* *
| **U. S. SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **WASHINGTON, D.C. 20549**                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| **FORM 10-Q**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|  (X)                                                                                                                                                                                                                                                                                                                                                                                                                                                     | QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | OF 1934 |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| For the quarterly period ended June 30, 2008                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|  (  )                                                                                                                                                                                                                                                                                                                                                                                                                                                    | TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | OF 1934 |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 incorporation or  organization)                                                                                                                                                                                                                                                                                                                                                                                                    |   | (IRS Employer Identification No.) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   |
| **301 Hillcrest Drive, Laurens, South Carolina**                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **29360** |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (Zip Code) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** |   |
| **(864) 984–4551**                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (Registrant’s telephone number)                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|           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  whether the registrant is a large accelerated filer, an accelerated filer, or  a  non-accelerated filer.  See  definitions of "large accelerated filer," "accelerated  filer" and "smaller reporting company" in Rule 12b-2  of the Exchange Act.                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Large accelerated filer [ ] |   | Accelerated filer [x] |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Non-accelerated filer [ ] |   | Smaller reporting company  [  ] |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|           Indicate by check mark  whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes [ ] No  [x]                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|           Indicate the number of  shares outstanding of each of the issuer's classes of common stock, as of the  latest practicable date.                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | Class |   | Outstanding at August 7, 2008 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |  ----------------------------- |   |   ------------------------------- |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | Common stock, $5.00 par value |   | 6,442,090 |   |   |

* *

 

 

 

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| **PALMETTO  BANCSHARES, INC. AND SUBSIDIARY 	Table of  Contents** |
|-------------------------------------------------------------------|
|                                                              |
|                                                              |   |   |   |   |   |
|                                                              |   |   |   |   |   |
|                                                              |   |   | Page |
| PART I - FINANCIAL INFORMATION                                    |   |   |   |
|                                                              | Item 1. | Financial Statements |   | 3 |   |
|                                                              | Item 2. | Management's Discussion and Analysis of Financial  Condition and |   |   |   |
|                                                              |   |     	Results of Operations |   | 32 |   |
|                                                              | Item 3. | Quantitative and Qualitative Disclosures about Market Risk |   | 61 |   |
|                                                              | Item 4. | Controls and Procedures |   | 62 |   |
|                                                              |   |   |   |   |   |
| PART II - OTHER INFORMATION                                       |   |   |   |
|                                                              | Item 1. | Legal Proceedings |   | 63 |   |
|                                                              | Item 1A. | Risk Factors |   | 63 |   |
|                                                              | Item 2. | Unregistered Sales of Equity Securities and Use of  Proceeds |   | 63 |   |
|                                                              | Item 3. | Defaults Upon Senior Securities |   | 63 |   |
|                                                              | Item 4. | Submission of Matters to a Vote of Security Holders |   | 63 |   |
|                                                              | Item 5. | Other Information |   | 63 |   |
|                                                              | Item 6. | Exhibits |   | 64 |   |
|                                                              |   |   |   |   |   |
| SIGNATURES                                                        |   | 65 |   |
|                                                              |   |   |   |   |   |
|                                                              |   |   |   |   |   |

 

 

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*Certain statements contained inthis Quarterly Report on Form 10-Q that are not statements of historicalfact constitute forward-looking statements within the meaning of theSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities and Exchange Act of 1934, as amended, notwithstanding that such statements are not specificallyidentified as such. In addition, certain statements may be contained in theregistrant’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and writtenstatements made by or with the approval of the registrant that are notstatements of historical fact and constitute forward-looking statements. Broadlyspeaking, forward-looking statements include, but are not limited to,projections of the registrant’s revenues, income, earnings per common share,capital expenditures, dividends, capital structure, or other financial items,descriptions of plans or objectives of management for future operations,products or services, forecasts of the registrant’s future economicperformance, and descriptions of assumptions underlying or relating to any ofthe foregoing.  Because these statements discuss future events or conditions,forward-looking statements often include words such as “anticipate,” “believe,”“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”“may,” “should,” “will,” “would,” “targeted,” “continue,” “remain,” or other similar expressions that are intended to identifyforward-looking statements but are not the exclusive means of identifying suchstatements.*

* *

*Forward-looking statementsinvolve risks and uncertainties that may cause actual results to differmaterially from those in such statements. Refer to the registrant’s AnnualReport on Form 10-K for the year ended December 31, 2007 for a discussion of thematerial risks and uncertainties that managementbelieves impact the registrant and may cause actual results to differ fromthose discussed in the forward-looking statements.*

* *

*The registrant wishes to caution readers not to placeundue reliance on any forward-looking statements, which speak only as of thedate made. The registrant also wishes to advise readers that the factors listedabove could impact the registrant’s financial performance and could cause theregistrant’s actual results for future periods to differ materially from anyopinions expressed with respect to future periods in any current statements.The registrant does not undertake, and specifically disclaims any obligation,to publicly release the result of any revisions that may be made to anyforward-looking statements to reflect events or circumstances after the date ofsuch statements or to reflect the occurrence of anticipated or unanticipatedevents.*

 

 

 

 

 

 

 

2

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| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**                           |
|------------------------------------------------------------------------|
| **Consolidated Balance Sheets**                                        |
| **(dollars in thousands, except common and per share  data)**          |
|                                                                   |   |   |   |   |   |   |   |   |
| ** **                                                             |   |   |   |   | **June 30,** |   | **December 31,** |   |
|                                                                   |   |   |   |   | **2008** | ** ** | **2007** | ** ** |
|                                                                   |   |   |   |   | (unaudited) |   |   |   |
| Assets                                                                 |   |   |   |   |   |   |   |
| Cash and cash equivalents                                              |   |   |   |   |   |
|                                                                   | Cash and due from banks |   |  $ | 37,978  |   | 42,450  |   |
|                                                                   | Federal funds sold |   | -    |   | 9,782  |   |
|                                                                   |   | Total cash and cash  equivalents | 37,978  |   | 52,232  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank  ("FHLB") stock, at cost              | 5,913  |   | 2,617  |   |
| Investment securities  available for sale, at fair value               | 133,199  |   | 95,715  |   |
| Mortgage loans held for  sale                                          |   | 3,801  |   | 5,005  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Loans, gross                                                           |   |   | 1,114,522  |   | 1,044,770  |   |
|                                                                   | Less: allowance for loan  losses |   | (7,645) |   | (7,418) |   |
|                                                                   |   | Loans, net |   | 1,106,877  |   | 1,037,352  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Premises and equipment, net                                            |   | 24,744  |   | 25,133  |   |
| Premises held for sale                                                 |   | 1,651  |   | -    |   |
| Goodwill, net                                                          |   |   | 3,691  |   | 3,691  |   |
| Core deposit intangibles,  net                                         |   | 57  |   | 79  |   |
| Accrued interest receivable                                            |   | 6,257  |   | 6,655  |   |
| Other                                                                  |   |   |   | 18,187  |   | 19,698  |   |
|                                                                   |   |   | Total assets |   |  $ | 1,342,355  |   | 1,248,177  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Liabilities and  shareholders' equity                                  |   |   |   |   |   |
| Liabilities                                                            |   |   |   |   |   |   |   |
| Deposits                                                               |   |   |   |   |   |   |   |
|                                                                   | Noninterest-bearing |   |  $ | 144,959  |   | 135,111  |   |
|                                                                   | Interest-bearing |   | 905,720  |   | 923,683  |   |
|                                                                   |   | Total deposits |   | 1,050,679  |   | 1,058,794  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Retail repurchase  agreements                                          |   | 15,579  |   | 11,280  |   |
| Commercial paper (Master  notes)                                       |   | 32,401  |   | 26,326  |   |
| Other short-term borrowings                                            |   | 67,671  |   | 30,000  |   |
| Long-term borrowings                                                   |   | 52,000  |   | -    |   |
| Accrued interest payable                                               |   | 1,709  |   | 2,042  |   |
| Other                                                                  |   |   |   | 7,602  |   | 9,479  |   |
|                                                                   |   | Total liabilities |   | 1,227,641  |   | 1,137,921  |   |
|                                                                   |   |   |   |   |   |   |   |   |
| Shareholders' equity                                                   |   |   |   |   |   |
| Common stock - par value  $5.00 per share;  authorized 10,000,000 |   |   |   |   |
|                                                                   | shares; issued and  outstanding 6,442,090 and 6,421,765 |   |   |   |   |
|                                                                   | at June 30, 2008 and  December 31, 2007, respectively | 32,211  |   | 32,109  |   |
| Capital surplus                                                        |   | 2,013  |   | 1,664  |   |
| Retained earnings                                                      |   | 84,521  |   | 79,221  |   |
| Accumulated other  comprehensive loss, net of tax                      | (4,031) |   | (2,738) |   |
|                                                                   |   | Total shareholders' equity |   | 114,714  |   | 110,256  |   |
|                                                                   |   |   |   |   |   |   |   |   |
|                                                                   |   |   | Total liabilities and  shareholders' equity |  $ | 1,342,355  |   | 1,248,177  |   |
|                                                                   |   |   |   |   |   |   |   |   |
|                                                                   |   |   |   |   |   |   |   |   |
|                                                                   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Interim Financial  Statements                |
|                                                                   |   |   |   |   |   |   |   |   |

 

3

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| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**                              |
|---------------------------------------------------------------------------|
| **Consolidated Interim Statements of Income**                             |
| **(dollars in thousands, except common and per share  data) (unaudited)** |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   | **For the three month	periods 	ended June 30,** |
|                                                                      |   |   |   |   | **2008** | ** ** | **2007** |
|                                                                      |   |   |   |   |   |
| Interest income                                                           |   |   |   |
|                                                                      | Interest earned and fees on  loans |  $ | 18,290  |   | 19,301  |
|                                                                      | Interest earned on  investment securities available for sale |   |   |   |
|                                                                      |   | Government-sponsored  enterprises (taxable) | 36  |   | 381  |
|                                                                      |   | State and municipal  (nontaxable) | 455  |   | 452  |
|                                                                      |   | Mortgage-backed (taxable) | 1,170  |   | 297  |
|                                                                      | Dividends paid on FHLB  stock | 86  |   | 38  |
|                                                                      | Interest earned on federal  funds sold | 10  |   | 211  |
|                                                                      | Interest earned on cash and  due from banks | 3  |   | 16  |
|                                                                      |   |   | Total interest income | 20,050  |   | 20,696  |
|                                                                      |   |   |   |   |   |   |   |
| Interest expense                                                          |   |   |   |
|                                                                      | Interest paid on deposits | 5,653  |   | 7,437  |
|                                                                      | Interest paid on retail  repurchase agreements | 57  |   | 130  |
|                                                                      | Interest paid on commercial  paper | 87  |   | 289  |
|                                                                      | Interest paid on other  short-term borrowings | 258  |   | 54  |
|                                                                      | Interest paid on long-term  borrowings | 373  |   | 78  |
|                                                                      |   |   | Total interest expense | 6,428  |   | 7,988  |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net interest income | 13,622  |   | 12,708  |
|                                                                      |   |   |   |   |   |   |   |
| Provision for loan losses                                                 | 687  |   | 433  |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net interest income after  provision for loan losses | 12,935  |   | 12,275  |
|                                                                      |   |   |   |   |   |   |   |
| Noninterest income                                                        |   |   |   |
|                                                                      | Service charges on deposit  accounts, net | 2,127  |   | 1,991  |
|                                                                      | Fees for trust and  investment management and brokerage services | 755  |   | 826  |
|                                                                      | Mortgage-banking income,  net | 384  |   | 171  |
|                                                                      | Investment securities gains | 1  |   | -    |
|                                                                      | Other | 1,293  |   | 956  |
|                                                                      |   |   | Total noninterest income | 4,560  |   | 3,944  |
|                                                                      |   |   |   |   |   |   |   |
| Noninterest expense                                                       |   |   |   |   |
|                                                                      | Salaries and other  personnel | 6,070  |   | 6,057  |
|                                                                      | Occupancy | 803  |   | 722  |
|                                                                      | Furniture and equipment | 985  |   | 894  |
|                                                                      | Marketing | 291  |   | 219  |
|                                                                      | Amortization of core  deposit intangibles | 11  |   | 12  |
|                                                                      | Other | 2,666  |   | 2,046  |
|                                                                      |   |   | Total noninterest expense | 10,826  |   | 9,950  |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net income before provision  for income taxes | 6,669  |   | 6,269  |
|                                                                      |   |   |   |   |   |   |   |
| Provision for income taxes                                                | 2,340  |   | 2,204  |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net income |  $ | 4,329  |   | 4,065  |
|                                                                      |   |   |   |   |   |   |   |
| Common share data                                                         |   |   |   |
|                                                                      | Net income - basic |  $ | 0.67  |   | 0.64  |
|                                                                      | Net income - diluted | 0.66  |   | 0.63  |
|                                                                      | Cash dividends | 0.20  |   | 0.19  |
|                                                                      | Book value | 17.81  |   | 16.49  |
|                                                                      |   |   |   |   |
|                                                                      | Weighted average common  shares outstanding - basic | 6,435,515  |   | 6,385,483  |
|                                                                      | Weighted average common  shares outstanding - diluted | 6,521,169  |   | 6,499,649  |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   |   |   |   |
| See Notes to Consolidated Interim Financial  Statements                   |

 

4

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| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**                              |
|---------------------------------------------------------------------------|
| **Consolidated Interim Statements of Income**                             |
| **(dollars in thousands, except common and per share  data) (unaudited)** |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   |   |   | **For the six month periods ended June 30,** |
|                                                                      |   |   |   |   |   |   | **2008** | ** ** | **2007** | ** ** |
|                                                                      |   |   |   |   |   |   |   | ** ** |
| Interest income                                                           |   |   |   |   |   |   |   |   |
|                                                                      | Interest earned and fees on  loans |   |  $ | 37,341  |   | 38,067  |   |
|                                                                      | Interest earned on  investment securities available for sale |   |   |   |   |
|                                                                      |   | Government-sponsored  enterprises (taxable) | 235  |   | 816  |   |
|                                                                      |   | State and municipal  (nontaxable) |   | 914  |   | 876  |   |
|                                                                      |   | Mortgage-backed (taxable) |   | 1,602  |   | 609  |   |
|                                                                      | Dividends paid on FHLB  stock |   | 143  |   | 75  |   |
|                                                                      | Interest earned on federal  funds sold |   | 47  |   | 419  |   |
|                                                                      | Interest earned on cash and  due from banks | 8  |   | 32  |   |
|                                                                      |   |   | Total interest income |   | 40,290  |   | 40,894  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                          |   |   |   |   |   |   |   |
|                                                                      | Interest paid on deposits |   |   | 12,769  |   | 14,664  |   |
|                                                                      | Interest paid on retail  repurchase agreements | 169  |   | 276  |   |
|                                                                      | Interest paid on commercial  paper   |   | 231  |   | 527  |   |
|                                                                      | Interest paid on other  short-term borrowings | 509  |   | 83  |   |
|                                                                      | Interest paid on long-term  borrowings |   | 441  |   | 173  |   |
|                                                                      |   |   | Total interest expense |   | 14,119  |   | 15,723  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net interest income |   | 26,171  |   | 25,171  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                                                 |   |   | 1,175  |   | 800  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net interest income after  provision for loan losses | 24,996  |   | 24,371  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Noninterest income                                                        |   |   |   |   |   |   |   |
|                                                                      | Service charges on deposit  accounts, net |   | 4,294  |   | 3,899  |   |
|                                                                      | Fees for trust and  investment management and brokerage services | 1,511  |   | 1,522  |   |
|                                                                      | Mortgage-banking income,  net |   | 637  |   | 519  |   |
|                                                                      | Investment securities gains |   |   | 1  |   | -    |   |
|                                                                      | Other |   |   |   |   | 2,806  |   | 1,903  |   |
|                                                                      |   |   | Total noninterest income |   | 9,249  |   | 7,843  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Noninterest expense                                                       |   |   |   |   |   |   |   |
|                                                                      | Salaries and other  personnel |   |   | 12,265  |   | 12,194  |   |
|                                                                      | Occupancy |   |   |   | 1,608  |   | 1,430  |   |
|                                                                      | Furniture and equipment |   |   | 1,929  |   | 1,833  |   |
|                                                                      | Marketing |   |   |   | 623  |   | 487  |   |
|                                                                      | Amortization of core  deposit intangibles |   | 22  |   | 24  |   |
|                                                                      | Other |   |   |   |   | 5,546  |   | 4,191  |   |
|                                                                      |   |   | Total noninterest expense |   | 21,993  |   | 20,159  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net income before provision  for income taxes | 12,252  |   | 12,055  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                                                |   |   | 4,277  |   | 4,229  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   | Net income |   |   |  $ | 7,975  |   | 7,826  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| Common share data                                                         |   |   |   |   |   |   |   |
|                                                                      | Net income - basic |   |   |  $ | 1.24  |   | 1.23  |   |
|                                                                      | Net income - diluted |   |   | 1.22  |   | 1.21  |   |
|                                                                      | Cash dividends |   |   |   | 0.40  |   | 0.38  |   |
|                                                                      | Book value |   |   |   | 17.81  |   | 16.49  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      | Weighted average common  shares outstanding - basic | 6,433,343  |   | 6,382,019  |   |
|                                                                      | Weighted average common  shares outstanding - diluted | 6,518,299  |   | 6,480,454  |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Interim Financial  Statements                   |
|                                                                      |   |   |   |   |   |   |   |   |   |   |

5

----

 

 

 

 

 

| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**                                                                                 |
|------------------------------------------------------------------------------------------------------------------------------|
| ** Consolidated Interim Statements of Changes in  Shareholders' Equity and Comprehensive Income**                       |
| **(dollars in thousands, except common and per share  data) (unaudited)**                                                    |
|                                                                                                                         |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** |
|                                                                                                                         |   | **Shares of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **other** | ** ** | ** ** |
|                                                                                                                         |   | **common** | ** ** | **Common** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | ** ** |
|                                                                                                                         |   | **stock** | ** ** | **stock** | ** ** | **surplus** | ** ** | **earnings** | ** ** | **income (loss), net** | ** ** | **Total** |
| Balance at December 31,  2006                                                                                                |   | 6,367,450  |   |  $ | 31,837  |   |  $ | 1,102  |   |  $ | 68,132  |   |  $ | (695) |   |  $ | 100,376  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                   |   |   |   |   |   |   |   | 7,826  |   |   |   | 7,826  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive	income (loss),  net of tax                                                                               |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|      Investment securities  available for sale                                                           |   |   |   |   |   |   |   |   |   |   |   |
|           Change in  unrealized position during the period, net                 |   |   |   |   |   |   |   |   |   |   |   |
|                of tax  impact of $491                  |   |   |   |   |   |   |   |   |   | (784) |   |   |
|           Reclassification  adjustment included                                 |   |   |   |   |   |   |   |   |   |   |   |
|                in net  income, net of tax impact of $0 |   |   |   |   |   |   |   |   | -    |   |   |
|      Net unrealized loss on  investment securities available for sale                                    |   |   |   |   |   |   |   | (784) |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   | 7,042  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash dividend declared and  paid ($0.19 per share)                                                                           |   |   |   |   |   |   | (2,427) |   |   |   | (2,427) |
| Compensation expense  related to stock options                                                                               |   |   |   |   | 66  |   |   |   |   |   | 66  |
| Common stock issued  pursuant to stock option plan                                                                           | 22,210  |   | 111  |   | 223  |   |   |   |   |   | 334  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at June 30, 2007                                                                                                     |   | 6,389,660  |   |  $ | 31,948  |   |  $ | 1,391  |   |  $ | 73,531  |   |  $ | (1,479) |   |  $ | 105,391  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31,  2007                                                                                                |   | 6,421,765  |   |  $ | 32,109  |   |  $ | 1,664  |   |  $ | 79,221  |   |  $ | (2,738) |   |  $ | 110,256  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                   |   |   |   |   |   |   |   | 7,975  |   |   |   | 7,975  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income	(loss),  net of tax                                                                               |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|      Investment securities  available for sale                                                           |   |   |   |   |   |   |   |   |   |   |   |
|           Change in  unrealized position during the period, net                 |   |   |   |   |   |   |   |   |   |   |   |
|                of tax  impact of $258                  |   |   |   |   |   |   |   |   |   | (426) |   |   |
|           Reclassification  adjustment included                                 |   |   |   |   |   |   |   |   |   |   |   |
|                in net  income, net of tax impact of $0 |   |   |   |   |   |   |   |   | (1) |   |   |
|      Net unrealized loss on  investment securities available for sale                                    |   |   |   |   |   |   |   |   |   |   | (427) |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|      Defined benefit  pension plan                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |
|           Change in  unrealized position during the period, net                 |   |   |   |   |   |   |   |   |   |   |   |
|                of tax  impact of $466                  |   |   |   |   |   |   |   |   |   | (866) |   | (866) |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   | 6,682  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative effect of  adoption of new accounting standard (See Note 1)                                                       |   |   |   | (99) |   |   |   | (99) |
| Cash dividend declared and  paid ($0.20 per share)                                                                           |   |   |   |   |   |   | (2,576) |   |   |   | (2,576) |
| Compensation expense  related to stock options                                                                               |   |   |   |   | 47  |   |   |   |   |   | 47  |
| Excess tax benefit from  stock-based awards                                                                                  |   |   |   |   | 78  |   |   |   |   |   | 78  |
| Common stock issued  pursuant to stock option plan                                                                           | 20,325  |   | 102  |   | 224  |   |   |   |   |   | 326  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at June 30, 2008                                                                                                     |   | 6,442,090  |   |  $ | 32,211  |   |  $ | 2,013  |   |  $ | 84,521  |   |  $ | (4,031) |   |  $ | 114,714  |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Interim Financial  Statements                                                                      |
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

6

----

 

 

| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**            |
|---------------------------------------------------------|
| **Consolidated Interim Statements of Cash Flows**       |
| **(in thousands)**                                      |
|                                                    |   |   |   |  **For the six month periods		ended June 30,** |
|                                                    |   |   |   | **2008** | ** ** | **2007** | ** ** |
|                                                    |   |   |   |   | ** ** |
| Operating	activities                                    |   |   |   |   |
|                                | Net income |  $ | 7,975  |   | 7,826  |   |
|                                                    | Adjustments to reconcile  net income to net cash provided by operating activities |   |   |   |   |
|                                                    |     | Premises, furniture, and  equipment depreciation | 971  |   | 986  |   |
|                                                    |   | Gain on disposition of  premises, furniture, and equipment | 3  |   | -    |   |
|                                                    |   | Amortization of core  deposit intangibles | 22  |   | 24  |   |
|                                                    |   | Amortization of unearned  discounts / premiums on investment securities available for sale, net | 18  |   | 42  |   |
|                                                    |   | (Accretion) amortization of  unearned discounts / premiums on mortgage-backed securities, net | (15) |   | 57  |   |
|                                                    |   | Investment securities gains | (1) |   | -    |   |
|                                                    |   | Provision for loan losses | 1,175  |   | 800  |   |
|                                                    |   | Originations of mortgage  loans held for sale | (41,379) |   | (28,991) |   |
|                                                    |   | Sales of mortgage loans  held for sale | 43,073  |   | 29,702  |   |
|                                                    |   | Gain on sales of mortgage  loans held for sale, net | (490) |   | (335) |   |
|                                                    |   | Writedowns and losses on  sales of real estate acquired in settlement of loans | 69  |   | 171  |   |
|                                                    |   | Compensation expense  related to stock options granted | 47  |   | 66  |   |
|                                                    |   | Excess tax benefit from  stock-based awards | 78  |   | -    |   |
|                                                    |   | Decrease (increase) in  accrued interest receivable and other assets, net | 551  |   | (778) |   |
|                                                    |   | (Decrease) increase in  accrued interest payable and other liabilities, net | (970) |   | 507  |   |
|                                                    |   |   | Net cash provided by  operating activities | 11,127  |   | 10,077  |   |
|                                                    |   |   |   |   |   |   |   |
| Investing	activities                                    |   |   |   |   |
|                                                    | Maturities and calls of  investment securities available for sale | 21,434  |   | 30,595  |   |
|                                                    | Purchases of  mortgage-backed investment securities available for sale | (65,155) |   | (22,332) |   |
|                                                    | Repayments on  mortgage-backed investment securities available for sale | 5,550  |   | 2,222  |   |
|                                                    | Purchases of FHLB stock | (3,701) |   | -    |   |
|                                                    | Redemptions of FHLB stock | 405  |   | 72  |   |
|                                                    | Increase in loans, net | (71,489) |   | (42,010) |   |
|                                                    | Sales of real estate  acquired in settlement of loans | 131  |   | 294  |   |
|                                                    | Purchases of premises and  equipment, net | (2,236) |   | (1,444) |   |
|                                                    |   |   | Net cash used in investing  activities | (115,061) |   | (32,603) |   |
|                                                    |   |   |   |   |   |   |   |
|                                                    |   |   |   |   |   |   |   |
| Financing	activities                                    |   |   |   |   |
|                                                    | (Decrease) increase in  transaction, money market, and savings deposit accounts, net | (16,124) |   | 36,893  |   |
|                                                    | Increase (decrease) in time  deposit accounts, net | 8,009  |   | (28,649) |   |
|                                                    | Increase (decrease) in  retail repurchase agreements, net | 4,299  |   | (2,282) |   |
|                                                    | Increase in commercial  paper, net | 6,075  |   | 6,749  |   |
|                                                    | Increase in other  short-term borrowings | 37,671  |   | 18,500  |   |
|                                                    | Increase in long-term  borrowings | 52,000  |   | -    |   |
|                                                    | Repayments of long-term  borrowings | -    |   | (10,000) |   |
|                                                    | Proceeds from stock option  activity | 326  |   | 334  |   |
|                                                    | Cash dividends declared and  paid on common stock | (2,576) |   | (2,427) |   |
|                                                    |   |   | Net cash provided by  financing activities | 89,680  |   | 19,118  |   |
|                                                    |   |   |   |   |   |   |   |
| Net decrease in cash and  cash equivalents              | (14,254) |   | (3,408) |   |
| Cash and cash equivalents, beginning of period          | 52,232  |   | 46,666  |   |
| Cash and cash equivalents,  end of period               |  $ | 37,978  |   | 43,258  |   |
|                                                    |   |   |   |   |   |   |   |
| Supplemental	cash flow  disclosures                     |   |   |   |   |
|                                                    | Cash paid during the period  for: |   |   |   |   |
|                                                    |   | Interest expense |  $ | 14,452  |   | 15,784  |   |
|                                                    |   | Income taxes | 4,137  |   | 3,618  |   |
|                                                    | Significant noncash  investing and financing activities |   |   |   |   |
|                                                    |   | Net unrealized losses on  investment securities available for sale, net of tax |  $ | (426) |   | (784) |   |
|                                                    |   | Net unrealized losses on  defined benefit pension plan, net of tax | (866) |   | -    |   |
|                                                    |   | Loans transferred to real  estate acquired in settlement of loans, at fair market value | 789  |   | 582  |   |
|                                                    |   | Premises reclassified as  held for sale, at fair market value | 1,651  |   | -    |   |
|                                                    |   |   |   |   |   |   |   |
|                                                    |   |   |   |   |   |   |   |
|                                                    |   |   |   |   |   |   |   |
| See Notes to Consolidated Interim Financial  Statements |
|                                                    |   |   |   |   |   |   |   |

** **

** **

 

7

----

 

 

 

 

 

**PALMETTOBANCSHARES, INC. AND SUBSIDIARY**

**Notes ToConsolidated Interim Financial Statements**

** **

***1.       Summaryof Significant Accounting Policies***

 

*Natureof Operations*

* *

“PalmettoBancshares” is a regional financial services bank holding companyorganized in 1982 under the laws of South Carolina and headquartered inLaurens, South Carolina that provides, through itssubsidiary, a broad array of commercial banking, consumer banking, trust andinvestment management, and brokerage services throughout its market area primarilywithin northwest South Carolina (the “Upstate”).

