The Palmetto Bank Reports Third Quarter Net Income of $2.0 Million

Net Loan Growth of $23.9 Million (3.2%) During the Third Quarter

Download Full 2Q 2014 The Palmetto Bank Earnings Release with Financial Tables

GREENVILLE, SC – Palmetto Bancshares, Inc. (NASDAQ: PLMT) (the “Company”) reported third quarter 2014 net income of $2.0 million ($0.15 per diluted share), which is unchanged from the second quarter 2014 ($0.16 per diluted share). For the nine months ended September 30, 2014, the Company reported net income of $6.0 million ($0.47 per diluted share) compared to net income of $25.9 million ($2.03 per diluted share) for the nine months ended September 30, 2013. Results for the nine months ended September 30, 2013 include a non-cash income tax benefit resulting from the reversal of substantially all of the valuation allowance on the Company’s net deferred tax asset. Income before provision (benefit) for income taxes was $9.6 million for the nine months ended September 30, 2014 compared to $7.7 million for the nine months ended September 30, 2013. The Company also declared a quarterly cash dividend of $0.05 per common share payable on November 17, 2014 to shareholders of record on November 3, 2014.

“We continue to demonstrate our ability to produce solid financial results in this challenging economic environment and competitive banking market,” said Samuel L. Erwin, Chairman and Chief Executive Officer. “We are encouraged by both our loan production during the quarter and our deposit generation efforts. We are also pleased to continue the quarterly dividend for our shareholders as part of our “value creation strategy” to increase the value of The Palmetto Bank franchise.”

Highlights for the third quarter 2014 are summarized as follows:

• Net income was $2.0 million, which was unchanged from the second quarter. As detailed below, a negative provision for loan losses was recorded which was offset primarily by writedowns on foreclosed real estate and vacant bank properties being marketed for sale.
• Net interest margin declined 4 basis points from the second quarter to 3.77%, reflecting a reduction in average loan balances and loan yields from the continued low interest rate environment, as well as a decline in investment securities yields from an increase in prepayments on securities backed by mortgage and Small Business Administration (“SBA”) loans. As a result, net interest income declined $44 thousand.
• The provision for loan losses was negative $500 thousand reflecting continued improvement in the risk profile of the loan portfolio, low charge-offs and a recovery of $833 thousand that was realized on a previously charged-off loan. There was no provision for loan losses recorded during the second quarter. The allowance for loan losses coverage ratio declined to 1.98%, also reflecting continued positive trends in credit quality.
• Noninterest income decreased $82 thousand from the second quarter as increases in deposit-related fees were more than offset by a decline in mortgage banking and trading asset income.
• Non-credit related expenses increased $438 thousand from the second quarter primarily due to writedowns of $253 thousand on vacant bank properties being marketed for sale, an increase in performance-based incentive accruals and professional fees associated with the revenue enhancement initiatives implemented in the third quarter.
• Credit-related expenses, defined as foreclosed real estate writedowns and expenses and loan workout expenses, declined $40 thousand from the second quarter. The second and third quarters included writedowns related to a single real estate development included in foreclosed real estate of $478 thousand and $337 thousand, respectively.
• Total period-end loans held for investment increased $23.9 million from the second quarter 2014 reflecting an increase in commercial and consumer loan originations, a strategic decision to retain a larger portion of mortgage loan production in the held for investment loan portfolio, and the purchase of $14.0 million of adjustable-rate mortgage (“ARM”) loans to supplement organic loan originations.
• Nonperforming assets decreased $1.4 million from the second quarter reflecting ongoing payments and dispositions of problem loans and foreclosed assets.

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

Net Interest Income
he net interest margin decreased 4 basis points to 3.77% in the third quarter 2014 and net interest income declined $44 thousand. The declines in net interest margin and net interest income are primarily due to lower average loan balances and yields and an increase in prepayments on securities backed by mortgage and SBA loans. While loans held for investment increased $23.9 million as of the end of the third quarter 2014, the increase occurred primarily in September, therefore interest income was only earned on these loans during a portion of the third quarter 2014.

