Fintrust Brokerage Services Equity Researchfintrustadvisors.com/wp-content/uploads/2014/10/Fin...1 Fintrust Brokerage Services 124 Verdae Blvd, Ste. #504 864-288-2849 Equity Research

Palmetto Bancshares, Inc. (PLMT) Initiating Coverage

Fintrust Brokerage Services Equity Research

May 8, 2014

1 Fintrust Brokerage Services www.Fintrustadvisors.com 124 Verdae Blvd, Ste. #504

864-288-2849 Equity Research Greenville, SC 29607

Analyst’s Notes....Continued

Company Summary: Palmetto Bancshares Inc. is the BHC for The Palmetto Bank (the ‘Bank’), headquartered in Greenville, South Carolina. The Bank is a 107-year old state-chartered community bank serving the state’s Upstate market, and is the third largest banking institution headquartered in South Carolina with $1.1 billion in assets. The Bank is emerging from a turnaround: In the years leading up to 2008, prior management of the Bank imprudently expanded the Commercial Real Estate (CRE) loan portfolio such that by 2009 non-performing loans reached 9.32% of totals loans and the Bank was reeling with losses. New management, installed in 2009, has deftly executed a multi-pronged strategy including a capital infusion and CRE loan roll offs, and by mid 2013 the Bank turned profitable. With problem loans by and large in the rear view mirror, the Bank is pursuing a conservative strategy to expand profitability to industry levels and is in a position, we estimate, to consider commencing a dividend to common, which was suspended in 1Q 20009, or to explore merger and acqusition opportunities.

Fintrust Recommendation

Fintrust Rating: BUY

Target Price: $14.84

Current Share Price $13.51

Expected Return 9.8%

52 Week Price Range $14.98 - $11.43

Fintrust Brokerage Services, LLC rates companies a BUY,

HOLD, SELL, or SHORT.

· A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A SELL SHORT is given when the security is expected to decline in value over the next year.

The distribution of ratings across Fintrust’s entire

company universe is 50% Buy, 50% Hold, 0% Sell, 0%

Short

Key Figures Key figures pricing data reflects previous trading day’s

closing price. Other applicable data are trailing 12-months

unless otherwise specified.

Assets / Equity 8.7x

Return on Assets 0.74%

Return on Equity 6.45%

Payout Ratio n/a

Revenue (mm) $53.7

Net Income (000’s) $8,437

Outstanding (mi) 12.7 Shares

Short (mil) nmf

Market Capitalization ($ mil) $171.4

Gross Loans ($ mil) $755.8

Beta 1.24x

Valuation

Price/Book 1.38x

Book Value/Share $9.78

EPS (13A) $0.48

EPS (‘14E) $0.67

EPS (‘15E) $0.97

P/E (13) 28.1x

P/E (14) 20.1x

P/E (15) 13.9x

Est. 2014-2015 Growth 44.7%

Industry: Financial Services GICS Sector/ Sub code: Financials Sector / Banks (GIC Code: 40 / Sub code: 4010)

Please see pages 29 and 30 of this publication for important certification and disclosure information

Analyst Notes:

Analysis by Bruce Roberts (917) 701-3357 & Allen Gillespie, CFA (864) 288-2849

The Bank’s asset quality metrics continue to improve - in 1Q 2014, Net Charge Offs (NCO) dropped to 0.13% (from 0.39% in 1Q 2013) and Non Performing Loans (NPL) fell to 1.86% of gross loans (versus 2.34%). In the quarter, PLMT took zero Provisions for Loan Losses (PLL). In 2013, PLL were 6.0% of revenues (Net Interest Income (NII) + non interest income). The Bank’s Capital Ratios are very strong and we expect them to continue to well exceed required levels as the Bank transitions to more stringent Basel III Capital rules starting 1/01/15.

We view 2014 as a quasi transitional year. While we anticipate that ROAA and Net Income Margin (NIM) will decline sequentially in the current quarter due to soft loan demand, based on our view that rates will climb, we anticipate that ROAA will pick up in 2015, to 1.10%, from 0.77% in 2014. We also anticipate that y-o-y loan growth will accelerate in 2015 to 5.9% from 2.5% this year and 3.9% last year. With respect to 2014, we estimate that (1) credit quality will continue to improve (2) results from non interest income related businesses will improve and (3) that the Bank’s balance sheet is positioned for rising interest rates as it has both a positive dollar and duration GAP. Finally, 2014 will likely prove to be another year where the Bank benefits from its exceptional deposit ‘franchise’. In 1Q 2014 the Bank’s Funding Costs ratio was 0.07%, however, in an era of prolonged low interest rates this competitive advantage may erode over time.

While we acknowledge that the shares enjoyed a 56% stock price appreciation in 2013, we rate PLMT BUY for patient investors looking to invest in a premier community banking institution that (1) operates in a demographically attractive market (2) has engineered a solid balance sheet that is primed for low cost loan growth (the loan / deposit ratio is just 80.0%, well below the bank’s 90% target) and (3) is very well managed, as evidenced by several evolving metrics and ratios. Based on a peer group 1.4x Price-to-Book ratio and our estimate of year-end 2014 $10.60 Book Value / Share, we have set a one-year $14.84 price target on the shares, or 9.8% upside.

PLMT has shown an ability to acquire assets through appropriate funding, control its

bruden and maintain an acceptable risk profile?

PLMT is well capitalized. New Basel III rules taking effect 1/1/15, will not, we

estimate (1) impinge on the Bank’s choice of assets (many of which, such as volatile

CRE, will receive higher ‘risk weightings’ next year) or (2) require raising added caital

to fund expected loan growthg in 2105. We estimate that the bank, upon achieving a

reasonable ROAA, can expand its asset portfolio without added outside capital (which

as a rule is more expensive for ‘small’ community banks to obtain).

http://www.fintrustadvisors.com/



May 8, 2014




Risks to Our Recommendation

Risks to our BUY rating include but are not limited to: (1) rising rates and loan demand do not materialize later this year and in 2015 (2) the Bank’s asset quality doesn’t continue to improve necessitating higher PLL (3) management fails to add profitable loans with risks commensurate with potential return (4) the Bank’s Supervising Authorities chose to deny a request – assuming one is to be made - by the Bank to pay a dividend to its stockholders (5) the CFPB and the many other regulatory bodies governing the bank’s activities make adverse and/or burdensome rulings and regulations and (6) the Bank’s private equity shareholders, whom together own 8.2 million or 64.4% of the Bank’s outstanding shares, continue to dominate the Bank’s shareholdings to the extent that a float sufficient to accommodate new investors fails to materialize, impeding the stock’s potential ascent. U.S. Banking Market

At the end of 2013, there were 11,124 FDIC insured and supervised institutions holding $14.72 trillion in assets and $7.89 trillion in loans, up 2.6% y-o-y. The majority of banks are small and medium sized retail or consumer banks. Currently, 90% of insured institutions have $1 billion or less in assets. As evidenced by the following chart, industry consolidation is an ongoing phenomenon.

Among other factors, geographic deregulation in the 1990s and regulation (the 1999 act repealing Glass-Steagall) allowing for the consolidation of banks, investment banks and insurance companies after 1999, as well as advances in computer and communications technology have fed banks’ ability to achieve economies of scale.

Share of Total Bank Assets by SizeFDIC: 4Q 2013

70.3%

14.5% 12.8%2.5% 0.8%

8.5%10.0%

80.7%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Assets > $10

Billion

Assets $1

Billion - $10

Billion

Assets $100

Million - $1

Billion

Assets <

$100 Million

4Q 2003

4Q 2013

Bank ROA appears to be correlated to asset size further suggesting the rationale towards consolidation, a phenomena that is likely to make the Bank a participant in the inevitable rationalization of the community banking sector in the Carolinas.

