-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AgWiPXPyWKHeiaaQ1Gq05uLSMMr69S7hpql6O/ddtfbRgwQWh/ZoUNJ9eTOoNguH +pl2XjXhXDChxzABimUL3w== 0001021408-02-006082.txt : 20020502 0001021408-02-006082.hdr.sgml : 20020501 ACCESSION NUMBER: 0001021408-02-006082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALMETTO BANCSHARES INC CENTRAL INDEX KEY: 0000706874 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742235055 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26016 FILM NUMBER: 02631151 BUSINESS ADDRESS: STREET 1: 301 HILLCREST DR STREET 2: P O BOX 49 CITY: LAURENS STATE: SC ZIP: 29360 BUSINESS PHONE: 8649844551 10-Q 1 d10q.txt PALMETTO BANCSHARES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q __X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 OR ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 0-26016 PALMETTO BANCSHARES, INC. ------------------------------------------- (Exact name of registrant as specified in its charter) South Carolina 74-2235055 ---------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 301 Hillcrest Drive Laurens, South Carolina 29360 ----------------------------------- (Address of principal executive offices) (Zip Code) (864) 984-4551 ----------------------------------- ( Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 2, 2001 ----------------------- ----------------------- Common stock, $5.00 par value 6,292,578 PALMETTO BANCSHARES, INC. Quarterly Report on Form 10-Q For the Quarter Ended March 31, 2002
INDEX Page No. - ----- -------- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 1 Consolidated Income Statements for the Three Months Ended March 31, 2002 and 2001 2 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the Three Months Ended March 31, 2002 and 2001 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 4 Notes to the Consolidated Interim Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11-12 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 - ----------
PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands, except per share data)
March 31, 2002 December 31, 2001 ---------------------------------------------------- Assets (unaudited) Cash and due from banks $ 36,079 $ 27,742 Federal funds sold 22,280 17,949 Federal Home Loan Bank stock, at cost 1,733 1,733 Investment securities available for sale (amortized cost of $104,763 and $94,708, in 2002 and 2001, respectively) 104,873 95,095 Loans held for sale 13,363 10,054 Loans 555,660 553,821 Less allowance for loan losses (5,744) (5,658) ---------------------------------------------------- Loans, net 549,916 548,163 Premises and equipment, net 19,522 19,175 Accrued interest 4,740 4,947 Other assets 12,014 10,421 ---------------------------------------------------- Total assets $ 764,520 $ 735,279 ==================================================== Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest-bearing $ 101,945 $ 102,679 Interest-bearing 565,695 542,621 ---------------------------------------------------- Total deposits 667,640 645,300 Securities sold under agreements to repurchase 16,798 15,313 Commercial paper (Master notes) 13,154 11,076 Other liabilities 6,225 4,522 ---------------------------------------------------- Total liabilities 703,817 676,211 ---------------------------------------------------- Shareholders' Equity: Common stock-$5.00 par value. Authorized 10,000,000 shares; 6,291,578 issued and outstanding in 2002; and 6,283,623 issued and outstanding in 2001 31,458 31,418 Capital surplus 29 26 Retained earnings 29,148 27,386 Accumulated other comprehensive income (loss) 68 238 ---------------------------------------------------- Total shareholders' equity 60,703 59,068 ---------------------------------------------------- Total liabilities and shareholders' equity $ 764,520 $ 735,279 ====================================================
See accompanying notes to consolidated interim financial statements. 1 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Income Statements (Unaudited) For the three months ended March 31, 2002 and 2001 (Dollars in thousands, except per share data)
2002 2001 --------------------------------------- Interest income: Interest and fees on loans $ 10,528 $ 10,832 Interest and dividends on investment securities available for sale: U.S. Treasury and U.S. Government agencies 311 272 State and municipal 635 691 Mortgage-backed securities 131 345 Interest on federal funds sold 58 142 Dividends on FHLB stock 26 35 --------------------------------------- Total interest income 11,689 12,317 --------------------------------------- Interest expense: Interest on deposits 3,267 5,099 Interest on securities sold under agreements to repurchase 41 282 Interest on federal funds purchased 1 15 Interest on commercial paper (Master notes) 34 136 --------------------------------------- Total interest expense 3,343 5,532 --------------------------------------- Net interest income 8,346 6,785 Provision for loan losses 900 850 --------------------------------------- Net interest income after provision for loan losses 7,446 5,935 Non-interest income: Service charges on deposit accounts 1,825 1,412 Fees for trust services 457 499 Gains on sales of loans 225 58 Investment securities gains 140 - Other income 724 633 --------------------------------------- Total non-interest income 3,371 2,602 Non-interest expense: Salaries and other personnel 3,679 3,074 Net occupancy 548 551 Furniture and equipment 635 570 FDIC assessment 28 27 Postage and supplies 382 354 Marketing and advertising 255 225 Telephone 193 189 Cardholder processing expense 141 152 Sales finance losses 24 20 Other expense 1,288 1,035 --------------------------------------- Total non-interest expense 7,173 6,197 --------------------------------------- Income before income taxes 3,644 2,340 --------------------------------------- Income tax provision 1,189 670 --------------------------------------- Net income $ 2,455 $ 1,670 ======================================= Net income per share-basic $ 0.39 $ 0.27 Net income per share-dilutive $ 0.38 $ 0.26 Cash dividends declared per share $ 0.11 $ 0.10
See accompanying notes to consolidated interim financial statements. 2 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Unaudited) For the three months ended March 31, 2002 and 2001 (Dollars in thousands except number of shares)
Accumulated Capital Other Common Surplus Retained Comprehensive Stock (Deficit) Earnings Loss, Net Total ------ --------- -------- ------------- ----- Balance at December 31, 2000 31,279 23 21,555 (264) 52,593 Net income 1,670 1,670 Other comprehensive income, net of tax: Unrealized holding losses arising during period, net of tax effect of $585 934 Less: reclassification adjustment for gains included in net income, net of tax effect of $0 - Net unrealized losses on securities 934 --------- Comprehensive income 2,604 --------- Cash dividend declared (626) (626) Issuance of 4,000 shares in connection with stock options 20 15 35 ----------------------------------------------------- Balance at March 31, 2001 31,299 38 22,599 670 54,606 ===================================================== Balance at December 31, 2001 31,418 26 27,386 238 59,068 Net income 2,455 2,455 Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of tax effect of $53 (84) Less: reclassification adjustment for gains included in net income, net of tax effect of $54 (86) Net unrealized gains on securities (170) --------- Comprehensive income 2,285 --------- Cash dividend declared (693) (693) Issuance of 7,955 shares in connection with stock options 40 3 43 ----------------------------------------------------- Balance at March 31, 2002 31,458 29 29,148 68 60,703 =====================================================
See accompanying notes to consolidated interim financial statements. PALMETTO BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) For the three months ended March 31, 2002 and 2001 (Dollars in thousands)
2002 2001 ---------------------------------- Cash flows from operating activities: Net income $ 2,455 $ 1,670 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 588 533 Gain on sale of investment securities (140) - Provision for loan losses 900 850 Origination of loans held for sale (27,184) (12,291) Sale of loans held for sale 24,100 8,481 Gain on sale of loans (225) (58) Change in accrued interest receivable 207 286 Change in other assets (219) (391) Change in other liabilities, net 1,809 412 ---------------------------------- Net cash provided by (used in) operating activities 2,291 (508) Cash flows from investing activities: Purchase of investment securities available for sale (37,130) - Proceeds from maturities of investment securities available for sale 4,841 1,932 Proceeds from sale of investment securities available for sale 20,779 - Principal paydowns on mortgage-backed securities available for sale 1,451 1,568 Net increase in loans outstanding (4,043) (18,173) Purchases of premises and equipment, net (774) (1,108) ---------------------------------- Net cash used in investing activities (14,876) (15,781) Cash flows from financing activities: Net increase in deposit accounts 22,340 25,626 Net increase (decrease) in securities sold under agreements to repurchase 1,485 1,598 Net increase in commercial paper 2,078 (3,257) Proceeds from issuance of common stock 43 35 Dividends paid (693) (626) ---------------------------------- Net cash provided by financing activities 25,253 23,376 ---------------------------------- Net increase (decrease) in cash and cash equivalents 12,668 7,087 ---------------------------------- Cash and cash equivalents at beginning of the period 45,691 38,184 ---------------------------------- Cash and cash equivalents at end of the period $ 58,359 $ 45,271 ================================== Supplemental Information: Cash paid during the period for: Interest expense $ 3,573 $ 5,619 ================================== Income taxes 698 485 ================================== Supplemental schedule of non-cash investing and financing transactions: Change in unrealized gain (loss) on investment securities available for sale, before tax $ (276) $ 1,519 ================================== Loans transferred to other real estate owned 1,390 252 ================================== Loans charged -off 868 787 ==================================
See accompanying notes to consolidated interim financial statements. 4 PALMETTO BANCSHARES, INC. AND SUBSIDIARY Notes To Consolidated Interim Financial Statements 1. Basis of Presentation --------------------- The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in Palmetto Bancshares, Inc.'s (the "Company's") Annual Report on Form 10-K for the year ended December 31, 2001. In the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the entire year. 2. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, The Palmetto Bank (the "Bank"), and Palmetto Capital, Inc., the Bank's wholly owned subsidiary. The Bank provides a full range of banking services, including taking deposits and making loans. Palmetto Capital, Inc. offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital, Inc. also offers advisory services and variable rate annuities. In consolidation, all significant intercompany accounts and transactions have been eliminated. 3. Summary of Significant Accounting Policies ------------------------------------------ The significant accounting policies used by the Company are described in Note 1 to the Company's December 2001 Annual Report on Form 10-K. There have been no changes in these policies subsequent to the year ended December 31, 2001. 4. Earnings Per Share ------------------ The following table illustrates a reconciliation of the numerators and denominators of the basic and diluted per-share computations for net income for the three months ended March 31, 2002 and 2001 (dollars in thousands except per share numbers):