• The overall yield on the loan portfolio continued to decline as higher-yielding loans matured and were replaced with new loan originations at lower rates in the current low interest rate and competitive banking environment.
• The overall cost of funds was unchanged and remained at 0.05% during the third quarter 2014, reflecting the Company’s strong core deposit franchise. Core deposits, defined as total deposits less time deposits over $100 thousand, increased $9.5 million during the third quarter 2014 and represent 93% of total deposits at September 30, 2014.
• The Federal Reserve continues to maintain short term interest rates near historically low levels. The sustained level of low interest rates, in addition to increasing competition for credit-worthy borrowers in the Company’s markets, has an overall negative impact on earning asset yields and makes improvement in our net interest income and margin challenging.

Noninterest Income
Noninterest income decreased $82 thousand from the second quarter, primarily due to the following:

• Mortgage banking income declined $241 thousand from a $1.1 million reduction in mortgage loan sales due to the Company’s decision during the third quarter 2014 to retain mortgage production in the held for investment portfolio rather than selling the loans in the secondary market, as well as a $196 thousand reduction in the fair value of mortgage loan commitments accounted for as derivatives. The Company expects to continue its strategy of retaining a portion of its mortgage loan production during the fourth quarter 2014. Mortgage loan production was $25.7 million and $20.5 million in the second and third quarters 2014, respectively.
• Trading asset income, before account management expenses, declined $77 thousand due to lower trading activity and a reduction in pricing spreads.
• These decreases were partially offset by an increase in gains on sales of investment securities of $62 thousand, higher trading asset income of $37 thousand and gains on sales of SBA loans of $70 thousand.
• These decreases were partially offset by an increase in service charges on deposit accounts of $236 thousand. The increase reflects the impact of the revenue enhancement initiatives that were implemented on July 1 and September 1, 2014, as well as increases in deposit transaction volumes. The Company also refined the features of select deposit products and introduced new products effective September 1, 2014. The increase in noninterest income from the revenue enhancement initiatives and product changes implemented during the third quarter are expected to result in incremental revenues in the fourth quarter 2014 and in 2015.

Noninterest Expense
Total noninterest expense increased $398 thousand during the third quarter 2014, primarily due to the following:

• The Company recorded a non-recurring writedown of $253 thousand to reflect a reduction in the estimated fair values of vacant land and a branch facility that are being marketed for sale.
• Salaries and other personnel expense increased $100 thousand due to an increase in performance- based incentive accruals. Base salaries declined $82 thousand in the third quarter 2014 compared to the second quarter 2014 reflecting the reduction in full-time equivalent employees (including contractors) from 300 at June 30, 2014 to 291 at September 30, 2014 as a result of process improvement projects implemented during 2014.
• Professional services expense increased $70 thousand primarily due to expenses associated with the revenue enhancement initiatives implemented during the third quarter 2014.
• The second and third quarter 2014 included writedowns of $478 thousand and $337 thousand, respectively, related to a single real estate development included in foreclosed real estate. The third quarter 2014 writedown reflects the execution of a contract to sell 16 residential lots located in one particular development and represents 10% of the Company’s book value concentration in this overall development. The sale is expected to close in the fourth quarter 2014.

The Company continues its focus on strategic efficiency to address net interest margin challenges, revenue pressures on fee income and increased regulatory compliance costs. During the third quarter 2014, the Company continued the implementation of various process improvement projects such as continuing the transition to part-time staffing in the branches, direct recruiting in lieu of paying staffing agencies, further consolidation of telephone providers and renegotiation of equipment maintenance contracts. The process improvement projects generated expense reductions during the second and third quarters 2014 and are expected to have a continued positive impact on the Company’s financial results over the remainder of 2014 and in 2015. The Company has additional process improvement projects that will result in further expense reductions over the remainder of 2014 and in 2015.

Credit Quality
Nonperforming assets decreased $1.4 million from the second quarter 2014 to $21.3 million at September 30, 2014 as a result of continued problem asset resolutions.

• Net recoveries were $270 thousand during the third quarter 2014 compared to net charge-offs of $647 thousand during the second quarter 2014 (0.34% of average loans, annualized). Net recoveries include an $833 thousand recovery on one borrower relationship previously charged-off. Excluding the impact of this recovery, net charge-offs were $563 thousand (0.30% of average loans, annualized) during the third quarter 2014.
• Past due loans were 0.47% of loans outstanding at September 30, 2014 compared to 0.38% at June 30, 2014 and have remained below 1.00% for seven consecutive quarters.
• The amount of the Company’s allowance for loan losses was reduced given the continued overall improvement in credit quality and reduced risk profile of the loan portfolio. The allowance for loan losses coverage ratio was 1.98% at September 30, 2014 compared to 2.07% at June 30, 2014. Absent unexpected negative trends in credit quality, the Company expects its allowance for loan losses coverage ratio to be further reduced in the fourth quarter 2014.