ROA by Asset Size: 4Q 1013FDIC 4Q 2013

1.12% 1.12%

0.89%

0.63%

1.10%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Assets > $10

Billion

Assets $1

Billion - $10

Billion

Assets $100

Million - $1

Billion

Assets <

$100 Million

All Insured

Institutions




May 8, 2014




Current Banking Trends

While most banks are suffering from a lack of loan growth and flat Net Interest Income margins due to a nagging low interest rate environment, and large banks are experiencing a retrenchment in bond trading activity, we estimate that PLMT’s straightforward business model of deposit collecting and loan generation will serve it well should rates begin to rise. To the extent the interest rate environment has reached a reversal point, on the margin banks are poised to benefit from expanding net interest income margins, although the stall out in mortgage fee growth and the potential for investment security losses, as rates rise, could serve to offset profit expansion. As the general credit environment improves, banks are taking less PLL, boosting net income. As Palmetto’s ratio of loan loss provisions to charge offs falls below 1x, reductions in provisions are less likely to drive earnings growth going forward. Thus, expense rationalization (the Bank’s efficiency ratio is ~600 b.p. higher than peers) and fee income become more important than in the past several years, when management was much more focused on cleaning the balance sheet. To that end, PLMT took steps in 2013 to stimulate private banking, brokerage and wealth management and increase productivity that we estimate will pays dividends in 2H 2014 and in 2015. South Carolina Economy

South Carolina’s economy is poised to grow at or above near term expected real U.S. GDP growth, which is estimated at 2.8 percent this year and 3.0% in 2015, according to the IMF. Real GDP increased 1.9 percent in 2013 (that is, from the 2012 annual level to the 2013 annual level), compared with an increase of 2.8 percent in 2012. The state suffered outsized losses during the recession. While recent economic data suggests that the state’s economy is poised to expand, state income growth has severely lagged the nation due to at least 2 factors: the loss of traditional manufacturing jobs during the recession and a dearth of a higher skilled workforce.

Median HH Income 2000 2011 2012 2012 / 2000

U.S. 55,030 51,324 51,371 -6.6% S.C. 48,401 43,163 43,107 -10.9%

Sources: U.S. Census Bureau, ACS Survey

S.C. is more government and manufacturing centric than the nation as a whole.

Industry Sector % of Labor Force % of S.C. GDP

Government 18.8% 17.0% Manufacturing 12.0% 16.3%

Source: S.C. Dept of Commerce, 2012

Government accounts for a relatively large share of the state’s economy which means that sequestration is an ongoing threat to the state. Manufacturing is by far the state’s largest economic sector, accounting for 12% and 16% of state employees and state GDP, respectively; in 2012 (government was responsible for 17% of state GDP in 2012). Supported by outsized gains in the durable goods sector, as epitomized by BMW’s growing presence and the buildup of Boeing’s production in Charleston, South Carolina’s economy is expanding at a solid pace: according to the BEA, South Carolina’s GDP grew 2.7% in 2012 - above the nation’s 2.5% rate, and South Carolina is a regional leader; in 2012 only 2 of the Southeast’s 12 states enjoyed higher GDP growth (W. Virginia and Tennessee). In fact, the state’s GDP growth rate has been higher than the U.S. as a whole since 2010. Based on several competitive advantages – diverse industrial base, excellent transportation links, employer friendly labor laws, and a favorable geographic location – South Carolina remains well positioned relative to other competing states, to benefit from an expanding economy, insofar as the state is keenly focused on worker training and S.C. has been very successful in attracting foreign investment. S.C. is 2nd only to California in exports to Germany. In 2012 exports reached a record $25.3 bn, a 2.2% y-o-y increase. Nationally, S.C. ranked 1st and 2nd in the export of automobiles and tires, respectively and 2nd in the export of gas turbines. Finally, in 2012, $2.58 bn out of $3.99 billion (65%) in total capital investment made in the state came from foreign companies. Momentum in Manufacturing, Real Estate and Employment Growth




May 8, 2014




Manufacturing is rebounding. The state has a large diversified industrial base including BMW, Michelin, Boeing, Nucor, Roche and others, which should enhance the state’s ability to attract other relevant growth industries including IT and advanced manufacturing. In 2012, 72% of the 14,000 jobs added in the state were in manufacturing with the remainder in service jobs. In 2012, S.C. manufacturing GDP advanced 8.5% compared to a 7.8% advance for the U.S. In 2013, the state posted strong results in overall employment and manufacturing growth.

In 2013 S.C. employment grew 1.7% versus 1.6% for the rest of the country.

According to the BLS, S.C. payroll employment growth was 1.9% in 4Q 2013 versus 1.7% for the U.S.

For the 1st time in 8 quarters, S.C. personal income growth exceeded that of the U.S., at 1.8% versus 1.4% in 4Q 2013.

S.C. manufacturing employment grew 1.0% in 2013 versus 0.5% in the U.S.

Manufacturing employment momentum is up, growing 1.7% y-o-y in 4Q 2013, its best rate of growth in 2013. South Carolina’s real estate market is reviving. The state’s housing market is recovering with sales of existing homes through the first 8 months of 2013 running 20% ahead of last year. Single family permits are up 27.5% over the same y-o-y time frame with some of the strongest gains in the Upstate (however, single family home building remains below historic norms). The recession left a glut of commercial real estate space empty across the state. The retail market has firmed up, and while office vacancies have declined marginally, vacancy rates remain in the upper teens. Tenant demand for better space and increased investments by landlords and office renters points to increased rent growth in 2014, according to a CBRE report. Industrial real estate has experienced steady improvement in most metro areas. Upstate Economic Backdrop

PLMT serves the Upstate region in South Carolina. The Upstate is sandwiched between Atlanta and Charlotte, two of the region’s largest metro areas. Although loosely defined among locals, the general definition includes the 10 counties of the commerce-rich I-85 corridor in the northwest corner of South Carolina, 9 of which are served by PLMT. The Upstate is one of the more prosperous economies of the state:

1. While the state’s unemployment rate stood at 6.6%, the unemployment rate for the 9 counties was 5.9% at 12/31/13, based on BLS statistics. Population for the 9 counties is expected to reach 1.467 million by 2020E, according to the U.S. Census Bureau, up from an estimated 1.398 million at year-end 2015, implying a 0.97% CAGR, which is in line with the state’s 1.1% rate of growth in 2013, and above the nation’s estimated 0.72% growth rate last year.

2. Major industries in the Upstate include the automobile industry, the health care sector, and others. The Upstate is home to

national and regional corporate headquarters of BMW, GE, Flour, Michelin, Milliken, Adidas, Electrolux and others.

3. The region is an academic center home to Clemson, Furman and other universities. The Upstate is also home to a large amount of private sector and university-based research including research and development facilities for Michelin, Fuji and General Electric and research centers to support the automotive, life sciences, plastics and photonics industries. Clemson University, BMW, IBM, Microsoft and Michelin have combined their resources to create the International Center for Automotive Research, a research park that specializes in the development of automotive technology.

4. Significant international presence: 250+ international companies are active in S. C. resulting in the highest international per

capita investment in the U.S. After BMW's initial investment in 1994, foreign companies, including others from Germany have made substantial investments in the Upstate (BMW recently announced a $1 billion investment in the Upstate to expand vehicle production 50% by 2016).

5. The South Carolina Inland Port opened in October 2013, extending the Port of Charleston’s reach 212 miles inland to Greer,

S.C., and provides shippers with access to more than 95 million consumers within a one-day drive. The Port boosts efficiency for international freight movements between the Port of Charleston and companies located across the Southeast, and the project is expected to create additional economic investment in the South Carolina Upstate.

