PALMETTO BANCSHARES INC - 10-Q Quarterly Report

PALMETTO BANCSHARES, INC.
Table of Contents

			Page No.

PART I. FINANCIAL INFORMATION			3
	Item 1.	Financial Statements	3
	Item 2.	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
	Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION			30
	Item 1.	Legal Proceedings	30
	Item 2.	Changes in Securities and Use of Proceeds	30
	Item 3.	Defaults Upon Senior Securities	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30
	Item 5.	Other Information	30
	Item 6.	Exhibits and Reports on Form 8-K	30

SIGNATURES			31

CERTIFICATIONS PURSUANT TO 15 U.S.C. SECTION 7241			32

PALMETTO BANCSHARES, INC.
Consolidated Balance Sheets
(in thousands, except share data)

	March 31,		December 31,
	2003	2002	2002
	(unaudited)
ASSETS
Cash and due from banks	$ 32,953	36,079	32,608
Federal funds sold	14,479	22,280	5,485
Federal Home Loan Bank (FHLB) stock, at cost	1,868	1,733	1,733
Investment securities available for sale at fair value	113,138	104,873	115,108
Loans held for sale	11,093	13,363	11,851

Loans	646,628	555,660	625,542
Less allowance for loan losses	(6,771)	(5,744)	(6,402)
Loans, net	639,857	549,916	619,140

Premises and equipment, net	19,805	19,522	19,715
Accrued interest receivable	4,114	4,740	4,146
Other assets	15,792	12,014	15,206
Total assets	$ 853,099	764,520	824,992

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing	$ 116,615	101,945	114,573
Interest-bearing	622,144	565,695	607,418
Total deposits	738,759	667,640	721,991

Securities sold under agreements to repurchase	16,261	16,798	12,831
Commercial paper (Master notes)	16,965	13,154	14,839
Other liabilities	11,358	6,225	7,810
Total liabilities	783,343	703,817	757,471

Shareholders' equity
Common stock - par value $5.00 per share; authorized 10,000,000
shares; issued and outstanding 6,329,909, 6,291,578 and 6,324,659
at March 31, 2003 and 2002 and December 31, 2002, respectively.	31,650	31,458	31,623
Capital surplus	89	29	50
Retained earnings	36,314	29,148	34,173
Accumulated other comprehensive income, net of tax	1,703	68	1,675
Total shareholders' equity	69,756	60,703	67,521

Total liabilities and shareholders' equity	$ 853,099	764,520	824,992



See accompanying notes to consolidated interim financial statements.

PALMETTO BANCSHARES, INC.
Consolidated Statements of Income
(in thousands, except share data)

		For the three months ended March 31,
		2003	2002
		(unaudited)
Interest income
	Interest and fees on loans	$ 10,722	10,528
	Interest and dividends on investment securities available for sale
	U.S. Treasury and U.S. Government agencies	415	311
	State and municipal	382	635
	Mortgage-backed securities	209	131
	Interest on federal funds sold	35	58
	Dividends on FHLB stock	23	26
	Total interest income	11,786	11,689

Interest expense
	Interest on deposits, including retail repurchase agreements	2,804	3,308
	Interest on federal funds purchased	4	1
	Interest on commercial paper (Master notes)	23	34
	Total interest expense	2,831	3,343

	Net interest income	8,955	8,346

Provision for loan losses		900	900

	Net interest income after provision for loan losses	8,055	7,446

Noninterest income
	Service charges on deposit accounts	2,004	1,825
	Fees for trust and brokerage services	637	612
	Gains on sales of mortgage loans	339	225
	Gains on sales of investment securities	95	140
	Other	398	569
	Total noninterest income	3,473	3,371

Noninterest expense
	Salaries and other personnel	3,670	3,679
	Net occupancy	567	548
	Furniture and equipment	813	635
	FDIC assessment	39	28
	Postage and supplies	396	382
	Marketing and advertising	184	255
	Telephone	184	193
	Cardholder processing	136	141
	Sales finance losses	11	24
	Other	1,228	1,288
	Total noninterest expense	7,228	7,173

	Income before income taxes	4,300	3,644

Income tax provision		1,398	1,189

	Net income	$ 2,902	2,455

Share Data:
	Net income - Basic	$ 0.46	0.39
	Net income - Diluted	0.45	0.38
	Book value	11.02	9.65

	Weighted average common shares outstanding - Basic	6,326,698	6,287,279
	Weighted average common shares outstanding - Diluted	6,482,699	6,473,816




See accompanying notes to consolidated interim financial statements.