Balance Sheet and Capital
Total assets increased $5.5 million from June 30, 2014 to $1.1 billion at September 30, 2014 primarily due to an increase in cash from growth in deposits during the third quarter 2014.

• During the third quarter 2014, gross loans increased $23.9 million reflecting organic growth in commercial and consumer loans, a strategic decision to retain a larger portion of mortgage loan production in the loan portfolio, and the purchase of $14.0 million of ARM loans. The decision to retain mortgage loan production and the ARM loan purchase were intended to supplement the Company’s organic loan originations. To the extent organic loan growth slows or unscheduled payoffs exceed organic loan growth, the Company may consider additional loan pool purchases in the future. The loans purchased during the third quarter 2014 are comprised of 16 performing jumbo hybrid ARM loans secured by residential real estate located primarily in and around Atlanta, Georgia.
• While loan origination volume increased during the third quarter 2014, the overall economic environment remains sluggish and the level of competition for lending relationships is increasing. As a result, loan demand is uneven and the pricing on new loan originations remains extremely competitive.
• Investment securities available for sale increased $5.0 million during the third quarter 2014 to $214.6 million as excess liquidity was redeployed into higher-yielding earning assets. At September 30, 2014, an after-tax net unrealized loss on the investment securities portfolio of $1.5 million was recorded in accumulated other comprehensive loss, compared to $1.0 million at June 30, 2014. The Company continues to evaluate the interest rate sensitivity of its investment securities portfolio in anticipation of rising interest rates. At September 30, 2014, the estimated percentage decrease in fair value resulting from an instantaneous 100 basis point increase in interest rates was 4.09%.
• Noninterest bearing deposits increased $13.6 million while time deposits decreased $6.0 million, demonstrating the Company’s continued ability to both attract low cost deposits and achieve further reductions in higher-cost time deposits.
• The Company remains focused on executing several strategies to continue growing core deposits through increasing balances in existing accounts as well as growth in the number of households. These strategies include proactively retaining clients, attracting new clients, utilizing teammates with specialized deposit product knowledge, and enhancing existing deposit products. Growth in deposits is expected to be used primarily to fund future loan growth.
• The Company’s banking subsidiary, The Palmetto Bank, met all regulatory required minimum capital ratios and continued to be categorized as “well-capitalized” at September 30, 2014.
• In October 2014, the Company declared a quarterly cash dividend of $0.05 per common share, reflecting sustained profitability and strong capital levels. The dividend is payable on November 17, 2014 to shareholders of record on November 3, 2014.

“Our organic loan production improved notably during the third quarter,” continued Erwin. “However, we continue to experience an elevated level of unscheduled loan payoffs and uneven loan demand. Accordingly, during the third quarter we executed several tactical strategies to continue to increase our earning assets to generate interest income. In addition, we implemented revenue enhancement and expense reduction initiatives during the third quarter to further improve our financial results. We expect all of these actions to result in bottom line improvement in the fourth quarter.”

 

About The Palmetto Bank

Headquartered in Greenville, South Carolina, The Palmetto Bank is a 108-year old community bank and is the second largest banking institution headquartered in South Carolina. The Palmetto Bank has assets of $1.1 billion and serves the Upstate of South Carolina through 25 branch locations in nine counties along the economically attractive I-85 corridor, as well as 24/7/365 service through online and mobile banking, ATMs and telephone. The Bank has a unique understanding of the Upstate market and delivers local decision making with greater responsiveness to clients. Through its Retail, Commercial and Wealth Management lines of business, the Bank specializes in providing financial solutions to consumers and small to mid-size businesses with deposit and cash management products, loans (including consumer, mortgage, credit card, automobile, Small Business Administration, commercial, and corporate), lines of credit, trust, brokerage, private banking, financial planning and insurance. The Bank provides solutions that improve the client experience by providing clients the ability to bank whenever they want, wherever they want. Additional information may be found at the Bank’s website at palmettobank.com or on Facebook.

Download Full 2Q 2014 The Palmetto Bank Earnings Release with Financial Tables