6. Greenville-Mauldin-Easley, S.C - #2 Best Cities for Jobs – Forbes 2013.

Palmetto Bancshares, Inc. PLMT is a S.C. bank holding company organized in 1982 and headquartered in Greenville, S.C. PLMT serves as a holding company for The Palmetto Bank (the ‘Bank’), an FDIC insured state chartered bank which began operations in 1906. Via 3 businesses - Retail, Commercial and Wealth Management – the bank provides financial services to consumers and businesses with deposit and cash management products, loans (including consumer, Small Business Administration (“SBA”), commercial, corporate, mortgage, credit




May 8, 2014




card and automobile), lines of credit, trust, brokerage, private banking, financial planning and insurance throughout its primary market area of nine counties located in the Upstate - which includes the counties of Abbeville, Anderson, Cherokee, Greenville, Greenwood, Laurens, Oconee, Pickens and Spartanburg. Competition & Market Share

The market is heavily banked with new entrants attempting to penetrate the market. Many national and regional banks compete in the Upstate including large legacy competitors such as Bank of America, SunTrust, Regions, and BB&T and large banks recently acquiring into the market including Toronto Dominion and Wells Fargo. De novo entrants include Fifth Third and UCBI. Larger local competitors include South State Bank (SCBT) and First Citizens, and non bank players headquartered in the Upstate include World Acceptance (WRLD, $77.40, HOLD), Regional Management (RM, $14.47, Buy), and Advance America. As a community bank with a well defined local geographic locus, the Bank’s Board, management and community advisors are largely drawn from the local communities enabling the Bank to respond to local banking needs, thereby diminishing the competitive impact of national banking institutions. The Bank’s overall strategy is outmuscle smaller community banks and out service large banks by

operating with local decision making and knowledge while also offering many of the products and services available from larger competitors (in part by using award winning technology driven services that are competitive with the big banks but not offered by smaller community banks). PLMT originates substantially all of its loans and deposits in its primary market area. The Bank’s asset generation focus is on C&I and high quality, owner occupied CRE loans. Sources: Company financials and Fintrust Brokerage Services estimates




May 8, 2014




Market Share

PLMT operates 25 branches and 27 ATMs in the Upstate and offers online and mobile banking. The bank offers residential mortgage applications online and offers ‘indirect’ auto loans through a local network of dealerships throughout its footprint and loans to small businesses through the U.S. SBA program. Competition is robust, both from regional, national and community banks and other financial institutions including securities firms. Money market, stock and fixed income mutual funds have attracted an increasing share of household savings. PLMT competes with institutions that have much higher capitalizations and can therefore better serve borrowing needs of larger companies; hence PLMT focuses on individuals and SME and competes on the basis of local relationships, service and other factors. With strong local roots, a community bank such as PLMT is potentially able to make better credit decisions on potential local borrowers who may have opaque credit characteristics. As the Upstate has grown, however, management indicated they are beginning to see more CRE projects where the lead investors and financing sources are from outside of the local Upstate market. The Upstate deposit market is highly fragmented. According to the FDIC, as of 6/30/13, in its 9-region footprint, PLMT competed with 42 other institutions with 403 branches representing $19.9 billion in deposits and ranked 7th for Upstate deposit share.

Upstate Bank Deposit Market Share

Well Fargo 15.59% Branch Banking & Trust Co. 11.77% Bank of America 11.20%

SunTrust Bank 7.38% T.D. Bank 7.20% 1st Citizens Bank & Trust 6.93% The Palmetto Bank 4.81%

Others 35.12%

Source: FDIC, 2Q 2013

Furthermore, according to the company’s 10K, at 6/30/13, there were 28 S.C. – based banking institutions in the Upstate and PLMT ranked 2nd in deposit market share with 11.8%. Also, the bank ranked 10th overall in S.C. deposit market share of all institutions banking in the state. In a consolidating environment, spurred by a number of factors including the need to respond to growing regulatory burdens, given its relatively large presence, the bank would likely be an eventual participant on either side of the equation.

10th Largest deposit franchise in S.C.

4th largest community bank in S.C.

Only 24 publicly traded community banks in the Southeast have $5 billion or more in assets. Loan Portfolio

At 1Q 2014, the bank had a $755.9 million gross loan portfolio equal to 70.7% of total assets of $1.09 billion (down from 84.9% in 2008). The loan-to-deposit ratio stood at 80.0% at year end down from 83.3% at year-end 2009. The loan portfolio expanded 3.3% in 1Q 2014 on a y-o-y basis driven by an 11.1% increase in owner-occupied CRE loans to $164.7 million and a 46.1% increase in

commercial and industrial (C&I) loans to $72.4 million. Due to first quarter economic softness, sequentially, the gross loan portfolio dipped 1.5% 2009 – 2013 Loan Portfolio Contraction Driven By Falling CRE Assets Under prior management, quite frankly, the Bank made a significant amount of what turned out to be poor CRE loans prior to the recession. In 2009, 11.7% of CRE loans were on non accrual status, versus 1.95% in 2013. The CRE portfolio dipped 2.5% in 1Q 2014, after declining 28.6% over the 2009 – 2012 timeframe. At 03/30/14, real estate represented 82.2% of the total portfolio, down from 84.9% in 2012 and 86.4% in 2009. At $445.1 million, commercial real estate still dominates the entire loan portfolio at 58.9%, but down significantly from $695.2 million in 2009, or 66.8% of the total 2009 loan portfolio. Put differently, the 2009 – 2013 $240 million decline in CRE loans represented 87.2% of the Bank’s entire loan portfolio erosion since 2009. In particular, the Bank’s construction and land development (C&D) loans soured in 2009, with 17.9% of non accrual C&D loans. Since then the bank has pared back on C&D and non owner occupied CRE. In 1Q 2014, owner-occupied CRE represented 36.1% of CRE loans, up from 17.6% in 2009. The Bank, according to management, continues to have a ‘low appetite’ for C&D loans while seeking to continue the expansion of owner-occupied CRE.




May 8, 2014




Sources: Company financials and Fintrust Brokerage Services estimates

Pre Recession Until 2009, the Company operated under the same executive management team for more than 30 years. During that time, the Bank grew to become the fifth largest banking institution headquartered in South Carolina and one of the most profitable banking franchises in the Carolinas. From 1999 to 2008, the Company averaged a return on average assets and return on average equity of 1.25% and 15.2%, respectively. Over the same time period, noninterest income as a percentage of average assets averaged 1.60%.

1. In 2007, PLMT was expanding rapidly, generating high profitability / high asset quality metrics, and paying a dividend. In particular loans expanded 10.8% over 2006; return on average assets was 1.35%, net charge offs / average gross loans was 0.21% and the Bank’s dividend payout ratio was 30.8%.

2. By 2009, loans dropped 10.5% over 2008; return on average assets was (2.80) %, net charge offs / average gross loans was

5.36% and the Bank’s dividend was cancelled. In response new management - CEO Samuel L. Ervin, COO / Chief Risk Officer Lee S. Dixon and CFO Roy D. Jones – devised a multi-pronged strategy to resuscitate the Bank’s balance sheet and position PLMT for future growth.

As the impact of the recession worsened in 2009, the new management team quickly developed and implemented a comprehensive Strategic Project Plan in June 2009 to address all areas of the Bank with a primary emphasis on raising capital and aggressively resolving the Company’s asset quality issues. Increased regulatory scrutiny, given declining asset quality, diminished financial results and capital position, resulted in the Bank agreeing to the issuance of a Consent Order with its primary bank regulatory agencies in June 2010, the remaining portion of which is expected to be lifted this year. The initial and most immediate requirement of the Order required PLMT to raise substantial equity, which it did in the form of a $103.9 million Private placement completed on October 7, 2010. With the capital infusion, the Bank’s Tier 1 ratio expanded to 13.16% in 2010, from 6.99% in 2009. In response to challenges presented by the recession, the Bank began executing a Strategic Project Plan to address issues related to credit quality, liquidity, earnings and

capital.