PALMETTO BANCSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
(in thousands, except share data) (unaudited)

					Accumulated
	Shares of				other
	common	Common	Capital	Retained	comprehensive
	stock	stock	surplus	earnings	income, net	Total
Balance at December 31, 2001	6,283,623	$ 31,418	26	27,386	238	59,068

Net income				2,455		2,455
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period, net
of tax effect of $53					(84)
Less: reclassification adjustment for gains included
in net income, net of tax effect of $54					(86)
Net unrealized gains (losses) on securities						(170)
Comprehensive income						2,285

Cash dividend declared and paid ($.11 per share)				(693)		(693)
Stock option activity	7,955	40	3			43
Balance at March 31, 2002	6,291,578	$ 31,458	29	29,148	68	60,703


Balance at December 31, 2002	6,324,659	$ 31,623	50	34,173	1,675	67,521

Net income				2,902		2,902
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net
of tax effect of $54					86
Less: reclassification adjustment for gains included
in net income, net of tax effect of $37					(58)
Net unrealized gains on securities						28
Comprehensive income						2,930

Cash dividend declared and paid ($.12 per share)				(761)		(761)
Stock option activity	5,250	27	39			66
Balance at March 31, 2003	6,329,909	$ 31,650	89	36,314	1,703	69,756

PALMETTO BANCSHARES, INC.
Consolidated Statements of Cash Flows
(in thousands)

		For the three months ended March 31,
		2003	2002
		(unaudited)
Cash flows from operating activities
	Net income	$ 2,902	2,455
	Adjustments to reconcile net income to net cash
	provided by (used in) operating activities
	Depreciation and amortization	249	588
	Gain on sale of investment securities	(95)	(140)
	Provision for loan losses	900	900
	Origination of loans held for sale	(36,773)	(27,184)
	Sale of loans held for sale	37,870	24,100
	Gain on sale of loans	(339)	(225)
	Change in accrued interest receivable	32	207
	Change in other assets	(21)	(219)
	Change in other liabilities, net	3,531	1,809

	Net cash provided by operating activities	8,256	2,291


Cash flows from investing activities
	Purchase of investment securities available for sale	(15,327)	(37,130)
	Proceeds from maturities of investment securities available for sale	4,335	4,841
	Proceeds from sale of investment securities available for sale	9,114	20,779
	Principal paydowns on mortgage-backed securities available for sale	3,744	1,451
	Purchase of Federal Home Loan Bank stock	(135)	-
	Net increase in loans outstanding	(21,750)	(4,043)
	Purchases of premises and equipment, net	(527)	(774)

	Net cash used in investing activities	(20,546)	(14,876)


Cash flows from financing activities
	Net increase in deposit accounts	16,768	22,340
	Net increase in securities sold under agreements to repurchase	3,430	1,485
	Net increase in commercial paper	2,126	2,078
	Proceeds from issuance of common stock	66	43
	Dividends paid	(761)	(693)

	Net cash provided by financing activities	21,629	25,253


Net increase in cash and cash equivalents		9,339	12,668
Cash and cash equivalents at beginning of the period		38,093	45,691

Cash and cash equivalents at end of the period		$ 47,432	58,359

Supplemental Information
Cash paid during the period for:
	Interest expense	$ 2,926	3,573
	Income taxes	962	698

Supplemental schedule of non-cash investing and financing transactions
	Change in unrealized gain on investment securities available
	for sale, pre-tax	$ 45	(276)
	Loans transferred to other real estate owned	133	1,506
	Loans charged -off	588	868


See accompanying notes to consolidated interim financial statements.

Principles of Consolidation and Nature of Operations
The foregoing unaudited consolidated financial statements include accounts of the Palmetto Bancshares, Inc. (defined collectively with its subsidiaries as the "Company"), its wholly owned subsidiary, The Palmetto Bank (the "Bank"), and Palmetto Capital, Inc., the Bank's wholly owned subsidiary. The Bank provides a full range of banking services including, but not limited to, taking deposits and making loans. Palmetto Capital offers the brokerage of stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital also offers advisory services and variable rate annuities. The Company's primary market area is the upstate of South Carolina.

In management's opinion, all significant intercompany accounts and transactions have been eliminated, and all adjustments necessary for a fair presentation of the results for interim periods presented have been included. Any such adjustments are of a normal and recurring nature. The Company operates as one business segment. Assets held by the Company or its subsidiary in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as such items do not represent assets of the Company or its subsidiary.

Basis of Presentation
The unaudited consolidated interim financial statements are presented in accordance with the instructions for Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

Summary of Significant Accounting Policies
The significant accounting policies used by the Company for interim reporting are consistent with the accounting policies followed for annual financial reporting as described in Note 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. There have been no changes in these policies subsequent to the year ended December 31, 2002.

Accounting Estimates and Assumptions
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the consolidated balance sheets for the periods presented. In addition, they affect the reporting amounts of income and expense during the reporting period as of the dates of the consolidated statements of income for the periods presented. Actual results could differ from these estimates and assumptions. As such, the results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results of operations that may be expected in future periods.

Risks and Uncertainties
In the normal course of its business the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans, the valuation of real estate held by the Company and the valuation of mortgage loans held for sale, investments and mortgage-backed securities available for sale and mortgage servicing rights.

The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examinations.

Reclassifications
Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classifications. All such reclassifications had no effect on the prior years' net income or shareholders' equity as previously reported.

Basic and diluted earnings per share have been computed based on net income in the accompanying consolidated statements of income divided by the weighted average common shares outstanding or assumed to be outstanding as summarized below: