###### PALMETTO BANCSHARES, INC.

|U. S. SECURITIES AND EXCHANGE
      COMMISSIONWASHINGTON, D.C. 20549                                                                                                                                                                                                                                                                                                                                      
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|FORM 10-Q                                                                                                                                                                                                                                                                                                                                                                                                 
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|(X)                                                                                                                                                                                                                                                                                                                                                                                                       
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|For the transition period from
      __________ to __________                                                                                                                                                                                                                                                                                                                                             
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|Commission file number  0-26016                                                                                                                                                                                                                                                                                                                                                                           
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|PALMETTO BANCSHARES,
      INC.(Exact name of registrant as specified in its
      charter)                                                                                                                                                                                                                                                                                                               
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|South Carolina(State or other jurisdiction of
      incorporation or organization)                                                                                                                                                                                                                                                                                                                        
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|301 Hillcrest Drive, Laurens, South
      Carolina(Address of principal executive offices)                                                                                                                                                                                                                                                                                                                
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|(864) 984-4551(Registrant's telephone
      number)                                                                                                                                                                                                                                                                                                                                                       
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|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 an accelerated filer (as defined
      in Rule 12b-2 of the Exchange Act).  Yes X   No __                                                                                                                                                                                                                                                          
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|Indicate the number of shares outstanding of each of the issuer's classes
      of common stock, as of the latest practicable date.                                                                                                                                                                                                                                                                       
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266:
  PALMETTO BANCSHARES, INC.Table of ContentsPage No.PART I.  FINANCIAL INFORMATION
    3Item 1.
    Financial Statements
    3Item 2.
    Management's Discussion and Analysis of Financial Condition
      andResults of Operations
    13Item 3.
    Quantitative and Qualitative Disclosures about Market
Risk
    34Item 4.
    Controls and Procedures
    36PART II.  OTHER INFORMATION
    37Item 1.
    Legal Proceedings
    37Item 2.
    Changes in Securities and Use of Proceeds
    37Item 3.
    Defaults Upon Senior Securities
    37Item 4.
    Submission of Matters to a Vote of Security Holders
    37Item 5.
    Other Information
    37Item 6.
    Exhibits and Reports on Form 8-K
    37SIGNATURES
    39


2

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

PALMETTO BANCSHARES, INC.Consolidated Balance
  Sheets(in thousands, except share
      data)June 30,
    
    December 31,2003
    
    2002
    
    2002(unaudited)ASSETSCash and due from banks
    
    
    $       
28,387
    
    32,939
    
    32,608Federal funds sold
    
    
    1,880
    
    21,316
    
    5,485Federal Home Loan Bank (FHLB) stock, at cost
    1,868
    
    1,733
    
    1,733Investment securities available for sale at fair
      value
    115,380
    
    102,101
    
    115,108Loans held for sale
    
    
    12,963
    
    4,147
    
    11,851Loans
    
    
    
    
    666,627
    
    570,283
    
    625,542Less allowance for loan losses
    
    (7,022)
    
    (5,867)
    
    (6,402)Loans, net
    
    
    659,605
    
    564,416
    
    619,140Premises and equipment, net
    
    
    19,934
    
    19,789
    
    19,715Accrued interest receivable
    
    
    4,002
    
    4,628
    
    4,146Other assets
    
    
    
    15,937
    
    12,505
    
    15,206Total assets
    
    
    $     
      859,956
    
    763,574
    
    824,992LIABILITIES AND SHAREHOLDERS' EQUITYLiabilitiesDepositsNoninterest-bearing
    
    
    $      120,343
    
    105,444
    
    114,573Interest-bearing
    
    
    624,062
    
    558,949
    
    607,418Total deposits
    
    
    744,405
    
    664,393
    
    721,991Securities sold under agreements to repurchase
    12,750
    
    17,306
    
    12,831Commercial paper (Master notes)
    
    
    19,676
    
    14,401
    
    14,839Federal funds purchased
    
    
    5,900
    
    -
    
    -Other liabilities
    
    
    5,119
    
    3,853
    
    7,810Total liabilities
    
    
    787,850
    
    699,953
    
    757,471Shareholders' equityCommon stock - par value $5.00 per share; 
    authorized10,000,000 shares; issued and outstanding
      6,351,339, 6,295,578and 6,324,659 at June 30, 2003 and 2002 and
      December 31,2002, respectively.
    