Reduce problem assets which caused overall annual losses from 2009 – 2012

Raise $114 mm in equity in 2010

Reposition balance sheet from an asset – liability (‘ALM’) perspective

Focus on expenses; reduce efficiency ratio

$756 Million Gross Loan Portfolio - 1Q 2014

37%

22%

23%

10%

7% 1%Non Ow ner-Occupied

CRE

Ow ner-Occupied CRE

Single-family Homes

Commerical/Industrial

Consumer

Other

$1.04 Billion Gross Loan Portfolio - 2009

55%

12%

20%

6%7% 0%

Non Ow ner-

Occupied CRE

Ow ner-Occupied

CRE

Single-family Homes

Commerical/Industrial

Consumer

Other




May 8, 2014




Introduce new products and specialized lending niches including SBA, Corporate banking, C&I and Private banking in 2012

Technology enhancements by 2012

Return to profitability in 2013 (achieved in 3Q 2012)

Exit Consent Order in 2013 (achieved)

Net Charge off Ratio Falls to Lowest Rate in Years

2.64% 2.75%

0.64%0.13%0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2011 2012 2013 1Q14

Allow for Loan Losses / Gross Loans Net Charge offs / Avg Total Loans

Non Accrual Loans / Gross Loans


The Bank’s asset quality has improved greatly, but there is more work to be done. Non Accrual to gross loans declined in 1Q 2014 to 1.86%, from 1.97% in 2013, but is still above the peer group’s 1.78% ratio. The difference is attributable to (1) non-performing C&I loans that management has indicated is a one-off loan and (2) land development –related CRE loans that will take time to resolve.


Juggling Growth and Asset Restructuring

The bank has achieved many of its goals including the termination of a Consent Order between the bank, the FDIC and the S.C. State Board of Financial Institutions, on 1/31/13. As a result the Bank is positioned to demonstrate more consistent and predictable profitability. As the following chart implies, interest earnings assets dropped sharply (down 23% since 2009) along with interest income, but NII remained stable as problem loans were successfully identified and weeded out, while simultaneously retaining and




May 8, 2014




originating performing loans. From 2009-13, non accrual loans and non performing assets declined $184 million, total loans declined

$381 million, Net Interest Income was flat, and Net Interest Margin – NIM – climbed to a level comparable to the industry.

PLMT Successfully Restrutures Loan Portfolio

3.85%

3.18% 3.03%3.42%

3.58%

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2009 2010 2011 2012 2013

$ 0

00s

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Int Income NII NIM


To strengthen the balance sheet, management aggressively pruned the non owner occupied and C&D CRE loan portfolios, and turned its focus to expanding owner occupied assets.


Gross Loan Composition 2013 vs. 2009 - $000sSource: Company financials

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1-4 Family Multifamily Owner-

Occupied

CRE

Non

Owner-

Occupied

CRE

C&D Land C&D

Other

C&I Consumer Other

2009

2013




May 8, 2014




Loan Growth Looking at the balance sheet from a risk-based capital perspective, the bank has significant ‘headroom’ to grow its loan portfolio. For example, in 2014 and 2015, we estimate that the Bank’s loan portfolio will advance 2.5% and 5.6%, respectively. These metrics suggest that the bank can, for each dollar of retained earnings profit, support over $20 in new assets. Put differently assuming ~ 5% loan growth, no dividend payouts and a shareholders / capital ratio of ~ 12%, the bank would very roughly require just a 0.65% ROA to internally fund loan growth. In 2013, the Bank generated approx $275 million in loan originations, up from $243 million and $222 million in 2012 and 2011, respectively. After experiencing a 6.2% drop in its total loan portfolio in 2012, the Bank’s total loan portfolio expanded 3.9% in 2013, its first gain in 5 years. While the increase is less than the 6.5% total loan growth generated by small commercial banks in the U.S., we estimate that the decline in the CRE portfolio has bottomed and that spurred by an estimated 12.5% y-o-y growth rate in owner occupied loans in both 2014 and 2015, that total CRE loans will expand in 2014 by 1.9% and by 6.6% in 2015. We note that U.S. small commercial bank CRE lending advanced 7.0% in 2013, according to recent Fed data. We also expect that the company’s consumer loan portfolio will expand 5.5% in 2014 and 3.0% in 2015 after a flat year in 2013. The Bank is a significant player in the indirect auto lending marketplace, and has approx. $40 million in auto loans outstanding. The Bank added to its coterie of auto dealerships in 2013. After a modest 1.9% decline in 2013, Bank management expects its auto portfolio to grow in 2014 (it advanced 3.6% in 1Q 2014). Fed data shows that small commercial bank consumer lending expanded 3.5% in 2013. According to the Federal Reserve, C&I loans outstanding to small commercial banks grew 9.7% over the last 12 months. The Bank expanded its C&I loan department last year and was able to generate a 42% increase in C&I loans in 2013. In 2014, we estimate a 5% y-o-y increase in C&I loans, which could prove to be conservative (in 2015, we expect such loans to advance 10%). Last year the bank expanded its single family residential portfolio by 5.9% while at the same time engineering a lower single family residential loan non-accrual rate which dropped to 2.3% from 3.3% in 2012. U.S. Department of Housing data show March 2014 permits for single family residential construction declined 1.1% y-o-y to 592k units nationwide while single family residential housing units started increased 1.9% y-o-y to 635k units. In 1Q 2014, single family residential loans dropped ~ 1% sequentially. We are forecasting 2.1% and 3.0% rises in 2014 and 2015, respectively.


We estimate that the bank’s gross loan portfolio will increase 2.5% in 2014 and 5.9% in 2015, to $786.7 million, and $832.9 million, respectively.




May 8, 2014




PLMT - Profitable Growth Resumes in 2013

3.18%3.03%

3.42%3.58%

3.85% 3.80%

4.06%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

2009 2010 2011 2012 2013 2014E 2015E

$ 0

00s

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Total Assets Gross Loans Net Interest Margin - NIM


Funding Advantage – Two Sides of the Same Coin

The Bank’s interest funding expenses are relatively low and the bank uses a relatively conservative funding strategy: PLMT doesn’t have any subordinated debt, it employs relatively little expensive ‘volatile’ liabilities such as federal funds and PLMT has a premier deposit gathering franchise. Its 2013 deposit expense / total average deposits and deposit expense / average interest bearing deposits ratios were 0.23% and 0.29%, respectively, metrics that easily best its peer group which posted a deposit expense /total deposit ratio of 0.42% in 2013. Driven by significant maturities of time deposits, in 1Q 2014, these metrics plummeted to 0.06% and 0.07%,

respectively (cross town competitor Southern First Bancshares (SFST, $13.60, NR), which relies more heavily on time deposits registered a 0.47% deposit expense / interest bearing deposits in 1Q 2014). We estimate that lower funding costs reflect three factors: (1) the Bank is able to rely more heavily on core deposits such as demand deposits and doesn’t for example use higher volatility / higher cost brokered deposits or CDs (2) the Bank’s long history likely is being rewarded with a perception of lower risk by borrowers and (3) the Bank has an inherent deposit franchise advantage: Many of the Bank’s branches are located in rural markets with little competition for deposits. In addition, as the

Bank points out, its 107 year old franchise engenders customer loyalty, enhancing the Bank’s deposit rate setting ability (as interest rates rise, the Bank estimates that it can ‘hold the line’ on deposit rates while enjoying higher loan yields). In 1Q 2014, non interest bearing deposits expanded 7.5% q-o-q, to $191.5 million, from $178.1 million, while interest bearing deposits grew to $736.5 million, or 1% sequentially, enabling the Bank to reduce its FHLB advances without endangering liquidity. While the branch network delivers low cost deposits, many of these same branches enjoy total deposits that are low by industry standards, lessening the Bank’s deposits per branch metric and heightening the lender’s overall efficiency ratio which stands at ~ 76% (as well, the Bank’s Non interest expense / average assets ratio was 3.69% last year vs. 3.17% for peers and 2.60% for SFST, although it’s not unusual for a bank with large amounts of transactions deposits – such as PLMT – to exhibit greater relative overhead costs). Throughout its markets, the Bank has a number of deposit growth strategies, including debit card awards for checking accounts. We estimate that the bank will continue to shed expensive time deposits and ‘grow’ non interest and non time deposits this year and next.




May 8, 2014




Non Interest Bearing Deposit Base Peaks Driving Down

Deposit Expense

791,906 770,644 757,662729,285 736,559

180,290 188,197 187,150 178,075 191,474

0.44%

0.25%

0.21%

0.07%

0.26%

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014

$ 0

00s

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

Interest Bearing Non Interesting Bearing Interest Expense / Total Deposits


Profitability Expansion

As we detail herein, we estimate that PLMT is on the cusp of generating higher ROAA. The Bank’s non interest expense / average total assets (ata) ratio is falling swiftly. In addition, we expect that by moving to a new wealth management P&L model that the Bank’s non-interest income / ata ratio could increase going forward; hence both revenues and expense components of ROAA are estimated to both evolve in the ‘right’ direction. In 2013 the Bank drove 0.55% ROAA and 5.69% ROAE normalized profit margins. Breaking ROAA into its constituent components reveals that the Bank did an excellent job managing revenues relative to average assets in 2013, but was less effective in 1Q 2014 in light of falling loan yields and a seasonal first quarter decline in deposit fees. On the expense side, the Bank achieved meaningful, steady reduction in both interest and non interest expense in 2013 and 1Q 2014, and despite steady increases in relative taxes, expanded ROAA in both periods:

PLMT ROAA Analysis

2012 2013 Q1 2014

(1) Revenues / average total assets (ata) 5.27% 5.34% 4.91% Interest Income / ata 3.86% 3.88% 3.68% Non Interest Income / ata 2.30% 1.35% 1.23%

(2) Total Op Expense / ata 6.09% 4.39% 3.74% Interest exp / ata 0.44% 0.21% 0.05%

PLL / ata 1.11% 0.32% 0.0% Non Interest Exp / ata 4.54% 3.86% 3.69%

(3) Taxes / ata -0.23% 0.30% 0.43%

ROAA (1-2-3) -0.82% 0.55% 0.74% Net Interest Margin – NIM 3.58% 3.85% 3.94%

Sources: Company financials and Fintrust Brokerage estimates




May 8, 2014




Comparison to Some Peer Metrics

1. The Bank’s Revenue / ata ratios are marginally above peer averages, a combination of below average interest yield on interest

earning assets and above average non interest income / ata.

2. With respect to interest income, the Bank’s interest earning assets / ata ratio, at 95.7%, is 130 basis points above peers. However, the Bank’s earns a lower yield on investment securities than its peers, so that net, net the Bank’s average interest yield - at 3.68% - is below average.

3. With respect to loan yield, at 4.77% in 1Q 2014, it is comparable with peers even though the Bank has a slightly higher

proportion of higher risk CRE loans, suggesting that the bank is still assuming too much risk for its return on CRE assets.

4. With regard to non interest income / ata, the bank’s ratio was 1.23% in 1Q 2014, well above peers. We estimate that the Bank’s service charges on deposit accounts at 0.68% in 1Q 2014, are higher than peers, accounting for a significant amount of the difference in non interest income / ata ratios.

5. In 1Q 1024, PLMT did an impressive job in lowering its operating expense relative to assets, which came in at 3.74% in 1Q

2014, down from 4.39% in 2013. Consequently, even though its Revenue / ata ratio dropped, the Bank’s ROAA margin expanded to 0.74%. Driven by lower time deposits, the Bank’s Net Interest Margin – NIM – expanded to 3.94% in 1Q 2014, up from 3.86% in 4Q 2013, and 3.85% last year. Insofar as the Bank has been able to generate extremely low interest expense, it has offset its below-peer interest income / ata average to achieve superior relative NIMs.

6. Finally, the Bank’s below average total assets / equity ratio indicates that PLMT is able to generate higher returns with lower

relative financial risk. Liquidity, Reserves and Capital Ratios

The Bank is able to acquire funds at a reasonable cost and has strong liquidity; its core deposit base is stable and its 1Q 2014 ratio of loans-to-deposits was modest at 80.0%. In 1Q 2014, the bank attracted significant additional transactions deposits, both interest and non interest bearing, and its deposit base increased by $20.6 million or 2.3%. At the same time, its net proceeds from investment securities and gross loans were $6.2 million and $9.8 million, respectively, for an additional $16 million in liquidity, giving the bank approx. $36.3 million in total new liquidity. After reducing its FHLB advances balance by $15.0 million, Bank increased net liquidity by approx. $21.3 million in the quarter. We expect the Bank to add ~ $31 million in gross loans during the remaining quarters of 2014, funding for which will be easily met by liquidity generated in the 1st quarter, projected increase in core deposits during the rest of this year, and cash on hand. Our expectations for $46 million in loan growth next year, is expected to be funded by deposit growth, and internally generated cash from operations. If need be, the Bank is positioned to fund further loan growth through additional channels such as retail repurchase agreements, added FHLB advances, higher amounts of jumbo CDs, funds and CP, not necessarily in that order. We estimate that the Bank’s volatile liabilities-to-asset ratio is low at ~ 7%. Furthermore, the Bank’s Equity Multiplier – EM – that is, total average assets to average equity is conservative at 8.71x in 1Q 2014, very roughly implying that the bank could absorb 11.43% of asset default before becoming insolvent and/or assume more debt to fund loan growth. Its peer group’s EM was 9.36x at year-end 2013, while SFST was at 13.1x. Note: The Bank’s EM x ROAA = ROAE of 6.48% The balance sheet is well reserved with the allowance for loan losses – ALL – running at 2.15% of Q1 2014 gross loans, or $16.3 million, and equal to 75.4% of non performing assets and 115% of non accrual loans. In fact on a sequential basis the ALL ratio remained constant at 2.15% even though non accrual to gross loans fell to 1.86% from 1.97%. In the quarter, the Bank took no provisions, and net charge offs were just $968k annualized, equating to 0.13% of average total loans, down from 0.39% in 1Q 2013 and well below last year’s 0.64% level. Arguably, in light of the fall off in NCOs and the ratio of the ALL to NCOs the bank over provisioned for loan losses in the recent past and that therefore the ALL is more than is likely to be needed to cover future near term charge offs suggesting that upcoming provisions will be modest, benefitting future profit measures. All key capital ratios such as Tier 1, total capital and Tier 1 leverage are (1) above levels to be considered ‘well capitalized under prompt corrective action provisions’ (2) at levels that exceed peer metrics and (3) higher than they were on a sequential quarterly basis to 4Q 2013. In particular we estimate that Tier 1, Total Capital and Tier 1 Capital Leverage ratios will equate to 15.93%, 17.04%




May 8, 2014




and 11.89% by year-end 2014. Under Basel III, the Bank’s Common Equity Tier 1 capital will be, we estimate, well above the required percentages. We estimate that Basel III CET1 and Total Capital will equate to 12.60% and 13.90% of Basel III RWA.

