158 445,757 443,820
======== ======= ======= =======
Deposits........................... $572,666 572,771 538,324 538,387
======== ======= ======= =======
Borrowings:
Securities sold under agreements
to repurchase................... $ 19,923 19,923 19,021 19,021
Commercial paper (Master notes).. 15,359 15,359 12,573 12,573
Federal funds purchased.......... -- -- 7,800 7,800
-------- ------- ------- -------
$ 35,282 35,282 39,394 39,394
======== ======= ======= =======
(16) 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, 2000, the Bank had available
retained earnings of approximately $10,177 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, 2000 and 1999, and the related condensed statements of
operations and cash flows for the three-year period ended December 31, 2000
are as follows:
Statements of Financial Condition
Assets 2000 1999
------ -------- ------
Cash......................................................... $ 366 197
Due from subsidiary.......................................... 15,359 12,573
Investment in wholly-owned bank subsidiary................... 51,462 44,604
Goodwill..................................................... 765 826
-------- ------
Total assets............................................... $ 67,952 58,200
======== ======
Liabilities and Shareholders' Equity
------------------------------------
Commercial paper (Master notes).............................. $ 15,359 12,573
-------- ------
Total liabilities.......................................... 15,359 12,573
-------- ------
Shareholders' equity......................................... 52,593 45,627
-------- ------
Total liabilities and shareholders' equity................. $ 67,952 58,200
======== ======
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Operations
2000 1999 1998
------ ----- -----
Interest income from commercial paper (Master
notes)............................................. $ 789 526 521
Dividends received from Bank........................ 2,310 1,956 1,544
Equity in undistributed earnings of subsidiary...... 4,725 6,174 5,376
Interest expense on commercial paper (Master
notes)............................................. (789) (526) (521)
Other operating expenses............................ (60) (61) (70)
------ ----- -----
Net income.......................................... $6,975 8,069 6,850
====== ===== =====
Statements of Cash Flows
2000 1999 1998
------- ------ ------
Cash flows from operating activities:
Net income...................................... $ 6,975 8,069 6,850
Decrease (increase) in due from subsidiary...... (2,786) (1,714) 430
Earnings retained by wholly owned subsidiary.... (4,725) (6,174) (5,376)
Amortization of goodwill........................ 61 62 61
------- ------ ------
Net cash provided (used) by operating
activities................................... (475) 243 1,965
------- ------ ------
Cash flows from financing activities:
Net change in commercial paper (Master notes)... 2,786 1,714 (430)
Proceeds from issuance of common stock.......... 168 156 104
Retirement of common stock...................... -- -- (78)
Dividends paid.................................. (2,310) (1,956) (1,544)
------- ------ ------
Net cash (used) provided by financing
activities................................... 644 (86) (1,948)
------- ------ ------
Net increase in cash.............................. 169 157 17
Cash at beginning of year......................... 197 40 23
------- ------ ------
Cash at end of year............................... $ 366 197 40
======= ====== ======
(17) 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, 2000, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 1999 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.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
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%
As of December 31, 1999:
- ------------------------
Total capital to risk-weighted
assets:
Company $48,376 10.68% $36,241 8.00% N/A N/A
Bank............................. $48,178 10.64% $36,241 8.00% $45,301 10.00%
Tier 1 capital to risk-weighted
assets:
Company $42,705 9.43% $18,120 4.00% N/A N/A
Bank............................. $42,507 9.38% $18,120 4.00% $27,181 6.00%
Tier 1 capital to average assets:
Company $42,705 6.96% $24,530 4.00% N/A N/A
Bank............................. $42,507 6.93% $24,532 4.00% $30,665 5.00%
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(18) Quarterly Financial Data (Unaudited)
Quarterly operating data for the years ended December 31 is summarized as
follows:
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
======= ===== ===== ===== ======
1999
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
Net interest income.................. $ 6,464 6,678 6,849 6,752 26,743
Provision for loan losses............ 491 540 741 659 2,431
Non-interest income.................. 1,749 1,977 2,192 2,151 8,069
Non-interest expense................. 4,995 5,203 5,306 5,770 21,274
Income tax provision................. 836 896 897 409 3,038
------- ----- ----- ----- ------
Net income........................... $ 1,891 2,016 2,097 2,065 8,069
======= ===== ===== ===== ======
Net income per share-basic........... $ 0.30 0.32 0.34 0.34 1.30
======= ===== ===== ===== ======
Net income per share-dilutive........ $ 0.30 0.32 0.33 0.31 1.26
======= ===== ===== ===== ======
51
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 "Named Executive Officers" on pages 2 through 4 in
the definitive Proxy Statement of the Company filed in connection with its
2001 Annual Meeting of the Shareholders, which is incorporated herein by
reference.