    
    31,757
    
    31,478
    
    31,623Capital surplus
    
    
    225
    
    44
    
    50Retained earnings
    
    
    38,260
    
    30,941
    
    34,173Accumulated other comprehensive income, net of
    tax
    1,864
    
    1,158
    
    1,675Total shareholders' equity
    
    72,106
    
    63,621
    
    67,521Total liabilities and shareholders' equity
    $     
      859,956
    
    763,574
    
    824,992See accompanying notes to consolidated interim financial
      statements.


3

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PALMETTO BANCSHARES,
  INC.Consolidated Statements of
      Income(in thousands, except share
      data)For the three
      months ended June 30,2003
    
    2002(unaudited)Interest incomeInterest and fees on loans
    
    
    $     10,772
    
    $     10,297Interest and dividends on investment securities
      available for saleU.S. Treasury and U.S. Government agencies
    299
    
    437State and municipal
    
    
    391
    
    498Mortgage-backed securities
    
    181
    
    107Interest on federal funds sold
    
    
    28
    
    153Dividends on FHLB stock
    
    
    20
    
    24Total interest income
    
    11,691
    
    11,516Interest expenseInterest on deposits, including retail repurchase
      agreements
    2,688
    
    3,035Interest on federal funds purchased
    8
    
    --Interest on commercial paper (Master notes)
    29
    
    37Total interest expense
    
    2,725
    
    3,072Net interest income
    8,966
    
    8,444Provision for loan losses
    
    
    900
    
    1,000Net interest income after provision for loan
    losses
    8,066
    
    7,444Noninterest incomeService charges on deposit accounts
    
    2,217
    
    1,982Fees for trust and brokerage services
    
    715
    
    651Gains on sales of mortgage loans
    
    
    335
    
    193Gains on sales of investment securities
    
    186
    
    95Other
    
    
    
    
    337
    
    634Total noninterest income
    
    3,790
    
    3,555Noninterest expenseSalaries and other personnel
    
    
    4,132
    
    3,677Net occupancy
    
    
    541
    
    561Furniture and equipment
    
    
    839
    
    669Postage and supplies
    
    
    409
    
    328Marketing and advertising
    
    
    253
    
    275Telephone
    
    
    
    
    188
    
    197Cardholder processing
    
    
    138
    
    147Other
    
    
    
    1,360
    
    1,455Total noninterest expense
    
    7,860
    
    7,309Income before income taxes
    3,996
    
    3,690Income tax provision
    
    
    1,288
    
    1,205Net income
    
    $     
      2,708
    
    2,485Share Data:Net income - Basic
    
    
    $        0.43
    
    0.40Net income - Diluted
    
    
    0.42
    
    0.38Book value
    
    
    11.35
    
    10.11Weighted average common shares outstanding -
    Basic
    6,346,105
    
    6,293,765Weighted average common shares outstanding -
      Diluted
    6,498,919
    
    6,465,218See accompanying notes to consolidated interim financial
      statements.


4

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PALMETTO BANCSHARES, INC.Consolidated Statements
      of Income(in thousands, except share data)For the six months ended June 30,2003
    
    2002(unaudited)Interest incomeInterest and fees on loans
    
    
    $    
    21,494
    
    $    
    20,825Interest and dividends on investment
      securities available for saleU.S. Treasury and U.S. Government
      agencies
    714
    
    748State and municipal
    
    
    774
    
    1,133Mortgage-backed securities
    
    390
    
    238Interest on federal funds sold
    
    
    63
    
    211Dividends on FHLB stock
    
    
    42
    
    50Total interest income
    
    23,477
    
    23,205Interest expenseInterest on deposits, including retail
      repurchase agreements
    5,492
    
    6,343Interest on federal funds purchased
    
    
    12
    
    1Interest on commercial paper (Master
      notes)
    
    52
    
    71Total interest expense
    
    5,556
    
    6,415Net interest income
    17,921
    
    16,790Provision for loan losses
    
    
    1,800
    
    1,900Net interest income after provision for
      loan losses
    16,121
    
    14,890Noninterest incomeService charges on deposit accounts
    
    4,221
    
    3,807Fees for trust and brokerage services
    
    1,352
    
    1,263Gains on sales of mortgage loans
    
    
    674
    
    418Gains on sales of investment
    securities
    
    281
    
    235Other
    
    
    
    
    736
    
    1,203Total noninterest income
    
    7,264
    
    6,926Noninterest expenseSalaries and other
      personnel
    
    
    7,802
    
    7,356Net occupancy
    
    
    1,108
    
    1,109Furniture and equipment
    
    
    1,652
    
    1,304Postage and supplies
    
    
    805
    
    710Marketing and advertising
    
    
    437
    
    530Telephone
    
    
    
    
    372
    
    390Cardholder processing
    
    
    274
    
    288Other
    
    
    
    
    2,639
    
    2,795Total noninterest expense
    
    15,089
    
    14,482Income before income taxes
    8,296
    
    7,334Income tax provision
    
    
    2,686
    
    2,394Net income
    
    $     
      5,610
    
    4,940Share Data:Net income - Basic
    
    
    $        0.89
    
    0.79Net income - Diluted
    
    
    0.87
    
    0.76Book value
    
    
    11.35
    
    10.11Weighted average common shares
      outstanding - Basic
    6,336,455
    
    6,290,529Weighted average common shares
      outstanding - Diluted
    6,483,582
    
    6,461,727See accompanying notes to consolidated interim financial
      statements.


5

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PALMETTO BANCSHARES, INC.Consolidated Statements of Changes in
      Shareholders' Equity and Comprehensive Income(in
      thousands, except share data) (unaudited)AccumulatedShares of
    
    
    
    othercommon
    Common
    Capital
    Retained
    comprehensivestock
    stock
    surplus
    earnings
    income,
      net
    TotalBalance at December 31,
      2001
    6,283,623
    $   31,418
    26
    27,386
    238
    59,068Net income
    
    
    
    
    4,940
    
    4,940Other comprehensive income,
      net of tax:Net unrealized holding gains (losses) arising duringperiod, net
      of tax effect of $667
    
    
    
    
    
    1,065Less:  reclassification adjustment for gains includedin net
      income, net of tax effect of $90
    
    
    
    
    (145)Net unrealized gains (losses) on securities
    
    
    
    
    
    920Comprehensive income
    
    
    
    
    
    
    5,860Cash dividend ($.11 per
      share)
    
    
    
    (1,385)
    
    (1,385)Stock option activity
    
    11,955
    60
    18
    
    
    78Balance at June 30, 2002
    
    6,295,578
    $  
      31,478
    44
    30,941
    1,158
    63,621Balance at December 31,
      2002
    6,324,659
    $   31,623
    50
    34,173
    1,675
    67,521Net income
    
    
    
    
    5,610
    
    5,610Other comprehensive income,
      net of tax:Net unrealized holding gains (losses) arising duringperiod, net
      of tax effect of $227
    
    
    
    
    
    362Less:  reclassification adjustment for gains includedin net
      income, net of tax effect of $108
    
    
    
    
    (173)Net unrealized gains on securities
    
    
    
    
    
    189Comprehensive income
    
    
    
    
    
    
    5,799Cash dividend ($.12 per
      share)
    
    
    
    (1,523)
    
    (1,523)Stock option activity
    
    26,680
    134
    175
    
    
    309Balance at June 30, 2003
    
    6,351,339
    $  
      31,757
    225
    38,260
    1,864
    72,106


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PALMETTO BANCSHARES, INC.Consolidated Statements of Cash Flow(in
      thousands)For the six months ended June 30,2003
    
    2002(unaudited)Cash flows from operating activitiesNet income
    
    
    $      5,610
    
    4,940Adjustments to reconcile net income to net cash
      provided by (used in) operating activitiesDepreciation and amortization
    2,616
    
    938Gain on sale of investment securities
    (281)
    
    (235)Provision for loan losses
    1,800
    
    1,900Origination of loans held for sale
    (78,032)
    
    (40,456)Sale of loans held for sale
    77,594
    
    46,781Gain on sale of loans
    (674)
    
    (418)Change in accrued interest receivable
    144
    
    319Change in other assets
    (1,264)
    
    (56)Change in other liabilities, net
    (2,809)
    
    (1,245)Net cash provided by operating activities
    4,704
    
    12,468Cash flows from investing activitiesPurchase of investment securities available for
      sale
    (44,453)
    
    (50,123)Proceeds from maturities of investment securities
      available for sale
    12,278
    
    17,743Proceeds from sale of investment securities
      available for sale
    20,545
    
    23,925Principal paydowns on mortgage-backed securities
      available for sale
    11,331
    
    2,928Purchase of Federal Home Loan Bank stock
    (135)
    
    --Net increase in loans outstanding
    (42,873)
    
    (19,996)Purchases of premises and equipment, net
    (1,079)
    
    (1,485)Net cash used in investing activities
    (44,386)
    
    (27,008)Cash flows from financing activitiesNet increase in deposit accounts
    22,414
    
    19,093Net increase in securities sold under agreements
      to repurchase
    (81)
    
    1,993Net increase in commercial paper
    4,837
    
    3,325Net increase (decrease) in federal funds
    purchased
    5,900
    
    --Proceeds from issuance of common stock
    309
    
    78Dividends paid
    
    (1,523)
    
    (1,385)Net cash provided by financing activities
    31,856
    
    23,104Net increase in cash and cash
    equivalents
    (7,826)
    
    8,564Cash and cash equivalents at beginning
      of the period
    38,093
    
    45,691Cash and cash equivalents at end of the
      period
    $    30,267
    
    54,255Supplemental InformationCash paid during the period for:Interest expense
    
    $      5,675
    
    6,741Income taxes
    
    
    2,637
    
    2,310Supplemental schedule of non-cash
      investing and financing transactionsChange in unrealized gain on investment securities
      available or sale, pre-tax
    $         307
    
    1,496Loans transferred to other real estate owned
    608
    
    1,843Loans charged -off
    1,262
    
    1,770See accompanying notes to consolidated interim financial
      statements.


7

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Notes To Consolidated Interim Financial Statements

1.   GENERAL

Principles of Consolidation and Nature of Operations

The foregoing unaudited consolidated financial statements include accounts of
Palmetto Bancshares, Inc. (defined collectively with its subsidiaries as the
"Company"), its wholly owned subsidiary, The Palmetto Bank (the "Bank"), and
Palmetto Capital, Inc. ("Palmetto Capital"), the Bank's wholly owned subsidiary.
The Bank provides a full range of banking services including, but not limited
to, taking deposits and making loans. Palmetto Capital offers the brokerage of
stocks, bonds, mutual funds and unit investment trusts. Palmetto Capital also
offers advisory services and variable rate annuities. The Company's primary
market area is the upstate of South Carolina.

In management's opinion, all significant intercompany accounts and
transactions have been eliminated, and all adjustments necessary for a fair
presentation of the results for interim periods presented have been
included.  Any such adjustments are of a normal and recurring nature. The
Company operates as one business segment. Assets held by Palmetto Bancshares or
its subsidiary in a fiduciary or agency capacity for customers are not included
in the consolidated financial statements as such items do not represent assets
of Palmetto Bancshares or its subsidiary.

Basis of Presentation

The unaudited consolidated interim financial statements are presented in
accordance with the instructions for Form 10-Q.  Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included.  The interim statements
should be read in conjunction with the financial statements and footnotes
thereto included in Palmetto Bancshares' Annual Report on Form 10-K for the year
ended December 31, 2002.

Summary of Significant Accounting Policies

The significant accounting policies used by the Company for interim reporting
are consistent with the accounting policies followed for annual financial
reporting as described in Note 1 to the Palmetto Bancshares' Annual Report on
Form 10-K for the year ended December 31, 2002.  There have been no changes
in these policies subsequent to the year ended December 31, 2002.

Accounting Estimates and Assumptions

The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the dates of the consolidated balance sheets for
the periods presented. In addition, they affect the reporting amounts of income
and expense during the reporting period as of the dates of the consolidated
statements of income for the periods presented. Actual results could differ from
these estimates and assumptions.  As such, the results of operations for
the three months ended June 30, 2003 are not necessarily indicative of the
results of operations that may be expected in future periods.

Risks and Uncertainties

In the normal course of its business the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that

8

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results from borrowers' inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral
underlying loans, the valuation of real estate held by the Company and the
valuation of mortgage loans held for sale, investments and mortgage-backed
securities available for sale and mortgage servicing rights.

The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examinations.

Reclassifications

Certain amounts previously presented in the consolidated financial statements
for prior periods have been reclassified to conform to current classifications.
All such reclassifications had no effect on the prior years' net income or
shareholders' equity as previously reported.