Refined Fee Income Strategy

The Bank is executing on its plan to generate more fee income, from, for example, its Wealth Management division where the bank increased it Private Banking, Trust and broke dealer capabilities. In 2013, the Bank added a seasoned Private Banker, and last year the Bank transferred its Trust and Brokerage operations and accounts to third parties that focus solely on these markets. The new Fee business model means that the Bank can continue to share in commissions for the execution of Fee services and through customer referrals, generate Fee growth. In addition the model enables the Bank to focus on its core lending and deposit gathering capabilities and the model is forecast to produce increased Fee activity profit margins. Improved Asset and Credit Quality

Overall asset quality improved dramatically last year and into the 1st quarter of 2014, as well as in each year since 2010. Since 2010, CRE quality has improved significantly. In 2010, CRE accounted for 86.7% of non accruing loans (NAL), but just 66.7% of total gross loans. Last year CRE’s representation of both total NAL and gross loans has equalized at 59% indicating that the credit risk exposure has become much more acceptable. In 2013, Net Charge Offs / total average loans fell to 0.64% from 2.75% in 2012, before declining further to 0.13% in 1Q 2014. In 2013, non accrual / gross loans leveled off at 1.97% from 2.15% in 2012, before declining to 1.83% in 1Q 2014, an improvement driven largely by lower single family loan non accruals. Both metrics are, however, still slightly elevated when compared to the Bank’s peer group. The difference is largely due to a single C&I loan the bank estimates is an isolated case and remaining high levels of non accrual CRE loans which expanded to 1.97% of CRE loans in 1Q 2014, from 1.95% in 4Q 2013. We estimate that it could take at least several more quarters for the CRE non accrual rate to return to lower levels. The Bank is well reserved. At year-end 2013, allowance for loan losses – ALL – was 3.4x last year’s NCO, and 72.8% of non performing assets, suggesting that the Bank could post negative provisions for loan losses and still be well reserved. In fact in Q1 2014 the bank took no provisions, and ended the quarter with an ALL / average gross loans ratio of 2.15%, unchanged from 4Q 2013 as non performing loans and average loans both declined marginally on a q-o-q basis. The provision for loan losses was $3.5 million last year and $13.1 million the year before. Financial Analysis and Projections 2010 – 2013: During this period, the Bank generated healthy revenues driven by strong asset yield (interest income / interest earning

assets) which peaked at 4.19% in 2010. However loan quality was substandard and the Bank ultimately drove significant losses until 2013. Based on several peer group metrics supplied by the Uniformed Bank Performance Report, the Bank faired less well than its peers in the aftermath of the financial crisis. The Bank’s assets, gross loans, and net interest income fell 24%, 26% and 6.4%, respectively over the 2010-13 period. While interest income dropped 34%, interest expense plummeted 89%, enabling the Bank to generate substantial net interest income during the period. However, elevated PLL, foreclosed real estate write downs, and losses on loans held for sale drove significant net losses until last year, when - due to improving credit quality (lower PLL, loan losses and RE write downs) - the Bank posted it first positive net income since 2008. In 2010, the worst year of the entire period, PLMT generated $60.2 million in net losses, a (4.30) % ROAA and non accrual loans were 10.63% of total loans, highlighted by CRE nonaccruals equal to 13.8% of such loans. By year-end 2013, total non accrual loans were 1.97% of total loans, and CRE nonaccruals were 2.0%. At year-end, the Bank maintained a higher concentration of CRE loans than peers. Specifically, non owner occupied CRE was equal to 240% of total Bank capital versus 191% for peers. The Bank is also working off a large Construction and Development portfolio. At year-end, ‘other construction and land loans’ were 53% of capital versus 30% for peers. Compared to peers, the Bank’s C&I loan portfolio is modest at 56% of capital versus 97% for peers; we note that the Bank is focused on both increasing C&I loans and owner occupied real estate. Due to the private placement discussed earlier, in 2010, the Bank’s asset / equity ratio dropped to 11.9x, from 19.1x in 2009 and Tier 1 + Tier 2 capital jumped to 14.43% from 8.25% in 2009. In 2013, the asset / equity ratio fell further, to 8.8x caused by the recognition of a $22.4 million net deferred tax asset. This resulted in an $18.4 million tax benefit in 2013. Excluding the benefit, in 2013 PLMT generated a normalized 0.55% ROAA and 5.69% ROAE. The recognition of the DTA helped drive up PLMT book value / share to $9.78, from $7.78 at the end of 2012. Throughout the period, the Bank maintained its strong deposit franchise. In each year since 2010, according to the Uniform Bank Performance Report (UBPR), The Bank’s demand deposits / average assets ratio was ~2x its peers.




May 8, 2014




However, last year (and into the 1st quarter of 2014), overall profitability lagged peers by a not unsubstantial margin. According to the UBPR, the Bank generated slightly superior total revenues (interest income and non interest income) / ata. But non interest expense / ata were higher by 74 basis points, causing the Bank to generate below average ROAA in 2013. Both personnel and occupancy expense as a percent of ata were higher than the peer group. As we indicated earlier, there is a structural difference between PLMT and its peers with respect to deposits and assets per average PLMT branch, both of which are below the peer group. Finally we note that in 2013, the Bank’s loan portfolio expanded 3.9% versus 8.6% for its peers. 1Q 2014: Although there were signs of economic weaknesses, the Bank had a solid quarter. Total interest income and net interest

income declined both y-o-y and sequentially as the bank experienced soft loan demand and falling loan yields. Gross loans declined 1.5% sequentially to $755.8 million, while loan yield dropped to 4.77%, from 4.83% in 4Q 2013. Although funding costs also dropped dramatically to 0.07%, reflecting a strategic reduction in higher rate time deposits, and produced a sequential increase in Net Interest Margin to 3.94% from 3.86%, the NIM expansion was not enough to offset the drop in loan balances and hence absolute Net Interest Income fell to $10.1 million from $10.4 million in 4Q 2013. Obviously, the Bank has indicated to us that the dramatic declines in funding costs are not likely to continue while loan pricing remains increasingly competitive such that we estimate that the Net Interest Margin will drop marginally over the next two quarters before rebounding in 4Q 2014. Credit quality increased marginally as we discussed earlier. NCOs dropped dramatically as the quality of the non accruing loan portfolio continues to improve; however non accrual loans still remains somewhat elevated. Non accrual loans and non performing assets remained sticky and roughly in line with 4Q 2013 levels. Non accrual loans to gross loans was 1.86%, up slightly from 1.78% in 4Q 2013 driven by a slight uptick in non accruing CRE loans / CRE loans. However, due to a overall improvement in loan quality, in the quarter, the Bank charged off 0.13% of average loans, down from 0.37% in 4Q 2013. Non interest income decreased sequentially to $3.36 million from $3.57 million due largely to a seasonal drop in service charges on deposit accounts, and a new tiered pricing structure for per-item NSF charges instituted on January 1st. Non interest expense, decreased to $10.1 million from $10.2 million in 4Q 2014 largely due to lower salary, marketing and foreclosed real estate write downs, offset by significant sequential increases in occupancy expense and professional fees. The increase in professional fees reflects expenses associated with both non interest income revenue enhancement and non interest income expense reduction that are expected to positively impact the Bank in 2H 2014. Due to a much lower tax rate in 1Q 2013, for 1Q 2014 the Bank reported a drop in EPS to $0.16 versus $0.17 last year, even though pretax income increased 7.3% y-o-y. On a sequential basis, EPS declined from $0.21, in part due to a lower tax rate in 4Q 2013. While Net Interest Income fell slightly, the Bank made good progress in transforming its cost structure, resulting in sequential growth in pretax earnings. Specifically, PLL fell from $350k in 4Q 2013, to $0 in 1Q 2014, and as well, the bank engineered cuts in salary expense and other non interest expenses due to (1) internal streamlining and (2) the transition to a commission based wealth management business. 2014E and 2015E: We estimate that the Bank will generate a marginal decline in net interest income in the current quarter, compared

