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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[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, 1999
[_] 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
PALMETTO BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 74-2235055
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
29360
301 Hillcrest Drive, Laurens, South (Zip Code)
Carolina
(Address of principal executive
offices)
Registrant's telephone number--(864) 984-4551
palmettobank.com
(Registrant's subsidiary's web site)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of February 16, 2000, $124,493,066--based on the most recent
sales price of $23.00 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. 6,232,834--
February 16, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement dated March 17, 2000 with respect to an
Annual Meeting of Shareholders to be held April 18, 2000: Incorporated by
reference in Part III of this Form 10-K.
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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 Bank is a state, non-member bank that 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 Dealer Finance Department establishes
relationships with Upstate automobile dealers to provide customer financing of
automobile purchases. In the later part of 1995, the Bank started a mortgage
banking operation to continue to meet a broader range of its customers'
financial service needs. By March 1996, this mortgage banking operation was in
full operation: originating, selling, and servicing mortgage loans. Due to
reorganization in the Bank's mortgage servicing department in 1997, the Bank
did not actively purchase and originate loans to be sold in 1997. The Bank re-
engaged in these originating and selling activities in 1998. The Bank
continues to service its portfolio of loans sold.
Financial Information
See Item 8, "Financial Statements and Supplementary Data."
Competition
The upstate South Carolina market 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 has competed
effectively in its market.
Interstate Banking
In 1986, South Carolina adopted legislation that 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. The legislation
resulted in a number of the Bank's competitor banks being 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 has competed effectively in this market
segment by offering quality, personalized service. It is management's
intention to remain a locally based, independent, South Carolina Bank.
3
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
For a discussion of growth in the current year, please see the "General"
heading in Management's Discussion and Analysis, page 12.
Management continually reviews opportunities to expand in the upstate South
Carolina market 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 now access accounts for multiple purposes in a virtual
banking environment--and a secure one. Customers can obtain balances, review
account histories, transfer money between accounts and even pay bills via the
Internet banking service. This Internet Banking System brings together a
combination of industry-approved 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. Investment in new technology has
long been a tradition with the Palmetto Bank and it is essential to remaining
competitive and growing a strong customer base.
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, 1999, the Bank had 327 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.
4
Bancshares. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), Bancshares is subject to
regulation and supervision by the Federal Reserve. Under the BHCA, Bancshares'
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking, managing or controlling banks
as to be a proper incident thereto. The BHCA also restricts the ability of
Bancshares to acquire ownership or control of more than 5% of the outstanding
voting stock of any bank or certain other nonbanking businesses.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss exposure to the depositors
of such depository institutions and to the Federal Deposit Insurance
Corporation ("FDIC") insurance funds in the event the depository institution
becomes in danger of defaulting or in default under its obligations to repay
deposits. For example, under current federal law, to reduce the likelihood of
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured 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 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 and 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,"
5
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.
Capital Adequacy
Bancshares. The Federal Reserve has adopted risk-based capital guidelines
for bank holding companies. Under these guidelines, the minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier 1 capital," principally consisting of
common shareholders' equity, noncumulative preferred stock, a limited amount
of cumulative perpetual preferred stock and minority interest in the equity
accounts of consolidated subsidiaries, 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, 1999, 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, 1999, 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").
Effective January 1, 1993, the FDIC implemented a risk-based assessment
schedule, having assessments ranging from 0.23% to 0.31% of an institution's
average assessment base. 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. In
6
August 1995, the FDIC approved a reduction in the insurance assessments for
Bank Insurance Fund ("BIF") deposits. This reduction decreased the Bank's
insurance assessment for BIF deposits from 0.26% to 0.04% of the average
assessment base. During 1996, the insurance assessment for the Bank's BIF
deposits was set at zero (although banks pay a $2 annual fee) due to the fact
that it was "well capitalized." In 1997 and most of 1998, the Bank was
"adequately capitalized," and paid insurance premiums ranging from 0.00% to
0.27% of the average assessment base. Now the Bank has returned to the "well
capitalized" category and the FDIC insurance premium decreased from $206 in
1998 to $132 in 1999.
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).
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 rating 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, 1999, 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
7
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 now 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.
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
8
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 region of South Carolina.
The Bank owns all of its facilities except the following leased facilities,
which have annual rental expenses from $1 to $115:
East North Street, Haywood Road, East North Street at Howell Road, Woodruff
Road, Greer offices--Greenville
Spartan Centre, Blackstock Road, Fernwood, Hillcrest offices--Spartanburg
Gaffney office--Gaffney
South Main Street and Ninety-Six offices--Greenwood
North Main office--North 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. The Corporate Center houses the corporate offices, finance department,
and telephone banking center. All facilities are protected by alarm and
security systems, which meet or exceed regulatory standards. Each facility is
in good condition and capable of handling increased volume. All of the
locations are considered suitable and adequate for their intended purposes.
Item 3. Legal Proceedings
Bancshares is not currently engaged in legal proceedings. From time to time
the Bank is involved in legal proceedings incidental to its normal course of
business as a bank. Management believes 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
On December 14, 1999, the Board of Directors approved a two-for-one stock
split effected in the form of a 100% stock dividend to shareholders of record
as of January 3, 2000. All number of common shares outstanding and per share
amounts contained in this report have been retroactively adjusted to give
effect to the stock split.
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 $23.00 per share on February 16,
2000. As of February 16, 2000, the Company had 837 shareholders with 6,232,834
shares outstanding.
Bancshares, or its predecessor, the Bank, has paid regular dividends on
common stock since 1909. For the years ended December 31, 1999, 1998 and 1997,
Bancshares paid cash dividends of $1,956 or $0.32 per share, $1,544 or $0.25
per share, and $1,165 or $0.19 per share, respectively. These dollars equate
to dividend payout ratios (dividends declared divided by net income) of
24.24%, 22.54% and 19.66% in 1999, 1998 and 1997, 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, 1999, there were 826
shareholders of record.
Sales Prices by Quarter
Fiscal Year 1999 High Low
---------------- ------ ------
First Quarter.................................................. $20.00 $18.50
Second Quarter................................................. $21.00 $20.00
Third Quarter.................................................. $22.50 $21.00
Fourth Quarter................................................. $22.50 $20.00
Fiscal Year 1998
----------------
First Quarter.................................................. $14.50 $14.00
Second Quarter................................................. $17.50 $14.50
Third Quarter.................................................. $18.50 $17.50
Fourth Quarter................................................. $18.50 $17.50
Dividends Paid Per Share
Fiscal Year 1999 Fiscal Year 1998
---------------- ----------------
March 30......................... $.07 March 31.......................... $.06
June 29.......................... $.08 June 30........................... $.06
September 30..................... $.08 September 30...................... $.06
December 27...................... $.09 December 28....................... $.07
The ability of Bancshares to pay dividends depends upon the amount of
dividends that is received from the Bank. The Company and the Bank are subject
to certain regulatory restrictions on the amount of dividends they are
permitted to pay. The Bank's current total risk-based capital ratio is 10.64%.
At December 31, 1999, the Bank had $6.8 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.
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Item 6. Selected Financial Data (Dollars in thousands)
5 Year Summary
----------------------------------------------------------
1999 1998 1997 1996 1995
For the Year ---------- ---------- ---------- ---------- ----------
Total interest income... $ 43,142 40,829 36,969 32,191 26,268
Total interest expense.. 16,399 16,440 15,841 13,810 10,842
Net interest income..... 26,743 24,389 21,128 18,381 15,426
Provision for loan
losses................. 2,431 1,877 1,331 1,450 1,140
Total non-interest
income................. 8,069 6,468 5,628 5,018 4,192
Total non-interest
expense................ 21,274 19,130 17,085 15,544 13,630
Income before income
taxes.................. 11,107 9,850 8,340 6,405 4,848
Income tax provision.... 3,038 3,000 2,415 1,652 1,246
Net income.............. 8,069 6,850 5,925 4,753 3,602
Per Common Share (3)
Net income per share-
basic, not subject to
put/call............... $ 1.30 1.05 0.98 0.77 0.60
Net income per share-
dilutive, not subject
to put/call............ 1.26 1.02 0.97 0.76 0.59
Cash dividends
declared............... 0.32 0.25 0.19 0.14 0.11
Book value at year end
(1).................... 7.35 6.81 6.00 5.23 4.64
Average common shares
outstanding (1)........ 6,208,750 6,178,318 6,109,754 6,015,322 6,020,640
At Year End
Total assets............ $ 625,198 577,400 513,207 468,377 376,241
Investment securities... 106,772 112,542 97,731 82,447 83,404
Loans................... 445,757 413,266 367,585 332,986 255,187
Total deposits.......... 537,687 499,673 449,390 412,386 329,659
Total shareholders'
equity (2)............. 45,627 42,085 36,616 31,438 27,909
Total shareholders'
equity................. 45,627 37,353 32,832 28,124 25,138
Common shares
outstanding............ 6,226,834 6,199,390 6,179,104 6,047,682 6,029,880
Full-time equivalent
employees.............. 327 306 281 257 219
Average Balances
Assets.................. $ 595,678 541,799 493,737 430,718 342,374
Investment securities... 110,546 102,635 97,136 86,655 73,395
Loans................... 430,960 390,776 350,493 301,839 230,908
Deposits................ 512,405 467,749 432,031 373,244 294,608
Total shareholders'
equity (2)............. 45,094 39,552 33,858 29,131 26,142
Key Ratios (1)
Return on average
assets................. 1.35% 1.26% 1.20% 1.10% 1.05%
Return on average
equity................. 17.89% 17.32% 17.50% 16.32% 13.78%
Primary capital to
assets at year end..... 8.23% 8.21% 8.06% 7.65% 8.33%
Net interest margin
(fully tax-
equivalent)............ 5.09% 5.06% 4.80% 4.88% 5.23%
Allowance for loan
losses to total loans.. 1.43% 1.40% 1.40% 1.42% 1.45%
Nonperforming assets to
total assets........... 0.49% 0.33% 0.25% 0.24% 0.20%
Net charge-offs to
average loans.......... 0.43% 0.32% 0.26% 0.14% 0.20%
Average equity to
average asset ratio.... 7.57% 7.30% 6.86% 6.76% 7.64%
- --------
(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.
(3) Certain share and per share amounts have been retroactively restated to
reflect the two-for-one stock split effected in the form of a 100% stock
dividend to shareholders of record as of January 3, 2000.
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.
General
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.
The Company's assets grew $47,798, or 8%, total loans grew $32,491, or 8%,
and deposits grew $38,014, or 8% in 1999 as a result of expansion, acquisition
and general growth in all geographic markets. In 1998, total assets grew
$64,193, or 13%, total loans grew $45,681, or 12%, and deposits grew $50,283,
or 11% in 1998 as a result of growth in all geographic markets.
Results of Operations
Three Years Ended December 31, 1999, 1998 and 1997
Net income for 1999 was $8,069, an increase of 18% from the $6,850 reported
in 1998. Net income in 1998 increased 16% from the $5,925 reported in 1997.
Net income per common share-basic, not subject to put/call was $1.30 in 1999,
compared with $1.05 in 1998, and $0.98 in 1997. Net income per common share-
dilutive, not subject to put/call was $1.26 in 1999, compared with $1.02 in
1998, and $0.97 in 1997. Return on average assets was 1.35% in 1999 compared
with 1.26% in 1998 and 1.20% in 1997.
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 1999, net interest income was $26,743, which represented a 10% increase
over the $24,389 earned in 1998. This increase is due to increases in the
volume of earning assets and an increase in the net interest margin. In 1998,
net interest income increased $3,261 or 15%, over the $21,128 earned in 1997.
During 1999, the average tax equivalent yield on all interest-earning
assets was 8.08%, down from 8.36% and 8.29% in 1998 and 1997, respectively.
The average prime interest rate was 8.00% for 1999, compared to an average
prime rate of 8.25% and 8.5% for 1998 and 1997, respectively. The Bank's
average effective rate paid on all interest-bearing liabilities decreased in
1999 to 3.53%, from 3.86% and 4.06% in 1998 and 1997, respectively. The Bank's
net tax equivalent yield on interest-earning assets (net interest margin) was
5.09%, 5.06% and 4.80% in 1999, 1998 and 1997, respectively. The Company was
able to increase its net interest margin through strategic asset-liability
management as discussed on pages 13 and 14.
Interest and fees on loans increased $2,159, or 6% from 1998 to 1999, and
increased $3,840, or 12% from 1997 to 1998 due to loan growth of 8% in 1999
and 12% in 1998. 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 on
investment securities increased $38 or 1% from 1997 to 1998 due to a 15%
growth in securities, offset by a decrease in the fully tax-equivalent
weighted-average rate on the security portfolio from
12
6.72% in 1997 to 6.59% in 1998. Interest income on federal funds sold
increased $58 or 27% due to higher average balances invested. This compares to
a decrease of $80, or 27%, from 1997 to 1998 due to lower average balances
invested.
Total interest expense decreased 0.25% or $41 from 1998 to 1999 and
increased 4% or $599 from 1997 to 1998. The largest component of total
interest expense is interest expense on deposits, which 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. Interest expense on deposits increased $341 or 2%
from 1997 to 1998 due to an 11% growth in deposits, offset by effective
management of the cost of deposits. The average cost of deposits was 2.96%,
3.24% and 3.43% in 1999, 1998 and 1997, respectively.
Interest on securities sold under agreements to repurchase decreased $75,
or 12% from 1998 to 1999 due to maintained average balances outstanding,
offset by a decrease in the average rate paid from 3.97% to 3.40%. This
compares to an increase of $81, or 15% from 1997 to 1998 due to an increase in
the average balances outstanding, offset by a decrease in the average rate
paid from 4.01% to 3.97%. Interest on commercial paper increased $5, or 1%,
from 1998 to 1999 due to an decrease in the average rate paid from 4.11% to
3.44%, offset by an increase in the average balances outstanding during the
year. This compares to an increase of $140, or 37%, from 1997 to 1998 due to
an increase in the average rate paid from 4.06% to 4.11% and 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.
Rate/Volume Analysis
Table 1 (on page 15) includes, for the years ended December 31, 1999, 1998
and 1997 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.
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
13
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, 1999,
approximately 25% of the Company's earning assets could be repriced within one
year compared to approximately 95% of its interest-bearing liabilities. This
compares to 27% and 92%, respectively, in 1998 and 26% and 95%, respectively,
in 1997.
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 manage the deposit side. The Company generally does
not raise deposit rates as fast or as much. The Company also has the ability
to manage its funding costs by choosing alternative sources of funds.
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.
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, 1999, 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 9%. 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 6%, 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 ($2.4
million at December 31, 1999). This unrealized loss exists because the current
market rates are higher that 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 24). The Company sees the investment security portfolio as
mainly an income source, not a liquidity source.
On page 16, 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, 1999. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
14
TABLE 1
Rate Volume Analysis
1999 1998
----------------------------------------- ---------------------------------------
Average Yield/ Volume Rate Average Income/ Volume Rate
Balances Interest Rate Change Change Balances Expense Yield Change Change
-------- -------- ------ ------ ------- -------- ------- ----- ------ ------
Assets:
Interest-earning
deposits........ $ 211 $ 11 5.21% $ 6 $ 0 $ 99 $ 5 5.05% $ 3 $ 3
Federal funds
sold............ 5,287 269 5.09% 74 (16) 3,876 211 5.44% (86) 6
Federal Home
Loan Bank
stock........... 1,691 128 7.57% 13 2 1,520 113 7.43% 54 3
Taxable
investment
securities...... 40,596 2,573 6.34% (828) 44 53,756 3,357 6.24% (452) (85)
Non-taxable
investment
securities (1).. 69,950 4,606 6.58% 1,428 (230) 48,879 3,408 6.97% 902 (131)
Loans, net of
unearned
discount (2).... 430,960 36,759 8.53% 3,493 (1,334) 390,776 34,600 8.85% 3,551 289
1997
----------------------------------------
Average Income/ Volume Rate
Balances Expense Yield Change Change
--------- ------- ------ ------- -------
Assets:
Interest-earning
deposits........ $ -- $ -- 0.00% $ -- $ --
Federal funds
sold............ 5,465 291 5.32% 197 1
Federal Home
Loan Bank
stock........... 779 56 7.19% 28 28
Taxable
investment
securities...... 60,915 3,894 6.39% 293 283
Non-taxable
investment
securities (1).. 36,221 2,637 7.28% 450 (396)
Loans, net of
unearned
discount (2).... 350,493 30,760 8.78% 4,299 (391)
Total earning
assets......... 548,695 44,346 8.08% 4,092 (1,440) 498,906 41,694 8.36% 3,749 307
Total earning
assets......... 453,873 37,638 8.29% 5,315 (523)
Cash and due
from banks...... 25,205 22,145
Allowance for
loan losses..... (6,085) (5,393)
Premises and
equipment, net.. 15,230 14,255
Accrued
Interest........ 4,344 4,065
Other assets.... 8,289 7,821
-------- --------
Total assets... $595,678 $541,799
======== ========
Liabilities and
Shareholders'
Equity:
Interest-bearing
demand
deposits........ 165,370 3,079 1.86% 334 (43) 147,580 2,788 1.89% 392 (334)
Savings
deposits........ 31,308 615 1.96% 55 (103) 28,718 663 2.31% 26 (39)
Time deposits... 232,806 11,457 4.92% 752 (1,001) 218,185 11,706 5.37% 444 (148)
Federal funds
purchased and
securities
sold under agreements to repurchase.. 19,295 722 3.74% 21 (61) 18,747 762 4.06% 144 (26)
Commercial
paper........... 15,273 526 3.44% 98 (93) 12,668 521 4.11% 134 6
-------- ------- ---- ------ ------- -------- ------- ---- ------ -----
Total interest-
bearing
liabilities.... 464,052 16,399 3.53% 1,411 (1,452) 425,898 16,440 3.86% 1,407 (808)
Cash and due
from banks...... 20,098
Allowance for
loan losses..... (4,876)
Premises and
equipment, net.. 12,679
Accrued
Interest........ 3,563
Other assets.... 8,400
---------
Total assets... $493,737
=========
Liabilities and
Shareholders'
Equity:
Interest-bearing
demand
deposits........ 128,098 2,730 2.13% 277 (240)
Savings
deposits........ 27,639 676 2.45% 32 (9)
Time deposits... 209,961 11,410 5.43% 2,018 13
Federal funds
purchased and
securities
sold under agreements to repurchase.. 15,279 644 4.21% (103) (25)
Commercial
paper........... 9,382 381 4.06% 52 16
--------- ------- ------ ------- -------
Total interest-
bearing
liabilities.... 390,359 15,841 4.06% 2,021 9
Non-interest
bearing demand
deposits........ 82,921 73,266
Other
liabilities..... 3,611 3,083
Shareholders'
equity.......... 45,094 39,552
-------- --------
Total
liabilities and
shareholders'
equity......... $595,678 $541,799
======== ========
Net interest
income on a
fully taxable
equivalent basis
(1)
Net yield on
interest-earning
assets (FTE).... 27,947 5.09% 25,254 5.06%
Non-interest
bearing demand
deposits........ 66,333
Other
liabilities..... 3,187
Shareholders'
equity.......... 33,858
---------
Total
liabilities and
shareholders'
equity......... $493,737
=========
Net interest
income on a
fully taxable
equivalent basis
(1)
Net yield on
interest-earning
assets (FTE).... 21,797 4.80%
- ----
(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 $1,204, $865 and $669 for 1999, 1998 and 1997, respectively.
(2) 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
TABLE 2
Market Risk Sensitivity
Expected Maturity/Repricing/Principal Repayments at December 31, 1999
2000
------------------------------------------------------------------------------------------------
2 Days
Average to 3 3 to 6 6 to 12 There- Carrying
Rate 1 Day Months Months Months 2001 2002 2003 2004 after Value
------- --------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Interest-sensitive
assets:
Federal funds
sold............ 5.09% $ 1,371 -- -- -- -- -- -- -- -- 1,371
Federal Home Loan
Bank stock...... 7.57% -- -- -- -- -- -- 1,733 -- -- 1,733
Mortgage-backed
investment
securities...... 6.27% -- 2,098 142 301 1,099 3,247 4,140 13,153 3,482 27,662
Other investment
securities...... 7.09% 128 850 569 457 4,531 4,147 6,469 4,534 57,425 79,110
Loans
receivable...... 8.53% 59,870 26,937 25,961 18,821 50,412 34,710 90,298 43,947 105,801 445,757
---- --------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total interest-
earning
assets......... $ 61,369 29,885 26,672 19,579 56,042 42,140 102,640 50,634 166,708 555,633
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Interest-sensitive
liabilities:
Interest-bearing
demand.......... 1.24% 120,173 -- -- -- -- -- -- -- -- 120,173
Insured money
markets......... 2.96% 59,768 -- -- -- -- -- -- -- -- 59,768
Savings
deposits........ 1.96% 30,975 -- -- -- -- -- -- -- -- 30,975
Time deposits
over $100....... -- 21,451 17,901 10,717 2,213 1,041 514 -- -- 53,837
Other time
deposits........ 11 76,572 50,452 38,506 10,710 5,575 3,727 1,506 79 187,138
---- --------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total time
deposits....... 4.92% 11 98,023 68,353 49,223 12,923 6,616 4,241 1,506 79 240,975
==== ========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Short-term
borrowings...... 3.61% 39,394 -- -- -- -- -- -- -- -- 39,394
---- --------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total interest-
bearing
liabilities.... $ 250,321 98,023 68,353 49,223 12,923 6,616 4,241 1,506 79 491,285
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Interest rate
sensitivity
gap............. $(188,952) (68,138) (41,681) (29,644) 43,119 35,488 98,399 49,128 166,629 64,348
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Cumulative
interest rate
sensitivity
gap............. $(188,952) (257,090) (298,771) (328,415) (285,296) (249,808) (151,409) (102,281) 64,348 --
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Cumulative
interest rate
sensitive gap as
a % of total
interest-earning
assets.......... -34.01% -46.27% -53.77% -59.11% -51.35% -44.96% -27.25% -18.41% 11.58% 0.00%
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Off-balance sheet
items:
Commitments to
extend credit*.. -- -- -- -- -- -- -- -- 71,592 71,592
Unused lines of
credit.......... 7.95% -- -- -- -- -- -- -- -- 13,763 13,763
Fair
Value
-------
Interest-sensitive
assets:
Federal funds
sold............ 1,371
Federal Home Loan
Bank stock...... 1,733
Mortgage-backed
investment
securities...... 27,662
Other investment
securities...... 79,110
Loans
receivable...... 443,820
-------
Total interest-
earning
assets......... 553,696
=======
Interest-sensitive
liabilities:
Interest-bearing
demand.......... 120,173
Insured money
markets......... 59,768
Savings
deposits........ 30,975
Time deposits
over $100.......
Other time
deposits........
