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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............