2.   PER SHARE INFORMATION

Basic and diluted earnings per share have been computed based on net income
in the accompanying consolidated statements of income divided by the weighted
average common shares outstanding or assumed to be outstanding as summarized
below:

For the three months ended June
      30,2003
    2002BASICAverage common shares outstanding
    (denominator)
    6,346,105
    6,293,765DILUTEDAverage common shares outstanding
    6,346,105
    6,293,765Dilutive potential common shares
    152,814
    171,453Average diluted shares outstanding
      (denominator)
    6,498,919
    6,465,218For the six months ended June
      30,2003
    2002BASICAverage common shares outstanding
    (denominator)
    6,336,455
    6,290,529DILUTEDAverage common shares outstanding
    6,336,455
    6,290,529Dilutive potential common shares
    147,127
    171,198Average diluted shares outstanding
    (denominator)
    6,483,582
    6,461,727


Option shares are excluded from the calculation of diluted earnings when the
exercise price is greater than the average market price of the common
shares.  At June 30, 2003 there were no option shares that were excluded
from the calculation of diluted earnings due to the exercise price being greater
than the average market price of the common shares as of that date, based on
information available to the Company at that time.

3.  INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 required that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. Also under SFAS No. 141, identified intangible assets acquired
in a purchase business combination must be separately valued and recognized on
the balance sheet if they meet certain requirements. Under SFAS No. 142,
goodwill and identified intangible assets with indefinite useful lives are not
subject to amortization but are to be tested for impairment on an annual basis.
The Company adopted SFAS

9

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No. 141 and the provisions of SFAS No. 142 relating to non-amortization and
amortization of intangible assets on July 1, 2001.

Effective January 1, 2002, the Company adopted SFAS No. 142, which requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized; instead they must be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. Goodwill and intangible assets
with indefinite useful lives acquired in purchase business combinations
completed before July 1, 2001 were subject to amortization through December 31,
2001, at which time amortization ceased. Intangible assets with estimable useful
lives are amortized over their respective estimable useful lives to their
estimable residual values and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 141 required the Company to evaluate its existing intangible assets that
were acquired in prior purchase business combinations and make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 in
terms of recognition of finite and infinite useful lives intangibles. Upon
adoption of SFAS No. 142, the Company reassessed the useful lives and residual
values of all intangible assets acquired.

In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the statement requires the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption. The Company then had six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. The Company completed its analysis of the fair value of its
reporting units with goodwill by June 30, 2002 and was not required to provide
for any transitional impairment losses.

In accordance with SFAS No. 142, the Company plans to review impairment
annually and make adjustments as necessary to the carrying amount of
goodwill.

The table set forth below illustrates the activity of intangible assets with
finite lives, which are comprised of customer list intangibles, presented in
"other assets" in the consolidated balance sheets, and the related amortization,
presented in "other noninterest expense" in the consolidated statements of
income, for the years noted (in thousands).

For the three months ended June
      30,2003
    2002Balance, at beginning of period
    $   574
    697Amortization
    37
    29Balance, at end of period
    $   537
    668For the six months ended June
      30,2003
    2002Balance, at beginning of period
    $   608
    727Amortization
    71
    59Balance, at end of period
    $   537
    668


The table set forth below illustrates the activity of intangible assets with
infinite lives, presented in "other assets" in the consolidated balance sheets,
and the related amortization, presented in "other noninterest expense" in the
consolidated statements of income, for the years noted (in thousands).

For the three months ended June
      30,2003
    2002Balance, at beginning of period
    $  3,691
    3,691Amortization
    ----
    ----Balance, at end of period
    $  3,691
    3,691


In accordance with FASB No. 72, "*Accounting for Certain Acquisitions of
Banking or Thrift Institutions-an amendment of APB Opinion No. 17, an
interpretation of APB Opinions 16 and 17, and an amendment of FASB
Interpretation No. 9,"*which gave the option to differentiate between
intangible assets, the intangible assets acquired in a past transaction were not
differentiated

10

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between indefinite and definite useful lives prior to the issuance of FASB
No. 141 and No. 142 although the information to do so was available. Upon the
adoption of these statements, indefinite useful life intangibles were segregated
from the total balance as permitted by the pronouncements. The preceding tables
have been adjusted to reflect this change.

The Company estimates that its amortization expense related to intangibles
with finite lives in fiscal years 2003 through 2009 will range from $144
thousand to $33 thousand.