Income Shares Per-Share 2002 (Numerator) (Denominator) Amount ---- -------------------------------------- Basic EPS: ---------- Net income $2,455 6,287,279 $0.39 Effect of dilutive securities: stock options -- 186,537 -- -------------------------------------- Diluted EPS: ------------ Net income plus assumed exercises of stock options $2,455 6,473,816 $0.38 ====================================== Income Shares Per-Share 2001 (Numerator) (Denominator) Amount ---- -------------------------------------- Basic EPS: ---------- Net income $1,670 6,259,023 $0.27 Effect of dilutive securities: stock options -- 170,886 -- -------------------------------------- Diluted EPS: ------------ Net income plus assumed exercises of stock options $1,670 6,429,909 $0.26 =====================================
5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements - -------------------------- This document may contain certain "forward-looking statements," within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that represent the Company's expectations or beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to certain risks, uncertainties, and assumptions. Factors that could influence the matters discussed in certain forward-looking statements include the relative levels of market interest rates, loan prepayments and rates of change in deposit balances, the timing and amount of revenues that may be recognized by the Company, continuation of current revenue, expense and charge-off trends, legal and regulatory changes, and general changes in the economy. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected or projected. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation to update any forward-looking statements. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them. DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 2001 TO MARCH 31, 2002 Assets - ------ Total assets increased $29.2 million, or 4%, for the three month period ended March 31, 2002, primarily as a result of an increase in liquid assets. Liquid assets, which include cash, federal funds sold, and investments available for sale, increased by $22.4 million, or 16%, for the three-month period. This increase was attributable to the $8.3 million increase in cash and due from banks, the $9.8 million increase in investment securities available for sale, and the $4.3 million increase in federal funds sold. During the first three months of 2002, the Bank purchased $37.1 million of investment securities (available for sale), $25.6 million of the investment portfolio matured or was sold, and $1.4 million was paid down on mortgage backed securities held for sale. The Bank had a $170,000 change in pre-tax unrealized gains in its investment portfolio at March 31, 2002. Net loans increased by $1.8 million, or less than 1%, during the three-month period. Loan demand has remained flat during the first quarter due to the slower economy. Also, management's strategy during the quarter has been to avoid excessive loan growth fueled exclusively by low rate positions. The allowance for loan losses as a percentage of total loans increased slightly to 1.03% at March 31, 2002 from 1.02% at December 31, 2001. Management feels the allowance is adequate at March 31, 2002 because the Bank uses an allowance model that takes into account the risk grades of loans, delinquency trends, charge-off ratios and loan growth. The Bank has been making efforts to improve its underwriting standards, shift its emphasis toward higher-dollar, higher-quality loans, and charge off significant amounts of lower-quality loans. Non-performing loans (which consists of loans on non-accrual and loans greater than 90 days past due and still accruing) were $3.1 million at March 31, 2002, compared to $4.0 million at December 31, 2001. At March 31, 2002, the Company had $13.4 million in loans held for sale with commitments to sell these loans in April and May 2002. Because the interest rate environment has been favorable for mortgage loans and refinances, the Bank has been able to originate approximately $30.4 million in mortgage loans during the first three months of 2002, with over 75% being sold in the secondary market. The mortgage servicing rights related to the mortgage servicing department's activities were $1.7 million at March 31, 2002, which approximates their fair value. Loans serviced for the benefit of others amounted to $204.2 million at March 31, 2002. Other assets increased by $1.6 million, or 15%, from December 31, 2001 to March 31, 2002. Because of the increased sales of mortgage loans, mortgage servicing rights increased approximately $325,000, 6 while $196,000 of those rights were amortized. Other real estate increased by $1.4 million with the addition of nine properties. Liabilities and Shareholders' Equity - ------------------------------------ Total deposit balances increased by 3% during the