* *

*Principles of Consolidation / Basis ofPresentation   *

*** ***

The accompanying ConsolidatedInterim Financial Statements include the accounts of Palmetto Bancshares, Inc.,(the “Company”), which includes its wholly owned subsidiary, ThePalmetto Bank, (the "Bank"), andthe Bank's wholly owned subsidiary, “Palmetto Capital.”  In management’sopinion, all significant intercompanyaccounts and transactions have been eliminated in consolidation. Theaccounting and financial reporting policies the Company follows conform, in allmaterial respects, to accounting principles generally accepted in the UnitedStates and to general practices within the financial services industry.

 

The Consolidated InterimFinancial Statements in this Quarterly Report on Form 10-Q have not beenaudited by the Company’s independent registered public accounting firm, but inthe opinion of management, reflect all adjustments necessary for a fairpresentation of the Company’s financial position and results of operations. Allsuch adjustments were of a normal and recurring nature. The Consolidated Interim Financial Statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q adopted by the SEC. Accordingly, the Consolidated Interim Financial Statements do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements and should beread in conjunction with the Company’s ConsolidatedFinancial Statements, and notes thereto, for the year endedDecember 31, 2007, included in the Company’s Annual Report on Form 10-K.Operating results for the interim periods disclosed herein are not necessarilyindicative of the results that may be expected for a full year or any futureperiod.

 

*Use of Estimates*

* *

In preparing its Consolidated Interim Financial Statements, the Company'smanagement makes estimates and assumptions that impact the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesas of the date of the Consolidated Interim Financial Statements for the periods presented. Actual resultscould differ from these estimates and assumptions. Therefore, the results ofoperations for the three and six month periods ended June 30, 2008 are notnecessarily indicative of the results of operations that may be expected infuture periods.

 

Business Segments

 

The Company adheres to the provisions of the FinancialAccounting Standards Board’s (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 131, "Disclosures About Segments of an Enterpriseand Related Information." Operating segments are components of an enterpriseabout which separate financial information is available that are evaluatedregularly by the chief operating decision makers in deciding how to allocateresources and assess performance. SFAS No. 131 requires that a publicenterprise report a measure of segment profit or loss, certain specific revenueand expense items, segment assets, and information about the way that theoperating segments were determined, among other items. 

 

TheCompany considers business segments by analyzing distinguishable components that are engaged in providing individualproducts, services, or groups of related products or services that are subjectto risks and returns different from those of other businesssegments. When determining whether products and services are related, theCompany considers the nature of the products or services, the nature of theproduction processes, the type or class of customer for which the products orservices are designed, and the methods used to distribute the products orprovide the services. 

 

8

----

 

 

As ofJune 30, 2008, the Company had made no changes to its determination in itsAnnual Report on Form 10-K for the year ended December 31, 2007 that it had onereportable operating segment, banking.  

 

Reclassifications

* *

Certain amounts previously presented in the Company’s Consolidated Financial Statements for the yearended December 31, 2007 and the Company’s Consolidated Interim FinancialStatements for the three and six month periods ended June 30, 2007 havebeen reclassified to conform to current classifications.  All suchreclassifications had no impact on the prior period net income or retainedearnings as previously reported. 

 

Balance Sheet

The following tablesummarizes the Company’s Consolidated Balance Sheet at December 31,2007, as then reported, prior to these reclassifications (in thousands).

 

| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Balance Sheet**

**( in thousands)** |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                      |   |   |   |   |   | **December 31,**

**2007** |   |
| Assets                                                                                                                                    |   |   |   |   |
| Cash and cash equivalents                                                                                                  |   |   |   |   |
|                                                                                                                                      | Cash and due from banks |   |   | $ | 41,769  |   |
|                                                                                                                                      | Federal funds sold |   |   | 10,463  |   |
|                                                                                                                                      |   | Total cash and cash equivalents |   | 52,232  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| FHLB stock, at cost                                                                                                        |   |   | 2,617  |   |
| Investment securities available for sale, at fair market value                                    | 95,715  |   |
| Mortgage loans held for sale                                                                                          |   |   | 5,006  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| Loans                                                                                                                                     |   |   | 1,044,770  |   |
|                                                                                                                                      | Less: allowance for loan losses |   | (7,418) |   |
|                                                                                                                                      |   | Loans, net |   |   | 1,037,352  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| Premises and equipment, net                                                                                                |   |   | 25,133  |   |
| Goodwill                                                                                                                                  |   |   | 3,691  |   |
| Core deposit intangibles                                                                                                        |   |   | 79  |   |
| Accrued interest receivable                                                                                                     |   |   | 6,655  |   |
| Other                                                                                                                                     |   |   | 19,697  |   |
|                                                                                                                                      |   |   | Total assets |   |   | $ | 1,248,177  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| Liabilities and shareholders' equity                                                                                       |   |   |   |
| Liabilities                                                                                                                               |   |   |   |   |
| Deposits                                                                                                                                  |   |   |   |   |
|                                                                                                                                      | Noninterest-bearing |   |   | $ | 135,111  |   |
|                                                                                                                                      | Interest-bearing |   |   | 923,683  |   |
|                                                                                                                                      |   | Total deposits |   |   | 1,058,794  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| Retail repurchase agreements                                                                                                    |   |   | 11,280  |   |
| Commercial paper (Master notes)                                                                                            |   | 26,326  |   |
| Federal funds purchased                                                                                                         |   |   | 30,000  |   |
| FHLB borrowings - long-term                                                                                                |   |   | -  |   |
| Accrued interest payable                                                                                                        |   |   | 2,042  |   |
| Other                                                                                                                                     |   |   |   |   | 9,479  |   |
|                                                                                                                                      |   | Total liabilities |   |   | 1,137,921  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| Shareholders' equity                                                                                                                 |   |   |   |   |
| Common stock                                                                                                                         |   |   |   | 32,109  |   |
| Capital surplus                                                                                                                      |   |   |   | 1,664  |   |
| Retained earnings                                                                                                                    |   |   | 79,221  |   |
| Accumulated other comprehensive loss, net of tax                                                            |   | (2,738) |   |
|                                                                                                                                      |   | Total shareholders' equity |   | 110,256  |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
|                                                                                                                                      |   |   | Total liabilities and shareholders' equity | $ | 1,248,177  |   |

  

Cash and cash equivalents arecomprised of cash and due from bank balances, as well as federal funds sold tocorrespondent banks.  Federal funds sold are essentially uncollateralized loansto other financial institutions. During 2007, interest-bearing cashbalances held at the FHLB were reported within the Federal Funds Sold financialstatement line item.  During 2008,management concluded that, although such balances were interest-bearing, theywere not federal funds sold.  Within this Quarterly Report on Form 10-Q,prior period balances have been reclassified  and are reported within the Cash and Due From Banksfinancial statement line item. 

 

The Company originates certain mortgage loans with theintention of selling them in the secondary market.  A lag may occur from thetime that the sale proceeds are received by the Company and the time that allpaperwork is received and the appropriate entries are made to the Company’srecords.  During this period, sale proceeds received are recorded in a clearingaccount.  At December 31, 2007, this clearing account was reported within the Otherfinancial statement line item within the Assets section.  During 2008, management concluded that, due tothe fact that the sales proceeds relate to loans no longer held for sale, theclearing account should be offset against mortgage loans held for sale.Within this Quarterly Report on Form 10-Q,  prior period balances have beenreclassified and are reportedwithin the Mortgage Loans Held for Sale financial statement line item. 

9

----

 

Statements of Income****The following tablesummarizes the Company’s Consolidated Interim Statements of Income forthe three and six month periods ended June 30, 2007, as then reported.

 

| **PALMETTO BANCSHARES, INC. AND SUBSIDIARY** |                                                                               |
|------------------------------------------------------------------|------------------------------------------------------------------------------------|
| **Consolidated Interim Statement of Income** |                                                                               |
| **(in thousands) (unaudited)**                         |                                                                               |
|                                                             |                                                                               |   |   |   |   | **For the three**

**month period**

**ended June 30,**

**2007** |   | **For the six**

**month period**

**ended June 30,**

**2007** |
| Interest income                                             |                                                                               |   |   |   |
|                                                             | Interest and fees on loans                                     |   | $ | 19,301  |   | 38,067  |
|                                                             | Interest on investment securities available for sale | 1,130  |   | 2,301  |
|                                                             | Interest on federal funds sold                                 |   | 227  |   | 451  |
|                                                             | Dividends on FHLB stock                                             |   | 38  |   | 75  |
|                                                             |                                                                               |   | Total interest income |   | 20,696  |   | 40,894  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
| Interest expense                                            |                                                                               |   |   |   |
|                                                             | Interest on deposits                                                     |   | 7,437  |   | 14,664  |
|                                                             | Interest on retail repurchase agreements                       | 130  |   | 276  |
|                                                             | Interest on commercial paper                                        |   | 289  |   | 527  |
|                                                             | Interest on other short-term borrowings                        | 54  |   | 83  |
|                                                             | Interest on long-term borrowings                                    | 78  |   | 173  |
|                                                             |                                                                               |   | Total interest expense |   | 7,988  |   | 15,723  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
|                                                             |                                                                               |   |   | Net interest income | 12,708  |   | 25,171  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
| Provision for loan losses                         |                                                                               | 433  |   | 800  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
|                                                             |                                                                               |   |   | Net interest income after provision for loan losses | 12,275  |   | 24,371  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
| Noninterest income                                          |                                                                               |   |   |   |
|                                                             | Service charges on deposit accounts                            | 1,991  |   | 3,899  |
|                                                             | Fees for trust and brokerage services                     | 826  |   | 1,522  |
|                                                             | Mortgage-banking income                                                       |   | 171  |   | 519  |
|                                                             | Investment securities gains                                              |   | -  |   | -  |
|                                                             | Other                                                                              |   | 877  |   | 1,757  |
|                                                             |                                                                               |   | Total noninterest income | 3,865  |   | 7,697  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
| Noninterest expense                                         |                                                                               |   |   |   |
|                                                             | Salaries and other personnel                                        |   | 6,057  |   | 12,194  |
|                                                             | Occupancy                                                                          |   |   | 379  |   | 749  |
|                                                             | Furniture and equipment                                                  |   | 422  |   | 903  |
|                                                             | Premises and equipment leases and rentals                 | 335  |   | 625  |
|                                                             | Premises and equipment depreciation                                 | 480  |   | 986  |
|                                                             | Marketing                                                                          |   |   | 219  |   | 487  |
|                                                             | Amortization of core deposit intangibles                       | 12  |   | 24  |
|                                                             | Other                                                                              |   | 1,967  |   | 4,045  |
|                                                             |                                                                               |   | Total noninterest expense | 9,871  |   | 20,013  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
|                                                             |                                                                               |   |   | Net income before provision for income taxes | 6,269  |   | 12,055  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
| Provision for income taxes                        |                                                                               | 2,204  |   | 4,229  |
|                                                             |                                                                               |   |   |   |   |   |   |   |
|                                                             |                                                                               |   |   | Net income |   | $ | 4,065  |   | 7,826  |

 

During 2008, consistent with the reclassification of interest-bearingcash balances held at the FHLB from federal funds sold within the ConsolidatedInterim Balance Sheets, interest income from such accounts was also segregatedfrom interest earned on federal funds sold on the Consolidated InterimStatements of Income. Within this Quarterly Report on Form 10-Q, prior periodbalances have been reclassified and are reported within the Interest Earned onCash and Due From Banks financial statement line item.

 

During 2007, in an effort to provide more transparent information to readers offinancial statements, the Company reclassified certain expenses relating to theoperation of its automatic teller machines, the operation of its Internetbanking product, and the offering of merchant and cardholder services. During the three and six month periods ended June 30, 2007, such amounts werereported net of related income within the Other noninterest income financial statement line item.  Within this Quarterly Report onForm 10-Q, prior period balances have been reclassified and are reported gross within the Othernoninterest expensefinancial statement line item. 

 

Within this Quarterly Report on Form 10-Q, occupancy,premises, furniture, and equipment balances that were previously reportedseparately within the Consolidated Interim Statements of Income were aggregateddue to such desegregated balances not meeting materiality thresholds forpresentation on the face of the Company’s Consolidated Interim Statements ofIncome.  Management concluded that such separately reported balances on theface of the Company’s Consolidated Interim Statements of Income did not resultin more transparent information to readers of financial statements but did,however, provide such disclosure elsewhere in the Notes To Consolidated InterimFinancial Statements.  The following table compares previously reportedfinancial statement line items to current classifications (in thousands).

 

|                             |                                                               |                                                                                       |        |                                                                                     |        |
|----------------------------------|--------------------------------------------------------------------|--------------------------------------------------------------------------------------------|-------------|------------------------------------------------------------------------------------------|-------------|
|                             |                                                               | **For the three month**

**period ended June 30,**

**2007** |        | **For the six month**

**period ended June 30,**

**2007** |
| As previously reported |                                                               |                                                                                       |        |
|                             | Occupancy                                                          | $                                                                                          | 379    |                                                                                     | 749    |
|                             | Furniture and equipment                                  | 422                                                                                   |        | 903                                                                                 |
|                             | Premises and equipment leases and rentals | 335                                                                                   |        | 625                                                                                 |
|                             | Premises and equipment depreciation                 | 480                                                                                   |        | 986                                                                                 |
|                             |                                                               | $                                                                                          | 1,616  |                                                                                     | 3,263  |
| As currently reported  |                                                               |                                                                                       |        |
|                             | Occupancy                                                          | $                                                                                          | 722    |                                                                                     | 1,430  |
|                             | Furniture and equipment                                  | 894                                                                                   |        | 1,833                                                                               |
|                             |                                                               | $                                                                                          | 1,616  |                                                                                     | 3,263  |
|                             |                                                               |                                                                                       |        |                                                                                     |

 

See Note 14 for information regarding the Company’spremises and equipment lease and rental expense for the periods covered by thisQuarterly Report on Form 10-Q.  See Note 5 for information regarding the Company’spremises and equipment depreciation for the periods covered by this QuarterlyReport on Form 10-Q.  

 

Statement of Cash Flows. Within this Quarterly Reporton Form 10-Q, in an effort to provide more detailed information to the readersof the Company’s Consolidated Interim Financial Statements, financial statementline items previously reported in the Company’s Consolidated Interim Statementof Cash Flows for the six month period ended June 30, 2007 were reclassified inorder to comply with current classifications.  The following table summarizesselected financial statement line items as previously reported in the Company’sConsolidated Interim Statement of Cash Flows for the six month period endedJune 30, 2007 that have been subject to current reclassifications (inthousands).

 

10

----

 

 

|                                                                                                                                                       |                                                                                                                                                                                     |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                                                                                                                       | **For the six month   **

**period ended June   **

**30, 2007          ** |
| Depreciation, amortization, and accretion, net                                                                                         | $                                                                                                                                                                                        | 1,109  |
|                                                                                                                                                       |                                                                                                                                                                                     |
| Maturities, redemption, calls, and principal repayments of investment securities available for sale | 32,817                                                                                                                                                                              |
|                                                                                                                                                       |                                                                                                                                                                                     |
| Deposits, net                                                                                                                                         | 8,244                                                                                                                                                                               |
|                                                                                                                                                       |                                                                                                                                                                                     |

 

The following table summarizes thereclassified reporting of such itemsin the Company’s current Quarterly Report on Form 10-Q (in thousands).

 

|                                                                                                                                                       |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               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|                                                                                                                                                       | **For the six month**

**period ended June**

**30, 2007** |
| Premises, furniture, and equipment depreciation                                                                                        | $                                                                                        | 986                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Amortization of core deposit intangibles                                                                                               | 24                                                                                  |
| Amortization of unearned discounts / premiums on investment securities available for sale, net | 42                                                                                  |
| Amortization of unearned discounts / premiums on mortgage-backed securities, net                              | 57                                                                                  |
|                                                                                                                                                       | $                                                                                        | 1,109 
 

 

Maturities and calls of investment securities available for sale
$
30,595 

Repayments on mortgage-backed investment securities available for sale

2,222 

 
$
32,817 

 

 

Increase in transaction, money market, and savings deposit accounts, net
$
36,893 

Decrease in time deposit accounts, net

(28,649)

 
$
8,244 

 

 

 

As notedwith regard to Balance Sheet reclassifications, during 2007, the clearing account in whichmortgage loan sales proceeds are recorded until the paperwork is processed wasreported within the Other financial statement line item within the Assetssection of the Company’s Consolidated Balance Sheets.  During 2008, theclearing account began being offset against mortgage loans held for sale.Therefore, within this Quarterly Report on Form 10-Q, prior period balances have beenreclassified and are reportedwithin the Mortgage Loans Held for Sale financial statement line item withinthe Consolidated Balance Sheets. This reclassification impacted the reportingof cash flows relative to mortgage loans held for sale for the six month period ended June30, 2007.  The following table summarizes fluctuations and cash flows relative to mortgage loansheld for sale as reported in the Company’s Quarterly Report on Form 10-Q forthe period ended June 30, 2007 (in thousands).

 

 

 

 

Mortgage loans held for sale, December 31, 2006

$

1,675 

Mortgage loans held for sale, June 30, 2007

1,293 

Decrease in mortgage loans held for sale during the six month period ended June 30, 2007

$

	382

 

 

Origination of mortgage loans held for sale

$

(27,466)

Proceeds from sale of mortgage loans held for sale

28,183 

Gain on sale of mortgage loans

(335)

Decrease in mortgage loans held for sale during the six month period ended June 30, 2007

$

382 

 

 

 

The following table summarizes reclassifiedfluctuations and cash flowsrelative to mortgage loans held for sale as reported in the Company’s currentQuarterly Report on Form 10-Q relative to the six month period ended June 30,2007 (in thousands).

 

 

 

 

Mortgage loans held for sale, December 31, 2006

$

1,670 

Mortgage loans held for sale, June 30, 2007

1,294 

Decrease in mortgage loans held for sale during the six month period ended June 30, 2007

$

	376

 

 

Originations of mortgage loans held for sale

$

(28,991)

Sales of mortgage loans held for sale

29,702 

Gain on sales of mortgage loans held for sale, net

(335)

Decrease in mortgage loans held for sale during the six month period ended June 30, 2007

$

376 

 

 

* *

*Recently Issued / Adopted Accounting Pronouncements*

 

The following does not constitute a comprehensive summary ofall material changes or developments impacting the accounting, reporting, anddisclosure of financial information by the Company. It is intended only as asummary of recent authoritative pronouncements that may impact the Company’sfinancial position, results of operations, or cash flows. 

 

11

 

 

 

 

 

 

 

In September 2006, the FASB issuedSFAS No. 157, "Fair Value Measurements,” which provides guidance for usingfair value to measure assets and liabilities but does not expand the use offair value in any circumstance. SFAS No. 157 also requires expanded disclosuresabout the extent to which a company measures assets and liabilities at fairvalue, the information used to measure fair value, and the effect of fair valuemeasurements on an entity’s financial statements. The statement applies whenother standards require or permit assets and liabilities to be measured at fairvalue. SFAS No. 157 was effective for the Company forfiscal and interim periods beginning January 1, 2008.  Subsequently,in February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2,“Effective Date of FASB Statement No. 157,” which delayed the effectivedate of SFAS No. 157 for nonrecurring, nonfinancial instruments to fiscal yearsbeginning after November 15, 2008. The Company adopted SFAS No. 157 onJanuary 1, 2008.  Its adoption did not have a material impact on theCompany’s financial position, results of operations, or cash flows.  

 

In February 2007, the FASB issuedSFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB StatementNo. 115.” SFAS No. 159 permits entities to choose to measure eligibleitems at fair value at specified election dates. Unrealized gains and losses onitems for which the fair value option has been elected are reported in earningsat each subsequent reporting date. The fair value option may be appliedinstrument by instrument, with certain exceptions, is irrevocable (unless a newelection date occurs), and is applied only to entire instruments and notto portions of instruments. SFAS No. 159 was effective for the Company onJanuary 1, 2008. The Company has not elected the fair value option for anyfinancial assets or liabilities as of January 1, 2008. As such, its adoptionsdid not have a material impact on the Company’s financial position, results ofoperations, or cash flows. 

 

In March 2007, the FASB ratified the consensus reached by the Emerging IssuesTask Force (“EITF”) in Issue No. 06-10, “Accounting for Collateral AssignmentSplit-Dollar Life Insurance Arrangements.”  The EITF’s consensus concluded thatan employer should recognize a liability for the postretirement benefit relatedto a collateral assignment split-dollar life insurance arrangement inaccordance with either SFAS No. 106 (if, in substance, a postretirement benefitplan exists) or Accounting Principles Board (“APB”) Opinion No. 12, “OmnibusOpinion—1967,” (if the arrangement is, in substance, an individual deferredcompensation contract) if the employer has agreed to maintain a life insurancepolicy during the employee's retirement or provide the employee with a deathbenefit based on the substantive agreement with the employee. Additionally, theEITF concluded that an employer should recognize and measure an asset based onthe nature and substance of the collateral assignment split-dollar lifeinsurance arrangement. The EITF observed that in determining the nature andsubstance of the arrangement, the employer should assess what future cash flowsthe employer is entitled to, if any, as well as the employee'sobligation and ability to repay the employer. The consensus in this Issue iseffective for fiscal years beginning after December 15, 2007, including interimperiods within those fiscal years with earlier application permitted. Theconsensus further directs entities to recognize the effects of applying theconsensus in this Issue through either (a) a change in accounting principlethrough a cumulative-effect adjustment to retained earnings or to othercomponents of equity or net assets in the statement of financial position as ofthe beginning of the year of adoption or (b) a change in accounting principlethrough retrospective application to all prior periods. The Company adoptedEITF No. 06-10 on January 1, 2008 as a change in accounting principle through acumulative-effect adjustment to retained earnings totaling $99 thousand.

 

In November 2007, the SEC issuedStaff Accounting Bulletin (“SAB”) No. 109, “Written Loan CommitmentsRecorded at Fair Value Through Earnings,” which expressed the views of thestaff regarding written loan commitments that are accounted for at fair valuethrough earnings under generally accepted accounting principles. SAB No. 105, “Applicationof Accounting Principles to Loan Commitments,” provided the views of the staffregarding derivative loan commitments that are accounted for at fair valuethrough earnings pursuant to SFAS No. 133. SAB No. 105 stated that in measuringthe fair value of a derivative loan commitment, the staff believed it would beinappropriate to incorporate the expected net future cash flows related to theassociated servicing of the loan. This SAB supersedes SAB No. 105 and expressesthe current view of the staff that, consistent with the guidance in SFAS No.156 and SFAS No. 159*,* the expected net future cash flows related to theassociated servicing of the loan should be included in the measurement of allwritten loan commitments that are accounted for at fair value through earnings.SAB No. 105 also indicated that the staff believed that internally-developedintangible assets (such as customer relationship intangible assets) should notbe recorded as part of the fair value of a derivative loan commitment. This SABretains that staff view and broadens its application to all written loancommitments that are accounted for at fair value through earnings. The staffexpects registrants to apply the views in SAB No. 109 on a prospective basis toderivative loan commitments issued or modified in fiscal quarters beginningafter December 15, 2007. The guidance within SAB No. 109 was effective onJanuary 1, 2008.  The Company adopted the guidance of SAB No. 109 onJanuary 1, 2008.  Its adoption did not have a material impact on the Company’s financialposition, results of operations, or cash flows.  

 

12

 

 

InDecember 2007, the FASB issued SFAS No. 141, “BusinessCombinations (Revised 2007).”**SFAS No. 141R replaces SFAS No. 141,“Business Combinations,” and applies to all transactions and other events inwhich one entity obtains control over one or more other businesses.SFAS No. 141R requires an acquirer, upon initially obtaining control ofanother entity, to recognize the assets, liabilities and any noncontrollinginterest in the acquiree at fair value as of the acquisition date. Contingentconsideration is required to be recognized and measured at fair value on thedate of acquisition rather than at a later date when the amount of thatconsideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost allocation process requiredunder SFAS No. 141 whereby the cost of an acquisition was allocated to theindividual assets acquired and liabilities assumed based on their estimatedfair value. SFAS No. 141R requires acquirers to expense acquisitionrelated costs as incurred rather than allocating such costs to the assetsacquired and liabilities assumed, as was previously the case under SFASNo. 141. Under SFAS No. 141R, the requirements of SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities,” would have to be met inorder to accrue for a restructuring plan in purchase accounting. Preacquisitioncontingencies are to be recognized at fair value, unless it is a noncontractualcontingency that is not likely to materialize, in which case, nothing should berecognized in purchase accounting and, instead, that contingency would besubject to the probable and estimable recognition criteria of SFAS No. 5,“Accounting for Contingencies.” SFAS No.141R is effective for the Company on January 1, 2009. When and if theCompany consummates a business combination transaction subsequent toDecember 31, 2008, the adoption of SFAS No. 141R will have an impact on the Company’s accounting for such businesscombinations based on the Statement’s requirements as summarized above.  

 

In February 2008, the FASBissued FSP No. 140-3, “Accounting for Transfers of Financial Assets andRepurchase Financing Transactions.”  FSP No. 140-3 provides guidance onaccounting for a transfer of a financial asset and the transferor’s repurchasefinancing of the asset and presumes that an initial transfer of a financialasset and a repurchase financing are considered part of the same arrangement(linked transaction) under SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities-a replacementof FASB Statement No. 125.” However, if certain criteria are met, the initialtransfer and repurchase financing are not evaluated as a linked transaction andare evaluated separately under SFAS No.  140.  FSP No. 140-3 is effective for the Company for fiscal and interim periods beginningJanuary 1, 2009. Earlier application is not permitted. The Companydoes not anticipate that the adoption of FSP No. 140-3 will have a materialimpact on its financial position, results of operations, or cash flows.  

 

In March 2008, the FASB issuedSFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No. 133,” which requires enhanceddisclosures about an entity’s derivative and hedging activities and therebyimproves the transparency of financial reporting. This SFAS No. 161 iseffective for the Company on January 1, 2009, with early applicationencouraged. This Statement encourages, but does not require, comparativedisclosures for earlier periods at initial adoption. The Company is currentlyevaluating the impact that the adoption of SFAS No. 161 may have on itsfinancial position, results of operations, or cash flows.  

 

InApril 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life ofIntangible Assets.”  FSP No. 142-3 amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of a recognized intangible asset under SFAS No. 142, “Goodwill and OtherIntangible Assets.”  This FSP is intended to improve the consistency between theuseful life of a recognized intangible asset under SFAS No. 142 and the periodof expected cash flows used to measure the fair value of the asset under SFASNo. 141R**and other United States ("U.S.") generally accepted accounting principles.  FSPNo. 142-3 is effective for the Company for fiscal and interim periods beginningJanuary 1, 2009. Earlier application is not permitted. The Company iscurrently evaluating the impact that the adoption of FSP No. 142-3 may have onits financial position, results of operations, or cash flows.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles.”   SFAS No. 162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (GAAP) in the United States (the GAAP hierarchy). This Statement isnot intended to change current practice.  However, the FASB provided transitionprovisions in the unusual circumstance that the application of the provisionsof this Statement result in a change in practice.  This Statement is effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AUSection 411, “The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.”

 

13

 

 

InJune 2008, the FASB issued EITF No. 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities.”  The EITF provides that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents are participating securities and must be included in theearnings per share computation.  EITF No. 03-6-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years. All prior-period earnings per share datapresented must be adjusted retrospectively. Early application is notpermitted.  EITFNo. 03-6-1 is effective for the Company for fiscal and interim periodsbeginning January 1, 2009. The Company is currently evaluating the impactthat the adoption of EITF No. 03-6-1 may have on its financial position, resultsof operations, or cash flows.