4.      MORTGAGE SERVICING RIGHTS

Capitalized mortgage servicing rights ("MSRs") totaled $2.1 million, $2.1
million and $2.0 million at June 30, 2003, December 31, 2002, and June 30, 2002,
respectively. Amortization expense for MSRs totaled $517 thousand and $163
thousand for the three months ended June 30, 2003 and 2002, respectively.
Amortization expense for MSRs totaled $937 thousand and $359 thousand for the
six months ended June 30, 2003 and 2002, respectively. Amortization expense for
MSRs for the twelve months ended December 31, 2002 totaled $946 thousand.
Amortization expense is based on current information regarding loan payments and
prepayments. Amortization expense could change in future periods based on
changes in the volume of prepayments and other environmental factors.
Prepayments could increase as a result of any further decline in market interest
rates, leading to an increase in amortization expense.  The impairment
adjustments to MSRs for the three months ended June 30, 2003 and 2002 were $87
thousand and $8 thousand, respectively. The impairment adjustments to MSRs for
the six months ended June 30, 2003 and 2002 were $133 thousand and $44 thousand,
respectively. The impairment adjustment to MSRs for the twelve months ended
December 31, 2002 totaled $44 thousand. A valuation allowance for impairment
totaling $246 thousand was required at June 30, 2003, increasing from a
valuation allowance of $113 thousand required at June 30, 2002. The valuation
allowance for impairment required at December 31, 2002 totaled $113 thousand.

5.      STOCK-BASED COMPENSATION

At June 30, 2003, Palmetto Bancshares had a stock-based compensation plan,
which was described more fully in Note 12 of the Notes To Consolidated Financial
Statements included in Palmetto Bancshares' Annual Report on Form 10-K for the
year ended December 31, 2002. The Company accounts for this plan under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Key Company employees and Company directors are eligible to
participate in the stock awards plan. No stock-based compensation cost has been
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the fair market value of the underlying common stock on
the date of grant. The table set forth below illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation (in thousands, except share data).

11

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For the three months ended June
      30,2003
    2002Net income, as reported
    $  2,708
    2,485Deduct: Total stock-based employee and director
      compensation expense determined under fair value based methods for all
      awards, net of related tax
      effects
    34
    42Pro forma net income
    $  2,674
    2,443Earnings per shareBasic - as
      reported
    $  .43
    .40Basic - pro forma
    .42
    .39Diluted - as reported
    $  .42
    .38Diluted - pro forma
    .41
    .38


For the six months ended June
      30,2003
    2002Net income, as reported
    $  5,610
    4,940Deduct: Total stock-based employee and director
      compensation expense determined under fair value based methods for all
      awards, net of related tax
      effects
    61
    84Pro forma net income
    $  5,549
    4,856Earnings per shareBasic - as
      reported
    $  .89
    .79Basic - pro forma
    .88
    .77Diluted - as reported
    $  .87
    .76Diluted - pro forma
    .86
    .75


12

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Item 2.  Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion and analysis is presented to assist in understanding
the financial condition and results of operations of Palmetto Bancshares,
Inc..  This discussion should be read in conjunction with the consolidated
financial statements and related notes and other financial data appearing in
this report as well as the Annual Report of Palmetto Bancshares, Inc. on Form
10-K for the year ended December 31, 2002.  Results of operations for the
three month period ended June 30, 2003 are not necessarily indicative of results
that may be attained for any other period.  Percentage calculations
contained herein have been calculated based upon actual, not rounded,
results.

Palmetto Bancshares was organized in 1982 under the laws of South Carolina.
Through its wholly-owned subsidiary, The Palmetto Bank, and the Bank's
wholly-owned subsidiary, Palmetto Capital, Inc., the Company engages in the
general banking business in the upstate South Carolina market of Laurens,
Greenville, Spartanburg, Greenwood, Anderson, Cherokee, Abbeville, and Oconee
counties (the "Upstate").  The Bank was organized and chartered under South
Carolina law in 1906.

The Bank performs a full range of banking activities, including such services
as checking, savings, money market, and other time deposits of various types of
consumer and commercial depositors; loans for business, real estate, and
personal uses; safe deposit box rental and various electronic funds transfer
services.  The Bank also offers both individual and commercial trust
services through its trust department.  Palmetto Capital is a brokerage
subsidiary of the Bank, which offers customers stocks, treasury and municipal
bonds, mutual funds and insurance annuities, and college and retirement
planning.