Total time
deposits....... 241,038
=======
Short-term
borrowings...... 39,394
-------
Total interest-
bearing
liabilities.... 491,348
=======
Interest rate
sensitivity
gap.............
Cumulative
interest rate
sensitivity
gap.............
Cumulative
interest rate
sensitive gap as
a % of total
interest-earning
assets..........
Off-balance sheet
items:
Commitments to
extend credit*.. 71,592
Unused lines of
credit.......... 13,763
- -----
* 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.
16
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.
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.
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..... $47,020 45,463 15,451 107,934
Real estate-construction................... 5,086 7,728 559 13,373
------- ------ ------ -------
Total..................................... $52,106 53,191 16,010 121,307
======= ====== ====== =======
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, 1999
-----------------
Predetermined interest rate............................... $69,201
Floating or adjustable interest rate...................... --
-------
Total.................................................... $69,201
=======
Thirty percent of total loans are repricable within one year.
17
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
$2,431, $1,877 and $1,331, respectively, for the years ended December 31,
1999, 1998 and 1997. The provision in 1999 reflects replenishing the allowance
for loan losses to cover net charge-offs of $1,864, plus providing for the 8%
increase in total loans outstanding. Net charge-offs to average loans are
0.43% for 1999 as compared to 0.32% for 1998 and 0.26% for 1997. The increase
in net charge-offs is largely due to charge-offs in the sales finance
portfolio of $613. Management expects increased levels of charge-offs in the
sales finance portfolio to continue in 2000. The allowance for loan losses
totaled $6,362, $5,795 and $5,152 at December 31, 1999, 1998 and 1997,
respectively. The level of the allowance for loan losses to total loans
outstanding is 1.43% at December 31, 1999. This compares to 1.40% as of
December 31, 1998 and 1997.
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. At December 31, 1999, management has increased its allocation of the
allowance to the installment loan portfolio as a result of increased charge-
offs. In addition, at December 31, 1999, the allocation to the real estate-
mortgage portfolio has decreased after a reconsideration by management of
historical charge-off patterns of this specific portfolio.
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.
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. Charge-offs are expected to return to a
lower level when this process is complete.
Management feels the 1.43% allowance for loan losses to total loans at
December 31, 1999 is adequate even when considering that charge-offs have
increased in 1999 because the allowance model described above takes into
account the risk grades of loans, delinquency trends, charge-off ratios and
loan growth.
18
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:
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
Average loans, net of unearned
discount....................... $430,960 390,776 350,493 301,839 230,908
======== ======= ======= ======= =======
Allowance for loan losses:
Beginning balance.............. $ 5,795 5,152 4,729 3,700 3,016
Add provision for loan losses.. 2,431 1,877 1,331 1,450 1,140
Loan charge-offs:
Commercial, financial and
agricultural.................. 532 344 158 131 262
Real estate--construction...... -- -- -- -- --
Real estate--mortgage.......... -- -- -- 92 14
Installment loans to
individuals................... 1,441 1,018 891 487 337
-------- ------- ------- ------- -------
Total loan charge-offs.......... 1,973 1,362 1,049 710 613
Recoveries of loans previously
charged-off:
Commercial, financial and
agricultural.................. 22 5 56 42 60
Real estate--construction...... -- -- -- -- --
Real estate--mortgage.......... -- -- -- 65 33
Installment loans to
individuals................... 87 123 85 182 64
-------- ------- ------- ------- -------
Total recoveries of loans
previously charged-off......... 109 128 141 289 157
-------- ------- ------- ------- -------
Net charge-offs............. 1,864 1,234 908 421 456
-------- ------- ------- ------- -------
Ending balance.................. $ 6,362 5,795 5,152 4,729 3,700
======== ======= ======= ======= =======
Net charge-offs to average
loans, net..................... 0.43% 0.32% 0.26% 0.14% 0.20%
Allowance for loan losses to
average loans, net............. 1.48 1.48 1.47 1.57 1 1.60
Allowance for loan losses to
total loans at period-end...... 1.43 1.40 1.40 1.42 1.45
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:
1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------
% of % of % of % of % of
Total Total Total Total Total Total Total Total Total Total
------- ------ ----- ------ ----- ------ ----- ------ ----- ------
Balance applicable to:
Commercial, financial
and agricultural...... $ 2,022 31.78% 1,309 22.59% 1,145 22.22% 974 20.61% 658 17.78%
Real estate--
construction.......... 31 0.49 145 2.50 123 2.39 136 2.88 79 2.14
Real estate--mortgage.. 778 12.23 3,025 52.20 2,739 53.17 2,582 54.59 2,161 58.40
Installment loans to
individuals........... 3,531 55.50 1,316 22.71 1,145 22.22 1,037 21.92 802 21.68
------- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total................ $ 6,362 100.00% 5,795 100.00% 5,152 100.00% 4,729 100.00% 3,700 100.00%
======= ====== ===== ====== ===== ====== ===== ====== ===== ======
19
Non-Interest Income
Non-interest income for 1999 increased by $1,601 or 25% over 1998, as
compared to an increase in 1998 of $840 or 15% over 1997. These increases
generally resulted from increased fees for trust services, which continued to
increase in 1999 to $1,968 from $1,343 in 1998 and $986 in 1997. Fees for
trust services increased 47% as a result of the generation of new trust
business, a new fee structure and additional assets under management, which
increased 10%. The trust department had assets under management of $209,107,
$190,866 and $152,968 at December 31, 1999, 1998 and 1997, respectively.
A significant contributor to non-interest income is service charges on
deposit accounts, which increased 12% as a result of 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 $32, $150 and $40 of gains from sales of investment securities
during 1999, 1998 and 1997, 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.
Non-Interest Expense
Non-interest expense totaled $21,274 in 1999 as compared to $19,130 in 1998
and $17,085 in 1997. This represented an 11% increase from 1998 to 1999, and a
12% increase from 1997 to 1998. The overall increases during the year were due
to growth in all geographic markets, which is evidenced by the growth in
deposits of 8% from 1998 to 1999 and 11% from 1997 to 1998. Salaries and other
personnel expense, which comprised 48% of total non-interest expense for 1999,
were up $827 or 9% over 1998 due to normal salary increases and increased
personnel due to the two new branches. During 1998 and 1997, salaries and
other personnel expense accounted for 49% and 50%, of total other operating
expense, respectively.
Combined net occupancy and furniture and equipment expenses increased $442,
or 12% from 1998 to 1999, as compared to an increase of $381, or 12%, in 1998.
The increases in 1999 and 1998 are due to the opening of two new branches in
each year.
Postage and supplies expense increased 7% from $1,081 in 1998 to $1,155 in
1999. This increase can be attributed to growth in all geographical markets,
as well as the opening of two new branches in 1999. Postage and supplies
expense increased by 22% from 1997 to 1998 due to two new branches opened in
that year as well.
Income Taxes
Income tax expense totaled $3,038 in 1999 as compared to $3,000 in 1998 and
$2,415 in 1997. The amounts expensed represented effective tax rates of
approximately 27%, 31% and 29% for the years ended December 31, 1999, 1998 and
1997, 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 only recognize
actual loan losses. The Company works actively with outside tax consultants to
minimize tax expense.
Financial Condition
As of December 31, 1999, 1998 and 1997
At December 31, 1999, Bancshares had total assets of $625.2 million, loans
outstanding of $445.8 million and deposits of $537.7 million. This compares
with total assets of $577.4 million, loans outstanding of $413.3 million and
deposits of $499.7 million, at December 31, 1998; and with total assets of
$513.2 million, loans outstanding of $367.6 million and deposits of $449.4
million, at December 31, 1997. 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.
20
TABLE 5
Distribution of Assets and Liabilities
(DOLLARS IN THOUSANDS)
Years Ended December 31,
-------------------------------------------------------------------
1999 1999 1998 1998 1997 1997 1996 1996
Average % of Average % of Average % of Average % of
Balance Total Balance Total Balance Total Balance Total
-------- ------ ------- ------ ------- ------ ------- ------
ASSETS
Cash and due from
banks.................. $ 25,416 4.27% 22,244 4.11% 20,098 4.07% 23,743 5.51%
Federal funds sold...... 5,287 0.89% 3,876 0.72% 5,465 1.11% 1,758 0.41%
Federal Home Loan Bank
stock.................. 1,691 0.28% 1,520 0.28% 779 0.16% -- --
Taxable investment
securities............. 40,596 6.82% 53,756 9.92% 60,915 12.34% 56,145 13.04%
Non-taxable investment
securities............. 69,950 11.74% 48,879 9.02% 36,221 7.34% 30,510 7.08%
Loans, net of unearned
discount............... 430,960 72.35% 390,776 72.13% 350,493 70.99% 301,839 70.08%
Less: allowance for
loan losses........... (6,085) -1.02% (5,393) -1.00% (4,876) -0.99% (4,088) -0.95%
-------- ------ ------- ------ ------- ------ ------- ------
Net loans............. 424,875 71.33% 385,383 71.13% 345,617 70.00% 297,751 69.13%
-------- ------ ------- ------ ------- ------ ------- ------
Premises and equipment,
net.................... 15,230 2.56% 14,255 2.63% 12,679 2.57% 11,670 2.71%
Accrued Interest........ 4,344 0.73% 4,065 0.75% 3,563 0.72% 3,260 0.76%
Other assets............ 8,289 1.39% 7,821 1.44% 8,400 1.70% 5,881 1.37%
-------- ------ ------- ------ ------- ------ ------- ------
Total assets.......... $595,678 100.00% 541,799 100.00% 493,737 100.00% 430,718 100.00%
======== ====== ======= ====== ======= ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing
deposits.............. 82,921 13.92% 73,266 13.52% 66,333 13.43% 58,440 13.57%
Interest-bearing
demand................ 165,370 27.76% 147,580 27.24% 128,098 25.94% 115,674 26.86%
Savings................ 31,308 5.26% 28,718 5.30% 27,639 5.60% 26,331 6.11%
Time................... 232,806 39.08% 218,185 40.27% 209,961 42.52% 172,799 40.12%
-------- ------ ------- ------ ------- ------ ------- ------
Total deposits........ 512,405 86.02% 467,749 86.33% 432,031 87.50% 373,244 86.66%
-------- ------ ------- ------ ------- ------ ------- ------
Federal funds purchased
and securities sold
under agreements to
repurchase............. 19,295 3.24% 18,747 3.46% 15,279 3.09% 17,668 4.10%
Commercial paper........ 15,273 2.56% 12,668 2.34% 9,382 1.90% 8,075 1.87%
Other liabilities....... 3,611 0.61% 3,083 0.57% 3,187 0.65% 2,600 0.60%
-------- ------ ------- ------ ------- ------ ------- ------
Total liabilities..... 550,584 92.43% 502,247 92.70% 459,879 93.14% 401,587 93.24%
-------- ------ ------- ------ ------- ------ ------- ------
Shareholders equity:
Common stock--$5.00 par
value................. 31,042 5.21% 30,890 5.70% 30,576 6.19% 30,330 7.04%
Capital surplus........ -- -- 19 -- 206 0.04% 356 0.08%
Retained earnings...... 14,277 2.40% 8,385 1.55% 2,932 0.59% (1,516) -0.35%
Less: Treasury stock... -- -- -- -- (37) -0.01% (312) -0.07%
Accumulated other
comprehensive income
(loss)................ (225) -0.04% 258 0.05% 181 0.04% 273 0.06%
-------- ------ ------- ------ ------- ------ ------- ------
Total shareholders'
equity............... 45,094 7.57% 39,552 7.30% 33,858 6.86% 29,131 6.76%
-------- ------ ------- ------ ------- ------ ------- ------
Total liabilities and
shareholders'
equity............... $595,678 100.00% 541,799 100.00% 493,737 100.00% 430,718 100.00%
======== ====== ======= ====== ======= ====== ======= ======
21
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, 1999, total
loans, net of unearned discounts, were 80% of total earning assets. Loans
secured by real estate accounted for 55% of total loans as of December 31,
1999. Most of the loans classified as real estate-mortgage are commercial
loans where real estate provides additional collateral.