 

***2.      Cash and CashEquivalents***

 

The following tablesummarizes the composition of cash and due from banks at the datesindicated (in thousands).

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

**2008**

**2007**

Cash working funds

$

9,976 

11,122 

Interest-earning demand deposits in other banks

137 

681 

Noninterest-earning demand deposits in other banks

20,573 

20,883 

In-transit funds

7,292 

9,764 

 

Total cash and cash equivalents

$

37,978 

42,450 

 

 

 

 

 

The Federal Reserve Act requireseach depository institution to maintain reserves against its reservableliabilities as prescribed by Federal Reserve Board regulations. The Bankreports its reservable liabilities to the Federal Reserve on a weekly basis.  Weeklyreporting institutions maintain reserves on their reservable liabilities with a30-day lag.  For the maintenance period ended on July 2, 2008, based onreservable liabilities from May 20, 2008 through June 2, 2008, the FederalReserve required the Bank to maintain reserves of $10.9 million.  Due to theCompany’s levels of vault cash, $1.6 million was required to be maintained withcorrespondent banks in addition to $1.0 million that was required to bemaintained with the Federal Reserve. Deposits withthe Federal Reserve do not earn interest. 

* *

***3.       InvestmentSecurities Available for Sale***

 

General

 

During 2008, the Company began investing in collateralizedmortgage obligations. Collateralized mortgage obligations are a mortgage-backedsecurity sub-type in which the mortgages are ordered into tranches by somequality (such as repayment time), with each tranche sold as a separatesecurity. These securities, in addition to the Company’s other investmentsecurities available for sale, are accounted for in accordance with SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities,” asdiscussed in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

The following tablesummarizes the composition of the Company’s investment securities available forsale portfolio at the dates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

**December 31, 2007**

 

 

**Total**

**% of total**

 

**Total**

**% of total**

Government-sponsored enterprises

$

- 

- 

%

20,743 

21.7 

State and municipal

51,457 

38.6 

 

52,159 

54.5 

Collateralized mortgage obligations

61,803 

46.4 

 

- 

- 

Other mortgage-backed

19,939 

15.0 

 

22,813 

23.8 

 

Total investment securities available for sale

$

133,199 

100.0 

%

95,715 

100.0 

 

 

 

 

 

 

 

 

 

14

 

The following tablessummarize the amortized cost, gross unrealized gains, gross unrealizedlosses, and fair market values of investment securities available for sale atthe dates indicated (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

 

 

 

**Amortized**

**cost**

**Gross**

**unrealized**

**gains**

**Gross**

**unrealized**

**losses**

**Fair**

**market**

**value**

 

 

 

 

 

 

 

 

Government-sponsored enterprises

$

- 

- 

- 

- 

 

State and municipal

51,825 

86 

(454)

51,457 

 

Collateralized mortgage obligation

62,366 

- 

(563)

61,803 

 

Other mortgage-backed

20,101 

47 

(209)

19,939 

 

 

Total investment securities available for sale

$

134,292 

133 

(1,226)

133,199 

 

 

 

 

 

 

 

 

 

 

 

**December 31, 2007**

 

 

 

 

**Amortized**

**cost**

**Gross**

**unrealized**

**gains**

**Gross**

**unrealized**

**losses**

**Fair**

**market**

**value**

 

 

 

 

 

 

 

 

Government-sponsored enterprises

$

20,725 

26 

(8)

20,743 

 

State and municipal

52,677 

55 

(573)

52,159 

 

Other mortgage-backed

22,722 

196 

(105)

22,813 

 

 

Total investment securities available for sale

$

96,124 

277 

(686)

95,715 

 

 

 

 

 

 

 

 

*Securities Pledgedand Liquidity*

 

Approximately 58% of the investment securities portfolio waspledged to secure public deposits and trust assets as of June 30, 2008 ascompared with 80% at December 31, 2007.  Of the Company’s $76.6 million pledgedavailable for sale investment securities balance at June 30, 2008, $49.2million of available for sale investment securities were securing publicdeposits and trust assets at June 30, 2008.  Of the Company’s $76.6 millionpledged available for sale investment securities balance at December 31, 2007,$40.4 million of available for sale investment securities were securing publicdeposits and trust assets.  The decrease in pledged securities as a percentageof the investment securities portfolio from December 31, 2007 to June 30, 2008was the result of an increase in the investment security portfolio.  

 

*Impairment Analysis*

* *

The following table summarizes thegross unrealized losses, fair market value, and the number of securities ineach category of investment securities available for sale, aggregated byinvestment category and length of time that individual securities have been ina continuous unrealized loss position, atthe dates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

 

**Less than 12 months**

 

**12 months or longer**

 

**Total**

 

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

Government-sponsored enterprises

- 

$

- 

$

- 

 

- 

- 

- 

 

- 

- 

- 

State and municipal

76 

32,286 

410 

 

6 

2,070 

44 

 

82 

34,356 

454 

Collateralized mortgage obligation

12 

55,561 

563 

 

- 

- 

- 

 

12 

55,561 

563 

Other mortgage-backed

8 

11,060 

146 

 

2 

1,120 

63 

 

10 

12,180 

209 

 

Total investment securities available for sale

96 

$

98,907 

$

1,119 

 

8 

3,190 

107 

 

104 

102,097 

1,226 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**December 31, 2007**

 

 

**Less than 12 months**

 

**12 months or longer**

 

**Total**

 

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

Government-sponsored enterprises

- 

$

- 

$

- 

 

2 

3,476 

8 

 

2 

3,476 

8 

State and municipal

16 

6,135 

79 

 

98 

38,760 

494 

 

114 

44,895 

573 

Other mortgage-backed

1 

733 

- 

 

15 

10,655 

105 

 

16 

11,388 

105 

 

Total investment securities available for sale

17 

$

6,868 

$

79 

 

115 

52,891 

607 

 

132 

59,759 

686 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increases in gross unrealized losses in the investmentsecurities available for sale portfolio from December 31, 2007 to June 30, 2008were primarily the result of unrealized losses within collateralized mortgageobligations at June 30, 2008.  The Company had no investment in collateralizedmortgage obligations at December 31, 2007.

 

15

 

 

Declines in the fair market value of available-for-salesecurities below cost that are deemed to be other-than-temporary are reflectedin earnings as realized losses. In estimating other-than-temporary impairmentlosses, management considers, among other things, the length of time and theextent to which the fair market value has been less than cost, the financialcondition and near-term prospects of the issuer, and the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

 

The Company has the ability and intent to hold thesecurities classified as available for sale for a period of time sufficient fora recovery of cost. The unrealized losses are largely due to increases inmarket interest rates over the yields available at the time the underlyingsecurities were purchased. The fair market value is expected to recover as thebonds approach their maturity date or repricing date or if market yields forsuch investments decline. Management does not believe any of the securities areimpaired due to reasons of credit quality. Accordingly, as of June 30, 2008,management believes the impairments detailed in the preceding table aretemporary, and, therefore, no impairment loss has been realized in theCompany's Consolidated Interim Statements of Income for the three or six monthperiods ended June 30, 2008.

 

*Concentrations of Risk*

 

No state and municipal securityissuers issued securities with fair market values exceeding 2% of totalshareholders’ equity at June 30, 2008.  No collateralized mortgage obligationissuers issued securities with fair market values exceeding 9% of totalshareholders’ equity at June 30, 2008.  The following table summarizes issuerconcentration at fair market value of other mortgage-backed investmentsecurities, by issuer, at June 30, 2008 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

**Federal**

**National**

**Mortgage**

**Association**

 

**Federal**

**Home Loan**

**Mortgage**

**Corporation**

**Total**

Other mortgage-backed

$

16,356 

 

3,583 

19,939 

 

 

 

 

 

 

As a percentage of shareholders' equity

14.3 

%

3.1 

17.4 

 

Virtually all mortgage-basedsecurities are rated “AAA” by Standard and Poor's and / or Moody's or have animplicit “AAA” rating through government agency backing.  This AAA rating isbased not on the credit of the issuer, but rather on the structure of themortgage-based securities and the credit quality of the collateral.

 

***4.       Loans***

 

Composition

 

The following table summarizesgross loans, categorized by loan purpose, excluding those mortgage loans heldfor sale, at the dates indicated (dollars in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

 

**2008**

 

**2007**

 

 

 

**Total**

**% of**

**total**

 

**Total**

**% of**

**total**

 

Commercial business

$

163,032 

14.6 

%

145,634 

13.9 

 

Commercial real estate

689,224 

61.8 

 

639,144 

61.2 

 

Installment

23,871 

2.1 

 

25,315 

2.4 

 

Installment real estate

78,580 

7.1 

 

75,721 

7.3 

 

Indirect

36,632 

3.3 

 

39,502 

3.8 

 

Credit line

1,908 

0.2 

 

2,188 

0.2 

 

Prime access

59,959 

5.4 

 

54,164 

5.2 

 

Residential mortgage

40,069 

3.6 

 

40,842 

3.9 

 

Bankcards

12,526 

1.1 

 

12,702 

1.2 

 

Business manager

372 

- 

 

326 

- 

 

Other

1,508 

0.1 

 

2,045 

0.2 

 

Loans in process

6,353 

0.6 

 

6,511 

0.6 

 

Deferred loans fees and costs

488 

0.1 

 

676 

0.1 

 

 

Loans, gross

$

1,114,522 

100.0 

	%

1,044,770 

100.0 

 

 

 

 

 

 

 

 

 

 

16

 

The following table summarizesgross loans, categorized by Federal Deposit Insurance Corporation (“FDIC”)code, excluding those mortgage loans held for sale, at the dates indicated(dollars in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

 

**2008**

 

**2007**

 

 

 

**Total**

**% of**

**total**

 

**Total**

**% of**

**total**

 

Secured by real estate

 

 

 

 

 

 

 

Commercial, land development, and other land loans

$

51,933 

4.6 

%

52,236 

5.0 

 

 

Farmland

979 

0.1 

 

1,004 

0.1 

 

 

Single-family residential

216,980 

19.5 

 

209,275 

20.0 

 

 

Multifamily residential

34,877 

3.1 

 

28,659 

2.8 

 

 

Nonfarm nonresidential

634,870 

57.0 

 

578,719 

55.4 

 

Commercial and industrial

83,471 

7.5 

 

77,555 

7.4 

 

General consumer and other

88,386 

7.9 

 

93,983 

9.0 

 

Obligations of states and political subdivisions of the U.S.

3,026 

0.3 

 

3,339 

0.3 

 

 

Loans, gross

$

1,114,522 

100.0 

%

1,044,770 

100.0 

 

 

 

 

 

 

 

 

 

 

Loans included in both of the preceding loan composition tablesare net of participations sold, and mortgage loans sold and serviced forothers.  Participations sold totaled $17.9 million and $14.6 million at June30, 2008 and December 31, 2007, respectively. Mortgage loans serviced for thebenefit of others amounted to $363.8 million and $346.3 million at June 30,2008 and December 31, 2007, respectively. 

 

*Pledged*

 

To borrow from the FHLB, members must pledge collateral tosecure advances and letters of credit.  Acceptable collateral includes avariety of single-family residential loans, commercial real estate loans, homeequity lines of credit, and multifamily residential loans as well as a numberof types of securities.  No types of securities were pledged to collateralizeFHLB borrowings at June 30, 2008.  Approximately 14% of the gross loanportfolio was available to secure advances and letters of credit as of June 30,2008 as compared with 10% at December 31, 2007.  The following table summarizesthe Company’s FHLB borrowed funds utilization and availability at the dates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

 

 

**2008**

**2007**

 

Available lendable collateral value to serve against FHLB advances

$

151,477 

105,535 

 

 

 

 

 

 

 

Advances and letters of credit

 

 

 

 

Short-term advances

(29,500)

(12,000)

 

 

Long-term advances

(52,000)

- 

 

 

Letters of credit

(69,000)

(69,000)

 

 

 

Total advances and letters of credit

(150,500)

(81,000)

 

 

 

 

 

 

 

Available lendable collateral value to serve against FHLB advances

$

977 

24,535 

 

 

 

 

 

 

 

 

The increase in long-term advances over theperiods presented was a result of the transactions the Company entered intoduring March and April 2008, which were intended to support interest-earningasset growth, primarily investments in available for sale securities, andsupplement net interest income. 

 

*Concentrations of Risk*

* *

Loan Type / IndustryConcentration. Categorized by loan purpose, the Company’s commercial realestate portfolio accounts for 61.8% of the Company’s gross loan portfolio. Thefollowing table summarizes the composition of the Company’s commercial realestate portfolio at June 30, 2008. For the purpose of this analysis,adjustments have been made to the balance of commercial real estate loans byloan purpose in order to conform the Company’s definition of commercial realestate loans to that of regulators. 

 

17

 

 

 

 

 

 

 

 

**Commercial**

**real estate**

**loans, adjusted**

**by**

**concentration**

 

**Commercial**

**real estate**

**loans, adjusted**

**as a percentage**

**of "tier 1" capital**

Residential

13.2 

%

64.5 

Land-only

20.6 

 

100.3 

Construction

6.8 

 

33.1 

Commercial - specific

39.8 

 

194.5 

Commercial - nonowner occupied

19.4 

 

94.9 

Rounding

0.2 

 

0.8 

 

100.0 

%

488.1 

 

 

 

 

 

The following table further classifies materialconcentrations summarized above.  

 

 

 

 

 

 

 

 

**Commercial**

**real estate**

**loans, adjusted**

**by**

**concentration**

 

**Commercial**

**real estate**

**loans, adjusted**

**as a percentage**

**of "tier 1" capital**

Land-only

 

 

 

 

Developed land

18.5 

%

90.2 

 

Undeveloped land

2.1 

 

10.1 

 

 

20.6 

%

100.3 

 

 

 

 

 

Commercial - specific

 

 

 

 

Hotels / motels

17.2 

%

83.9 

 

Restaurants

1.6 

 

7.9 

 

Convenience stores

1.4 

 

7.0 

 

Golf courses

2.5 

 

12.5 

 

Religious facilities

10.0 

 

48.7 

 

Assisted living facilities

6.5 

 

31.7 

 

Mobile home communities

0.6 

 

2.8 

 

 

39.8 

%

194.5 

 

 

 

 

 

 

The Company believes that the properties securing itscommercial real estate portfolio are diverse in terms of type. This diversityreduces the Company’s exposure to adverse economic events that impact anysingle industry.

 

Asset Quality

 

Nonaccrual and PastDue 90 Days. The following tablesummarizes nonaccrual loans and loans past due 90 days and still accruinginterest at the dates indicated (in thousands).

 

 

 

 

 

 

 

 

**June 30,**

**March 31,**

**December 31,**

**June 30,**

 

**2008**

**2008**

**2007**

**2007**

Nonaccrual loans

$

6,419 

5,606 

4,810 

12,436 

Loans past due 90 days and still accruing (1)

140 

260 

236 

290 

 

$

6,559 

5,866 

5,046 

12,726 

 

 

 

 

 

(1) Substantially all of these loans are bankcard loans

 

 

 

 

 

Had all nonaccrual loans at June 30, 2008 been performing inaccordance with their original terms, interest income would have been higher by$183 thousand for the three month period ended June 30, 2008.  The amount oftotal interest collected during the period relative to loans classified asnonaccrual at this date totaled $13 thousand. Had all nonaccrual loans at June30, 2008 been performing in accordance with their original terms, interestincome would have been higher by $354 thousand for the six month period endedJune 30, 2008.  The amount of total interest collected during the periodrelative to loans classified as nonaccrual at this date totaled $19 thousand.

 

Had all nonaccrual loans at June 30, 2008 been performing inaccordance with their original terms, interest income would have been higher by$535 thousand over the nonaccrual period.  The amount of total interestcollected over the nonaccrual period relative to loans classified as nonaccrualat this date totaled $29 thousand. 

 

18

 

Troubled Debt Restructurings. Troubled debt restructurings entered into by the Company during the first threemonths of 2008 are subject to review by the Company, in accordance with theCompany’s loan review policies, to ensure loan classifications were inaccordance with applicable regulations.  Any allocations identified during thereview based on probable losses have been included in the Company’s allowancefor loan losses for the applicable period. At June 30, 2008 and December 31,2007, the principal balance of such loans totaled $1.2 million.  

 

Allowance for Loan Losses

 

The following tablesummarizes the activity impacting the allowance for loan losses for theperiods indicated (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

**2008**

**2007**

 

**2008**

**2007**

Allowance for loan losses, beginning of period

$

7,488 

8,460 

 
   
7,418 

8,527 

Provision for loan losses

687 

433 

 

1,175 

800 

 

 

 

 

 

 

 

Loans charged-off

(571)

(460)

 

(1,018)

(990)

Loan recoveries

41 

82 

 

70 

178 

 

Net loans charged-off

(530)

(378)

 

(948)

(812)

 

 

 

 

 

 

 

Allowance for loan losses, end of period

$

7,645 

8,515 

 
   
7,645 

8,515 

 

 

 

 

 

 

 

 

 

Management analyzes the adequacy ofthe allowance for loan losses on a monthly basis using an internal analysismodel.  No less than quarterly but often on a more frequent basis, theCompany’s allowance for loan losses model and conclusions are reviewed andapproved by senior management. The allowance for loan losses is a reserve establishedthrough a provision for loan losses charged to expense, which representsmanagement’s best estimate of probable losses that have been incurred withinthe existing portfolio of loans. The allowance for loan losses, in the judgmentof management, is necessary to reserve for estimated loan losses and risksinherent in the loan portfolio. The Company’s allowance for loan lossmethodology is based on guidance provided in SAB No. 102, “SelectedLoan Loss Allowance Methodology and Documentation Issues,” and includesallocations calculated in accordance with SFAS No. 114, as amended bySFAS No. 118, *“**Accounting by Creditors for Impairment of aLoan-Income Recognition and Disclosures—an amendment of FASB Statement No.114,”* and allocations calculated in accordancewith SFAS No. 5. Accordingly, the methodology is based on historicalloss experience by type of loans, specific homogeneous risk pools, and specificloss allocations. The Company’s process for determining the appropriate levelof the allowance for loan losses is designed to account for asset deteriorationas it occurs. The provision for loan losses reflects not only the necessaryincreases in the allowance for loan losses related to newly identifiedcriticized loans, but it also reflects actions taken related to other loansincluding, among other things, any necessary increases or decreases in requiredallowance for loan losses for specific loans or loan pools. 

 

Impaired Loans.  The following table summarizes information relative tothe Company’s impaired loans at and for the period indicated (in thousands).Impaired loans without a specific allowance for loan losses allocation at andfor the period indicated were generally reserved within the allowance for loanlosses.

 

 

 

 

 

 

 

**At and for the six month**

 

**At and for the year**

 

**period ended June 30, 2008**

 

**ended December 31, 2007**

Impaired loans, end of period

$

10,205 

 

5,256 

Specific allowance allocation on impaired loans, end of period

2,029 

 

976 

Average impaired loans, during period

7,730 

 

3,668 

 

19

 

***5.       Premisesand Equipment, Net***

* *

The following tablesummarizes the Company’spremises and equipment balances at the dates indicated (in thousands).

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

**June 30,**

 

 

**2008**

**2007**

**2007**

Land

$

5,827 

6,817 

6,703 

Buildings

19,160 

18,440 

17,611 

Leasehold improvements

2,438 

2,247 

2,857 

Furniture and equipment

18,647 

18,054 

18,167 

Software

3,343 

3,273 

3,238 

Bank automobiles

911 

939 

886 

 

Premises and equipment, gross

50,326 

49,770 

49,462 

 

 

 

 

 

Accumulated depreciation

(25,582)

(24,637)

(24,510)

 

Premises and equipment, net

$

24,744 

25,133 

24,952 

 

 

 

 

 

 

 

 

 

 

Long-lived assets to be sold are classified as held for saleand are no longer depreciated. Certain criteria must be met in order for thelong-lived asset to be classified as held for sale including that a sale isprobable and expected to occur within a one year period. Long-lived assetsclassified as held for sale are recorded at the lower of carrying amount orfair market value less the estimated costs to sell. The Company classified twoparcels of land, with a book value approximating $1.7 million at June 30, 2008,as held for sale.  These parcels will be purchased within the next twelvemonths from the Company, at book value, in conjunction with the construction ofthe Company’s corporate headquarters in downtown Greenville.

During 2007, the Company executed a ground lease contract onwhich to put in service a nonbanking office automatic teller machine atWoodmont Village Shopping Center on Highway 25 in Moonville, South Carolina. Equipment relative to this location was purchased and installed during thefirst quarter of 2008, and the automatic teller machine was put into serviceduring the second quarter of 2008.  

During the first quarter of 2008, the Company:
- Celebrated the grand opening of its relocated Pendleton     banking office in Anderson County.  The Company owned the previous     Pendleton banking office.  Management is currently considering options for     the previous location and has not yet concluded whether or not this     location will be sold.  Therefore, these assets have not been classified     as held for sale.  At June 30, 2008, the book value of the improvements     relative to this old location approximates market value, and such assets     continue to be depreciated.    
- Purchased property at the intersection of West Wade     Hampton Boulevard and Middleton Way in Greenville County on which to     construct and relocate its existing Greer banking office.  The Company has     extended bid invitations and expects to award the construction contract     during the third quarter. The Company expects to celebrate its grand     opening of the new Greer banking office during the first quarter of 2009.      The Company leases its current Greer banking office and is currently     evaluating its options for this leased branch.
- Executed an operating building lease and an operating     lease for additional office space as part of its plans to expand into north central South Carolina in the Piedmont region.     The Company is currently upfitting these leased banking offices and plans     to open its first banking office in York County during the third quarter     of 2008. 
- Began the final phase of its Montague banking office     renovation.  This final phase included demolishing the improvements that     were originally located on the purchased parcel and completing the site     design for this banking office to include additional parking, a new main     entrance, and a remote automatic teller machine.  Additionally, this final     stage of the renovation and expansion project integrated the previously     renovated existing building with the final stage improvements.  The     related contractual obligations with regard to this renovation were     materially expended as of the end of the second quarter of 2008.  

 

During the second quarter of 2008, the Company completed the renovation of its leased Woodruff Roadbanking office.  The related contractual obligations of this renovation werealso satisfied during this period.  

 

During April 2008, the Company consolidated its existingbanking office network from 32 to 29 banking offices. Banking offices locatedat 3695 East North Street in Greenville County, 1490 W.O. Ezell Boulevard inSpartanburg County, and 2915 North Main Street in Anderson County, all of whichwere leased banking offices, were consolidated.  Management is currentlyevaluating its options with regard to these leased premises. In accordance withSFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities,” a liability for costs that will continue tobe incurred under a contract for its remaining term without economic benefit tothe entity shall be recognized and measured at its fair value when the entityceases using the right conveyed by the contract.  Because in each of thesecases the contract is an operating lease, SFAS No. 146 requires that the fairvalue of the liability at the cease-use date be determined based on the remaininglease rentals, reduced by estimated sublease rentals that could be reasonablyobtained for the property, even if the entity does not intend to enter into asublease. With regard to two of these properties, no liability was determinedto be necessary in accordance with SFAS No. 146.  With regard to the thirdproperty consolidated during April 2008, due to the possibility of the landlordselling the property in the near term thereby eliminating the Company’sremaining term on the contract, as of the cease-use date, the Company booked aliability of $21 thousand based on the lease rentals through the third quarterof 2008.  

 

20

 

 

 

During May 2008, the Company further consolidated itsexisting banking office network from 29 to 28 banking offices. Management is currentlyconsidering options with regard to the Company’s banking office located at 4513Main Street (Hodges) in Greenwood County, which is owned by the Company and hasnot yet concluded whether or not this location will be sold.  As such, at June30, 2008, the long-lived assets associated with this consolidated bankingoffice have not been classified as held for sale.  Additionally, such assetscontinue to be depreciated.  Management does not believe there will be anyimpairment write-off associated with this banking office consolidation. 

 

*Accumulated Depreciation Activity*

 

The following table summarizes the activity impactingaccumulated depreciation for the periods indicated (in thousands). Depreciationbalances were impacted during the period by the activity discussed herein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

 

**2008**

**2007**

 

**2008**

**2007**

Accumulated depreciation, beginning of period

$

25,105 

24,030 

 
   
24,637 

23,597 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

Buildings

140 

108 

 

276 

220 

 

Leasehold improvements

32 

33 

 

62 

73 

 

Furniture and equipment

228 

237 

 

458 

483 

 

Software

43 

55 

 

85 

116 

 

Bank automobiles

46 

47 

 

90 

94 

 

 

Total depreciation

489 

480 

 

971 

986 

 

 

 

 

 

 

 

 

Disposals

(12)

- 

 

(26)

(73)

 

 

 

 

 

 

 

 

Accumulated depreciation, end of period

$

25,582 

24,510 

 
   
25,582 

24,510 

 

 

 

 

 

 

 

 

 

***6.       CoreDeposit Intangibles        ***

** **

The following table summarizes thegross carrying amount and accumulated amortization of intangible assets withfinite lives at the dates indicated (in thousands).

 

 

 

 

 

 

**June 30,**

**December 31,**

 

**2008**

**2007**

Core deposit intangibles, gross

$

1,779 

1,779 

     Less: accumulated amortization

(1,722)

(1,700)

Core deposit intangibles, net

$

57 

79 

 

 

 

 

***7.       Mortgage-Servicing Rights Portfolio***

 

Mortgage loans serviced for the benefit of others amountedto $363.8 million and $346.3 million at June 30, 2008 and December 31, 2007,respectively. 

 

Thebook value of the Company’s mortgage-servicing rights portfolio at June 30,2008 and December 31, 2007 was $3.0 million and $2.9 million, respectively. The Company’s mortgage-servicing rightsportfolio is included in OtherAssets on the Consolidated Interim Balance Sheets. The aggregate fair value of the Company’s mortgage-servicingrights portfolio at June 30, 2008 and December 31, 2007 was $3.8 million and$3.6 million, respectively.

 

21

 

The amount of servicing fees earned by the Company duringthe three month periods ended June 30, 2008 and 2007 was $221 thousand and $206thousand, respectively. The amount of servicing fees earned by the Companyduring the six month periods ended June 30, 2008 and 2007 was $437 thousand and$409 thousand, respectively. Servicing fees are included in Mortgage-BankingIncome on the Consolidated Interim Statements of Income.

* *

*Activity*

* *

The following tablesummarizes the changes inthe the Company’s mortgage-servicing rights portfolio for the periods indicated(in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

 

**2008**

**2007**

 

**2008**

**2007**

Mortgage-servicing rights portfolio, net of valuation

 

 

 

 

 

 

allowance, beginning of period

$

2,898 

2,785 

 
   
2,949 

2,648 

 

 

Capitalized mortgage-servicing rights

320 

171 

 

485 

374 

 

 

Mortgage-servicing rights portfolio amortization

(213)

(234)

 

(426)

(301)

 

 

Change in mortgage-servicing rights portfolio valuation allowance

(3)

- 

 

(6)

1 

Mortgage-servicing rights portfolio, net of valuation

 

 

 

 

 

 

allowance, end of period

$

3,002 

2,722 

 
   
3,002 

2,722 

 

 

 

 

 

 

 

 

 

Mortgage-servicing rights amortizationand valuation allowances are included in Mortgage-Banking Income on theConsolidated Interim Statements of Income.

 

See Consolidated InterimStatements of Cash Flows for a summary of activity impacting the Company’smortgage-servicing rights portfolio.

 

*Valuation Allowance*

 

The mortgage-servicingrights portfolio allowance totaled $11 thousand and $2 thousand at June 30,2008 and 2007, respectively.

 

**8.       *RealEstate and Personal Property Acquired in Settlement of Loans***

* *

*Composition*

* *

The following table summarizes real estate and personal propertyacquired in settlement of loans, which are included in Other Assets on theConsolidated Interim Balance Sheets at the dates indicated (in thousands). 

 
   
**June 30,**

**March 31, **
**December 31,**
**June 30,**
 

**2008**

**2008**

**2007**

**2007**

Real estate acquired in settlement of loans

$

8,332 

7,960 

7,743 

717 

Repossessed automobiles acquired in settlement of loans

288 

369 

403 

386 

     Total property acquired in settlement of loans

$

8,620 

8,329 

8,146 

1,103 

 

 

 

 

 

* *

*Activity*

* *

The following table summarizes the changes in the real estateacquired in settlement of loans portfolio, including the balance at thebeginning and end of the period, provision charged to expense, and lossescharged to the allowance for loan losses related to the Company’s real estateacquired in settlement of loans for the six month period ended June 30, 2008(in thousands).

 

 

 

 

 

Real estate acquired in settlement of loans, beginning of period

$

7,743 

 

Add: New real estate acquired in settlement of loans and related adjustments

789 

 

Less: Sales / recoveries of real estate acquired in settlement of loans

(131)

 

Less: Provision charged to expense

(69)

Real estate acquired in settlement of loans, end of period

$

8,332 

 

 

 

 

22

 

***9.       Deposits***

* *

*Composition*

* *

The following table summarizesthe Company’s traditional deposit composition at the dates indicated (inthousands).

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

**2008**

**2007**

Transaction deposit accounts

$

520,882 

522,359 

Money market deposit accounts

100,403 

118,681 

Savings deposit accounts

38,526 

34,895 

Time deposit accounts $100,000 and greater

154,854 

150,398 

Time deposit accounts less than $100,000

236,014 

232,461 

 

Total traditional deposit accounts

$

1,050,679 

1,058,794 

 

 

 

 

 

 

At June 30, 2008, $606 thousand of overdrawn transactiondeposit accounts had been reclassified as loan balances compared with $809thousand at December 31, 2007.

* *

Interest Expense on Deposit Accounts

 

The following table summarizes the Company’s interestexpense on traditional deposit accounts costs for the periods indicated (inthousands).

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

**2008**

**2007**

 

**2008**

**2007**

Transaction deposit accounts

$

1,229 

2,532 

 
   
3,258 

4,732 

Money market deposit accounts

435 

915 

 

1,211 

1,895 

Savings deposit accounts

32 

36 

 

62 

70 

Time deposit accounts

3,957 

3,954 

 

8,238 

7,967 

 

Total interest expense on traditional deposit accounts

$

5,653 

7,437 

 
   
12,769 

14,664 

 

 

 

 

 

 

 

 

 

***10.    Borrowings***

*** ***

FHLB Borrowings

 

The following table summarizes the Company’s FHLB borrowedfunds utilization and availability at thedates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

 

**2008**

**2007**

Available lendable collateral value to serve against FHLB advances

$

151,477 

105,535 

 

 

 

 

 

Advances and letters of credit

 

 

 

Short-term advances

(29,500)

(12,000)

 

Long-term advances

(52,000)

- 

 

Letters of credit

(69,000)

(69,000)

 

 

Total advances and letters of credit

(150,500)

(81,000)

 

 

 

 

 

Available lendable collateral value to serve against FHLB advances

$

977 

24,535 

 

 

 

 

 

 

Letters of credit are used tosecure public deposits as required or permitted by law.  

 

The following tablesummarizes the Company’s long-term borrowings from the FHLB at June 30, 2008(dollars in thousands).  The Company’s long-term FHLB advance does nothave embedded call options. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

Borrowing balance

$

5,000 

$

12,000 

$

30,000 

$

5,000 

$

52,000 

Interest rate

2.57 

2.75 

2.89 

3.61 

2.90 

Maturity date

3/8/2010

4/2/2010

3/7/2011

4/2/2013

 

 

 

*Federal Funds Accommodations*

* *

In addition to the FHLBborrowing capacity summarized above, at June 30, 2008, the Company had accessto federal funds funding sources at correspondent banks.  During April 2008, acorrespondent bank increased the Bank’s federal funds accommodation by $5million for a period beginning on April 7, 2008 and ending on March 31, 2009,subject to specified terms and conditions. Advances under this accommodationare advances of federal funds with a maturity of the next banking day.Management intends to extend this accommodation at its maturity.  The followingtable summarizes the Company’s federal funds funding sources utilization andavailability at the dates indicated(dollars in thousands).

 

23

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

**2008**

**2007**

Available federal funds funding sources

$

60,000 

50,000 

Utilized federal funds funding sources

(38,171)

(18,000)

Available federal funds funding sources

$

21,829 

32,000 

 

 

 

 

***11.    EmployeeBenefit Plans***

*** ***

*Defined Benefit Pension Plan*

 

Plan Freeze.  During the fourth quarter of 2007, the Company notifiedemployees that, effective in 2008, it would freeze accrued pension benefits foremployees under the Company’s noncontributory, defined benefit pensionplan.  Although no previously accrued benefitswill be lost, employees will no longer accrue benefits for service subsequentto 2007. The Company made the decision to freeze its defined benefit pensionplan because of the uncertainty of future costs of defined benefits resultingfrom such plans being captive to the volatility of capital markets and theincreased burden of government regulation. 

 

SFAS No. 158 Adoption.  The Company adopted SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R),” recognized thefunded status of its defined benefit postretirement plan, and provided theadditional required disclosures as of the year ended December 31, 2007. ThisStatement required, among other things, the recognition of the overfunded orunderfunded status of pension and other postretirement benefit plans on the balancesheet. Under SFAS No. 158, gains and losses, prior service costs and credits,and any remaining transition amounts under SFAS No. 87, “Employers' Accountingfor Pensions,” and SFAS No. 106, “Employers' Accounting for PostretirementBenefits Other Than Pensions,” that had not yet been recognized through netperiodic benefit cost are recognized in accumulated other comprehensive income,net of tax effects, until they are amortized as a component of net periodiccost. The following table summarizesthe adjustments made to accumulated other comprehensive income (loss)(“AOCI(L)”) since the Company’s adoption of SFAS No. 158 during the year endedDecember 31, 2007 (in thousands).

 

 

 

 

 

 

 

**Impact of**

**FASB No.**

**158 **

**Impact of**

**freeze**

**Total**

AOCI(L), pretax, December 31, 2007

$

(6,334)

2,508 

(3,826)

Income tax impact

2,218 

(878)

1,340 

AOCI(L), aftertax, December 31, 2007

$

(4,116)

1,630 

(2,486)

 

 

 

 

Change in AOCI(L), pretax, six month period ended June 30, 2008

$

(1,332)

- 

(1,332)

Income tax impact

466 

- 

466 

Change in AOCI(L), aftertax, six month period ended June 30, 2008

$

(866)

- 

(866)

 

 

 

 

AOCI(L), pretax, June 30, 2008

$

(7,666)

2,508 

(5,158)

Income tax impact

2,684 

(878)

1,806 

AOCI(L), aftertax, June 30, 2008

$

(4,982)

1,630 

(3,352)

 

 

 

 

* *

*401(k) Plan*

 

During the three month periods ended June 30, 2008 and 2007,the Company made matching contributions to its employee 401(k) plan totaling$81 thousand and $71 thousand, respectively. During the six month periods endedJune 30, 2008 and 2007, the Company made matching contributions to its employee401(k) plan totaling $173 thousand and $149 thousand, respectively.

 

*CollateralSplit-Dollar Life Insurance Arrangements*

* *

On January 1, 2008, as required,the Company changed its accounting policy and recognized a cumulative-effectadjustment to retained earnings totaling $99 thousand related toaccounting for certain collateral split-dollar life insurance arrangements inconnection with the adoption of EITF No. 06-10. 

 

 

24

 
***12.    EquityBased Compensation ***
Stock Option Plan

 

General. As of January 2007, all of the optionsavailable for issuance under the Company’s stock option plan had been grantedwith various expiration dates through December 31, 2016.  Of these, 177,830options remained outstanding at June 30, 2008 with exercise prices ranging from$13.00 to $30.40. All options granted have a vesting term of five years and anexercise period of ten years.  

 

Determining Fair Value. The following table summarizes the stock option awardsgranted by the Company during the periods covered by the Consolidated InterimFinancial Statements, the fair value of each award granted as estimatedon the date of grant using the Black-Scholes option-pricing model, and theweighted average assumptions used for such grants for the grant datesindicated. 

 

 

 

 

 

Grant date

1/16/2007

 

 

 

 

Stock option awards granted

800 

 

 

 

 

Option price

$

30.40 

 

 

 

 

Fair value of stock option awards granted

$

6.24 

 

 

 

 

Expected dividend yields

2.5 

%

Expected volatility

13 

 

Risk-free interest rate

5 

 

Expected term (years)

10 

 

Vesting period (years)

5 

 

 

The Company’s stock is not listed on an exchange or anyover-the-counter service. Historically, the Company utilized an annualindependent market valuation to assist the Company in establishing the marketvalue per share of a minority block of the outstanding common shares ofPalmetto Bancshares, Inc. for use in conjunction with stock options.  However,beginning in 2007, management determined that an average trading pricevaluation method, based on the last five known trades of the stock, was a moreappropriate estimate of the fair market value of the Company’s common stock. Management's determination was based upon the emergence of a more established,although still limited, trading market in the stock.  All of the stock optionawards summarized in the preceding table were granted prior to this change,which occurred during the second quarter of 2007.  

 

Stock Option CompensationExpense. The compensation cost that was charged against pretax net incomefor stock options during the three month periods ended June 30, 2008 and 2007was $23 thousand and $33 thousand, respectively. During the six month periodsended June 30, 2008 and 2007, such compensation expense was $47 thousand and$66 thousand, respectively. For all periods, management estimated thatforfeitures would not be significant and recognized compensation costs for allequity awards.

 

At June 30, 2008, based onoptions outstanding at that time, the total compensation cost related tononvested stock option awards granted under the Company’s stock option plansbut not yet recognized was $142 thousand before the impact of income taxes.Stock option compensation expense is recognized on a straight-line basis overthe vesting period of the option. Remaining costs are expected to be recognizedthrough 2011. 

 

Stock Option Activity.The following table summarizes stock option activity for the Company’s stockoption plan for the periods indicated.

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

**Stock options**

**outstanding**

**Weighted-**

**average**

**exercise**

**price**

Outstanding at December 31, 2006

251,670 

$

18.67 

 

Granted

800 

30.40 

 

Exercised

(22,210)

15.06 

Outstanding at June 30, 2007

230,260 

$

19.06 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2007

198,155 

$

20.29 

 

Granted

- 

- 

 

Exercised

(20,325)

16.03 

Outstanding at June 30, 2008

177,830 

$

20.78 

 

Cash received from stock optionexercises under the Company’s stock option plan during the first six months of2008 and 2007 was $326 thousand and $334 thousand, respectively.

 

The total intrinsic value ofstock options exercised during the three and six month periods ended June 30,2008 was $184 thousand and $517 thousand, respectively.  

 

Stock Options Outstanding. The following table summarizes information regarding stock optionsoutstanding and exercisable at June 30, 2008.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Options outstanding**

**Options exercisable**

**Exercise price or range of**

**exercise prices**

**Number of**

**stock options**

**outstanding at**

**6/30/08**

**Weighted-**

**average**

**remaining**

**contractual**

**life (years)**

**Weighted-**

**average**

**exercise**

**price**

**Number of**

**stock options**

**exercisable**

**at 6/30/08**

**Weighted-**

**average**

**exercise**

**price**

 

$

13.00 

 

18,120 

1.50 

$

13.00 

18,120 

$

13.00 

 

$

13.50 

 

11,800 

2.50 

13.50 

11,800 

13.50 

$

15.00 

to

$

20.00 

58,910 

3.95 

17.25 

58,910 

17.25 

$

23.30 

to

$

26.60 

55,200 

5.91 

24.63 

35,200 

24.14 

$

27.30 

to

$

30.40 

33,800 

7.51 

27.37 

12,320 

27.38 

 

 

Total

177,830 

4.89 

$

20.78 

136,350 

$

19.06 

 

 

 

 

 

 

 

 

 

The intrinsic value of stockoptions outstanding and exercisable at June 30, 2008 was $3.1 million. 

 

Restricted Stock Plan

* *

On February 19, 2008, the Company’s Board of Directors adopted, subject to shareholder approval, the Palmetto Bancshares, Inc. 2008 Restricted Stock Plan, which provides for the grant of stock awards to the Company’s employees, officers, and directors.  The Company’s shareholders approved the Palmetto Bancshares, Inc. 2008 Restricted Stock Plan on April 15, 2008. A total of 250,000 shares of common stock have been reserved for issuance pursuant to awards under the Plan, subject to its anti-dilution provisions.  A copy of the Palmetto Bancshares, Inc. 2008 Restricted Stock Plan was attached as Appendix A to the Company’s Proxy Statement dated March 17, 2008 for the Annual Meeting of Shareholders held on April 15, 2008. No restricted stock awards had been granted as of June 30, 2008.

 

26

 

***13.    NetIncome per Common Share***

 

The following table summarizes the Company’s reconciliationof the numerators and denominators of the basic and diluted net income percommon share computations for the periods indicated.

 

** **

 

 

 

 

 

 

 

 

 

**For the three month**

 

**For the six month**

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

**2008**

**2007**

 

**2008**

**2007**

Weighted average common shares outstanding - basic

6,435,515 

6,385,483 

 

6,433,343 

6,382,019 

 

Dilutive impact resulting from potential common share issuances

85,654 

114,166 

 

84,956 

98,435 

Weighted average common shares outstanding - diluted

6,521,169 

6,499,649 

 

6,518,299 

6,480,454 

 

 

 

 

 

 

 

	Common Share Data

 

 

 

 

 

 

Net income - basic

$

0.67 

0.64 

 

1.24 

1.23 

 

Net income - diluted

0.66 

0.63 

 

1.22 

1.21 

 

              

At June 30, 2008, all outstanding options were included inthe calculation of diluted net income per common share because the exerciseprice of all options was lower than the average market price as determined bythe average trading price of the last five known trades of the Company’s commonstock.

  

***14.    Guarantees,Commitments, and Contingencies***

 

Standby Letters of Credit

 

At June 30, 2008, the Company recorded no liability for itsobligation to perform as a guarantor under standby letters of credit. Themaximum potential amount of undiscounted future payments related to standbyletters of credit at June 30, 2008 was $10.9 million compared with $11.2million at December 31, 2007.  Past experience indicates that standby lettersof credit will expire unused. However, through its various sources ofliquidity, the Company believes that it has the necessary resources availableto meet these obligations should the need arise.  Additionally, the Companydoes not believe that the current fair value of such guarantees was material atJune 30, 2008.

 

*Derivatives*

 

See Note15 for further discussion regardingthe Company’s off-balance sheet arrangements and commitments related toderivative loan commitments and its forwardloan sales commitments.  

 

*Real Property Operating LeaseObligations*

 

The Company leases certain officefacilities and real estate relating to banking services under operatingleases.  Rental expense for such operating leases totaled $230 thousand and$203 thousand for the three month periods ended June 30, 2008 and 2007,respectively.  For the six month periods ended June 30, 2008 and 2007, rentalexpense for such operating leases totaled $447 thousand and $388 thousand,respectively. Other than as discussed below, there has been no significantchange in future minimum lease payments payable by the Company since December31, 2007.  

 

The Company enters intoagreements with third parties with respect to the leasing, servicing, andmaintenance of equipment. However,the Company believes that these agreements are immaterial when consideredindividually, or in the aggregate, with regard to the Company’s ConsolidatedInterim Financial Statements.  Additionally, management believes thatnoncompliance with terms of such agreements would not have a material impact onthe Company’s business, financial condition, results of operations, orcash flows.  Such commitments are generallyentered into for a 12-month period with option extensions.  Therefore, costsbeyond 2008 cannot be reasonably estimated at this time.

 

During the first quarter of 2008,the Company executed an operating building lease and an operating lease foradditional office space as part of its plans to expand into north central South Carolina in the Piedmont region.The Company is currently upfitting these leased banking offices and plans toopen its first banking office in York County during the third quarter of 2008.Rental expense for such operating leases paid during the three and six monthperiods ended June 30, 2008 are included in the rental expense totals disclosedabove.  Lease payments payable by the Company for the remainder of 2008relative to these locations approximate $35 thousand.   Although lease paymentsfor periods subsequent to 2008 cannot be determined because lease paymentsdepend on consumer price index changes, management does not believe that futureminimum lease payments relative to these locations will significantly differfrom those for 2008.  Obligations under these operating lease agreements arepayable over several years with the building lease expiring in 2015 and the additionaloffice space lease expiring in 2011.  

 

During April 2008, the Company consolidated its existingbanking office network from 32 to 29 banking offices. Banking offices locatedat 3695 East North Street in Greenville County, 1490 W.O. Ezell Boulevard inSpartanburg County, and 2915 North Main Street in Anderson County, all of whichwere leased banking offices, were consolidated.  Management is currentlyevaluating its options with regard to these leased premises. In accordance withSFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities,” a liability for costs that will continue tobe incurred under a contract for its remaining term without economic benefit tothe entity shall be recognized and measured at its fair value when the entityceases using the right conveyed by the contract.  Because in each of thesecases the contract is an operating lease, SFAS No. 146 requires that the fairvalue of the liability at the cease-use date be determined based on theremaining lease rentals, reduced by estimated sublease rentals that could bereasonably obtained for the property, even if the entity does not intend toenter into a sublease. With regard to two of these properties, no liability wasdetermined to be necessary in accordance with SFAS No. 146.  With regard to thethird property consolidated during April 2008, due to the possibility of thelandlord selling the property in the near term thereby eliminating theCompany’s remaining term on the contract, as of the cease-use date, the Companybooked a liability of $21 thousand based on the lease rentals through the thirdquarter of 2008.  

 

27

 

 

As discussed in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2007, the Company plans to relocate its corporateheadquarters to downtown Greenville, South Carolina. The Company anticipatesconstruction will be completed during the fourth quarter of 2008 with the grandopening celebration to follow during the first quarter of 2009.  Duringconstruction, the Company is continuing to pay real property operating leasepayments under its previous lease with the Lessor with regard to its previousdowntown Greenville banking office.  Upon occupancy, these real propertyoperating lease payments will be replaced with those required by thebuild-to-suit operating lease agreement.  

 

Contractual Capital ExpenditureObligations

 

During 2007, the Company executed a groundlease contract on which to put in service a nonbanking office automatic tellermachine at Woodmont Village Shopping Center on Highway 25 in Moonville, SouthCarolina.  Equipment for this location was purchased and installed during thefirst quarter of 2008, and the automatic teller machine was put into serviceduring the second quarter of 2008.  No contractualcapital expenditure obligations remain relative to this nonbankingoffice automatic teller machine at June 30, 2008.

 

During the first quarter of 2008, the Company:
- Purchased property at the intersection of West Wade     Hampton Boulevard and Middleton Way in Greenville County on which to     construct and relocate its existing Greer banking office.  The Company has     extended bid invitations and expects to award the construction contract     during the third quarter. The Company expects to celebrate its grand     opening of the new Greer banking office during the first quarter of 2009.      
- Executed an operating building lease and an operating     lease for additional office space as part of its plans to expand into north central South Carolina in the Piedmont region.     The Company is currently upfitting these leased banking offices and plans     to open its first banking office in York County during the third quarter     of 2008. 
- Began the final phase of its Montague banking office     renovation.  This final phase included demolishing the improvements that were     originally located on the purchased parcel and completing the site design     for this banking office to include additional parking, a new main     entrance, and a remote automatic teller machine.  Additionally, this final     stage of the renovation and expansion project integrated the previously     renovated existing building with the final stage improvements.  The     related contractual obligations with regard to this renovation were     materially expended as of the end of the second quarter of 2008.  

 

During the second quarter of 2008, the Company completed the renovation of its leased Woodruff Roadbanking office.  The related contractual obligations of this renovation werealso satisfied during this period.  

 

As discussed in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007, the Companyanticipates that it will be required to expend approximately $3 million during2008 with regard to the upfitting and furnishings of the new corporateheadquarters facility to make it suitable and adequate for the Company’sintended purposes. 

 

 

28

 

 

Legal Proceedings

 

The Company is currently subject to variouslegal proceedings and claims that have arisen in the ordinary course of itsbusiness. In the opinion of management, based on consultation with external legalcounsel, any reasonably foreseeable outcome of such current litigation wouldnot materially impact the Company's financial condition or results ofoperations.

 

***15.    DerivativeFinancial Instruments and Hedging Activities***

 

As part of its mortgage-banking activities, the Companyoriginates certain mortgage loans and enters into forward sales commitments ofclosed mortgage loans in the secondary market at a future date at a specifiedprice. The commitments to originate mortgage loans and the sales commitments arefreestanding derivative instruments and are generally funded within90 days. At June 30, 2008, and December 31, 2007, the fair value of theCompany’s derivative assets related to derivativeloan commitments and its forward loan sales commitments were immaterial.

 

***16.     DisclosuresRegarding Fair Value of Financial Instruments***

 

Effective January 1, 2008, the Company adopted SFAS No. 157.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosures about fair value measurements.  SFASNo. 157 has been applied prospectively as of the beginning of the period.

 

SFAS No. 157 defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurementdate.  SFAS No. 157 also establishes a fair value hierarchy thatrequires an entity to maximize the use of observable inputs and minimize theuse of unobservable inputs when measuring fair value.

 

In accordance with SFAS No.157, the Company groups its financial assets and financial liabilities measuredat fair value in three levels, based on the markets in which the assets andliabilities are traded and the reliability of the assumptions used to determinefair value.  These levels are:
- Level 1 - Valuations for assets and liabilities traded in     active exchange markets, such as the New York Stock     Exchange.  Valuations are obtained from readily available     pricing sources for market transactions involving identical assets or     liabilities.
- Level 2 - Valuations for assets and liabilities traded in     less active dealer or broker markets.  Valuations are obtained     from third party pricing services for identical or comparable assets or     liabilities which use observable inputs other than Level 1 prices, such as     quoted prices for similar assets or liabilities; quoted prices in active     markets that are not active; or other inputs that are observable or can be     corroborated by observable market data for substantially the full term of     the assets or liabilities.
- Level 3 - Unobservable inputs that are supported by little     or no market activity and that are significant to the fair value of the     assets or liabilities.

 

The following table presents the Company’s assets that aremeasured at fair value on a recurring basis and the level within the SFAS No.157 hierarchy in which the fair value measurements fall at June 30, 2008 (inthousands).

 

** **

 

 

 

 

 

 

**Level 1**

**Level 2  **

**Level 3  **

**Fair value  **

Investment securities available for sale

$

- 

133,199 

- 

133,199 

 

 

 

 

 

 

The fair value of investment securities available for saleis determined by various valuation methodologies.  Where quotedmarket prices are available in an active market, securities are classifiedwithin Level 1. Level 1 securities may include exchange traded equities. Ifquoted market prices are not available, fair values are estimated by usingpricing models or quoted prices of securities with similarcharacteristics.  Level 2 securities may include U.S. Treasurysecurities, obligations of government corporations and agencies, obligations ofstates and political subdivisions, mortgage-backed securities, collateralizedmortgage obligations, and corporate bonds. In certain cases where Level 1 orLevel 2 inputs are not available, securities are classified within Level 3 ofthe hierarchy and may include subordinated tranches of collateralized mortgageobligations and investments in financial institution trust preferredsecurities.

 

29

 

 

The Company may be required, from time to time, to measurecertain other financial assets and liabilities at fair value on a nonrecurringbasis.  These adjustments to fair value usually result fromapplication of lower-of-cost-or-market accounting or writedowns of individualassets.  The following table provides the level of valuationassumptions used to determine each adjustment and the fair value of the assetson a nonrecurring basis at June 30, 2008(in thousands).

 

** **

 

 

 

 

 

 

 

 

**Level 1**

**Level 2**

**Level 3**

**Fair value**

Impaired loans

$

- 

8,175 

- 

8,175 

 

Loans for which it is probable that the Company will notcollect all principal and interest due according to contractual terms aremeasured for impairment in accordance with the provisions of SFAS No. 114,“Accounting by Creditors for Impairment of a Loan.”  Impaired loans,which are measured for impairment using the fair value of the collateral forcollateral dependent loans, had a carrying amount of $10.2 million, with avaluation allowance of $2.0 million at June 30, 2008.

 

*Fair Value Option*

 

 

In February 2007, the FASB issuedSFAS No. 159, which permits entities to choose to measure eligibleitems at fair value at specified election dates. Unrealized gains and losses onitems for which the fair value option has been elected are reported in earningsat each subsequent reporting date. The fair value option may be appliedinstrument by instrument, with certain exceptions, is irrevocable (unless a newelection date occurs), and is applied only to entire instruments and notto portions of instruments. The main intent of SFAS No. 159 was to mitigate thedifficulty in determining reported earnings caused by a “mixed-attribute model”(that is, reporting some assets at fair value and others using a differentvaluation method such as amortized cost). The project is separated into twophases. This first phase addresses the creation of a fair value option forfinancial assets and liabilities.  A second phase will addresscreating a fair value option for selected nonfinancial items. SFAS No. 159was effective for the Company on January 1, 2008. The Company did not electedthe fair value option for any financial assets or liabilities as of January 1,2008. 

 

***17.    RegulatoryCapital Requirements***

 

Thefollowing table summarizes Palmetto Bancshares’ and the Bank’s actual andrequired capital ratios at the periods indicated (dollars in thousands). As ofJune 30, 2008, the Company and the Bank were categorized as “well capitalized”under the regulatory framework based on the most recent notification fromfederal banking agencies. Since June 30, 2008, management has become aware ofno conditions or events since the most recent notification from federal bankingagencies that would change the Company's or the Bank's category.

 

30

 

 

* *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Actual**

**For capital adequacy**

**purposes**

**To be "well capitalized"**

**under prompt**

**corrective action**

**provisions**

 

 

 

 

 

**amount**

**ratio**

**amount**

**ratio**

**amount**

**ratio**

**At June 30, 2008**

 

 

 

 

 

 

 

*Total capital to risk-weighted assets*

 

 

 

 

 

 

 

Company

 

 

$

122,344 

10.21% 

95,842 

8.00 

n/a 

n/a 

 

Bank

 

 

121,845 

10.17 

95,840 

8.00 

119,800 

10.00 

 

 

 

 

 

 

 

 

 

 

 

*"Tier 1" capital to risk-weighted assets*

 

 

 

 

 

 

 

Company

 

 

114,699 

9.57 

47,921 

4.00 

n/a 

n/a 

 

Bank

 

 

114,200 

9.53 

47,920 

4.00 

71,880 

6.00 

 

 

 

 

 

 

 

 

 

 

 

*"Tier 1" leverage ratio*

 

 

 

 

 

 

 

Company

 

 

114,699 

8.71 

52,698 

4.00 

n/a 

n/a 

 

Bank

 

 

114,200 

8.66 

52,726 

4.00 

65,908 

5.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**At December 31, 2007**

 

 

 

 

 

 

*Total capital to risk-weighted assets*

 

 

 

 

 

 

 

Company

 

 

$

116,349 

10.27% 

90,669 

8.00 

n/a 

n/a 

 

Bank

 

 

116,186 

10.25 

90,669 

8.00 

113,337 

10.00 

 

 

 

 

 

 

 

 

 

 

 

*"Tier 1" capital to risk-weighted assets*

 

 

 

 

 

 

 

Company

 

 

108,931 

9.61 

45,335 

4.00 

n/a 

n/a 

 

Bank

 

 

108,768 

9.60 

45,335 

4.00 

68,002 

6.00 

 

 

 

 

 

 

 

 

 

 

 

*"Tier 1" leverage ratio*

 

 

 

 

 

 

 

Company

 

 

108,931 

8.97 

48,591 

4.00 

n/a 

n/a 

 

Bank

 

 

108,768 

8.94 

48,652 

4.00 

60,815 

5.00 

* *

31

 

 

 

 

 

**Item 2.   Management's Discussion and Analysis of Financial Conditionand Results Of Operations**

 

Thefollowing discussion and analysis presents the more significant factorsimpacting the Company’s financial condition as of June 30, 2008, results ofoperations for the three and six month periods ended June 30, 2008, and cashflows for the six month period ended June 30, 2008. This discussionshould be read in conjunction with the Company’s Consolidated Interim FinancialStatements and the notes thereto included in this Quarterly Report on Form 10-Qand the Company’s Consolidated Financial Statements, and notes thereto, for theyear ended December 31, 2007, included in the Company’s Annual Report on Form10-K.  Results for the three and six month periods ended June 30, 2008 are notnecessarily indicative of the results for the year ending December 31, 2008 orany future period.  Percentage calculations contained herein have beencalculated based on actual not rounded results presented herein.

 

***Critical Accounting Policies and Estimates***

 

*General*

 

The Company’s accounting andfinancial reporting policies are in conformity, in all material respects, toaccounting principles generally accepted in the United States and to generalpractices within the financial services industry.  The preparation of financialstatements in conformity with such principles requires management to makeestimates and assumptions that impact the reported amounts of assets and liabilities,the disclosure of contingent assets and liabilities during the reportingperiod, and the reported amounts of income and expense during the reportingperiod.  While the Company bases estimates on historical experience, currentinformation, and other factors deemed to be relevant, actual results coulddiffer from those estimates. On an annual basis, management, in conjunctionwith the Company’s independent registered public accounting firm, discusses thedevelopment and selection of the critical accounting estimates with the AuditCommittee of the Company’s Board of Directors.

 

The Company considers accounting policies and estimates to be“critical” to the Company’s financial condition, results of operations, or cashflows if the accounting policy or estimate requires management to makeassumptions about matters that are highly uncertain and differentestimates that management reasonably could have used for the accountingestimate in the current period, or changes in the accounting estimate that are reasonablylikely to occur from period to period, could have a material impact on theCompany’s financial condition, results of operations, or cash flows. The Company considers the accounting for its allowancefor loan losses, mortgage-servicingrights portfolio, and defined benefit pension plan to be “critical” because of the valuation techniquesused and the sensitivity of the amounts recorded in the Company’s ConsolidatedInterim Financial Statements to the methods, assumptions, and estimatesunderlying these balances. Accounting for these “critical” areas requiressubjective and complex judgments and could be subject to revision as newinformation becomes available. 

 

Foradditional information regarding the Company’s critical accounting policies andestimates, refer to theCompany’s Annual Report on Form 10-K for the Year Ended December 31, 2007. There have been no significant changes in theCompany’s application of critical accounting policies since December 31,2007.

 

***QuarterlyHighlights***

 

*ExecutiveSummary*

* *

Thefollowing dialogue should be read in conjunction with our Management’sDiscussion and Analysis of Financial Condition and Results of Operations in itsentirety.

 

Palmetto Bancshares, Inc. is a regional fnancial services bank holdingcompany organized in 1982 under the laws of South Carolina and headquartered inLaurens, South Carolina that provides, through its subsidiary, the Bank, abroad array of commercial banking, consumer banking, trust and investmentmanagement, and brokerage services throughout its market area primarily inUpstate, South Carolina.  Palmetto Bancshares, Inc.’s primary business is theoperation of the Bank. The Bank’s principal business is attracting retaildeposits from the general public and investing those deposits, together withfunds generated from operations, principal repayments on loans and securitiesand borrowings, primarily in loans and investment securities. The Company’sresults of operations are dependent primarily on its net interest income, whichis the difference between the interest earned on assets, primarily loans andinvestment securities, and the interest paid on deposits and borrowings.Results of operations are also significantly impacted by general economic andcompetitive conditions, particularly changes in market interest rates andUnited States Treasury yield curves, government policies, and actions ofregulatory authorities.

 

32

 

 

Asthe Upstate’s premier financial institution, the Company’s goals are to enhanceshareholder value while building a solid banking franchise. Focus is placed ongrowing the core businesses of lending and retail banking while maintainingstrong asset quality and controlling operating expenses. Additionally, theCompany continues to provide returns to shareholders through dividends. TheCompany has been successful in achieving these goals over the past severalyears.

 

Thenational economy continues to border on, if not already having entered into, arecession and the housing and real estate markets continue to decline. Thecurrent operating environment is the result of the significant disruption andvolatility in the financial and capital market places that began in the secondhalf of 2007 and continued throughout the first half of 2008. Due to concernsover the economy, the Federal Open Market Committee reduced the federal fundsrate by 100 basis points during the second half of 2007 and by an additional225 basis points during the first half of 2008, primarily during the 2008 firstquarter. These actions have resulted in a more positively sloped yield curve,as well as a reduction in many interest rates. 

 

Totalassets increased slightly during the six month period ended June 30, 2008,primarily due to an increase in the loan and investment securities portfolios. 

 

Loans continue to be the largest component of the Company’s mix ofassets. Total loans increased $68.5million, or 6.5%, at June 30, 2008 over December 31,2007 primarily as a result of growth within the commercial business andcommercial real estate portfolios. Averageloans accounted for 88.8% of average interest-earning assets during the threemonth period ended June 30, 2008 compared with 88.2% during the three monthperiod ended June 30, 2007. Average loans increased$139.1 million, or 14.4%, during the three month period ended June30, 2008 compared with the same period of 2007. 

 

Average investmentsecurities available for sale increased$24.3 million, or 22.6%, during the three month period ended June30, 2008 compared with the same period of 2007primarily within the collateralizedmortgage obligation sector of the portfolio.  The Company began investing incollateralized mortgage obligations during the first quarter of 2008. Additionally, during the three monthperiod ended June 30, 2008, the remaining securities in the Company’sgovernment-sponsored enterprises sectorof the portfolio matured.  Becauseinterest spreads within this sector became extremely narrow, the Companyreinvested these maturing funds as well as additional funds in collateralizedmortgage obligations, which managementbelieved were undervalued due to the market discount that has been applied tothe entire mortgage related marketplace.  

 

Traditional deposit accounts continue to be the Company’sprimary source of funding.  Average traditional deposit accounts increased$41.5 million, or 4.8% during the three monthperiod ended June 30, 2008 compared with the sameperiod of 2007.  Average nontraditionaldeposit accounts, including retail repurchase agreements and commercial paper,supplement the Company’s source of funding provided through traditional depositaccounts.  Such accounts increased $11.4 million, or 29.0% over the sameperiods.  The combination of increasing competition and alternative investmentoptions has made it more difficult to grow deposits accounts, both traditionaland nontraditional. To supplement funding provided through deposit accounts,management has primarily employed proceeds from maturing investment securitiesissued by government-sponsored enterprises and borrowed funds to fund assetgrowth.   

 

In order to supplement asset growth funding, total averagewholesale funding increased from an average of $11.8 million during the threemonth period ended June 30, 2007 to $98.1 million during the same period of2008, an increase of $86.3 million.  The Company has found wholesale funding,which includes federal funds purchased from correspondent banks and FHLBadvances, to be a logical answer to supplement asset growth funding whenfunding through deposits is insufficient. Management believes that such fundingprovides the Company with the ability to access the exact type of fundingneeded, at the exact time, in the exact quantity, and at market rates. Thisprovides the Company with the flexibility to tailor borrowings to its specificneeds. 

 

Beginning in late March 2008 andcontinuing into early April 2008, the Company transacted a series of long-termFHLB borrowings intended to support interest-earning asset growth, primarilyinvestments in available for sale securities, and supplement net interestincome. Although FHLB borrowings do not always result in lower interestexpense, management believes that such funding can increase net interest incomeif employed in higher yield interest-earning assets. The Company used theselong-term FHLB borrowings to invest in collateralized mortgage obligations. The impact of this transaction supplemented net interest income growth duringthe three month period ended June 30, 2008.

 

33

 

 

 

 

 

Net income increased $264 thousand, or 6.5%, during thethree month period ended June 30, 2008 from the same period of 2007.  Thefollowing table summarizes the components of net income for the three monthperiods ended June 30, 2008 and 2007 (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

 

 

 

**periods ended June 30,**

**Dollar**

**Percent**

 

 

 

**2008**

**2007**

**variance**

**variance**

 

Interest income

$

20,050 

20,696 

(646)

(3.1)

%

Interest expense

6,428 

7,988 

(1,560)

(19.5)

 

 

Net interest income

13,622 

12,708 

914 

7.2 

 

Provision for loan losses

687 

433 

254 

58.7 

 

 

Net interest income after provision for loan losses

12,935 

12,275 

660 

5.4 

 

Noninterest income

4,560 

3,944 

616 

15.6 

 

Noninterest expense

10,826 

9,950 

876 

8.8 

 

 

Net income before provision for income taxes

6,669 

6,269 

400 

6.4 

 

Provision for income taxes

2,340 

2,204 

136 

6.2 

 

 

Net income

$

4,329 

4,065 

264 

6.5 

%

 

 

 

 

 

 

 

 

Net interest income increased $914 thousand, or 7.2%, fromthe three month period ended June 30, 2007 to the same period of 2008.  Thefollowing table summarizes the dollar amount of changes in interest income andinterest expense attributable to changes in average volume and the amountattributable to changes in average interest rates when comparing the threemonth period ended June 30, 2008 to the three month period ended June 30, 2007(in thousands).  The impact of the combination of rate and volume change hasbeen divided proportionately between the rate change and volume change. Thecomparison between the periods includes an additional change factor thatsummarizes the impact of the difference in the number of days of each year.

 

 

 

 

 

 

 

 

 

 

**Change in**

**average**

**volume**

**Change in**

**average**

**rate**

**Change due**

**to**

**difference**

**in number**

**of days**

**Total**

**change**

Total interest income

$

5,594 

(6,185)

(55)

(646)

Total interest expense

1,132 

(2,673)

(19)

(1,560)

 

Net interest income

$

4,462 

(3,512)

(36)

914 

 

 

 

 

 

 

 

Given that the Company’s balancesheet was liability sensitive and interest rates fell during the three monthperiod ended June 30, 2008, management expected that net interest income wouldincrease during the period over the prior quarter.  The following tablesummarizes interest income and interest expense for the three month periodsended June 30, 2008 and March 31, 2008 (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

 

 

 

**periods ended**

 

 

 

 

 

**June 30,**

**March 31,**

**Dollar**

**Percent**

 

 

 

**2008**

**2008**

**variance**

**variance**

 

	Total interest income

$

20,050 

20,240 

(190)

(0.9)

%

	Total interest expense

6,428 

7,691 

(1,263)

(16.4)

 

 

Net interest income

$

13,622 

12,549 

1,073 

8.6 

%

 

 

 

 

 

 

 

 

In addition to the impact ofinterest rate changes, the impact of FHLB borrowings transaction supplementednet interest income growth during the three month period ended June 30, 2008.

 

Theprovision for loan losses recorded during the three and six monthperiods ended June 30, 2008 reflects not only thenecessary increases in the allowance for loan losses related to newlyidentified criticized loans, but it also reflects actions taken related to otherloans including, among other things, any necessary increases or decreases inrequired allowance for loan losses for specific loans or loan pools. 

 

Noninterest income increased $616 thousand, or 15.6%, duringthe three month period ended June 30, 2008 over the same period of 2007.  Thisincrease was impacted by increased service changes on deposit accounts,mortgage-banking income, and automatic teller machine income. The increase inservice charges on deposit accounts resulted from the increase in total averagetransaction deposit accounts. The increase in mortgage-banking income, net wasprimarily a result of an increase in loan sale gains over the periods.  Theincrease in automatic teller machine income, included in Other NoninterestIncome financial statement line item, was impacted by an increase innoncustomer transaction fees, which increased $0.50 per transaction effectiveMarch 2008.  Additional transaction volume also contributed to the increase.  

 

34

 

 

 

Noninterestexpense increased $876 thousand, or 8.8%, during the three month period endedJune 30, 2008 over the same period of 2007.  This increase was primarily withinthe Other Noninterest Expense financial statement line item and was impacted byincreased FDIC deposit insuranceassessments and expenses related to realestate acquired in settlement of loans substantially all of which was relatedto the holding of the Bank’s purchased portion of a participation agreementrelative to a commercial property within the portfolio. 

 

Marketforecasts anticipate a positively sloped yield curve forthe remainder of 2008, which should provide opportunities for earnings growthand continued expansion of the Company’s net interest margin. Asset qualityshould remain strong as the Company’s continues to maintain its conservativeunderwriting standards. However, the Company is not immune to the negativeconsequences arising from overall economic weakness and, in particular, a sharpdownturn in the housing industry nationally. As such, nonperforming loans andcredit costs may trend somewhat higher than historical levels. 

 

Other Second Quarter Highlights

 

Restricted Stock Plan. On April 15, 2008, the Company’s shareholdersapproved the Palmetto Bancshares, Inc. 2008 Restricted Stock Plan, pursuant towhich the Company may grant stock awards to its employees, officers, anddirectors.  A total of 250,000 shares of common stock have been reserved forissuance pursuant to awards under the Plan, subject to its anti-dilutionprovisions.  A copy of the Plan was attached as Appendix A to the Company’sProxy Statement dated March 17, 2008 for the Annual Meeting ofShareholders held on April 15, 2008. As of the date of this filing, norestricted stock awards have been granted.

 

Premises and Equipment ProgressHighlights.  During 2008, the Company:
- Purchased and installed the equipment for the new     nonbanking office automatic teller machine at Woodmont Village Shopping     Center on Highway 25 in Moonville, South Carolina.  The automatic teller     machine was put into service during the second quarter of 2008.  
- Continued to consider options with regard to its previous     Pendleton banking office location.  Therefore, these assets have not been     classified as held for sale.  At June 30, 2008, the book value of the     improvements to this old location approximates market value, and such     assets continue to be depreciated.    
- Purchased property at the intersection of West Wade     Hampton Boulevard and Middleton Way in Greenville County on which to     construct and relocate its existing Greer banking office.  The Company has     extended bid invitations and expects to award the construction contract     during the third quarter. The Company expects to celebrate its grand     opening of the new Greer banking office during the first quarter of 2009.      The Company leases its current Greer banking office and is currently     evaluating its options with regard to this leased banking office.
- Executed an operating building lease and an operating     lease for additional office space as part of its plans to expand into north central South Carolina in the Piedmont region.     The Company is currently upfitting these leased banking offices and plans     to open its first banking office in York County during the third quarter     of 2008. 
- Began the final phase of its Montague banking office     renovation.  This final phase included demolishing the improvements that     were originally located on the purchased parcel and completing the site     design for this banking office, which will include additional parking, a     new main entrance, and a remote automatic teller machine.  Additionally,     this final stage of the renovation and expansion project will integrate     the previously renovated existing building with the final stage     improvements.  The related contractual obligations with regard to this     renovation were materially expended as of the end of the second quarter of     2008.  
- Completed the renovation     of its leased Woodruff Road banking office.  The related contractual     obligations of this renovation were also satisfied during this period.  
- 	Consolidated, during April 2008, its existing banking office network from 32	to 29 banking offices. Banking offices located at 3695 East North Street in	Greenville County, 1490 W.O. Ezell Boulevard in Spartanburg County, and 2915	North Main Street in Anderson County, all of which were leased banking	offices were consolidated.  With regard to two of these properties no	liability was determined to be necessary in accordance with SFAS No. 146. 	With regard to the third property consolidated during April 2008, due to the	possibility of the landlord selling the property in the near term thereby	eliminating the Company’s remaining term on the contract, as of the	cease-use date, the Company booked a liability of $21 thousand based on the	lease rentals through the third quarter of 2008.  
- Further consolidated, during May 2008, its existing     banking office network from 29 to 28 banking offices. Management is     currently considering options with regard to its banking office located at     4513 Main Street (Hodges) in Greenwood County, which is owned by the Company     and has not yet concluded whether or not this location will be sold.  Therefore,     at June 30, 2008, the long-lived assets associated with this consolidated     banking office have not been classified as held for sale.  Additionally,     such assets continue to be depreciated.  Management does not believe there     will be any impairment write-off associated with this banking office     consolidation.    
 

 

 

35

 

 

 

***Financial Condition*****

* *

*Overview*

* *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PALMETTO BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Balance Sheets**

 

**(dollars in thousands)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

**Dollar**

 

**Percent**

 

 

 

 

 

 

 

**2008**

 

**2007**

 

**variance**

 

**variance**

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

$

37,978 

 

42,450 

 

(4,472)

 

(10.5)

%

 

Federal funds sold

 

 

- 

 

9,782 

 

(9,782)

 

(100.0)

 

 

 

Total cash and cash equivalents

 

37,978 

 

52,232 

 

(14,254)

 

(27.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB stock, at cost

 

 

5,913 

 

2,617 

 

3,296 

 

125.9 

 

Investment securities available for sale, at fair value

133,199 

 

95,715 

 

37,484 

 

39.2 

 

Mortgage loans held for sale

 

 

3,801 

 

5,005 

 

(1,204)

 

(24.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, gross

 

 

1,114,522 

 

1,044,770 

 

69,752 

 

6.7 

 

 

Less: allowance for loan losses

 

(7,645)

 

(7,418)

 

(227)

 

3.1 

 

 

 

Loans, net

 

 

1,106,877 

 

1,037,352 

 

69,525 

 

6.7 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises and equipment, net

 

 

24,744 

 

25,133 

 

(389)

 

(1.5)

 

Premises held for sale

 

 

1,651 

 

- 

 

1,651 

 

100.0 

 

Goodwill,	net

 

 

3,691 

 

3,691 

 

- 

 

- 

 

Core deposit intangibles,	net

 

 

57 

 

79 

 

(22)

 

(27.8)

 

Accrued interest receivable

 

 

6,257 

 

6,655 

 

(398)

 

(6.0)

 

Other

 

 

18,187 

 

19,698 

 

(1,511)

 

(7.7)

 

 

 

 

Total assets

 

 

$

1,342,355 

 

1,248,177 

 

94,178 

 

7.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

 

$

144,959 

 

135,111 

 

9,848 

 

7.3 

%

 

Interest-bearing

 

 

905,720 

 

923,683 

 

(17,963)

 

(1.9)

 

 

 

Total deposits

 

 

1,050,679 

 

1,058,794 

 

(8,115)

 

(0.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail repurchase agreements

 

 

15,579 

 

11,280 

 

4,299 

 

38.1 

 

Commercial paper (Master notes)

 

32,401 

 

26,326 

 

6,075 

 

23.1 

 

Other short-term borrowings

 

 

67,671 

 

30,000 

 

37,671 

 

125.6 

 

Long-term borrowings

 

 

52,000 

 

- 

 

52,000 

 

100.0 

 

Accrued interest payable

 

 

1,709 

 

2,042 

 

(333)

 

(16.3)

 

Other

 

 

7,602 

 

9,479 

 

(1,877)

 

(19.8)

 

 

 

Total liabilities

 

 

1,227,641 

 

1,137,921 

 

89,720 

 

7.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

32,211 

 

32,109 

 

102 

 

0.3 

 

Capital surplus

 

 

2,013 

 

1,664 

 

349 

 

21.0 

 

Retained earnings

 

 

84,521 

 

79,221 

 

5,300 

 

6.7 

 

Accumulated other comprehensive loss, net of tax

 

(4,031)

 

(2,738)

 

(1,293)

 

47.2 

 

 

 

Total shareholders' equity

 

114,714 

 

110,256 

 

4,458 

 

4.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,342,355 

 

1,248,177 

 

94,178 

 

7.5 

%

 

Investment Activities

 

The following tablesummarizes the composition of the Company’s investment securities available forsale portfolio at the dates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

**December 31, 2007**

 

 

**Total**

**% of total**

 

**Total**

**% of total**

Government-sponsored enterprises

$

- 

- 

%

20,743 

21.7 

State and municipal

51,457 

38.6 

 

52,159 

54.5 

Collateralized mortgage obligations

61,803 

46.4 

 

- 

- 

Other mortgage-backed

19,939 

15.0 

 

22,813 

23.8 

 

Total investment securities available for sale

$

133,199 

100.0 

%

95,715 

100.0 

 

36

 

Thefollowing table summarizes the amortized cost and fair market value compositionof the Company’s investment securities available for sale portfolio at thedates indicated (in thousands).

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

**December 31, 2007**

 

 

**Amortized**

**Fair market**

 

**Amortized**

**Fair market**

 

 

**cost**

**value**

 

**cost**

**value**

 

Government-sponsored enterprises

$

- 

- 

 

20,725 

20,743 

 

State and municipal

51,825 

51,457 

 

52,677 

52,159 

 

Collateralized mortgage obligations

62,366 

61,803 

 

- 

- 

 

Other mortgage-backed

20,101 

19,939 

 

22,722 

22,813 

 

          Total investment securities available for sale

$

134,292 

133,199 

 

96,124 

95,715 

 

 

 

 

 

 

 

 

 

Securities Pledgedand Liquidity. Approximately58% of the investment securities portfolio was pledged to secure publicdeposits and trust assets as of June 30, 2008 as compared with 80% at December31, 2007.  Of the Company’s $76.6 million pledged available for sale investmentsecurities balance at June 30, 2008, $49.2 million of available for saleinvestment securities were securing public deposits and trust assets at June30, 2008.  Of the Company’s $76.6 million pledged available for sale investmentsecurities balance at December 31, 2007, $40.4 million of available for saleinvestment securities were securing public deposits and trust assets.  The decreasein pledged securities as a percentage of the investment securities portfoliofrom December 31, 2007 to June 30, 2008 was the result of an increase in theinvestment security portfolio.  

 

Impairment Analysis.**Thefollowing table summarizes the gross unrealized losses, fair market value, andthe number of securities in each category of investment securities availablefor sale, aggregated by investment category and length of time that individualsecurities have been in a continuous unrealized loss position, at the dates indicated (dollars in thousands).

 

 

 

**June 30, 2008**

 

 

**Less than 12 months**

 

**12 months or longer**

 

**Total**

 

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

Government-sponsored enterprises

- 

$

- 

$

- 

 

- 

- 

- 

 

- 

- 

- 

State and municipal

76 

32,286 

410 

 

6 

2,070 

44 

 

82 

34,356 

454 

Collateralized mortgage obligation

12 

55,561 

563 

 

- 

- 

- 

 

12 

55,561 

563 

Other mortgage-backed

8 

11,060 

146 

 

2 

1,120 

63 

 

10 

12,180 

209 

 

Total investment securities

available for sale

96 

$

98,907 

$

1,119 

 

8 

3,190 

107 

 

104 

102,097 

1,226 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**December 31, 2007**

 

 

 

 

 

 

**Less than 12 months**

 

**12 months or longer**

 

**Total**

 

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

 

**#**

**Fair**

**market**

**value**

**Gross**

**unrealized**

**losses**

Government-sponsored enterprises

- 

$

- 

$

- 

 

2 

3,476 

8 

 

2 

3,476 

8 

State and municipal

16 

6,135 

79 

 

98 

38,760 

494 

 

114 

44,895 

573 

Other mortgage-backed

1 

733 

- 

 

15 

10,655 

105 

 

16 

11,388 

105 

 

Total investment securities

available for sale

17 

$

6,868 

$

79 

 

115 

52,891 

607 

 

132 

59,759 

686 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increases in gross unrealized losses in the investmentsecurities available for sale portfolio from December 31, 2007 to June 30, 2008were primarily the result of unrealized losses within collateralized mortgageobligations at June 30, 2008.  The Company had no investment in collateralizedmortgage obligations at December 31, 2007.

Declines in the fair market value of available-for-salesecurities below cost that are deemed to be other-than-temporary are reflectedin earnings as realized losses. In estimating other-than-temporary impairmentlosses, management considers, among other things, the length of time and theextent to which the fair market value has been less than cost, the financialcondition and near-term prospects of the issuer, and the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

The Company has the ability and intent to hold the securitiesclassified as available for sale for a period of time sufficient for a recoveryof cost. The unrealized losses are largely due to increases in market interestrates over the yields available at the time the underlying securities werepurchased. The fair market value is expected to recover as the bonds approachtheir maturity date or repricing date or if market yields for such investmentsdecline. Management does not believe any of the securities are impaired due toreasons of credit quality. Accordingly, as of June 30, 2008, managementbelieves the impairments detailed in the preceding table are temporary, and,therefore, no impairment loss has been realized in the Company's ConsolidatedInterim Statements of Income for the three or six month periods ended June 30,2008.

 

37

 

Concentrations of Risk. Nostate or municipal security issuers issued securities with fair market valuesexceeding 2% of total shareholders’ equity at June 30, 2008.  No collateralizedmortgage obligation issuers issued securities with fair market values exceeding9% of total shareholders’ equity at June 30, 2008.  The following tablesummarizes issuer concentration at fair market value of other mortgage-backedinvestment securities, by issuer, at June 30, 2008 (in thousands).

 

 

 

 

 

 

 

 

 

 

**Federal**

**National**

**Mortgage**

**Association**

 

**Federal**

**Home Loan**

**Mortgage**

**Corporation**

**Total**

Other mortgage-backed

$

16,356 

 

3,583 

19,939 

 

 

 

 

 

 

As a percentage of shareholders' equity

14.3 

%

3.1 

17.4 

 

Virtually all mortgage-basedsecurities are rated “AAA” by Standard and Poor's and / or Moody's or have animplicit “AAA” rating through government agency backing.  This AAA rating isbased not on the credit of the issuer, but rather on the structure of themortgage-based securities and the credit quality of the collateral.

 

*Lending Activities*

* *

Composition.  Thefollowing table summarizes gross loans, categorized by loan purpose, excludingthose mortgage loans held for sale, at the dates indicated (dollars inthousands). 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

 

**2008**

 

**2007**

 

 

 

**Total**

**% of**

**total**

 

**Total**

**% of**

**total**

 

Commercial business

$

163,032 

14.6 

%

145,634 

13.9 

 

Commercial real estate

689,224 

61.8 

 

639,144 

61.2 

 

Installment

23,871 

2.1 

 

25,315 

2.4 

 

Installment real estate

78,580 

7.1 

 

75,721 

7.3 

 

Indirect

36,632 

3.3 

 

39,502 

3.8 

 

Credit line

1,908 

0.2 

 

2,188 

0.2 

 

Prime access

59,959 

5.4 

 

54,164 

5.2 

 

Residential mortgage

40,069 

3.6 

 

40,842 

3.9 

 

Bankcards

12,526 

1.1 

 

12,702 

1.2 

 

Business manager

372 

- 

 

326 

- 

 

Other

1,508 

0.1 

 

2,045 

0.2 

 

Loans in process

6,353 

0.6 

 

6,511 

0.6 

 

Deferred loans fees and costs

488 

0.1 

 

676 

0.1 

 

 

Loans, gross

$

1,114,522 

100.0 

	%

1,044,770 

100.0 

 

 

 

 

 

 

 

 

 

 

The following table summarizesgross loans, categorized by Federal Deposit Insurance Corporation (“FDIC”)code, excluding those mortgage loans held for sale, at the dates indicated(dollars in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

 

**2008**

 

**2007**

 

 

 

**Total**

**% of**

**total**

 

**Total**

**% of**

**total**

 

Secured by real estate

 

 

 

 

 

 

 

Commercial, land development, and other land loans

$

51,933 

4.6 

%

52,236 

5.0 

 

 

Farmland

979 

0.1 

 

1,004 

0.1 

 

 

Single-family residential

216,980 

19.5 

 

209,275 

20.0 

 

 

Multifamily residential

34,877 

3.1 

 

28,659 

2.8 

 

 

Nonfarm nonresidential

634,870 

57.0 

 

578,719 

55.4 

 

Commercial and industrial

83,471 

7.5 

 

77,555 

7.4 

 

General consumer and other

88,386 

7.9 

 

93,983 

9.0 

 

Obligations of states and political subdivisions of the U.S.

3,026 

0.3 

 

3,339 

0.3 

 

 

Loans, gross

$

1,114,522 

100.0 

%

1,044,770 

100.0 

 

 

 

 

 

 

 

 

 

 

Loans included in both of the preceding loan compositiontables are net of participations sold, and mortgage loans sold and serviced forothers.  Participations sold totaled $17.9 million and $14.6 million at June30, 2008 and December 31, 2007, respectively. Mortgage loans serviced for thebenefit of others amounted to $363.8 million and $346.3 million at June 30,2008 and December 31, 2007, respectively. 

 

38

 

Loans Pledged. To borrow from the FHLB, members mustpledge collateral to secure advances and letters of credit.  Acceptablecollateral includes a variety of single-family residential loans, commercialreal estate loans, home equity lines of credit, and multifamily residentialloans as well as a number of types of securities.  No types of securities werepledged to collateralize FHLB borrowings at June 30, 2008.  Approximately 14%of the gross loan portfolio was available to secure advances and letters ofcredit as of June 30, 2008 as compared with 10% at December 31, 2007.  Thefollowing table summarizes the Company’s FHLB borrowed funds utilization andavailability at the dates indicated (dollarsin thousands).

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

 

**2008**

**2007**

Available lendable collateral value to serve against FHLB advances

$

151,477 

105,535 

 

 

 

 

 

Advances and letters of credit

 

 

 

Short-term advances

(29,500)

(12,000)

 

Long-term advances

(52,000)

- 

 

Letters of credit

(69,000)

(69,000)

 

 

Total advances and letters of credit

(150,500)

(81,000)

 

 

 

 

 

Available lendable collateral value to serve against FHLB advances

$

977 

24,535 

 

 

 

 

 

 

The increase in long-term advances over theperiods presented was a result of the transactions the Company entered intoduring March and April 2008 which were intended to support interest-earningasset growth, primarily investments in available for sale securities, andsupplement net interest income. 

 

Concentrations of Risk.Loan Type / Industry Concentration. Categorized by loan purpose, the Company’scommercial real estate portfolio accounts for 61.8% of the Company’s gross loanportfolio. The following table summarizes the composition of the Company’scommercial real estate portfolio at June 30, 2008. For the purpose of thisanalysis, adjustments have been made to the balance of commercial real estateloans by loan purpose in order to conform the Company’s definition ofcommercial real estate loans to that of regulators. 

 

 

 

 

 

**Commercial**

**real estate**

**loans, adjusted**

**by**

**concentration**

 

**Commercial**

**real estate**

**loans, adjusted**

**as a percentage**

**of "tier 1" capital**

Residential

13.2 

%

64.5 

Land-only

20.6 

 

100.3 

Construction

6.8 

 

33.1 

Commercial - specific

39.8 

 

194.5 

Commercial - nonowner occupied

19.4 

 

94.9 

Rounding

0.2 

 

0.8 

 

100.0 

%

488.1 

 

 

 

 

 

The following table further classifies materialconcentrations summarized above.  

 

 

 

 

 

 

 

 

**Commercial**

**real estate**

**loans, adjusted**

**by**

**concentration**

 

**Commercial**

**real estate**

**loans, adjusted**

**as a percentage**

**of "tier 1" capital**

Land-only

 

 

 

 

Developed land

18.5 

%

90.2 

 

Undeveloped land

2.1 

 

10.1 

 

 

20.6 

%

100.3 

 

 

 

 

 

Commercial - specific

 

 

 

 

Hotels / motels

17.2 

%

83.9 

 

Restaurants

1.6 

 

7.9 

 

Convenience stores

1.4 

 

7.0 

 

Golf courses

2.5 

 

12.5 

 

Religious facilities

10.0 

 

48.7 

 

Assisted living facilities

6.5 

 

31.7 

 

Mobile home communities

0.6 

 

2.8 

 

 

39.8 

%

194.5 

 

 

 

 

 

 

The Company believes that the properties securing itscommercial real estate portfolio are diverse in terms of type. This diversityreduces the Company’s exposure to adverse economic events that impact anysingle industry.

39

 

Asset Quality.  The following table summarizes the composition ofthe Company’s classified assets, categorized by FDIC code, at the dates indicated (dollars in thousands). 

 

 

 

 

 

 

**June 30, 2008**

 

 

**Special**

**mention**

 

**Substandard**

**Doubtful**

**Loss**

**Total**

 

**As a**

**percentage**

**of loans,**

**gross (1)**

 

**As a**

**percentage**

**of**

**applicable**

**portfolio,**

**gross (1)**

Secured by real estate

 

 

 

 

 

 

 

 

 

 

 

Commercial, land development, and other land loans

$

- 

 

184 

- 

- 

184 

 

- 

%

0.4 

 

Farmland

- 

 

- 

231 

- 

231 

 

- 

 

23.6 

 

Single-family residential

575 

 

5,716 

267 

- 

6,558 

 

0.6 

 

3.0 

 

Multifamily residential

- 

 

225 

- 

- 

225 

 

- 

 

0.6 

 

Nonfarm nonresidential

2,314 

 

11,315 

279 

- 

13,908 

 

1.3 

 

2.2 

Commercial and industrial

616 

 

825 

1,055 

- 

2,496 

 

0.2 

 

3.0 

General consumer and other

27 

 

311 

20 

- 

358 

 

- 

 

0.4 

 

Total classified loans

$

3,532 

 

18,576 

1,852 

- 

23,960 

 

2.1 

%

2.1 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of loans, gross (1)

0.3 

%

1.7 

0.1 

- 

2.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**December 31, 2007**

 

 

 

**Special**

**mention**

 

**Substandard**

**Doubtful**

**Loss**

**Total**

 

**As a**

**percentage**

**of loans,**

**gross (1)**

 

**As a**

**percentage**

**of**

**applicable**

**portfolio,**

**gross (1)**

Secured by real estate

 

 

 

 

 

 

 

 

 

 

 

Commercial, land development, and other land loans

$

- 

 

182 

- 

- 

182 

 

- 

%

0.3 

 

Farmland

- 

 

- 

223 

- 

223 

 

- 

 

22.2 

 

Single-family residential

176 

 

3,646 

370 

- 

4,192 

 

0.4 

 

2.0 

 

Multifamily residential

- 

 

- 

- 

- 

- 

 

- 

 

- 

 

Nonfarm nonresidential

1,578 

 

6,033 

238 

- 

7,849 

 

0.8 

 

1.4 

Commercial and industrial

118 

 

1,451 

647 

- 

2,216 

 

0.2 

 

2.9 

General consumer and other

20 

 

322 

29 

- 

371 

 

- 

 

0.4 

 

Total classified loans

$

1,892 

 

11,634 

1,507 

- 

15,033 

 

1.4 

%

1.4 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of loans, gross (1)

0.2 

%

1.1 

0.1 

- 

1.4 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Calculated using loans excluding mortgage loans held for sale, net of unearned, excluding the allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

Impacting the increase in assets classified as “specialmention” at June 30, 2008 over December 31, 2007 was the addition of a retailshopping center loan relationship with a principal balance of $1.8 million. 

 

The following loan relationships impacted the increase inassets classified as “substandard” at June 30, 2008 over December 31, 2007.
-  A failed store franchise venture     with a principal balance of  $543 thousand.
-  A participation relationship that funded golf course     communities including both courses and residential lots with a principal     balance of  $744 thousand.   
-  A lending relationship containing five loans all of which     are secured by income producing collateral with the exception of one loan     that is collateralized by two commercial warehouses, one complete and one     incomplete.  The lending relationship’s principal balance was $2.3 million     at June 30, 2008.
-  A lending relationship containing five loans the largest     of the five loans is secured by a new dealership facility.  The remaining     four loans are secured by the borrowers’ residential properties.  The     lending relationship’s principal balance was $1.8 million at June 30,     2008.

 

TheCompany’s process for determining the appropriate level of the allowance forloan losses is designed to account for asset deterioration as it occurs.  SeeAllowance for Loan Losses for a discussion of the Company’s inclusion ofallocations calculated in accordance with SFAS No. 114, as amended bySFAS No. 118 and allocations calculated in accordance with SFAS No. 5,if applicable, with regard to classified loans. The allowance for loan lossesrepresents management’s best estimate of probable losses that have beenincurred within the existing portfolio of loans including, but not limited to,classified assets.

 

Nonperforming Assets. Thefollowing table summarizes trends in nonperforming assets at the dates indicated (dollars inthousands). The composition of nonaccrual loans is categorized by FDIC code. 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**March 31,**

**December 31,**

**June 30,**

 

 

**2008**

 

**2008**

**2007**

**2007**

Secured by real estate

 

 

 

 

 

 

Commercial, land development, and other land loans

$

184 

 

184 

182 

- 

 

Single-family residential

1,487 

 

829 

781 

1,507 

 

Nonfarm nonresidential

4,228 

 

3,844 

3,164 

10,534 

Commercial and industrial

438 

 

631 

567 

329 

General consumer and other

82 

 

118 

116 

66 

 

Total nonaccrual loans

6,419 

 

5,606 

4,810 

12,436 

 

 

 

 

 

 

 

Real estate acquired in settlement of loans

8,332 

 

7,960 

7,743 

717 

Repossessed automobiles acquired in settlement of loans

288 

 

369 

403 

386 

 

Total assets acquired in settlement of loans

8,620 

 

8,329 

8,146 

1,103 

 

 

 

 

 

 

 

 

Total nonperforming assets

$

15,039 

 
   
13,935 

12,956 

13,539 

 

 

 

 

 

 

 

Loans past due 90 days and still accruing (1)

$

140 

 
   
176 

236 

290 

 

 

 

 

 

 

 

Loans (2)

$

1,114,522 

 
   
1,072,825 

1,044,770 

986,529 

 

 

 

 

 

 

 

Total assets

1,342,355 

 

1,295,775 

1,248,177 

1,179,869 

 

 

 

 

 

 

 

Nonaccrual loans as a percentage of:

 

 

 

 

 

 

loans and foreclosed assets (2)

0.57 

%

0.52 

0.46 

1.26 

 

total assets

0.48 

 

0.43 

0.39 

1.05 

 

 

 

 

 

 

 

Nonperforming assets as a percentage of:

 

 

 

 

 

 

loans and foreclosed assets (2)

1.34 

 

1.29 

1.23 

1.37 

 

total assets

1.12 

 

1.08 

1.04 

1.15 

 

 

 

 

 

 

 

(1)

Substantially all of these loans are bankcard loans

 

 

 

 

 

(2)

Calculated using loans excluding mortgage loans held for sale, net of unearned, excluding the allowance for loan losses

 

 

41

 

 

Nonaccrual loans secured by nonfarm residential real estateincreased $1.1 million from December 31, 2007 to June 30, 2008 to a balance of$4.2 million. Three loan relationships represented 68% of the nonaccrualbalance at June 30, 2008.  Two of these loan relationships totaling $1.3 millionwere added during the period.  The two new loan relationships added included afailed store franchise venture totaling $543 thousandand a participation relationship for which the Bank’s gross loan balancetotaled $744 thousand at June 30, 2008 that funded golf course communitiesincluding both courses and residential lots.  Both loans were previouslydiscussed with regard to their asset classifications.  Remaining in nonaccrualstatus since December 31, 2007 was a loan that funded the construction of athree-phase master development project.  Funds previously advanced were not, inall cases, utilized for the purposes intended, leaving the borrower unable toservice the debt.  The lead bank in this participation arrangement hascontracted to have the first phase properties completed so that this portion ofthe project may be completed and sales contracts honored.  As building iscompleted and funds disbursed, the Company’s loans will be proportionatelyincreased.  As sales commence, the Company’s loan will be proportionatelyreduced.  The lead bank has several development companies that have expressedan interest in purchasing the second and third phase of the development in its“as is” condition. Net of its specific allowance for loan losses, this loan relationship’scarrying value totaled $1.2 million at June 30, 2008, which management believesrepresents its best estimate of losses that have been incurred within theexisting portfolio of loans and reserves for the estimated loan losses andrisks inherent in this loan relationship.  

 

The following table summarizes the changes in the real estateacquired in settlement of loans portfolio, including the balance at thebeginning and end of the period, provision charged to expense, and lossescharged to the allowance for loan losses related to the Company’s real estateacquired in settlement of loans for the six month period ended June 30, 2008(in thousands).

 

 

 

 

Real estate acquired in settlement of loans, beginning of period

$

7,743 

 

Add: New real estate acquired in settlement of loans and related adjustments

789 

 

Less: Sales / recoveries of real estate acquired in settlement of loans

(131)

 

Less: Provision charged to expense

(69)

Real estate acquired in settlement of loans, end of period

$

8,332 

 

 

 

 

Real estate acquired in settlement of loans remainedrelatively unchanged during the first six months of 2008.  Two loanrelationships comprise approximately 87% of the real estate acquired insettlement of loans portfolio.  Both loan relationships are secured by otherreal estate for which foreclosure proceedings were completed during the thirdquarter of 2007 and during the fourth quarter of 2007, respectively.  Withregard to the property added to the portfolio during the third quarter, thelead bank is currently marketing this property for sale and believes it hasseveral interested parties.  The property placed into the real estate acquiredin settlement of loans portfolio during the fourth quarter was the Bank’spurchase portion of a participation arrangement. The lead bank is managing theoperations of the property and is currently working with an external firm tomarket the property.  The Bank was a 20% participant in the loan relationshipand is now a 20% owner of the collateral property.  Expenses related to theholding of this property within the real estate acquired in settlement of loansportfolio totaled $339 thousand during the six month period ended June 30, 2008. Both properties were carried at marketvalue at June 30, 2008 based on management’s best judgment and informationavailable at that time.  

 

Troubled debt restructuringsentered into by the Company during the second quarter of 2008 are subject toreview by the Company, in accordance with the Company’s loan review policies,to ensure loan classifications were in accordance with applicable regulations. Any allocations identified during the review based on probable losses have beenincluded in the Company’s allowance for loan losses for the applicable period.At June 30, 2008 and December 31, 2007, the principal balance of such loanstotaled $1.2 million.  

 

Potential problem loans consist ofloans that are generally performing in accordance with contractual terms butfor which management has concerns about the ability of the borrower to continueto comply with repayment terms because of the borrower’s potential operating orfinancial difficulties. Management monitors these loans closely and reviewsperformance on a regular basis. As of June 30, 2008, the Company had potentialproblem loans totaling $10.1 million that were not categorized as nonaccrual. 

 

Allowance for Loan Losses.Activity. The following table summarizes activity within the allowance for loanlosses at the dates and for the periods indicated (dollars in thousands).Losses and recoveries are charged or credited to the allowance for loan lossesat the time realized. The composition of loans charged-off and loan recoveriesare categorized by FDIC code. 

42

 

 

 

 

**At and for the three month**

**periods ended June 30,**

 

**At and for the six month**

**periods ended June 30,**

 

**At and for**

**the year**

**ended**

**December 31,**

 

 

 

**2008**

 

**2007**

 

**2008**

 

**2007**

 

**2007**

Allowance for loan losses, beginning of period

$

7,488 

 

8,460 

 
   
7,418 

 

8,527 

 

8,527 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

687 

 

433 

 

1,175 

 

800 

 

988 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged-off

 

 

 

 

 

 

 

 

 

 

Secured by real estate

 

 

 

 

 

 

 

 

 

 

 

Single-family residential

20 

 

125 

 

97 

 

212 

 

371 

 

 

Nonfarm nonresidential

99 

 

51 

 

112 

 

158 

 

496 

 

Commercial and industrial

120 

 

32 

 

245 

 

138 

 

505 

 

General consumer

332 

 

252 

 

564 

 

482 

 

991 

 

 

Total loans charged-off

571 

 

460 

 

1,018 

 

990 

 

2,363 

 

 

 

 

 

 

 

 

 

 

 

 

Loan recoveries

 

 

 

 

 

 

 

 

 

 

Secured by real estate

 

 

 

 

 

 

 

 

 

 

 

Single-family residential

- 

 

30 

 

2 

 

33 

 

39 

 

 

Nonfarm nonresidential

2 

 

2 

 

3 

 

3 

 

13 

 

Commercial and industrial

8 

 

3 

 

16 

 

21 

 

54 

 

General consumer

31 

 

47 

 

49 

 

121 

 

160 

 

 

Total loan recoveries

41 

 

82 

 

70 

 

178 

 

266 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged-off

530 

 

378 

 

948 

 

812 

 

2,097 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses, end of period

$

7,645 

 

8,515 

 
   
7,645 

 

8,515 

 

7,418 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans (1)

$

1,098,544 

 

966,064 

 
   
1,080,748 

 

957,630 

 

986,518 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loans (1)

1,114,522 

 

986,529 

 

1,114,522 

 

986,529 

 

1,044,770 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

6,419 

 

12,436 

 

6,419 

 

12,436 

 

4,810 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged-offs as a percentage of average loans, annualized (1)

0.19 

%

0.16 

 

0.18 

 

0.17 

 

0.21 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percentage of ending loans (1)

0.69 

 

0.86 

 

0.69 

 

0.86 

 

0.71 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percentage of nonaccrual loans

119.10 

 

68.47 

 

119.10 

 

68.47 

 

154.22 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Calculated using loans excluding mortgage loans held for sale, net of unearned income, excluding allowance for loan losses

 

 

 

Management analyzes the adequacy ofthe allowance for loan losses on a monthly basis using an internal analysismodel.  No less than quarterly but often on a more frequent basis, theCompany’s allowance for loan losses model and conclusions are reviewed andapproved by senior management. The allowance for loan losses is a reserve establishedthrough a provision for loan losses charged to expense, which represents management’sbest estimate of probable losses that have been incurred within the existingportfolio of loans. The allowance for loan losses, in the judgment ofmanagement, is necessary to reserve for estimated loan losses and risksinherent in the loan portfolio. The Company’s allowance for loan lossmethodology is based on guidance provided in SAB No. 102 and includesallocations calculated in accordance with SFAS No. 114, as amended bySFAS No. 118 and allocations calculated in accordance withSFAS No. 5. Accordingly, the methodology is based on historical lossexperience by type of loans, specific homogeneous risk pools, and specific lossallocations. The Company’s process for determining the appropriate level of theallowance for loan losses is designed to account for asset deterioration as itoccurs. The provision for loan losses reflects not only the necessary increasesin the allowance for loan losses related to newly identified criticized loans,but it also reflects actions taken related to other loans including, amongother things, any necessary increases or decreases in required allowance forloan losses for specific loans or loan pools. 

 

The allowance for loanlosses increased slightly from $7.4 million at December 31, 2007 to $7.6million at June 30, 2008, declining from 0.71% to 0.69% of loans, respectively,calculated using loans excluding mortgage loans held for sale and the allowancefor loan losses, net of unearned income. Managementattributes the declining allowance for loan losses as a percentage of loans, gross primarily to improvement in historical loss experience by type of loans primarilywithin the consumer portfolio.  

 

43

 

The following table summarizes information about the Company’s impairedloans at and for the period indicated (in thousands). Impaired loans without aspecific allowance for loan losses allocation at and for the period indicatedwere generally reserved within the allowance for loan losses.

 

 

 

 

 

 

 

**At and for the six month**

 

**At and for the year**

 

**period ended June 30, 2008**

 

**ended December 31, 2007**

Impaired loans, end of period

$

10,205 

 

5,256 

Specific allowance allocation on impaired loans, end of period

2,029 

 

976 

Average impaired loans, during period

7,730 

 

3,668 

 

Management considers its allowance for loan losses at June30, 2008 appropriate and adequate to cover current losses in the loanportfolio. However, underlying assumptions may be impacted in future periods bychanges in economic conditions, the impact of regulatory examinations, and thediscovery of information with respect to borrowers, which was not known tomanagement at the time of the issuance of the Company’s Consolidated InterimFinancial Statements. As such, management’s assumptions may or may not provevalid. Thus, there can be no assurance that loan losses in future periods willnot exceed the current allowance for loan losses amount or that futureincreases in the allowance for loan losses will not be required. Additionally,no assurance can be given that management’s ongoing evaluation of the loanportfolio, in light of changing economic conditions and other relevant factors,will not require significant future additions to the allowance for loan losses,thus adversely impacting the Company’s business, financial condition, resultsof operations, and cash flows.

 

*Deposit Activities*

* *

The following tablesummarizes the Company’s traditional deposit composition at the datesindicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

 

 

**2008**

 

**2007**

 

 

 

 

**Total**

**% of total**

 

**Total**

**% of total**

 

 

Noninterest-bearing transaction deposit accounts

$

144,959 

13.8 

%

135,111 

12.7 

 

 

Interest-bearing transaction deposit accounts

375,923 

35.8 

 

387,249 

36.6 

 

 

 

Transaction deposit accounts

520,882 

49.6 

 

522,360 

49.3 

 

 

 

 

 

 

 

 

 

 

 

Money market deposit accounts

100,403 

9.5 

 

118,680 

11.2 

 

 

Savings deposit accounts

38,526 

3.7 

 

34,895 

3.3 

 

 

Time deposit accounts

390,868 

37.2 

 

382,859 

36.2 

 

 

 

Total traditional deposit accounts

$

1,050,679 

100.0 

%

1,058,794 

100.0 

 

 

 

 

 

 

 

 

 

 

 

 

Dependence ontraditional deposit account funding declined from December 31, 2007 to June 30,2008.  At December 31, 2007, traditional deposit accounts as a percentage ofliabilities were 93.0% compared with 85.6% at June 30, 2008. 

 

In addition to traditional deposit accounts, the Companyoffers nontraditional deposit accounts through its retail repurchase andcommercial paper agreements.  

 

The following tablesummarizes the Company’s nontraditional deposit composition at the datesindicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

**2008**

 

**2007**

 

 

**Total**

**% of total**

 

**Total**

**% of total**

Noninterest-bearing transaction deposit accounts

$

15,579 

32.5 

%

11,280 

30.0 

Interest-bearing transaction deposit accounts

32,401 

67.5 

 

26,326 

70.0 

 

Total nontraditional deposit accounts

$

47,980 

100.0 

%

37,606 

100.0 

 

 

 

 

 

 

 

 

Dependence onnontraditional deposit account funding increased from December 31, 2007 to June30, 2008.  At December 31, 2007, traditional deposit accounts as a percentageof liabilities were 3.3% compared with 3.9% at June 30, 2008. 

 

44

 

 

 

 

The following table summarizes total dependence on deposit account funding atthe dates indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

**Dollar**

**Percent**

 

 

 

**2008**

**2007**

**variance**

**variance**

 

Total traditional deposit accounts

$

1,050,679 

1,058,794 

(8,115)

-0.77% 

 

Total nontraditional deposit accounts

47,980 

37,606 

10,374 

27.59% 

 

 

Total deposit accounts

$

1,098,659 

1,096,400 

2,259 

0.21% 

 

 

 

 

 

 

 

 

 

The slight increase in funding provided by total depositaccounts during the first six months of 2008 resulted in the Company relyingmore heavily on alternative funding sources from which to fund asset growth. 

 

*Borrowing Activities*

* *

In addition to depositaccounts, which are the Company’s primary funding source for assetgrowth, the Company borrows funds tosupplement its supply of lendable funds, to assist in meeting depositwithdrawal requirements, and to fund growth of interest-earning assetsin excess of traditional deposit growth.Management believes that by locking in borrowed funding, liquidity risk can bereduced. 

The following tablesummarizes the Company’s borrowings composition at the dates indicated (dollarsin thousands).

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2008**

 

**December 31, 2007**

 

 

**Total**

**% of total**

 

**Total**

**% of total**

Other short-term borrowings

$

67,671 

56.5 

%

30,000 

100.0 

Long-term borrowings

52,000 

43.5 

 

- 

- 

 

Total borrowings

$

119,671 

100.0 

%

30,000 

100.0 

 

 

 

 

 

 

 

 

The Company’s reliance on borrowed funds increased by $89.7million during the first six months of 2008 because alternative funding sourceswere inadequate to cover asset growth. Borrowings as a percentage of totalliabilities were approximately 9.7% and 2.6% at June 30, 2008 and December 31,2007, respectively. 

 

FHLBBorrowings. Beginning in late March 2008 and continuing intoearly April 2008, the Company transacted a series of long-term FHLB borrowingsintended to support interest-earning asset growth, primarily investments inavailable for sale securities, and supplement net interest income. Managementbelieves that such funding provides the Company with the ability to access theexact type of funding needed, at the exact time, in the exact quantity, and atmarket rates. This provides the Company with the flexibility to tailorborrowings to its specific needs. Although FHLB borrowings do not always resultin lower interest expense, management believes that such funding can increasenet interest income by employing these funds in higher yield interest-earningassets. The Company used these long-term FHLB borrowings to invest incollateralized mortgage obligations, which management believed were undervalueddue to the market discount that has been applied to the entire mortgage relatedmarketplace.  The following tablesummarizes the Company’s long-term borrowings from the FHLB at June 30, 2008(dollars in thousands).  The Company’s long-term FHLB advance does nothave embedded call options. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

Borrowing balance

$

5,000 

$

12,000 

$

30,000 

$

5,000 

$

52,000 

Interest rate

2.57 

2.75 

2.89 

3.61 

2.90 

Maturity date

3/8/2010

4/2/2010

3/7/2011

4/2/2013

 

 

The following table summarizes the Company’s borrowed fundsutilization and availability at the datesindicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

**December 31,**

 

 

 

 

**2008**

**2007**

 

Available lendable collateral value to serve against FHLB advances

$

151,477 

105,535 

 

 

 

 

 

 

 

Advances and letters of credit

 

 

 

 

Short-term advances

(29,500)

(12,000)

 

 

Long-term advances

(52,000)

- 

 

 

Letters of credit

(69,000)

(69,000)

 

 

 

Total advances and letters of credit

(150,500)

(81,000)

 

 

 

 

 

 

 

Available lendable collateral value to serve against FHLB advances

$

977 

24,535 

 

 

 

 

 

 

 

 

Letters of credit are used tosecure public deposits as required or permitted by law.  

 

45

 

 

 

Federal FundsAccommodations. In addition to the FHLB borrowing capacity summarizedabove, at June 30, 2008, the Company had access to federal funds fundingsources at correspondent banks.  During April 2008, a correspondent bankincreased the Bank’s federal funds accommodation by $5 million for a periodbeginning on April 7, 2008 and ending on March 31, 2009 subject to specifiedterms and conditions. Advances under this accommodation are advances of federalfunds with a maturity of the next banking day. Management intends to extendthis accommodation at its maturity.  The following table summarizes theCompany’s federal funds funding sources utilization and availability at the dates indicated (dollars in thousands).

 

 

 

 

 

 

**June 30,**

**December 31,**

 

**2008**

**2007**

Available federal funds funding sources

$

60,000 

50,000 

Utilized federal funds funding sources

(38,171)

(18,000)

Available federal funds funding sources

$

21,829 

32,000 

 

 

 

* *

 

*Capital*

* *

General. The following table summarizes capitalresource key performance indicators at andfor the periods indicated (dollars in thousands, except common and pershare data).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

 

**2008**

 

**2007**

 

**2008**

 

**2007**

Total shareholders' equity

$

114,714 

 

105,391 

 

$

114,714 

 

105,391 

Average total shareholders' equity

115,472 

 

105,223 

 

114,093 

 

103,680 

 

 

 

 

 

 

 

 

 

 

Total shareholders' equity as a percentage of total assets

8.55 

%

8.93 

 

8.55 

%

8.93 

Total average shareholders' equity as a percentage of total average assets

8.74 

 

9.02 

 

8.84 

 

8.93 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

$

0.20 

 

0.19 

 

$

0.40 

 

0.38 

Dividend payout ratio

29.78 

%

29.86 

 

32.30 

%

31.01 

 

 

 

 

 

 

 

 

 

 

 

The Company’s dividend payout ratio calculates thepercentage of earnings paid to shareholders in dividends. 

 

The following table summarizes activity impactingshareholders’ equity at and for the periodindicated (in thousands).

 

      

      

 

 

 

 

 

 

**At and for the six month**

 

 

 

**period ended June 30, 2008**

Total shareholders' equity, beginning of period

$

110,256 

 

 

 

 

Additions to shareholders' equity during period

 

 

Net income

7,975 

 

	Common stock issued pursuant to stock option plans

373 

 

Excess tax benefit from stock-based awards

78 

 

 

Total additions to shareholders' equity during period

8,426 

 

 

 

 

Reductions in shareholders' equity during period

 

 

Net unrealized loss on investment securities

(427)

 

Cumulative effect of adoption of new accounting standard EITF No. 06-10

(99)

 

Net unrealized loss on defined benefit pension plan assets

(866)

 

Cash dividends declared and paid

(2,576)

 

 

Total reductions in shareholders' equity during period

(3,968)

 

 

 

 

Total shareholders' equity, end of period

$

114,714 

 

 

 

 

 

AccumulatedOther Comprehensive Income (Loss). The Company adopted SFAS No. 158, recognized the funded status of its definedbenefit postretirement plan, and provided the additional required disclosuresas of the year ended December 31, 2007. This Statement required, among otherthings, the recognition of the overfunded or underfunded status of pension andother postretirement benefit plans on the balance sheet. Under SFAS No. 158,gains and losses, prior service costs and credits, and any remaining transitionamounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognizedthrough net periodic benefit cost are recognized in accumulated othercomprehensive income, net of tax effects, until they are amortized as acomponent of net periodic cost. During the first six months of 2008, theCompany recorded a pretax adjustment to the funded status of its definedbenefit postretirement plan totaling $1.3 million.  The after tax impact to theCompany’s accumulated other comprehensive income totaled $866 thousand.

 

 

46

 

 

 

Thefollowing table summarizes the components of accumulated other comprehensiveincome (loss) at June 30, 2008.

 

 

 

 

 

 

Investment securities available for sale

$

(679)

Defined benefit pension plan

(3,352)

 

	Accumulated other comprehensive loss, net of tax

$

(4,031)

 

 

 

 

Regulatory Capital Requirements. Under regulatoryrequirements, reported accumulated other comprehensive income / loss amounts donot increase or reduce regulatory capital and are not included in thecalculation of risk-based capital and leverage ratios. The Company and the Bankare required to meet regulatory capital requirements that currently includeseveral measures of capital.  As of June 30, 2008, the Company and the Bankwere categorized as “well capitalized” under the regulatory framework based onthe most recent notification from federal banking agencies. Since June 30, 2008, there were no conditions or events of which management has beenmade aware that would materially change the Company’s or the Bank’s status. 

 

***Derivative Activities***

*** ***

As part of its mortgage-banking activities, the Companyoriginates certain mortgage loans and enters into forward sales commitments ofclosed mortgage loans in the secondary market at a future date at a specifiedprice. The commitments to originate mortgage loans and the sales commitmentsare freestanding derivative instruments and are generally funded within90 days. At June 30, 2008, the fair value of the Company’s derivativeassets related to derivative loan commitments and itsforward loan sales commitments were immaterial. 

 

***Liquidity***

** **

Cash Flow Needs

                    

Standby Letters ofCredit.**At June 30, 2008, the Company recorded no liability forits obligation to perform as a guarantor under standby letters of credit. Themaximum potential amount of undiscounted future payments related to standbyletters of credit at June 30, 2008 was $10.9 million compared with $11.2million at December 31, 2007.  Past experience indicates that standby lettersof credit will expire unused. However, through its various sources ofliquidity, the Company believes that it has the necessary resources availableto meet these obligations should the need arise.  Additionally, the Companydoes not believe that the current fair value of such guarantees was material atJune 30, 2008.

 

Derivatives.* *See Derivative Activities, included elsewhere in this item,for further discussion regarding theCompany’s off-balance sheet arrangements and commitments related to derivative loan commitments and its forward loansales commitments.  

 

Dividend Obligations. Thefollowing table summarizes dividend key performance indicators at and for the periods indicated (dollarsin thousands, except per common share data).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**At and for the three month**

 

**At and for the six month**

 

 

 

**periods ended June 30,**

 

**periods ended June 30,**

 

 

 

**2008**

 

**2007**

 

**2008**

 

**2007**

Cash dividends per common share

$

0.20 

 

0.19 

 

0.40 

 

0.38 

Cash dividends declared and paid

1,289 

 

1,214 

 

2,576 

 

2,427 

Dividend payout ratio

29.78 

%

29.86 

 

32.30 

 

31.01 

 

The Company has historically paid dividends on a quarterlybasis. The Company’s dividend payout ratio calculates the percentage ofearnings paid to shareholders in dividends. TheCompany’s Board of Directors currently expects to continue to pay regular cashdividends but may change this policy at any time in its discretion.  There canbe no assurance as to future dividends because they are dependent on theCompany’s financial condition, results of operations, and cash flows, as well as capital and dividend regulations.  

 

47

 

 

Real Property Operating LeaseObligations. See Part I – FinancialInformation, Item 1. Financial Statements, Note 14 contained herein fordiscussion regarding the Company’s realproperty and operating lease obligations.  

 

Contractual Capital Expenditure Obligations.**See Part I –Financial Information, Item 1. Financial Statements, Note 14 contained hereinfor discussion regarding the Company’scontractual capital expenditure obligations.  

 

 

***Earnings Review ***

Quarter Overview

 

**PALMETTO BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Interim Statements of Income**

 

**(dollars in thousands, except common and per share data) (unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

 

 

 

 

 

 

 

 

 

**periods ended June 30,**

 

**Dollar**

 

**Percent**

 

 

 

 

 

 

 

**2008**

 

**2007**

 

**variance**

 

**variance**

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

18,290 

 

19,301 

 

(1,011)

 

(5.2)

%

 

Interest on investment securities available for sale

1,661 

 

1,130 

 

531 

 

47.0 

 

 

Dividends on FHLB stock

 

86 

 

38 

 

48 

 

126.3 

 

 

Interest earned on federal funds sold

10 

 

211 

 

(201)

 

(95.3)

 

 

Interest earned on cash and due from banks

3 

 

16 

 

(13)

 

(81.3)

 

 

 

 

Total interest income

 

20,050 

 

20,696 

 

(646)

 

(3.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

5,653 

 

7,437 

 

(1,784)

 

(24.0)

 

 

Interest on retail repurchase agreements

57 

 

130 

 

(73)

 

(56.2)

 

 

Interest on commercial paper

 

87 

 

289 

 

(202)

 

(69.9)

 

 

Interest on other short-term borrowings

258 

 

54 

 

204 

 

377.8 

 

 

Interest on long-term borrowings

373 

 

78 

 

295 

 

378.2 

 

 

 

 

Total interest expense

 

6,428 

 

7,988 

 

(1,560)

 

(19.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

13,622 

 

12,708 

 

914 

 

7.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

687 

 

433 

 

254 

 

58.7 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

12,935 

 

12,275 

 

660 

 

5.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts, net

2,127 

 

1,991 

 

136 

 

6.8 

 

 

Fees for trust and investment management and brokerage services

755 

 

826 

 

(71)

 

(8.6)

 

 

Mortgage-banking income, net

 

384 

 

171 

 

213 

 

124.6 

 

 

Investment securities gains

 

1 

 

- 

 

1 

 

100.0 

 

 

Other

 

 

 

1,293 

 

956 

 

337 

 

35.3 

 

 

 

 

Total noninterest income

4,560 

 

3,944 

 

616 

 

15.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

Salaries and other personnel

 

6,070 

 

6,057 

 

13 

 

0.2 

 

 

Occupancy

 

 

803 

 

722 

 

81 

 

11.2 

 

 

Furniture and equipment

 

985 

 

894 

 

91 

 

10.2 

 

 

Marketing

 

 

291 

 

219 

 

72 

 

32.9 

 

 

Amortization of core deposit intangibles

11 

 

12 

 

(1)

 

(8.3)

 

 

Other

 

 

 

2,666 

 

2,046 

 

620 

 

30.3 

 

 

 

 

Total noninterest expense

10,826 

 

9,950 

 

876 

 

8.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before provision for income taxes

6,669 

 

6,269 

 

400 

 

6.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

2,340 

 

2,204 

 

136 

 

6.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,329 

 

4,065 

 

264 

 

6.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share data

 

 

 

 

 

 

 

 

 

 

 

Net income - basic

 

$

0.67 

 

0.64 

 

0.03 

 

4.7 

%

 

Net income - diluted

 

0.66 

 

0.63 

 

0.03 

 

4.8 

 

 

Cash dividends

 

0.20 

 

0.19 

 

0.01 

 

5.3 

 

 

Book value

 

 

17.81 

 

16.49 

 

1.32 

 

8.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

6,435,515 

 

6,385,483 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

6,521,169 

 

6,499,649 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin forthe three month period ended June 30, 2008 was 4.39% compared with 4.64% forthe three month period ended June 30, 2007. Average interest-earning assetsincreased $149.3 million, or 13.6% over the same periods.

 

48

 

 

Earnings resulted in areturn on average shareholders’ equity of 15.08% and 15.50% for the three monthperiods ended June 30, 2008 and 2007. Return on average assets was 1.32% and1.40% for the same periods.

 

 

Net Interest Income. General. Net interest income is the differencebetween interest income earned on interest-earning assets, primarily loans andinvestment securities, and interest expense paid on interest-bearing depositsand other interest-bearing liabilities.  This measure represents the largestcomponent of income for the Company. The net interest margin measures howeffectively the Company manages the difference between the interest incomeearned on interest-earning assets and the interest expense paid for funds tosupport those assets. Changes in interest rates earned on interest-earningassets and interest rates paid on interest-bearing liabilities, the rate ofgrowth of the interest-earning assets and interest-bearing liabilities base,the ratio of interest-earning assets to interest-bearing liabilities, and themanagement of interest rate sensitivity factor into changes in net interestincome.

       

Federal Reserve Rate Net InterestIncome Influence. As reported in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2007, the Company’s simulationmodel that measures the amount of interest rate risk associated with changingmarket rates indicated that the Company’s balance sheet was liabilitysensitive. Such a position suggests that in falling interest rate environment,net interest income would increase.  The following table summarizes theactions taken by the Federal Reserve with regard to the prime interest rate andthe federal funds interest rate for the three month periods ended June 30, 2007and June 30, 2008.  

 

 

 

 

 

 

**Prime**

**rate**

 

**Federal**

**funds rate**

Rate, at March 31, 2007

8.25 

%

5.25 

Changes in rate

- 

 

- 

Rate, at June 30, 2007

8.25 

%

5.25 

 

 

 

 

 

 

 

 

Rate, at March 31, 2008

5.25 

%

2.25 

Changes in rate

(0.25)

 

(0.25)

Rate, at June 30, 2008

5.00 

%

2.00 

 

 

 

 

 

As previously disclosed, beginningin late March 2008 and continuing into early April 2008, the Company transacteda series of long-term FHLB borrowings intended to support interest-earningasset growth, primarily investments in available for sale securities, andsupplement net interest income. In addition to the impact that Federal Reserverate fluctuations had on the Company’s net interest income during the three monthperiod ended June 30, 2008, this transaction supplemented net interest incomegrowth during the period. The following table summarizes the components of netinterest income for the three month periods ended June 30, 2008 and March 31,2008 including the impact of the Company’s long-term FHLB borrowingstransaction (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

 

 

 

**periods ended**

 

 

 

 

 

**June 30,**

**March 31,**

**Dollar**

**Percent**

 

 

 

**2008**

**2008**

**variance**

**variance**

 

	Total interest income

$

20,050 

20,240 

(190)

(0.9)

%

	Total interest expense

6,428 

7,691 

(1,263)

(16.4)

 

 

Net interest income

$

13,622 

12,549 

1,073 

8.6 

%

 

 

 

 

 

 

 

 

Average Balance Sheets and NetInterest Income / Margin Analysis. The following table summarizes the Company’saverage balance sheets and net interest income analysis for the periodsindicated (dollars in thousands). The Company's interest yield earned oninterest-earning assets and interest rate paid on interest-bearing liabilitiesshown in the table are derived by dividing interest income and expense by theaverage balances of interest-earning assets or interest-bearing liabilities.The following table does not include a tax-equivalent adjustment to netinterest income for interest-earning assets earning tax-exempt income to a comparableyield on a taxable basis.

 

 

 

49

 

 

 

 

 

 

For the three month periods ended June 30,

 

 

 

 

 

2008

 

2007

 

 

 

 

 

Average

Income/

Yield/

 

Average

Income/

Yield/

 

 

 

 

 

balance

expense

rate

 

balance

expense

rate

 

Assets

 

 

 

 

 

 

 

 

 

 

Interest-earnings assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

181 

$

3 

6.67 

%

$

1,150 

$

16 

5.58 

%

 

Federal funds sold

1,612 

10 

2.50 

 

17,904 

211 

4.73 

 

 

FHLB stock

5,592 

86 

6.19 

 

2,525 

38 

6.04 

 

 

Investment securities available for sale, nontaxable (2)

52,337 

455 

3.50 

 

50,730 

452 

3.57 

 

 

Investment securities available for sale, taxable (2)

79,737 

1,206 

6.08 

 

57,029 

678 

4.77 

 

 

Loans, net of unearned (1)

1,108,127 

18,290 

6.64 

 

968,985 

19,301 

7.99 

 

 

 

Total interest-earning assets

1,247,586 

20,050 

6.46 

 

1,098,323 

20,696 

7.56 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

31,346 

 

 

 

29,073 

 

 

 

 

Allowance for loan losses

(7,462)

 

 

 

(8,443)

 

 

 

 

Premises and equipment, net

24,633 

 

 

 

24,982 

 

 

 

 

Premises held for sale

1,651 

 

 

 

- 

 

 

 

 

Goodwill, net

3,688 

 

 

 

3,688 

 

 

 

 

Core deposit intangibles, net

62 

 

 

 

109 

 

 

 

 

Accrued interest receivable

5,984 

 

 

 

5,873 

 

 

 

 

Other

 

14,252 

 

 

 

12,642 

 

 

 

 

 

Total noninterest-earning assets

74,154 

 

 

 

67,924 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,321,740 

 

 

 

$

1,166,247 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

Transaction deposit accounts

$

389,064 

$

1,229 

1.27 

%

$

353,436 

$

2,532 

2.87 

%

 

Money market deposit accounts

105,735 

435 

1.65 

 

109,886 

915 

3.34 

 

 

Savings deposit accounts

38,209 

32 

0.34 

 

41,950 

36 

0.34 

 

 

Time deposit accounts

375,031 

3,957 

4.24 

 

361,285 

3,954 

4.39 

 

 

 

Total interest-bearing deposits

908,039 

5,653 

2.50 

 

866,557 

7,437 

3.44 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail repurchase agreements

18,368 

57 

1.25 

 

12,442 

130 

4.19 

 

 

Commercial paper (Master notes)

32,247 

87 

1.09 

 

26,804 

289 

4.32 

 

 

Other short-term borrowings

46,317 

258 

2.24 

 

3,570 

54 

6.07 

 

 

Long-term borrowings

51,813 

373 

2.90 

 

8,242 

78 

3.80 

 

 

 

Total interest-bearing liabilities

1,056,784 

6,428 

2.45 

 

917,615 

7,988 

3.49 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

139,613 

 

 

 

134,599 

 

 

 

 

Accrued interest payable

2,156 

 

 

 

2,468 

 

 

 

 

Other

 

7,715 

 

 

 

6,342 

 

 

 

 

 

Total noninterest-bearing liabilities

149,484 

 

 

 

143,409 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

1,206,268 

 

 

 

1,061,024 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

115,472 

 

 

 

105,223 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,321,740 

 

 

 

$

1,166,247 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME / NET YIELD ON

 

 

 

 

 

 

 

 

 

INTEREST-EARNING ASSETS

 

$

13,622 

4.39 

%

 

$

12,708 

4.64 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Calculated including mortgage loans held for sale.  Nonaccrual loans are included in average balances for yield computations.  The effect of foregone interest income as a result of loans on nonaccrual was not considered in the above analysis.  All loans and deposits are domestic.

(2)

The average balances for investment securities include the unrealized gain or loss recorded for available for sale securities.

 

50

 

 

 

 

 

Rate / Volume Analysis. Thefollowing table summarizes the dollar amount of changes in interest income andinterest expense attributable to changes in average volume and the amountattributable to changes in average interest rates when comparing the threemonth period ended June 30, 2008 to the three month period ended June 30, 2007(in thousands).  The impact of the combination of rate and volume change hasbeen divided proportionately between the rate change and volume change. Thecomparison between the periods includes an additional change factor thatsummarizes the impact of the difference in the number of days of each year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Change in**

**average**

**volume**

**Change in**

**average**

**rate**

**Change**

**due to**

**difference**

**in number**

**of days**

**Total**

**change**

Interest-earnings assets

 

 

 

 

 

Cash and due from banks

$

(17)

4 

- 

(13)

 

Federal funds sold

(132)

(69)

- 

(201)

 

FHLB stock

47 

1 

- 

48 

 

Investment securities available for sale

282 

254 

(5)

531 

 

Loans (1)

5,414 

(6,375)

(50)

(1,011)

 

 

Total interest income

$

5,594 

(6,185)

(55)

(646)

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

Interest-bearing deposits

$

377 

(2,145)

(16)

(1,784)

 

Retail repurchase agreements

154 

(226)

(1)

(73)

 

Commercial paper (Master notes)

76 

(277)

(1)

(202)

 

Other short-term borrowings

216 

(11)

(1)

204 

 

Long-term borrowings

309 

(14)

- 

295 

 

 

Total interest expense

$

1,132 

(2,673)

(19)

(1,560)

 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

4,462 

(3,512)

(36)

914 

 

 

 

 

 

 

 

 

(1) Calculated including mortgage loans held for sale, net of unearned income, excluding allowance for loan losses

 

 

 

 

 

 

 

 

 

Provision for Loan Losses.  The provision for loan losses reflects not only thenecessary increases in the allowance for loan losses related to newlyidentified criticized loans, but it also reflects actions taken related toother loans including, among other things, any necessary increases or decreasesin required allowance for loan losses for specific loans or loan pools. Theprovision for loan losses totaled $687 thousand for the three month periodended June 30, 2008 compared with $433 thousand for the same period of 2007.See Financial Condition – Lending Activities, included elsewhere in this item, for discussion regarding the factorsimpacting the amount added to the allowance for loanlosses, through its provision for loan losses.

 

Noninterest Income. Service Charges on Deposit Accounts. Service chargeson deposit accounts comprise a significant component of noninterest income. The following table summarizes service charges on deposit accounts as apercentage of average transaction deposit accounts forthe periods indicated (dollars in thousands).

 

 

 

 

 

 

 

 

 

**For the three month periods**

 

 

 

**ended June 30,**

 

 

 

**2008**

**2007**

 

Service charges on deposit accounts, net

$

2,127 

1,991 

 

 

 

 

 

 

Average interest-bearing transaction deposit accounts

$

389,064 

353,436 

 

Average noninterest-bearing transaction deposit accounts

139,613 

134,599 

 

Total average transaction deposit accounts

$

528,677 

488,035 

 

 

 

 

 

 

Service charges on deposit accounts, net as a percentage of total

 

 

 

average transaction deposit accounts, annualized

1.6% 

1.6 

 

 

51

 

 

 

 

 

Mortgage-Banking Income. The Company sells most of theresidential mortgage loans it originates in the secondary market and retainsservicing rights. Mortgage loans serviced for the benefit of others amounted to$363.8 million and $346.3 million at June 30, 2008 and December 31, 2007,respectively. Mortgage loans serviced for the benefit of others amounted to$330.2 million at June 30, 2007. The following table summarizes the componentsof mortgage-banking income for the periods indicated (in thousands).

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

**periods ended June 30,**

 

 

**2008**

 

**2007**

Mortgage-servicing fees

$

221 

 

206 

Gain on sale of mortgage loans held for sale

301 

 

157 

Mortgage-serciving right amortization, impairment, and recoveries

(216)

 

(234)

Other mortgage-banking income

78 

 

42 

 

Total mortgage-banking income

$

384 

 

171 

 

 

 

 

 

Mortgage-servicing fees as a percentage of mortgage loans

 

 

 

 

serviced for the benefit of others at period end, annualized

0.24 

%

0.24 

 

 

 

 

 

 

Managementbelieves that the higher gains from loan sales were attributable to acombination of several factors including a tightening of underwriting by the Federal National Mortgage Association (“FNMA”) andthe Federal Home Loan Mortgage Corporation (“FHLMC”) for all originations,which put the smaller and larger organizations on a more level playing fieldfrom a competitive perspective, and the public’s changing perception ofcommunity bank’s value proposition in light of recent negative publicityregarding national institutions.  To a lesser extent, this increase was fueledby a refinance cycle.  

 

Other. During 2007, in conjunction with a change in serviceproviders, the recording of merchant services was changed from a net income andexpense method to a gross income and expense method.  This change impacted thecomparability of other noninterest income during the three month period endedJune 30, 2008 compared with the same period of 2007. The following tablesummarizes the related account for the periods indicated (in thousands).

 

 

 

 

 

 

 

 

**For the three month**

 

 

**periods ended June 30,**

 

 

**2008            **

**2007        **

Merchant income

$

295 

53 

Merchant expense

(229)

- 

 

Merchant income, net

$

66 

53 

 

 

 

 

 

The slight increase in merchant income, net during the threemonth period ended June 30, 2008 over the same period of 2007 is attributed toincreased merchant volume combined with increasing prices on which such incomeand expense is based.

 

Merchant income is included in Other Noninterest Income onthe Consolidated Interim Statements of Income, and merchant expense accountsare included in Other Noninterest Expense on the Consolidated InterimStatements of Income.  Although the fluctuation in merchant income, net hadrelatively little impact on the Company’s Consolidated Interim Statements ofIncome over the periods noted, the change in recording method did impact thebreakout within the Other Noninterest Income and Other Noninterest Expensefinancial statement line items.  

 

The following table adjusts reported other noninterestincome for the merchant income account (in thousands).  

 

 

 

 

 

 

 

 

 

**For the three month**

 

 

**periods ended June 30,**

 

 

**2008**

**2007**

Other noninterest income

$

1,293 

956 

Merchant income

(295)

(53)

Other noninterest income, adjusted

$

998 

903 

 

 

 

 

 

After adjusting for this account, other noninterest incomeincreased $95 thousand, or 10.5%, during the three month period ended June 30,2008 over the same period of 2007.  

 

Automatic teller machine income, net of related processingexpenses, increased $56 thousand from the three month period ended June 30,2007 to the same period of 2008.  Contributing to this increase was an increasein noncustomer transaction fees, which increased $0.50 per transactioneffective March 2008.  Additional transaction volume also contributed to theincrease.  The Company’s automatic teller machines network declined from 39 to37 when comparing June 30, 2007 to June 30, 2008 as a result of the removal ofthree automatic teller machines from the network due to branch consolidationsoffset by the addition of an additional nonbanking office automatic tellermachine at Woodmont Village Shopping Center on Highway 25 in Moonville, SouthCarolina.  Although the number of automatic teller machines in the Company’snetwork declined over the periods, management believes that, due to the closeproximity of other network automatic teller machines in relation toconsolidated branches, overall network transactional volume due to theseconsolidations was not materially impacted.  

52

 

 

 

 

 

Noninterest Expense. Salaries and Other Personnel. Comprising 56.1% ofnoninterest expense during the three month period ended June 30, 2008 and 60.9%of noninterest expense during the same period of 2007, salaries and otherpersonnel expense increased by $13 thousand over the periods. This increaseresulted from several factors, both recurring and nonrecurring in nature.

 

Employee salaries and benefits,which includes base salary, overtime, payroll taxes, and life and medicalinsurance, increased $132 thousand, or 2.6%, from the three month period endedJune 30, 2007 to the same period of 2008.  Contributing to this increase wereannual merit raises for employees and officers as well as the addition of newofficer positions including those positions created in connection with theopening of the new Rock Hill banking office anticipated to be opened during thethird quarter of 2008.  Offsetting these factors was the impact of theretirement of two Palmetto Bank officers during the first quarter of 2008.  Thejob responsibilities of each of the retiring individuals were absorbedinternally.    

 

During the fourth quarter of 2007, the Company notifiedemployees that, effective 2008, it would freeze accrued pension benefits foremployees with regard to the Company’s noncontributory, defined benefit pensionplan.  Although no previously accrued benefits will be lost, employees will nolonger accrue benefits for service subsequent to 2007. Offsetting the overallincrease in employee salaries and benefits from the three month period endedJune 30, 2007 to the same period of 2008 was a reduction in pension planexpenses, due to the plan freeze, totaling $138 thousand.  

 

Marketing expenses increased $72 thousand during the threemonth period ended June 30, 2008 over the same period of 2007 primarily as aresult of increases in expenses related to the advertisement of promotionaldeposit products. 

 

Other.  As noted above, during 2007, in conjunction with achange in service providers, the recording of merchant services was changedfrom a net income and expense method to a gross income and expense method. This change impacted the comparability of other noninterest expense during thethree month period ended June 30, 2008 compared with the same period of 2007.The following table adjusts reported other noninterest expense for the merchantexpense accounts (in thousands).  

 

 

 

 

 

 

 

 

**For the three month**

 

 

**periods ended June 30,**

 

 

**2008**

**2007**

Other noninterest expense

$

2,666 

2,046 

Merchant expense

(229)

- 

 

Other noninterest expense, adjusted

$

2,437 

2,046 

 

 

 

 

 

After adjusting for this account, other noninterest expenseincreased $391 thousand, or 19.1%, during the three month period ended June 30,2008 over the same period of 2007.  

 

 

Asreported in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2007, in November 2006, theFDIC adopted final regulations that set deposit insurance assessment rates thattook effect in 2007. The Bankreceived a one-time assessment credit of $576 thousand that could be appliedagainst future premiums, beginning in 2007, subject to certain limitations.Any remaining credit couldbe used tooffset up to 90% of subsequent annual assessments through 2010. The increase inFDIC premiums during the three month period ended June 30, 2008 over the sameperiod of 2007 was due to the fact that the Company has utilized its one-time assessment credit against deposit insurance assessments due.  During the threemonth period ended June 30, 2008, the Company expensed $184 thousand in Financing Corporation (“FICO”) and depositinsurance assessments compared with $30 thousand expensed during the sameperiod of 2007, which was comprised totally of FICO assessments.  

 

Expenses related to real estate acquired in settlement ofloans during the three month period ended June 30, 2008 totaled $38 thousand,substantially all of which was related to the holding of the Bank’s purchasedportion of a participation agreement relative to a commercial property withinthe portfolio. The lead bank ismanaging the operations of the property and is currently working with anexternal firm to market the property.  The Bank was a 20% participant in theloan relationship and is now a 20% owner of the collateral property.  As such,the Bank must cover 20% of the costs related to the property.