FORWARD LOOKING STATEMENTS

This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) to assist in the understanding
of anticipated future operating and financial performance, growth opportunities,
growth rates, and other similar forecasts and statements of expectations. These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties, and other factors, which may cause
actual results to differ materially from those in such statements. These factors
include, but are not limited to, the following:

- risks from changes in
  economic, monetary policy and industry conditions;
- changes in interest
  rates, deposit rates, the net interest margin and funding sources;
- market risk and
  inflation;
- risks inherent in making
  loans, including repayment risks and value of collateral;
- loan growth;
- the adequacy of the
  allowance for loan losses and the assessment of problem loans;
- the Company's ability to
  meet its contractual obligations;
- fluctuations in consumer
  spending;
- competition in the
  banking industry and demand for the Company's products and services;
- dependence on senior
  management;
- level, 
  composition,  and repricing  characteristics of the securities
  portfolio;
- technological changes;
- ability to increase
  market share;
- expense projections;
- risks associated with
  income taxes, including the potential for adverse adjustments;
- changes in accounting
  policies and practices;
- costs and effects of
  litigation; and
- recently-enacted or
  proposed legislation.

Should one or more of these risks or uncertainties materialize, or should
underlying assumptions

13

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prove incorrect, actual results may vary materially from those expected or
projected. Any forward-looking statements speak only as of the date on which
they are made. The Company undertakes no obligation to update any forward
looking statement to reflect events or circumstances after the date on which
such statement is made to reflect the occurrence of unanticipated events. In
addition, certain statements in future filings by the Company with the
Securities Exchange Commission, in press releases and in oral and written
statements made by or with the approval of the Company, which are not statements
of historical fact, constitute forward-looking statements.

SIGNIFICANT ACCOUNTING POLICIES

The Company considers its policies regarding its allowance for loan losses to
be its most critical accounting policy due to the significant degree of
management judgment exercised in relation to this estimate. The Company has
developed policies and procedures for assessing the adequacy of the allowance,
which requires a number of assumptions and estimates with respect to its loan
portfolio. The adequacy of the allowance is analyzed on a monthly basis using an
internal analysis model. For purposes of this analysis, adequacy is defined as a
level sufficient to absorb probable losses in the portfolio. The Company's
allowance model takes into account factors such as the composition of the loan
portfolio (including risk grade classifications, based on an internally
developed grading system), historical asset quality trends (including, but not
limited to, previous loss experience ratios), and reviews of specific high risk
sectors of the portfolio. Loans are graded at inception and are reviewed on a
periodic basis to ensure that assigned risk grades are proper based on the
definition of such classification. The value of underlying collateral is also
considered during such analysis.  These assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers, which
is not known to management at the time of the issuance of the consolidated
financial statements.

14

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BALANCE SHEET REVIEW

Overview

Total assets increased by $35.0 million, or 4.2%, at June 30, 2003 as
compared with December 31, 2002 and increased by $96.4 million, or 12.6%, at
June 30, 2003 as compared with June 30, 2002. Liquid assets, which include cash,
federal funds sold, and investments available for sale, decreased by $7.4
million, or 4.8%, at June 30, 2003 from December 31, 2002 and decreased by $10.6
million, or 6.7%, at June 30, 2003 from June 30, 2002. Total liabilities
increased $30.4 million, or 4.0%, at June 30, 2003 from December 31, 2002 and
increased $87.9 million, or 12.6%, at June 30, 2003 from June 30, 2002. Total
shareholders' equity increased $4.6 million, or 6.8%, at June 30, 2003 from
December 31, 2002 and $8.5 million, or 13.3%, at June 30, 2003 from June 30,
2002.

Securities

At June 30, 2003, the Company's investment portfolio totaled $117.2 million
compared with $116.8 million and $103.8 million at December 31, 2002 and June
30, 2002, respectively.  This represents an increase of 0.3% from December
31, 2002 and a 12.9% increase from June 30, 2002. The composition of the
investment portfolio at June 30, 2003 was as follows: agencies 21%,
municipalities 33%, treasuries 2%, and mortgage-backed securities and other
securities 44%.