to 1Q 2014, before re-accelerating in 3Q 2014. Our estimates are based on the presumption that interest rates will increase as 4q2014/2015 unfolds. Consequently, we expect yields on loans and investment securities to turn marginally higher in 3Q 2014 and thereafter. Specifically we expect the Bank to generate $9.9 million in NII in 3Q 2014, after registering a dip to $9.6 million this quarter predicated on loan and investment securities yields increasing to 4.66% and 1.95%, respectively, in 3Q 2014. For the year we anticipate that loan yield will be 4.62% versus 5.09% last year. We foresee investment securities yield of 1.92% versus 1.68% last year. In addition, due to expected modest NCOs, we forecast that the Bank will not need to add to loan loss reserves for the rest of this year. With respect to non interest income and expense, we expect that non interest growth will be driven by Bank initiatives indicated earlier and that therefore non interest income / ata will gradually increase from 1.23% in 1Q 2014 to 1.42% in 4Q 2014. The combination of a swing to interest rate expansion and accelerating non interest income growth could, we estimate, enable the bank to generate quarterly EPS throughout 2014 as follows: $0.16, $0.15, $0.17, and $0.20, for a total 2014 EPS of $0.67. With regard to credit quality, we are somewhat cautious, since we estimate that it will take time for the Bank to more fully shed its problem CRE assets. However, we are estimating that non accrual / gross loans will continue to fall. We expect the ratio to fall to 1.65% by 4Q 2014, and to 1.50% in 2015. We expect the ALL / gross loans ratio to drift down to 1.96% by year end, and 1.72% at the end of next year, from 2.15% currently. In 2014, we expect the Bank to generate $8.59 million in net income (which assumes a 35% tax rate), and end the year with shareholder’s equity of $134.4 million, or $10.59 in book value / share. Our model assumes that gross loans expand 2.5% in 2014. For the year, we envision 0.77% and 6.59% ROAA and ROAE, respectively. We note that the Bank’s asset / shareholders ratio is just 8.71x, inhibiting higher ROAE. Next year, we estimate that the Bank’s loan portfolio will grow 5.9%, highlighted by 12.5% and 10% respective growth rates in CRE and C&I loans. Through yield expansion, we forecast that NII will advance 10.3% to $43.8 million. Specifically, we expect loan and investment securities yield rates to reach 4.96% and 2.08%, respectively next year, from 4.62% and 1.92% this year. In 2015, we




May 8, 2014




estimate that deposit expense / average interest bearing deposits will climb to 0.11% from 0.07% this year. Furthermore, we estimate that PLL will be modest - $250k – as the ALL / gross loans ration drops to 1.72% in 2015. Hence we forecast that PLMT will generate $43.6 million in NII after PLL in 2015, a 9.7% y-o-y growth rate. We estimate that non interest income will climb 7.7% in 2015 to $15.2 million, driven by 15% y-o-y increase in Fee income, a 12% y-o-y increase in Debit Card and ATM fees and a rebound in mortgage banking growth. At the same time, we expect non interest expense to fall 2.5% y-o-y to $39.6 million, driven by declines in salary expense and foreclosed RE write-down expenses. In essence we estimate that non interest income / non interest expense will climb to 38% in 2015, from 35% currently. Net, net we estimate a significant jump in net income next year to $12.4 million, or $0.97 per share, up 45% y-o-y, and that PLMT will end the year with shareholder’s equity of $147.7 million, or $11.57 in book value / share. For the year, we envision 1.10% and 8.86% ROAA and ROAE, respectively.

We Estimate that Higher Loan Yield / Flat Funding Costs to Drive 2015E

Jump In Net Interest Spread to 4.02%

1.81%

1.33%0.94%

0.58%0.28%

0.08% 0.14%

4.02%

5.33% 5.41% 5.39% 5.29% 5.12%

4.62%

2.95% 2.86%3.24%

3.46%3.78% 3.78%

4.96%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2009 2010 2011 2012 2013 2014E 2015E

Asset Yield (Int Income / Int Earning Assets) Funding Cost (Int Expense / Int Bearing Liabilities)

Net Interest Spread (Asset Yld - Funding Cost) Yield on Loans





May 8, 2014




ROAA Drivers: Net Interest Income to Drive ~ 65% of ROAA Improvement in 2015E

With Non Interest Inc/Expense Improvement to Drive ~ 35%

5.66%5.18% 5.23%

6.16%5.24% 4.94% 5.29%

10.02%9.57%

7.25%

4.39%3.75% 3.61%

-4.35% -4.40%

-2.03%

0.07%0.55% 0.77% 1.09%

6.09%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2009 2010 2011 2012 2013 2014E 2015E

Revenues /Average Total Assets (ata) Less: Total Op Expenses / ata

Less: Applicable Income Taxes / ata = ROA


2014/15: Continued Improvement in in Profits and Asset Quality

Expected

0.07%0.77% 1.09%

-1.86%

5.69%

6.59%

8.80%

3.58%4.06%

2.15% 1.97% 1.70% 1.50%

2.75%

0.14% 0.17%0.55%

3.85% 3.80%

0.64%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2012 2013 2014E 2015E

ROAA ROAE

Net Interest Margin - NIM Non Accrual Loans / Gross Loans

Net Charge offs / Avg Total Loans




May 8, 2014




Improved Credit Quality Drives 2014 EPS Growth / Loan Expansion Drives

2015E EPS Growth

($1.86)

($0.15)

$0.48$0.67

$0.97

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

2011 2012 2013 2014E 2015E

$ 0

00s

($2.50)

($2.00)

($1.50)

($1.00)

($0.50)

$0.00

$0.50

$1.00

$1.50

Net Interest Income - NII NII - PLL Dil. EPS (normalized)





May 8, 2014








May 8, 2014








May 8, 2014




Comparative Analysis: Based on Full Year 2013 Data

Against a group of 6 S.C. based commercial banks with assets ranging between $500 million and $1.0 billion, the Bank’s performance is best described as ‘in line’, but with potential for superior performance. The peer group’s key performance advantage is in efficiency. The group averaged a 69% efficiency ratio versus 77% for PLMT. Furthermore, the peer group’s non interest expense / assets ratio was significantly lower than PLMT (3.17% versus 3.88%). Assets per employee – at $4.2 million (peer) and $3.6 million (PLMT) further bears this out. From the standpoint of asset quality, while the peer group’s total net charge offs / loans ratio was 0.47% compared to 0.64% for PLMT, the difference is attributable to a much higher charge off rate in the Bank’s Commercial and Industrial loans which we see as a temporary phenomenon. The Bank’s strength is manifest in its superior Net Interest Margin – NIM. The difference is two fold. First the Bank generates a slightly higher asset yield ratio; 4.31% versus 4.15%. Second, the Bank has a tremendous advantage in deposit funding costs. Interest on deposits / period ending deposits was just 0.25% for PLMT but 0.42% for the peer group. Hence, the bank’s superior NIM of 3.94% versus 3.49%. To the extent, the Bank can rationalize its branches and employee count with respect to its asset size in line with peers, PLMT would improve its non interest expense / asset ratio, and generate superior ROA and ROE. The Bank’s higher asset utilization ratios, for example its loan-to-deposit ratio, at 83% is higher than last year (71%) and above its peers, indicate that the bank is positioned to go after loan market share, with the goal of reaching a loan-to-deposit ratio of 90%.




May 8, 2014




Corporate Governance:

3 of the 7 Board members are employees of the two private equity firms – CapGen Financial Partners and Patriot Financial Partners - that together own a significant majority of PLMT shares.

CapGen Financial Partners and Patriot Financial Partners own approximately 44.8% and 19.2%, respectively, of outstanding shares of common stock as of February 21, 2014. As a result, CapGen and Patriot are able, individually and collectively, to exercise significant influence on the bank’s business, including influence over election of the Board of Directors and the authorization of other corporate actions requiring shareholder approval. Shareholders should be aware that CapGen and Patriot may have interests that are different from, or in addition to, the interests of other shareholders.

