The Palmetto Bank Reports Improved First Quarter Financial Results

Credit Quality Trends Continue to Improve

GREENVILLE, SC – April 30, 2012 – Palmetto Bancshares, Inc. (NASDAQ: PLMT) reported a reduced consolidated net loss for the first quarter 2012 of $587 thousand, compared to a consolidated net loss for the fourth quarter 2011 of $2.3 million.

The net loss in both quarters was primarily due to credit-related costs resulting from depressed real estate values which declined to $4.4 million in the first quarter 2012 from $5.9 million in the fourth quarter 2011, the third consecutive quarterly decline. Results for the first quarter 2012 and fourth quarter 2011 also included $328 thousand and $343 thousand, respectively, of one-time charges related to the Company’s previously announced strategic decisions to sell and consolidate four branches and outsource certain operational functions. Excluding the credit-related items and one-time charges, pre-tax operating earnings were $4.7 million in the first quarter 2012, compared to $3.8 million in the fourth quarter 2011 and have increased in four of the last five quarters. The quarterly reduction in net loss is a direct result of the Company’s continued execution of its strategic plan.

Highlights for the first quarter 2012 are summarized as follows:

• Credit-related costs decreased to $4.4 million from $5.9 million in the fourth quarter 2011 (credit-related costs include the provision for loan losses, loan workout expenses, foreclosed real estate writedowns and expenses, and loss on commercial loans held for sale).
• Net charge-offs increased to $4.9 million from $3.3 million in the fourth quarter 2011, with the increase in charge-offs due to the strategic decision to execute contracts to sell problem loans at discounted values to reduce ongoing carrying costs.
• Nonperforming assets decreased $8.5 million during the quarter to $72.3 million, which represents a 49% decline from the peak at March 31, 2010 and the seventh quarterly decline in the last eight quarters.
• Net interest margin increased 6 basis points to 3.71% and has now increased five consecutive quarters.
• Noninterest income increased $134 thousand from the fourth quarter 2011 as a result of increased mortgage banking and debit card income.
• Non-credit expenses decreased $993 thousand from the fourth quarter 2011 due to continued expense management and realization of operational efficiencies, as well as lower provisions for unfunded commitments and the absence of certain year-end adjustments recorded in the fourth quarter 2011.
• In March 2012 the Company completed the previously announced consolidations of its North Harper and South Main branches in Laurens and Greenwood, South Carolina, respectively. In addition, the Company continues to move forward with the planned sale of its Rock Hill and Blacksburg branches and the outsourcing of certain operational functions, both of which are expected to be completed during the second quarter. One-time charges related to these actions of $328 thousand were recorded in the first quarter 2012 and are reflected in non-credit expenses.

“We continued to make significant progress on our return to profitability. First quarter results reflect improvement in credit costs and other credit quality measures that are indicative of the intense focus we have been placing on reducing problem assets and returning to profitability over the last several years,” said Samuel L. Erwin, Chief Executive Officer. “During the first quarter we also made significant progress implementing the strategic actions to accelerate our return to profitability which were announced in the fourth quarter of 2011, including the completion of our branch consolidations. These efforts resulted in lower operating expenses, the bulk of which are expected to be realized starting in the second quarter of this year and further contribute to improved financial performance over the remainder of 2012. Notwithstanding our hard work and improved financial results, we continue to face fundamental industry-wide issues such as volatile market conditions, low interest rates, slow loan growth, depressed real estate values, increased regulatory costs, and revenue challenges. These overall industry and economic factors confirm the need for the proactive actions we have taken which are yielding positive results.”

The discussion of the Company’s results of operations and financial condition below is supplemented by the accompanying financial tables.

Net Interest Income
Net interest income decreased $262 thousand during the quarter to $10.6 million, while the net interest margin improved 6 basis points to 3.71% from 3.65% in the prior quarter. The net interest margin has improved five consecutive quarters as a result of continued strategic reduction in higher cost time deposits, repayments of FHLB advances and reduced deposit funding costs. These benefits were partially offset by elevated cash balances and reduced yields on securities and loans as the continuation of the Federal Reserve’s monetary policy continues to keep interest rates low, which has negatively impacted earning asset yields.

Noninterest Income
Noninterest income increased $134 thousand during the quarter to $3.9 million. The increase is attributable to higher mortgage banking and debit card income. The improvement in mortgage banking income is largely due to improved pricing on secondary market loan sales based on changes in interest rates. These increases were partially offset by lower nonsufficient funds fees and overdraft fees which continue to be under pressure as a result of new regulatory guidelines.