three-month period, from $645.3 million to $667.6 million. There was an increase in all interest-bearing accounts, except IRAs. Securities sold under agreements to repurchase increased by $1.5 million, or 10%, and commercial paper associated with the alternative commercial sweep accounts (master note program) increased by $2.0 million, or 19%. These changes are the result of normal fluctuations in the accounts. Total shareholders' equity increased by $1.6 million, or 3%, for the three-month period as a result of comprehensive income of $2.3 million, less dividends paid of $693,000. The Company also added $43,000 to equity as the result of stock option exercises. During the three months ended March 31, 2002, the Company increased its dividends to stockholders to $.11 per share compared to $.10 per share in the first three months of 2001. Regulatory Capital - ------------------ As of March 31, 2002, the Company and the Bank were in compliance with each of the applicable regulatory capital requirements and met or exceeded the "well-capitalized" regulatory guidelines. The table below sets forth various capital ratios for the Company and the Bank: - -------------------------------------------------------------------------------- Adequately As of Capitalized Well-Capitalized 3/31/02 Requirement Requirement - -------------------------------------------------------------------------------- Company: - ------- Total Risk-based Capital 10.96% 8.00% 10.00% Tier 1 Risk-based Capital 9.94 4.00 6.00 Tier 1 Leverage Ratio 7.61 4.00 5.00 Bank: - ---- Total Risk-based Capital 10.86 8.00 10.00 Tier 1 Risk-based Capital 9.84 4.00 6.00 Tier 1 Leverage Ratio 7.53 4.00 5.00 LIQUIDITY AND ASSET/LIABILITY MANAGEMENT Liquidity - --------- The liquidity ratio is an indication of a company's ability to meet its short-term funding obligations. The Company's policy is to maintain a liquidity ratio between 10% and 25%. At March 31, 2002, the Company's liquidity ratio was 18.63%. 7 At March 31, 2002, the Bank had unused short-term lines of credit totaling approximately $37 million (which are withdrawable at the lender's option). At March 31, 2002, unused borrowing capacity from the Federal Home Loan Bank ("FHLB") totaled $76 million. The Bank has pledged assets to be used as collateral if the Bank takes advantage of the FHLB line of credit. Management believes that these sources are adequate to meet its liquidity needs and to maintain the liquidity ratio within policy guidelines. The Company has certain cash needs, including general operating expenses and the payment of dividends and interest on borrowings. The Company currently has no long-term debt outstanding and has declared and paid $0.11 per share in dividends so far in 2002. Although there can be no guarantee that any additional dividends will be paid in 2002, the Company plans to continue its quarterly dividend payments. At March 31, 2002, the Bank has issued commitments to extend credit of $96.0 million through various types of lending arrangements. All unused loan commitments are at adjustable rates that fluctuate with the prime rate or are at fixed rates that approximate market rates. The current amount of these commitments approximates their fair value. Liquidity is provided from the Company's subsidiary, the Bank. The Company and the Bank are subject to certain regulatory restrictions on the amount of dividends they are permitted to pay. The Bank's current total risk-based capital ratio is 10.86%. At March 31, 2002, the Bank had $4.9 million of excess retained earnings available to pay out dividends and still be considered "well-capitalized." Asset/Liability Management - -------------------------- 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. The following table is a summary of the Company's one year gap at March 31, 2002 (amounts in thousands): March 31, 2002 - -------------------------------------------------------------------------------- Interest-earning assets maturing or repricing within one year $ 216,414 Interest-bearing liabilities maturing or repricing within one year $ 364,585 - -------------------------------------------------------------------------------- Cumulative gap $(148,171) ================================================================================ Gap as a percentage of total assets (19.38)% 8 The above analysis does not take in to account any prepayments on mortgages, consumer or other loans, and securities. All maturities are stated in contractual terms. The Company's current GAP analysis reflects that in periods of increasing or decreasing interest rates, rate sensitive assets will reprice slower than rate sensitive liabilities. The Company's GAP analysis also shows that at the interest repricing of one year, the Company's net interest margin would be adversely impacted by an increase in market interest rates. This analysis, however, does not take into account the dynamics of the marketplace. GAP is a static measurement that assumes that if the prime rate increases by 100 basis points, all assets and liabilities that are due to reprice will increase by 100 basis points at the next opportunity. Because the Company's management feels that GAP analysis is a static measurement, it manages its interest income through its asset/liability strategies which focus on a net interest income model based on management's projections. The Company has a targeted net interest income range of plus or minus twenty percent based on a 300 basis point change over twelve months. The asset/liability committee meets weekly to address interest pricing issues, and this model is reviewed monthly. Management will continue to monitor its liability sensitive position in times of increasing interest rates, which might adversely affect its net interest margin. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Net Income - ---------- Net income for the three months ended March 31, 2002 and 2001 was $2.5 million and $1.7 million, respectively. Net income per common share-basic for the three months ended March 31, 2002 and 2001 was $0.39 and $0.27, respectively. Net income per common share-dilutive for the same periods was $0.38 and $0.26, respectively. Net Interest Income - ------------------- The largest component of the Company's net income is the Bank's net interest income, defined as the difference between gross interest and fees on earning assets, primarily loans and investment securities, and interest paid on deposits and borrowed funds. Net interest income is affected by the interest rates earned or paid and by volume changes in loans, securities, deposits and borrowed funds. For the three-month periods ended March 31, 2002 and 2001, net interest income was $8.3 million and $6.8 million, respectively. Earning assets averaged $685.3 million and $618.2 million during the first quarters of 2002 and 2001, respectively. The increase in volume was primarily due to the growth of loans. Although the volume of earning assets increased over the two comparative quarters, the yield on earning assets decreased during the same time period, from 8.08% to 6.92%. Average interest-bearing liabilities grew from $523.9 million at March 31, 2001 to $581.3 million at March 31, 2002. However, the cost of these funds shrunk 195 basis points, from 4.28% to 2.33% during the same time period. The dynamics of the yield on average earning assets and the cost of interest bearing liabilities have resulted in a positive growth in the average tax-equivalent net interest margin from 4.61% at March 31, 2001 to 5.07% at March 31, 2002. The underlying factor for the changes in the yields and rates on earning assets and costing liabilities has been the action of the Federal Reserve Open Market Committee during the past year. From January 2001 through the end of December 2001, the Federal Reserve cut interest rates four hundred and seventy five basis points. Although there have been no reductions during the first quarter of 2002, these reductions have continued to result in a much more favorable interest environment for the operations of the Company. Provision for Loan Losses - ------------------------- During the current quarter, the Company's provision for loan losses totaled $900,000, compared to $850,000 during the same period in the previous year. The provision is adjusted each month to reflect loan 9 volume growth and allow for loan charge-offs, recoveries and other factors which impact management's assessment of the adequacy of the allowance for loan losses. Management's objective is to maintain the allowance for loan losses at an adequate level to cover probable losses in the portfolio. Additions to the allowance for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, past loan loss experience, and such other factors, which in management's judgment deserve recognition in estimating loan losses. Annualized net charge-offs as a percentage of average total loans were .58% during the current quarter, compared to .69% for the same period last year. While management uses the best information available to make evaluations, future adjustments to the allowance in the form of provisions through the income statement may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment, based upon information that is available to them at the time of their examination. Non-interest Income - ------------------- Total non-interest income increased by $769,000, or 30%, for the three months ended March 31, 2002, as compared to the same period in 2001. Net NSF and overdraft charges totaled $1.3 million, increasing $381,000 from the comparable quarter in 2001. Net gains from the sale of mortgage loans totaled $225,000, increasing by $167,000 from the same quarter last year. The Company sold a portion of the investments held for sale resulting in a pre-tax gain of $140,000 during the current quarter; no investments were sold during the same quarter last year. Non-interest Expense - -------------------- Total non-interest expense increased by $976,000, or 16%, during the 2002 three-month period compared to the same period in 2001. $605,000 of the increase was a result of higher personnel costs, including salaries, related taxes and medical insurance premiums. At March 31, 2002, the Bank had 370 full-time equivalent employees compared to 355 full-time equivalent employees at March 31, 2001. Income Taxes - ------------ During the first quarter of 2002 and 2001, the Company's effective tax rate approximated 32.6% and 28.6%, respectively. The actual tax provision was $1.2 million during 2002 and $670,000 during 2001. Accounting and Reporting Matters - -------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. The Company adopted SFAS No. 141 on July 1, 2001 and does not expect the Statement to have a material impact on the financial statements in the future as the Company has always accounted for business combinations through the purchase method. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Currently, it is the Company's understanding that SFAS No. 142 does not apply to the acquisition of a commercial bank, a savings and loan association, a mutual savings bank, a credit union, other depository institutions having assets and liabilities of the same type as those institutions, and branches of such 10 enterprises. Intangible assets arising from these types of business combinations must conform to the guidance in SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions", and are thus excluded from the scope of SFAS No. 142. At December 31, 2001, the Company had unamortized intangible assets relating to core deposit premiums purchased of $382,000 as well as unamortized goodwill defined in SFAS 72 as an unidentifiable intangible asset ("Statement 72" goodwill) of $3.9 million. The Company plans to continue amortizing these assets as directed in SFAS No. 72. It is the Company's understanding that the FASB has undertaken a limited scope project to reconsider part of the guidance in SFAS No. 72, particularly the provision that requires recognition and amortization of an unidentifiable intangible asset. However, the Company has continued amortizing the "Statement 72" goodwill until receiving further guidance from the FASB. If it were determined that a commercial bank, a savings and loan association, a mutual savings bank, a credit union, or other depository institutions falls under the guidance of SFAS No. 142, the Company has conducted an initial impairment test based on market capitalization. Based on the results of the test, the Company believes does not have any additional impairment during the first quarter 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This SFAS supercedes prior pronouncements associated with impairment or disposal of long-lived assets. SFAS No. 144 establishes methodologies for assessing impairment of long-lived assets, including assets to be disposed of by sale or other means. The Company adopted the provisions of SFAS No. 144 on January 1, 2002 and does not expect the provisions to have a material impact on the Company's financial position. Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a further date are not expected to have a material impact on the consolidated financial statements upon adoption. On July 2, 2001, The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues". SAB 102 expresses the SEC's views on the development, documentation and application of a systematic methodology for determining the allowance for loan and lease losses in accordance with Generally Accepted Accounting Principles. The Company believes that it is currently in compliance with the requirements of SAB 102. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, deposit, borrowing and investing activities. Management actively monitors and manages its inherent rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk. This risk could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in interest rates. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the 11 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. At March 31, 2002, management believes that there have been no significant changes in market risk as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 12 PALMETTO BANCSHARES, INC. AND SUBSIDIARY PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- On January 19, 2001, M. Snyder's, Inc., an automobile dealership that has sold and assigned sales finance contracts to the Bank, filed suit against the Bank and Richard O. Lollis, a former employee of the Bank who was the manager of the sales finance department. The suit was filed in the Court of Common Pleas for Greenville County, South Carolina. M. Snyder's claims arise from the sales finance contracts and its business relationship with the Bank, including causes of action for alleged breach of contract, breach of fiduciary duty, fraud, negligent representation, breach of contract accompanied by fraudulent acts, unfair trade practices, negligence and negligent supervision; M. Snyder's seeks actual and consequential damages. The Bank has filed counterclaims against M. Snyder's based on, among other things, alleged breach of contract with fraudulent intent, fraud, misrepresentations, unfair trade practices, bad faith, procurement of breach of contracts by customers and conversion of assets properly belonging to the Bank. The Bank does not believe that M. Snyder's claims are well-founded and is vigorously pursuing its counterclaims and its defenses against the claims. In connection with the above lawsuit, the Bank has also filed a third party complaint against an employee of M. Snyder's, Inc. arising from his actions in dealing with sales finance contracts, including causes of action for fraud, misrepresentation and conversion. While the Bank does not anticipate a negative result from this lawsuit, based on the apparent claims being asserted by the plaintiff, there can be no assurance that a negative result might not have a material adverse effect on the Company's financial condition. The Company is not currently engaged in legal proceedings. In addition to the matter described above, from time to time the Bank is involved in legal proceedings incidental to its normal course of business as a bank. Management believes that none of these proceedings is likely to have a materially adverse effect on the business of the Company or the Bank. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Securities Holders ----------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PALMETTO BANCSHARES, INC. By: /s/ L. Leon Patterson - ---------------------- L. Leon Patterson Chairman and Chief Executive Officer /s/ Paul W. Stringer - ----------------------- Paul W. Stringer President and Chief Operating Officer (Chief Accounting Officer) Date: May 1, 2002 14 -----END PRIVACY-ENHANCED MESSAGE-----