Given restrictions imposed by the Supervisory Authorities, the Bank is currently prohibited from paying dividends to the Company without the prior consent of the Supervisory Authorities.




May 8, 2014




Financial Strength: PLMT is financially strong. The

Bank does not employ volatile funding sources and has strong liquidity. Its funding consists of non interesting bearing deposits (20%), interest bearing deposits (76%), retail repurchase agreements (2%) and FHLB advances (2%). Its asset / equity ratio, at just 8.71x, is well below peers and is indicative of a relatively low levered financial institution. In fact its ROAE ratio would be considerably higher if its asset / equity ratio was also higher. With respect to loan reserves, the Bank is well funded, particularly in light of plummeting NCOs. We estimate that the bank’s recent decision to not take PLL provisions was well founded. The one area of weakness is the presence of a limited number of problem loans in the CRE and C&I divisions. Together these two divisions have $12.1 million of non performing loans and the Bank has fully provisioned for these loans in its ALL. In addition, we expect PLMT to maintain strong Capital Ratios throughout this year and next (when Basel III takes effect). We expect the Bank to post 17% and 14% total capital ratios this year and next, respectively. Earnings and Growth Analysis: We estimate that the

Bank, unimpeded by charges, is poised to generate substantial earnings this year and next. We forecast that EPS will be $0.67 this year and $0.97 next year. Starting in 2H 2014 and throughout 2015, we expect that the Bank will generate higher non interest income from additional wealth management fee income, higher NSF charges on checking accounts, a rebound in mortgage banking revenues and higher Debit card and ATM fees. Coincidently, due to investments made in technology and process improvement over the last several quarters, the bank is poised to generate falling non interest expense, which, when combined with a rising interest rate environment and more vigorous loan demand environment in 2015, should combine to make 2015 a strong year in terms of profit growth. The Bank’s so called Burden Ratio (non interest expense less non interest income / average total assets) is estimated by us to fall to 2.1% from 2.4% in 2014. While we expect the bank’s Net Interest Spread to compress in 2Q 2014 and 3Q 2014 to 3.69% and 3.77%, respectively, we estimate that increasing asset yield (to 4.16% from 3.86% this year) combined with low funding costs (0.12% in 2015 versus 0.07% this year) will combine to create a healthy 4.04% NIS next year.




May 8, 2014




Source: Company data and Fintrust Brokerage Service estimates

Valuation: With respect to Price-to-Book value, the Bank’s peer’s trade for 1.4x mean trailing Book-Value-Per-Share ratio. We estimate

that the Bank is poised to generate higher than average EPS growth in 2015, and to demonstrate continued profit expansion, credit quality improvement and the evolving capability to pay a dividend. Hence we estimate that the Bank deserves to trade for the Peer BV multiple, at least. Our $14.84 price target is therefore calculated as 1.40 X $10.60 in trailing Book value, one year from now.




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Recommendation: We rate PLMT a BUY based on the Bank’s strong deposit franchise, strengthening balance sheet, improving asset

quality, strong community ties, favorable market demographics, attractive valuation and management performance. While the Bank still

has some underperforming CRE assets, we expect credit quality to continue to improve. From a valuation standpoint, we estimate that

the shares could be worth 1.4x 2014 year-ending book value per share of $10.60, or $14.84 one year from now, representing 9.8%

upside. The shares are appropriate for patient investors that can invest in a low share float situation. However, there are several

potential risks that we list earlier in the report. For a compete list of potential risks we recommend that investors consult the Company’s

latest SEC filings.




May 8, 2014




Important Disclosures:

Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views about

the subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirect

compensation in exchange for any specific recommendation in this report. In addition, said analysts have not received compensation

from any subject company in the last 12 months.

Ownership and Material Conflicts of Interest:

An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after the

issuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by the

research analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account must

be approved.

The research analyst nor a member of his household own any of the securities of the subject company including any options, rights,

warrants, futures or long or short positions. Neither the research analyst nor a member of his household own 1% or more of any of

the securities of the subject company based upon the same standards used to compute beneficial ownership for the purpose of

reporting requirements under 13(d) of the Securities Act of 1934, as amended.

The research analyst, Allen Gillespie, wife, Kelly Gillespie is a corporate banking officer of the subject company. The research

analyst or household member is not a director or advisory board member of the subject company.

The research analyst has not made a public appearance in front of more than 15 person to discuss the subject company and does

not know or have reason to know at the time of this publication of any other material conflict of interest.

The firm has no knowledge of any material conflict of interest involving the company mentioned in this report.

Receipt of Compensation:

The firm does not engage in investment banking activities.

The subject company (ies) has not been a client in the past 12 months preceding the date of distribution of this research report and is

not currently a client. The firm has not received non-investment banking compensation for products or services or other non-

securities services from the subject company or any affiliated company.

The research analysts at the firm do not receive any compensation based on investment banking revenues and may be paid a bonus

based upon the overall profitability of the firm.

Investment Banking Relationships:

The firm has not managed or co-managed a public offering or received investment banking compensation in the past 12 months

regarding the subject company (ies).

The firm does not expect to receive or intend to seek investment banking compensation in the next 3 months from the subject

company (ies).




May 8, 2014




Additional Important Disclosures...

Securities offered through Fintrust Brokerage Services, LLC (Member FINRA and SIPC) and Investment Advisory Services offered through Fintrust Investment Advisory Services, LLC. Any views expressed in this message are those of the individual sender, except where the message states otherwise and the sender is authorized to state them to be the views of any such entity. Trade instructions may not be accepted via email.This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such in the text of the email. Past performance is not necessarily indicative of future returns. Performance numbers have not necessarily been independently reviewed or audited and therefore we make no representation as to its accuracy. Any reference to the terms of any contracts should be treated as preliminary only and subject to our formal written confirmation. This report is prepared for general circulation. This report is not produced based on any individual persons or entities investment objectives or financial situation and opinions expressed by the analyst are subject to change without notice. This report is not provided to any particular individual with a view toward their individual circumstances. Investors should consider this report as only a single factor in making an investment decision. Securities prices fluctuate and investors may receive back less than originally invested and are not guaranteed. This information should not be construed as legal, regulatory, tax, or accounting advice. Any reference to the terms of any contracts should be treated as preliminary only and subject to our formal written confirmation This message (and any attached materials) is for the sole use of the intended recipient(s) and may contain information that is privileged, confidential and exempt from disclosure under applicable law. Any review, dissemination, distribution or duplication of this communication is strictly prohibited. If you are not the intended recipient, please contact the sender immediately by reply e-mail and destroy all copies of the original message. No part of this document may be copied, photocopied, or duplicated in any form or other means redistributed or quote without the prior written consent of the firm. This report and its contents are the property of Fintrust Brokerage Services, LLC and are protected by applicable copyright, trade secret or other intellectual property laws. United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. The firm does not make market in securities. The firm does not buy or sell the subject company (ies) securities for its own account. The firm does not buy or sell subject company (ies) securities on a principal basis with customers. The firm’s employees, or customers, may buy or sell the subject company (ies) securities.

Although the statements of fact in this report have been obtained from and are based upon outside sources that the firm believes to be reliable, the firm does not guarantee the accuracy or completeness of material contained in this report. Any such estimates or forecasts contained in this report may not be met. Past performance is not an indication of future results. Calculations of price targets are based on a combination of one or more methodologies generally accept among financial analysts, including but not limited to, analysis of multiples and/or discounted cash flows (whether in whole or in part), or any other method which may be applied. Rating, target price and price history information on the subject company (ies) in this report is available upon request. To receive any additional information upon which this report is based please contact (864) 288-2849, or write to:

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