Noninterest Expense
Noninterest expense was $11.9 million during the first quarter, a $3.2 million decrease from the fourth quarter 2011 and the third consecutive quarterly decline. Included in total noninterest expense are credit-related costs associated with loan workout expenses, foreclosed real estate writedowns and expenses, and loss on commercial loans held for sale which also declined for the third consecutive quarter and were $1.7 million in the first quarter 2012 compared to $3.9 million in the fourth quarter 2011. The decline in these expenses reflects a sustained decline in the level of the Company’s problem assets and moderation in the degree of decline in real estate values from appraisals.

Also reflected in noninterest expense in the first quarter 2012 and fourth quarter 2011 are one-time charges of $328 thousand and $343 thousand, respectively, associated with the Company’s previously announced strategic decision to sell and consolidate four branches and outsource certain operational functions.  These charges include severance and retention payments, writedowns on premises and equipment, a lease impairment charge and professional fees directly related to the strategic actions. Excluding these credit-related expenses and one-time charges, noninterest expenses were $9.9 million, or $978 thousand less than noninterest expense excluding credit-related expenses and one-time charges in the fourth quarter 2011, primarily as a result of continued expense management and realization of operational efficiencies, as well as lower provisions for unfunded commitments and the absence of certain year-end adjustments recorded in the fourth quarter 2011.

Credit Quality
The Company continued its aggressive focus on improving credit quality.  As a result of our proactive problem asset resolution efforts, total nonperforming assets decreased $8.5 million to $72.3 million in the first quarter 2012 and are down 49% from the peak at March 31, 2010. In addition, nonperforming assets include loans and foreclosed real estate with a net carrying value of $7.8 million that were under contract for sale or disposition at March 31, 2012 and are expected to c
lose during the second quarter 2012. Net charge-offs were $4.9 million during the first quarter 2012, compared to $3.3 million in the prior quarter and reflect charge-offs of $2.1 million related to the loan sales that are under contract at March 31, 2012.

In addition, past due loans increased to 1.59% of loans at March 31, 2012 compared to 0.62% at December 31, 2011. The increase is primarily due to two loan relationships, one of which is expected to be resolved during the second quarter, therefore the increase is not indicative of underlying deterioration in credit quality of the portfolio as a whole.

Balance Sheet and Capital
Total assets were $1.2 billion at March 31, 2012 and increased $11.0 million during the quarter as a result of increased cash and securities balances stemming from seasonal increases in transaction deposits. As loan pay downs continue to outpace new loan originations, the Company is attempting to strategically reduce the level of excess cash, primarily by reducing higher cost time deposits and investing in securities to improve the net interest margin, efficiently utilize capital, and reduce FDIC insurance premiums that are primarily based on deposit balances. The Company also expects to utilize cash of $34 million during the second quarter 2012 for the net cash outlay on the sale of the Rock Hill and Blacksburg branches.

The Company’s banking subsidiary, The Palmetto Bank, met all regulatory required minimum capital ratios and continued to be considered “well-capitalized” at March 31, 2012.

“As we completed the first quarter of 2012, we believe it is apparent that our efforts to improve our credit quality and execute on the business and operational changes necessary to return to profitability are working,” continued Erwin. “While moderating, credit costs remain higher than historical levels and continue to negatively impact our financial results; however, our credit quality has steadily improved which has resulted in three straight quarterly declines in these credit-related costs. We are continuing to aggressively pursue problem asset resolution strategies to accelerate the reduction in our problem assets, including the potential for a bulk asset sale in the future. Excluding the elevated credit costs, our core business continues to show sustained operating results and is confirmation that our hard work and strategic actions are achieving the desired results.”

About The Palmetto Bank
Headquartered in Greenville, South Carolina, The Palmetto Bank is a 105-year old independent state-chartered commercial bank and is the fourth largest banking institution headquartered in South Carolina. The Palmetto Bank has assets of $1.2 billion and after completion of the reduction in the branch network will serve the Upstate through 25 banking locations in the nine counties of Abbeville, Anderson, Cherokee, Greenville, Greenwood, Laurens, Oconee, Pickens, and Spartanburg. The Bank specializes in providing personalized community banking services to individuals and small to mid-size businesses including Retail Banking (including Mortgage, Credit Cards and Indirect Auto), Commercial Banking (including Business Banking, Treasury Management and Merchant Services), and Wealth Management (including Trust, Brokerage, Financial Planning, and Insurance).  Additional information may be found at the Company’s web site at www.palmettobank.com.