At December 31, 1999, the sales finance portfolio was $36,760 compared to
$31,238 at December 31, 1998. 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. However, management believes there
will be increased levels of charge-offs arising from these loans in 2000. In
estimating the allowance for loan losses at December 31, 1999 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 1999, 1998 and 1997 were
approximately $1,630 or 0.37% (of total loans), $1,572 or 0.38% and $862 or
0.23%, respectively. The majority of these non-performing loans are smaller-
balance homogeneous consumer loans. For information on impaired loans, please
see footnote number 5.
Table 6 on page 23 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, 1995 through
December 31, 1999.
22
TABLE 6
Nonperforming Loans
(Dollars in Thousands)
90 Days or
More Past Due Percentage Foregone Interest
and not on Total Loans 90 Days or Income From Non-
Non-Accrual Non-Accrual Outstanding More Past Due Accrual
----------- ------------- ----------- ------------- -----------------
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 -- 68,617 0.20 4
Real estate--
construction.......... -- -- 9,598 0.00 --
Real estate--mortgage.. 428 -- 181,775 0.24 25
Installment loans to
individuals........... 545 -- 72,996 0.75 23
------ --- ------- ---- ---
Total................. $1,113 -- 332,986 0.33% 52
====== === ======= ==== ===
December 31, 1995:
Commercial, financial
and agricultural...... 146 -- 45,377 0.32 20
Real estate--
construction.......... -- -- 5,453 0.00 --
Real estate--mortgage.. 241 -- 149,017 0.16 11
Installment loans to
individuals........... 409 3 55,340 0.74 35
------ --- ------- ---- ---
Total................. $ 796 3 255,187 0.31% 66
====== === ======= ==== ===
23
Deposits
For the average balances and average rates paid by category of deposit for
the years ended December 31, 1999, 1998 and 1997, please see Table 1 on page
15. The company has no foreign deposits.
The following table sets forth, by time remaining to maturity, domestic
certificates of deposit over $100, as of December 31, 1999, 1998 and 1997.
TABLE 7
Maturities of Time Deposits Over $100
1999 1998 1997
------- ------ ------
Maturities:
3 months or less......................................... $21,451 21,467 23,062
3 through 6 months....................................... 17,901 9,609 12,206
6 through 12 months...................................... 10,717 8,490 11,004
Over 12 months........................................... 3,768 7,146 3,680
------- ------ ------
$53,837 46,712 49,952
======= ====== ======
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 15%-25%. At December 31, 1999, the Company's liquidity
ratio was approximately 18%.
The Company's liquidity position is dependent upon its debt servicing needs
and dividends declared. The Company had no outstanding debt at December 31,
1999 and 1998, respectively.
During 1991 the Company began selling 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,
1999, the Company had $12,573 in commercial paper with a weighted average rate
of 3.44%, as compared to $10,859 in 1998 with a weighted average of 3.06% and
$11,289 in 1997 with a weighted average rate of 3.69%.
The Parent Company's liquidity needs are met through the payment of
dividends from the Bank. At December 31, 1999, the Bank had available retained
earnings of $6,814 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,
lines of credit from correspondent banks, 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. 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 75% of
the securities portfolio was pledged to secure liabilities as of December 31,
1999, as compared to 62% at December 31, 1998. Management believes that its
sources of liquidity are adequate to meet operational needs. Additional
sources of short-term liquidity are existing lines of credit from
correspondent banks totaling $85 million, all of which are available. The Bank
has also completed the necessary borrowing agreements with the Federal Reserve
Bank of Richmond giving the Bank access to the Federal Reserve Discount window
to borrow as needed for liquidity purposes. Loan demand has been constant and
loan originations can be controlled through pricing decisions.
24
Capital Resources
At December 31, 1999 and 1998 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, 1999.
The stock in the Company's Employee Stock Ownership Plan ("ESOP") had a put
and a call feature because the Company's stock is not listed on a national
securities exchange. Accordingly, the shares that had been distributed from
the ESOP were recorded outside of shareholders equity at their fair value,
which is determined annually by an independent valuation. The Company's Board
of Directors had voted to terminate the ESOP effective February 28, 1997. Per
the Plan document, the shares distributed in 1998 due to the termination of
the ESOP were subject to the put/call until June 29, 1999. 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
The Financial Accounting Standards Board has not released any accounting
pronouncements that have not been adopted and that affect the Company or the
Bank.
Industry Developments
Certain recently enacted and proposed legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institution's industry. Because of the uncertainty of the final
terms and likelihood of passage of the proposed legislation, the Company is
unable to assess the impact of any proposed legislation on its financial
condition or operations at this time.
Item 8. Financial Statements and Supplementary Data
The information that is required by this item is set forth on the following
pages, 26 through 51.
25
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, 1999 and
1998, 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, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
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."
KPMG LLP
[KPMG LLP LOGO]
Greenville, South Carolina
February 9, 2000
26
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands, except share and per share data)
1999 1998
-------- -------
Assets
Cash and due from banks..................................... $ 42,446 27,929
Federal funds sold.......................................... 1,371 110
Federal Home Loan Bank stock, at cost....................... 1,733 1,541
Investment securities held to maturity (fair value of
$68,737 in 1998)........................................... -- 66,455
Investment securities available for sale (amortized cost of
$110,670 and $45,551 in 1999 and 1998, respectively)....... 106,772 46,087
Loans held for sale......................................... 1,169 2,122
Loans....................................................... 445,757 413,266
Less allowance for loan losses............................. (6,362) (5,795)
-------- -------
Loans, net............................................... 439,395 407,471
-------- -------
Premises and equipment, net................................. 16,319 14,347
Accrued interest............................................ 4,648 4,499
Other assets................................................ 11,345 6,839
-------- -------
Total assets............................................. $625,198 577,400
======== =======
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing...................................... $ 85,796 83,788
Interest-bearing.......................................... 451,891 415,885
-------- -------
Total deposits........................................... 537,687 499,673
Securities sold under agreements to repurchase............. 19,021 21,630
Commercial paper (Master notes)............................ 12,573 10,859
Federal funds purchased.................................... 7,800 --
Other liabilities.......................................... 2,490 3,153
-------- -------
Total liabilities........................................ 579,571 535,315
-------- -------
Common stock subject to put/call option (ESOP).............. -- 4,732
Shareholders' equity:
Common stock--$5.00 par value. Authorized 10,000,000
shares; issued and outstanding 6,226,834 in 1999; issued
and outstanding 6,199,390 in 1998;........................ 31,134 30,997
Capital surplus (deficit).................................. -- (19)
Retained earnings.......................................... 16,890 10,777
Accumulated other comprehensive income (loss).............. (2,397) 330
Common stock subject to put/call option, 540,768 shares at
$8.75 per share in 1998................................... -- (4,732)
-------- -------
Total shareholders' equity............................... 45,627 37,353
-------- -------
Total liabilities and shareholders' equity............... $625,198 577,400
======== =======
See accompanying notes to consolidated financial statements.
27
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands, except share and per share data)
1999 1998 1997
---------- --------- ---------
Interest income:
Interest and fees on loans................... $ 36,759 34,600 30,760
Interest and dividends on investment
securities available for sale:
U.S. Treasury and U.S. Government agencies... 953 682 909
State and municipal.......................... 3,402 591 373
Mortgage-backed securities................... 1,620 333 --
Interest and dividends on investment
securities held to maturity:
U.S. Treasury and U.S. Government agencies... -- 934 1,282
State and municipal.......................... -- 1,952 1,595
Mortgage-backed securities................... -- 1,408 1,703
Interest on federal funds sold............... 269 211 291
Dividends on FHLB stock...................... 139 118 56
---------- --------- ---------
Total interest income....................... 43,142 40,829 36,969
---------- --------- ---------
Interest expense:
Interest on deposits......................... 15,151 15,157 14,816
Interest on securities sold under agreements
to repurchase............................... 564 639 558
Interest on federal funds purchased.......... 158 123 86
Interest on commercial paper (Master notes).. 526 521 381
---------- --------- ---------
Total interest expense...................... 16,399 16,440 15,841
---------- --------- ---------
Net interest income......................... 26,743 24,389 21,128
Provision for loan losses..................... 2,431 1,877 1,331
---------- --------- ---------
Net interest income after provision for loan
losses..................................... 24,312 22,512 19,797
---------- --------- ---------
Non-interest income:
Service charges on deposit accounts.......... 3,878 3,449 3,215
Fees for trust services...................... 1,968 1,343 986
Gains on sales of loans...................... 230 269 14
Investment securities gains.................. 32 150 40
Other income................................. 1,961 1,257 1,373
---------- --------- ---------
Total non-interest income................... 8,069 6,468 5,628
---------- --------- ---------
Non-interest expense:
Salaries and other personnel................. 10,255 9,428 8,468
Net occupancy................................ 1,922 1,793 1,501
Furniture and equipment...................... 2,081 1,768 1,679
FDIC assessment.............................. 132 206 177
Postage and supplies......................... 1,155 1,081 885
Marketing and advertising.................... 776 720 629
Telephone.................................... 792 601 518
Other expense................................ 4,161 3,533 3,228
---------- --------- ---------
Total non-interest expense.................. 21,274 19,130 17,085
---------- --------- ---------
Income before income taxes.................. 11,107 9,850 8,340
Income tax provision.......................... 3,038 3,000 2,415
---------- --------- ---------
NET INCOME.................................. $ 8,069 6,850 5,925
========== ========= =========
Increase in fair value of ESOP stock........ -- (948) (470)
---------- --------- ---------
Net income on common shares not subject to
put/call................................... $ 8,069 5,902 5,455
========== ========= =========
Per share data:
Net income per common share-basic, not
subject to put/call......................... $ 1.30 1.05 0.98
========== ========= =========
Net income per common share-dilutive, not
subject to put/call......................... $ 1.26 1.02 0.97
========== ========= =========
Cash dividends declared...................... $ 0.32 0.25 0.19
========== ========= =========
Weighted average common shares outstanding--
basic....................................... 6,208,750 6,178,318 6,109,754
========== ========= =========
Weighted average common shares outstanding--
basic, not subject to put/call.............. 6,208,750 5,631,040 5,544,596
========== ========= =========
Weighted average common shares outstanding--
dilutive, not subject to put/call........... 6,386,912 5,776,208 5,649,338
========== ========= =========
See accompanying notes to consolidated financial statements.
28
PALMETTO BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands, except share data)
Accumulated Common
Other Stock
Capital Comprehensive Subject to
Common Surplus Retained Treasury Income Put/call
Stock (Deficit) Earnings Stock (Loss), Net Option Total
------- --------- -------- -------- ------------- ---------- ------
Balance at December 31,
1996................... $30,330 356 620 (34) 166 (3,314) 28,124
Net income.............. -- -- 5,925 -- -- -- 5,925
Other comprehensive
income, net of tax:
Unrealized holding
gains arising during
period, net of tax
effect of $33......... -- -- -- -- -- -- 52
Less: reclassification
adjustment for gains
included in net
income, net of tax
effect of $15......... -- -- -- -- -- -- (25)
Net unrealized gains on
sec