53

 

 

 

DuringApril 2008, the Company consolidated its existing banking office network from32 to 29 banking offices. Banking offices located at 3695 East North Street inGreenville County, 1490 W.O. Ezell Boulevard in Spartanburg County, and 2915North Main Street in Anderson County, all of which were leased banking offices,were consolidated.  With regard to two ofthese properties no liability was determined to be necessary in accordance withSFAS No. 146.  With regard to the third property consolidated during April2008, due to the possibility of the landlord selling the property in the nearterm thereby eliminating the Company’s remaining term on the contract, as ofthe cease-use date, the Company booked a liability based on the lease rentalsthrough the third quarter of 2008.  This liability was not reduced by anyestimated sublease rentals that could be reasonably obtained for the propertydue to the fact that it was certain none would be collected during thisperiod.  At June 30, 2008, this liability totaled $21 thousand.  This amountwas charged to the Other Noninterest Expense financial statement line item forthe three month period ended June 30,2008.

 

Provision for Income Taxes. Income tax expense totaled $2.3 million forthe three month period ended June 30, 2008, compared with $2.2 million for thesame period of 2007.  The Company’s effective tax rate was 35.1% for the threemonth period ended June 30, 2008 compared with 35.2% for the three month periodended June 30, 2007. The Company’s effective income tax rate is expected to beapproximately 35% for 2008.

 

 

 

54

 

 

 

*Year-to-Date Overview*

 

 

**PALMETTO BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Interim Statements of Income**

 

**(dollars in thousands, except common and per share data) (unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the six month**

 

 

 

 

 

 

 

 

 

 

 

**periods ended June 30,**

 

**Dollar**

 

**Percent**

 

 

 

 

 

 

 

**2008**

 

**2007**

 

**variance**

 

**variance**

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

37,341 

 

38,067 

 

(726)

 

(1.9)

%

 

Interest on investment securities available for sale

2,751 

 

2,301 

 

450 

 

19.6 

 

 

Dividends on FHLB stock

 

143 

 

75 

 

68 

 

90.7 

 

 

Interest earned on federal funds sold

47 

 

419 

 

(372)

 

(88.8)

 

 

Interest earned on cash and due from banks

8 

 

32 

 

(24)

 

(75.0)

 

 

 

 

Total interest income

 

40,290 

 

40,894 

 

(604)

 

(1.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

12,769 

 

14,664 

 

(1,895)

 

(12.9)

 

 

Interest on retail repurchase agreements

169 

 

276 

 

(107)

 

(38.8)

 

 

Interest on commercial paper

 

231 

 

527 

 

(296)

 

(56.2)

 

 

Interest on other short-term borrowings

509 

 

83 

 

426 

 

513.3 

 

 

Interest on long-term borrowings

441 

 

173 

 

268 

 

154.9 

 

 

 

 

Total interest expense

 

14,119 

 

15,723 

 

(1,604)

 

(10.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

26,171 

 

25,171 

 

1,000 

 

4.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

1,175 

 

800 

 

375 

 

46.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

24,996 

 

24,371 

 

625 

 

2.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts, net

4,294 

 

3,899 

 

395 

 

10.1 

 

 

Fees for trust and investment management and brokerage services

1,511 

 

1,522 

 

(11)

 

(0.7)

 

 

Mortgage-banking income, net

 

637 

 

519 

 

118 

 

22.7 

 

 

Investment securities gains

 

1 

 

- 

 

1 

 

100.0 

 

 

Other

 

 

 

2,806 

 

1,903 

 

903 

 

47.5 

 

 

 

 

Total noninterest income

9,249 

 

7,843 

 

1,406 

 

17.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

Salaries and other personnel

 

12,265 

 

12,194 

 

71 

 

0.6 

 

 

Occupancy

 

 

1,608 

 

1,430 

 

178 

 

12.4 

 

 

Furniture and equipment

 

1,929 

 

1,833 

 

96 

 

5.2 

 

 

Marketing

 

 

623 

 

487 

 

136 

 

27.9 

 

 

Amortization of core deposit intangibles

22 

 

24 

 

(2)

 

(8.3)

 

 

Other

 

 

 

5,546 

 

4,191 

 

1,355 

 

32.3 

 

 

 

 

Total noninterest expense

21,993 

 

20,159 

 

1,834 

 

9.1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before provision for income taxes

12,252 

 

12,055 

 

197 

 

1.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

4,277 

 

4,229 

 

48 

 

1.1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,975 

 

7,826 

 

149 

 

1.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share data

 

 

 

 

 

 

 

 

 

 

 

Net income - basic

 

$

1.24 

 

1.23 

 

0.01 

 

0.8 

%

 

Net income - diluted

 

1.22 

 

1.21 

 

0.01 

 

0.8 

 

 

Cash dividends

 

0.40 

 

0.38 

 

0.02 

 

5.3 

 

 

Book value

 

 

17.81 

 

16.49 

 

1.32 

 

8.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

6,433,343 

 

6,382,019 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

6,518,299 

 

6,480,454 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin forthe six month period ended June 30, 2008 was 4.33% compared with 4.65% for thesix month period ended June 30, 2007. Average interest-earning assets increased$122.4 million, or 11.2% over the same periods.

 

Earnings resulted in areturn on average shareholders’ equity of 14.06% and 15.22% for the six monthperiods ended June 30, 2008 and 2007. Return on average assets was 1.24% and1.36% for the same periods.

 

Net Interest Income. The following table summarizesthe actions taken by the Federal Reserve with regard to the prime interest rateand the federal funds interest rate for the six month periods ended June 30,2007 and June 30, 2008.  

 

55

 

 

 

 

 

 

 

**Prime**

**rate**

 

**Federal**

**funds rate**

Rate, at December 31, 2006

8.25 

%

5.25 

Changes in rate

- 

 

- 

Rate, at June 30, 2007

8.25 

%

5.25 

 

 

 

 

 

 

 

 

Rate, at December 31, 2007

7.25 

%

4.25 

Changes in rate

(2.25)

 

(2.25)

Rate, at June 30, 2008

5.00 

%

2.00 

 

 

 

 

 

Average Balance Sheets and NetInterest Income / Margin Analysis. The following table summarizes the Company’saverage balance sheets and net interest income analysis for the periodsindicated (dollars in thousands). The following table does not include atax-equivalent adjustment to net interest income for interest-earning assetsearning tax-exempt income to a comparable yield on a taxable basis.

 

 

 

56

 

 

 

 

 

 

For the six month periods ended June 30,

 

 

 

 

 

2008

 

2007

 

 

 

 

 

Average

Income/

Yield/

 

Average

Income/

Yield/

 

 

 

 

 

balance

expense

rate

 

balance

expense

rate

 

Assets

 

 

 

 

 

 

 

 

 

 

Interest-earnings assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

591 

$

8 

2.72 

%

$

1,188 

$

32 

5.43 

%

 

Federal funds sold

3,316 

47 

2.85 

 

17,074 

419 

4.95 

 

 

FHLB stock

4,466 

143 

6.44 

 

2,560 

75 

5.91 

 

 

Investment securities available for sale, nontaxable (2)

52,454 

914 

3.50 

 

49,251 

876 

3.59 

 

 

Investment securities available for sale, taxable (2)

64,685 

1,837 

5.71 

 

61,334 

1,425 

4.69 

 

 

Loans, net of unearned (1)

1,088,555 

37,341 

6.90 

 

960,302 

38,067 

7.99 

 

 

 

Total interest-earning assets

1,214,067 

40,290 

6.67 

 

1,091,709 

40,894 

7.55 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

32,367 

 

 

 

30,332 

 

 

 

 

Allowance for loan losses

(7,448)

 

 

 

(8,435)

 

 

 

 

Premises and equipment, net

24,275 

 

 

 

24,925 

 

 

 

 

Premises held for sale

1,651 

 

 

 

- 

 

 

 

 

Goodwill, net

3,688 

 

 

 

3,688 

 

 

 

 

Core deposit intangibles, net

68 

 

 

 

115 

 

 

 

 

Accrued interest receivable

6,185 

 

 

 

5,916 

 

 

 

 

Other

 

16,280 

 

 

 

13,273 

 

 

 

 

 

Total noninterest-earning assets

77,066 

 

 

 

69,814 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,291,133 

 

 

 

$

1,161,523 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

Transaction deposit accounts

$

389,546 

$

3,258 

1.68 

%

$

341,873 

$

4,732 

2.79 

%

 

Money market deposit accounts

110,031 

1,211 

2.21 

 
   
113,531 

1,895 

3.37 

 

 

Savings deposit accounts

37,110 

62 

0.34 

 

42,066 

70 

0.34 

 

 

Time deposit accounts

377,950 

8,238 

4.38 

 

369,372 

7,967 

4.35 

 

 

 

Total interest-bearing deposits

914,637 

12,769 

2.81 

 

866,842 

14,664 

3.41 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail repurchase agreements

18,475 

169 

1.84 

 

13,154 

276 

4.23 

 

 

Commercial paper (Master notes)

29,504 

231 

1.57 

 

24,540 

527 

4.33 

 

 

Other short-term borrowings

37,267 

509 

2.75 

 

2,807 

83 

5.96 

 

 

Long-term borrowings

30,714 

441 

2.89 

 

9,116 

173 

3.83 

 

 

 

Total interest-bearing liabilities

1,030,597 

14,119 

2.76 

 

916,459 

15,723 

3.46 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

135,963 

 

 

 

132,857 

 

 

 

 

Accrued interest payable

2,367 

 

 

 

2,469 

 

 

 

 

Other

 

8,113 

 

 

 

6,058 

 

 

 

 

 

Total noninterest-bearing liabilities

146,443 

 

 

 

141,384 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

1,177,040 

 

 

 

1,057,843 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

114,093 

 

 

 

103,680 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,291,133 

 

 

 

$

1,161,523 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME / NET YIELD ON

 

 

 

 

 

 

 

 

 

INTEREST-EARNING ASSETS

 

$

26,171 

4.33 

%

 

$

25,171 

4.65 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Calculated including mortgage loans held for sale.  Nonaccrual loans are included in average balances for yield computations.

 

The effect of foregone interest income as a result of loans on nonaccrual was not considered in the above analysis.  All loans

 

and deposits are domestic.

(2)

The average balances for investment securities include the unrealized gain or loss recorded for available for sale securities.

 

57

 

 

 

 

 

Rate / Volume Analysis. Thefollowing table summarizes the dollar amount of changes in interest income andinterest expense attributable to changes in average volume and the amountattributable to changes in average interest rates when comparing the six monthperiod ended June 30, 2008 to the six month period ended June 30, 2007 (inthousands).  The impact of the combination of rate and volume change has beendivided proportionately between the rate change and volume change. Thecomparison between the periods includes an additional change factor thatsummarizes the impact of the difference in the number of days of each year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Change in**

**average**

**volume**

**Change in**

**average**

**rate**

**Change**

**due to**

**difference**

**in number**

**of days**

**Total**

**change**

 

 

Interest-earnings assets

 

 

 

 

 

 

 

Cash and due from banks

$

(12)

(12)

- 

(24)

 

 

 

Federal funds sold

(244)

(129)

1 

(372)

 

 

 

FHLB stock

60 

8 

- 

68 

 

 

 

Investment securities available for sale

141 

301 

8 

450 

 

 

 

Loans (1)

31,727 

(32,557)

104 

(726)

 

 

 

 

Total interest income

$

31,672 

(32,389)

113 

(604)

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

Interest-bearing deposits

$

874 

(2,804)

35 

(1,895)

 

 

 

Retail repurchase agreements

272 

(379)

- 

(107)

 

 

 

Commercial paper (Master notes)

139 

(435)

- 

(296)

 

 

 

Other short-term borrowings

444 

(20)

2 

426 

 

 

 

Long-term borrowings

297 

(30)

1 

268 

 

 

 

 

Total interest expense

$

2,026 

(3,668)

38 

(1,604)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

29,646 

(28,721)

75 

1,000 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Calculated including mortgage loans held for sale, net of unearned income, excluding allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

Provision for Loan Losses.  The provision for loan losses totaled $1.2 million for thesix month period ended June 30, 2008 compared with $800 thousand for the sameperiod of 2007. See Financial Condition – Lending Activities, includedelsewhere in this item, fordiscussion regarding the factors impacting the amount added to the allowance for loan losses, through its provisionfor loan losses.

 

Noninterest Income. Service Charges on Deposit Accounts. The followingtable summarizes service charges on deposit accounts as a percentage of averagetransaction deposit accounts for the periodsindicated (dollars in thousands).

 

 

 

 

 

 

 

 

**For the six month**

 

 

**periods ended June 30,**

 

 

**2008**

**2007**

Service charges on deposit accounts, net

$

4,294 

3,899 

 

 

 

 

Average interest-bearing transaction deposit accounts

$

389,546 

341,873 

Average noninterest-bearing transaction deposit accounts

135,963 

132,857 

Total average transaction deposit accounts

$

525,509 

474,730 

 

 

 

 

Service charges on deposit accounts, net as a percentage of total

 

 

average transaction deposit accounts

1.6% 

1.7 

 

 

58

 
Mortgage-Banking Income. The following table summarizes thecomponents of mortgage-banking income for the periods indicated (in thousands).
 

 

 

 

 

 

 

 

 

 

 

**For the six month**

 

 

**periods ended June 30,**

 

 

**2008**

 

**2007**

Mortgage-servicing fees

$

437 

 

409 

Gain on sale of mortgage loans held for sale

490 

 

335 

Mortgage-serciving right amortization, impairment, and recoveries

(432)

 

(300)

Other mortgage-banking income

142 

 

75 

 

Total mortgage-banking income

$

637 

 

519 

 

 

 

 

 

Mortgage-servicing fees as a percentage of mortgage loans

 

 

 

 

serviced for the benefit of others at period end, annualized

0.25 

%

0.24 

 

 

 

 

 

 

 Amortization of themortgage-servicing rights portfolio is based on the ratio of net servicingincome received in the current period to total net servicing income projectedto be realized from the mortgage-servicing rights portfolio. Projected netservicing income is in turn determined on the basis of the estimated futurebalance of the underlying mortgage loan portfolio that declines over time fromprepayments and scheduled loan amortization. Future prepayment rates areestimated based on current interest rate levels, other economic conditions,market forecasts, and relevant characteristics of the mortgage-servicing rightsportfolio, such as loan types, interest rate stratification, and recentprepayment experience.  The increase in amortization over the periods presentedis a result of how current interest rate levels, other economic conditions,market forecasts, and relevant characteristics of the mortgage-servicing rightsportfolio, such as loan types, interest rate stratification, and recentprepayment experience, impacted the Company’s estimate of future prepaymentrates.

 

Other. During 2007, in conjunction with a change in serviceproviders, the recording of merchant services was changed from a net income andexpense method to a gross income and expense method.  This change impacted thecomparability of other noninterest income during the six month period endedJune 30, 2008 compared with the same period of 2007. The following tablesummarizes the related account for the periods indicated (in thousands).

 

 

 

 

 

 

 

 

**For the six month**

 

 

**periods ended June 30,**

 

 

**2008**

**2007**

Merchant income

$

582 

91 

Merchant expense

(454)

- 

 

Merchant income, net

$

128 

91 

 

 

 

 

 

Merchant income is included in Other Noninterest Income onthe Consolidated Interim Statements of Income, and merchant expense accountsare included in Other Noninterest Expense on the Consolidated InterimStatements of Income.  Although the fluctuation in merchant income, net hadrelatively little impact on the Company’s Consolidated Interim Statements ofIncome over the periods noted, the change in recording method did impact thebreakout within the Other Noninterest Income and Other Noninterest Expensefinancial statement line items.  

 

The following table adjusts reported other noninterestincome for the merchant income account (in thousands).  

 

 

 

 

 

 

 

 

**For the six month**

 

 

**periods ended June 30,**

 

 

**2008**

**2007**

Other noninterest income

$

2,806 

1,903 

Merchant income

(582)

(91)

Other noninterest income, adjusted

$

2,224 

1,812 

 

 

 

 

 

After adjusting for this account, other noninterest incomeincreased $412 thousand, or 22.7%, during the six month period ended June 30,2008 over the same period of 2007.  

 

DuringMarch 2008, the Company recorded a pretax first quarter gain of approximately$226 thousand, recorded within Other Noninterest Income on the ConsolidatedInterim Statements of Income, resulting from the mandatory redemption of aportion of its Class B Visa, Inc. shares as part of Visa's recent initialpublic offering.  The Company continuesto own 8,386 shares of Visa Class B shares that are convertible into Class Ashares. The amount of Class A shares the Company could realize upon conversionof its remaining Class B shares may change depending upon whether additionalamounts of money need to be reserved by Visa to settle outstanding litigation.The Class B shares carry a three-year lock-up provision and may not beconverted or redeemed during that period. The Company obtained its ownership ofVisa shares, and resulting proportionate share of the Visa litigationsettlement, by being a long-time Visa member. The Company’s ownershipproportion is based upon its percentage of total fees paid to Visa over thisperiod. 

 

 

 

 

59

 

 

Automatic teller machine income, net of related processingexpenses, increased $102 thousand from the six month period ended June 30, 2007to the same period of 2008.  This increase was primarily the result of anincrease in noncustomer transaction fees and additional transaction volume.  

 

Noninterest Expense. Salaries and Other Personnel. Comprising 55.8% ofnoninterest expense during the six month period ended June 30, 2008 and 60.5%of noninterest expense during the same period of 2007, salaries and otherpersonnel expense increased by $71 thousand over the periods. This increaseresulted from several factors, both recurring and nonrecurring in nature.

 

Employee salaries and benefits,which include base salary, overtime, payroll taxes, and life and medicalinsurance, increased $428 thousand, or 4.1%, from the six month period endedJune 30, 2007 to the same period of 2008.  Contributing to this increase wereannual merit raises for employees and officers as well as the addition of newofficer positions including those positions created in connection with theopening of the new Rock Hill banking office anticipated to be opened during thethird quarter of 2008.  Offsetting these factors was the impact of theretirement of two tenured Palmetto Bank officers during the first quarter of2008.  The job responsibilities of each of the retiring individuals wereabsorbed internally.   Partially offsetting this increase in employee salariesand benefits from the six month period ended June 30, 2007 to the same periodof 2008 was a reduction in pension plan expenses, due to the plan freeze, overthe periods totaling $275 thousand.  

 

Marketing expenses increased $136 thousand during the sixmonth period ended June 30, 2008 over the same period of 2007 primarily as aresult of increases in expenses related to the advertisement of promotionaldeposit products.

 

Other.  As noted above, during 2007, the recording ofmerchant services was changed from a net income and expense method to a grossincome and expense method.  This change impacted the comparability of othernoninterest expense during the six month period ended June 30, 2008 comparedwith the same period of 2007. The following table adjusts reported othernoninterest expense for the merchant expense accounts (in thousands).  

 

 

 

 

 

 

**For the six month**

 

**periods ended June 30,**

 

**2008**

**2007**

Other noninterest expense

$

5,546 

4,191 

Merchant expense

(454)

- 

Other noninterest expense, adjusted

$

5,092 

4,191 

 

 

 

 

After adjusting for these accounts, other noninterestexpense increased $901 thousand, or 21.5%, during the six month period endedJune 30, 2008 over the same period of 2007.  The following table summarizessignificant fluctuations within other noninterest expense, adjusted during thesix month period ended June 30, 2008 over the same period of 2007.

 

 

 

 

 

 

 

 

**For the six month**

 

 

**periods ended June 30,**

**Dollar**

 

**2008**

**2007**

**variance**

FDIC assessment

$

349 

70 

279 

Sundry losses

157 

(74)

231 

Real estate acquired in settlement of loans writedowns

398 

151 

247 

 

$

904 
   
147 

757 

 

 

 

 

 

During the second quarter of 2006, as a result of a softwareupgrade, the Company experienced a temporary delay in check processing andelectronic check processing.  At December 31, 2006, the Bank had exposure, andreserved for in Other Noninterest Expense in the Consolidated InterimStatements of Income, of approximately $174 thousand related to itemsuncollected at that date.  Subsequently, during the first three months of 2007,the Bank collected virtually all of these items.  Therefore, this reserve wasreversed during the first quarter of 2007.  Excluding this reversal, sundrylosses would have been $100 thousand for the six month period ended June 30,2007.  

 

Expenses related to real estate acquired in settlement ofloans during the six month period ended June 30, 2008 totaled $339 thousand,substantially all of which was related to the holding of the Bank’s purchasedportion of a participation agreement relative to a commercial property withinthe portfolio. The lead bank ismanaging the operations of the property and is currently working with an externalfirm market the property.  The Bank was a 20% participant in the loanrelationship and is now a 20% owner of the collateral property.  As such, theBank must cover 20% of the costs related to the property.

 

 

 

60

 

 

 

 

 

Provision for Income Taxes. Income tax expense totaled $4.28 millionfor the six month period ended June 30, 2008, compared with $4.23 million forthe same period of 2007.  The Company’s effective tax rate was 34.9% for thesix month period ended June 30, 2008 compared with 35.1% for the six monthperiod ended June 30, 2007. The Company’s effective income tax rate is expectedto be approximately 35% for 2008.

 

***Recently Issued / Adopted Accounting Pronouncements*****

 

SeePart I, Item 1. Financial Statements, Note 1 for discussionregarding recently issued and recently adopted accounting pronouncements andtheir expected impact on the Company’s business, financial condition, resultsof operations, and cash flows.  

 

Item 3.  QuantitativeAnd Qualitative Disclosures About Market Risk

 

As of June 30, 2008, thefollowing table summarizes the forecasted impact on net interest income using abase case scenario given upward and downward movement in interest rates of 100basis points and 200 basis points.

 

 

 

 

 

**Interest rate scenario**

**Percentage**

**change in net**

**interest**

**income from**

**base**

 

 

Up 200 basis points

(7.37)

%

Up 100 basis points

(3.64)

 

 

Down 100 basis points

3.22 

 

 

Down 200 basis points

3.77 

 

 

 

 

 

 

 

Overall,the model results indicate that the Company’s balance sheet is liability sensitive.A liability sensitive balance sheet suggests that in falling interest rateenvironment, net interest income would increase and during an increasinginterest rate environment, net interest income would decrease.

 

The following table shows the Company’s one-year dynamic gapat June 30, 2008 (dollars in thousands).

 

 

 
   
Interest-earning assets maturing or repricing within one  year

 

$

744,599

 

Interest-bearing liabilities maturing or repricing within  one year

 

 

889,272 

 

Cumulative gap

 

$

(144,673

)

 

 

 

 

 

Cumulative gap as a percent of total assets

 

 

(10.8) 

%

 

The Company’s negative gap indicates that cumulativeinterest-bearing liabilities exceed cumulative interest-earning assets andsuggests increasing net interest income in periods of declining interestrates.  This relationship may not always be ensured due to the repricingattributes of both interest-earning assets and interest-bearing liabilities andthe shape of the yield curve. As indicated above indicates, management believesthat the Company’s net interest income will be positively impacted by a declinein interest rates.

 

 

 

 

61

 

 

 

**Item 4.****Controls AndProcedures**

 

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation of the Company’s disclosure controls and procedures (as defined inSection 13(a)-14(c) of the Securities Exchange Act of 1934) was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer, the President and Chief Operating Officer (PrincipalFinancial Officer) and several other members of the Company’s senior managementas of June 30, 2008, the last day of the period covered by this QuarterlyReport. The Company’s Chief Executive Officer and the President and ChiefOperating Officer (Principal Financial Officer) concluded that the Company’sdisclosure controls and procedures were effective as of June 30, 2008 inensuring that the information required to be disclosed by the Company in thereports it files or submits under the Securities Exchange Act of 1934 is (i)accumulated and communicated to the Company’s management (including the ChiefExecutive Officer and the President and Chief Operating Officer (PrincipalFinancial Officer)) in a timely manner, and is (ii) recorded, processed,summarized, and reported within the time periods specified in the SEC’s rulesand forms.

 

Second Quarter Internal Control Changes

 

During the second quarter of 2008, the Company did not make any changesin its internal controls over financial reporting that has materially affectedor is reasonably likely to materially affect those controls.

 

 

 

 

 

 

62

 

 

 

 

 

PART II – OTHERINFORMATION

 

**Item 1.****Legal Proceedings**

 

See Part I, Item 1. FinancialStatements, Note 14 contained herein for a discussion of the informationrequired by this item.

 

**Item 1A. Risk Factors**

** **

There has been no material change in the risk factorspreviously disclosed under Item 1A. of the Company's Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Item2. Unregistered Sales Of Equity Securities And Use Of Proceeds**

 

None

 

**Item3. Defaults Upon Senior Securities**

** **

None

 

**Item4. Submission Of Matters To A Vote Of Security Holders**

** **

The Company’s Annual Meeting of Shareholders was held onApril 15, 2008.  4,970,978 shares were voted of the 6,432,265 shares of $5 parvalue common stock entitled to vote at the Annual Shareholders’ Meeting.  

 

Proposal #1 - Election of Directors.  The Board of Directorsis divided into three classes. At each Annual Meeting of Shareholders, theCompany's shareholders elect the members of one of the three classes tothree-year terms. At this Annual Meeting, five directors were nominated forreelection for terms expiring at the 2011 Annual Meeting of Shareholders. 

 

 

 

 

Number of Votes

For

 

Number of Votes

Withheld

John T. Gramling, II

4,957,968

13,010

John D. Hopkins, Jr.

4,963,968

7,010

Edward K. Snead, III

4,963,968

7,010

Jane S. Sosebee

4,963,968

7,010

Paul W. Stringer

4,961,568

9,410

 

The following directors’ term ofoffice continued after the meeting: W. Fred Davis, Jr., David P. George, Jr.,Michael D. Glenn, L. Leon Patterson, Sam B. Phillips, Jr., Albert V. Smith, AnnB. Smith, L. Stewart Spinks, and J. David Wasson, Jr.

 

Proposal #2 – Approval of 2008Restricted Stock Plan.  On February 19, 2008, the Company’s Board of Directorsadopted, subject to shareholder approval, the Palmetto Bancshares, Inc. 2008Restricted Stock Plan, which provides for the grant of stock awards to theCompany’s employees, officers, and directors. At the Annual Meeting ofShareholders, the Company's 2008 Restricted Stock Plan was proposed forshareholder approval.  The following table summarizes the shareholder vote ofthis proposal.  

 

Number of  “For” Votes
3,818,003
Number of  “Against” Votes
964,502
Number of  “Abstain” Votes
79,241
Number of  “Broker Non-Vote” Votes
109,232
 

Shareholders approved thePalmetto Bancshares, Inc. 2008 Restricted Stock Plan on April 15, 2008 with79.8% of votes cast being “for” the Plan.

 

**Item5. Other Information**

** **

None

** **

63

 

 

 

 

 

**Item6. Exhibits**

 

31.1         L.Leon Patterson's Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 

31.2         PaulW. Stringer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 

32            Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibits 31.1, 31.2, and32 have been filed with the SEC in conjunction with this Quarterly Report onForm 10-Q. Copies of these exhibits are available upon written requestto Lauren S. Greer, The Palmetto Bank, Post Office Box 49, Laurens, SouthCarolina 29360.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

                                                                                                                                               

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 

PALMETTOBANCSHARES, INC.

 

 

 

By:

 

 

/s/ L. Leon Patterson                    

L.Leon Patterson

Chairmanand Chief Executive Officer

PalmettoBancshares, Inc.

 

 

/s/ Paul W. Stringer

PaulW. Stringer

Presidentand Chief Operating Officer, 

ChiefAccounting Officer

PalmettoBancshares, Inc.

 

 

Date:August 11, 2008

 

65

 

 

 

 

 

**EXHIBITINDEX**

 

 

Exhibit No.        Description

 

31.1                     L.Leon Patterson’s Certification Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 

 

31.2                     PaulW. Stringer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of2002

 

32                        CertificationsPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

* *

 

 

 

 

 

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