Item 11. Executive Compensation
The information required by this item is set forth under the headings
"Compensation of Directors and Executive Officers," "Aggregated Option
Exercises in Last Fiscal Year and Year-end Option Values" and "Security
Ownership of Certain Beneficial Owners and Management" on pages 5 through 7
and pages 11 through 12 in the definitive Proxy Statement of the Company filed
in connection with its 2001 Annual Meeting of Shareholders, which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" on pages 11
through 12 in the definitive Proxy Statement of the Company filed in
connection with its 2001 Annual Meeting of Shareholders, which is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the heading
"Certain Relationships and Related Transactions" on page 12 in the definitive
Proxy Statement of the Company filed in connection with its 2001 Annual
Meeting of Shareholders, which is incorporated herein by reference.
52
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 of-
fice of the Secretary of State of South Carolina: Incorpo-
rated by reference to Exhibit 3 to the Company's Registra-
tion Statement on Form S-4, Commission File No. 33-19367,
filed with the Securities and Exchange Commission on Decem-
ber 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 of-
fice of the Secretary of State of South Carolina: Incorpo-
rated by reference to Exhibit 4.1.3 to the Company's Regis-
tration 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 of-
fice of the Secretary of State of South Carolina: Incorpo-
rated by reference to Exhibit 3.1.5 to the Company's Quar-
terly Report on Form 10-Q for the fiscal quarter ended Sep-
tember 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 Re-
port 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 Re-
port 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 Ex-
hibits 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 ref-
erence to Exhibit 4.3 to the Company's Registration State-
ment 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.
53
Exhibit No. Description
----------- -----------
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: Incorpo-
rated by reference to Exhibit 10 (c) to the Company's Regis-
tration 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, filed with the Securi-
ties 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, 2000.
(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.
54
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.
/s/ L. Leon Patterson
By:__________________________________
L. Leon Patterson
Chairman and Chief
Executive Officer
/s/ Paul W. Stringer
__________________________________
Paul W. Stringer
President and Chief Operating
Officer
(Chief Accounting Officer)
Date: February 13, 2001
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 13, 2001
____________________________________
L. Leon Patterson
/s/ Paul W. Stringer Director February 13, 2001
____________________________________
Paul W. Stringer
/s/ W. Fred Davis, Jr. Director February 13, 2001
____________________________________
W. Fred Davis, Jr.
/s/ David P. George, Jr. Director February 13, 2001
____________________________________
David P. George, Jr.
Director
____________________________________
Michael D. Glenn
Director
____________________________________
John T. Gramling, II
Director
____________________________________
William S. Moore
Director
____________________________________
Sam B. Phillips, Jr.
/s/ James M. Shoemaker, Jr. Director February 13, 2001
____________________________________
James M. Shoemaker, Jr.
Director
____________________________________
Ann B. Smith
/s/ Edward Keith Snead III Director February 13, 2001
____________________________________
Edward Keith Snead III
/s/ J. David Wasson, Jr. Director February 13, 2001
____________________________________
J. David Wasson, Jr.
55
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
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
21.1 List of Subsidiaries of the Registrant
*Management contract or compensatory plan or arrangement.
Filed herewith.