During the first six months of 2003, the Bank purchased $44.5 million of
investment securities (available for sale), $32.5 million of the investment
portfolio matured or was sold, resulting in a gain of $281 thousand, and $11.3
million was paid down on mortgage-backed securities.  The June 30, 2003
securities balance included $3.0 million in pre-tax unrealized gains in the
portfolio.

During the first six months of 2002, the Bank purchased $50.1 million of
investment securities (available for sale), $41.7 million of the investment
portfolio matured or was sold, resulting in a gain of $235 thousand, and $2.9
million was paid down on mortgage-backed securities. The June 30, 2002
securities balance included $1.9 million in pre-tax unrealized losses in the
portfolio.

Loans

At June 30, 2003, the Company had total loans outstanding, including held for
investment loans net of related allowance and held for sale mortgage loans, of
$672.6 million, which equaled 87% of total deposits, including retail repurchase
agreements and commercial paper, and 78% of total assets.  Loans are the
largest category of the Company's earning assets and have generally produced
higher yields than other earning assets. The Company's loan portfolio consists
principally of commercial loans, commercial real estate loans, consumer loans,
sales finance loans, and mortgage loans.

Mortgage loans held for sale were $13.0 million at June 30, 2003 compared
with $11.9 million and $4.1 million at December 31, 2002 and June 30, 2002,
respectively.  This represents an increase of 9.4% from December 31, 2002
and an increase of 212.6% from June 30, 2002.  As a result of the favorable
interest rate environment for mortgage loans and refinances, the Bank originated
approximately $92.4 million in mortgage loans during the first six months of
2003, with substantially all being sold during the same period. The Company
originates the substantial majority of its loans in its primary market area
located in Upstate South Carolina.

Loans, net of unearned income and excluding those mortgage loans held for
sale, were $666.6 million at June 30, 2003 compared with $625.5 million and
$570.3 million at December 31, 2002 and June 30, 2002, respectively. This
represents increases of 6.6% from December 31, 2002 and 16.9% from June 30,
2002.

See "Credit Quality" for additional discussion of loan portfolio
performance.

15

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Allowance for Loan Losses

The adequacy of the allowance is analyzed on a monthly basis.  For
purposes of this analysis, adequacy is defined as a level sufficient to absorb
probable losses in the portfolio. The Bank uses an allowance model that takes
into account loan risk grades, delinquency trends, and charge-off ratios as well
as loan growth. Assessing the adequacy of the allowance requires considerable
judgment. See "Significant Accounting Policies" for additional discussion
related to the allowance for loan losses.  Management's judgments are based
on numerous assumptions about current events, which management believes to be
reasonable.  The allowance is subject to examination and adequacy testing
by regulatory agencies.

The allowance for loan losses totaled $7.0 million at June 30, 2003 compared
with $6.4 million and $5.9 million at December 31, 2002 and June 30, 2002,
respectively.  This represents an increase of 9.7% from December 31, 2002
and 19.7% from June 30, 2002.  Table 1 summarizes the changes in the
allowance.

Table 1Summary of Loan Loss and Recovery
      Experience(dollars in thousands)At and for the six months ended June
      30,
    At and for the year
  ended2003
    2002
    December 31, 2002Allowance at beginning of period
    $  6,402
    5,658
    5,658Net charge-offs:Loans charged-off
    1,262
    1,770
    3,770Less: loans
      recovered
    82
    79
    2261,180
    1,691
    3,544Additions to reserves through provision
    1,800
    1,900
    4,288Allowance at end of period
    $   7,022
    5,867
    6,402Average loans excluding mortgage loans held for
      sale
    $643,882
    558,314
    577,949Loans, net of unearned, excluding mortgage loans held for
      sale
    666,627
    570,283
    625,542Net charge-offs as a % of average loans excluding mortgage
      loans held for sale (annualized, where applicable)
    0.37%
    0.61
    0.61Allowance as a % of loans, net of unearned, excluding
      mortgage loans held for sale
    1.05
    1.03
    1.02




16

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The allowance for loan losses as a percentage of loans, excluding mortgage
loans held for sale, increased to 1.05% at June 30, 2003 from 1.02% and 1.03% at
December 31, 2002 and June 30, 2002, respectively. During mid-1999 management
noted deterioration in the performance of the sales finance portfolio, resulting
in increased charge-offs in 1999 and 2000. In the years since the discovery of
the deterioration in the portfolio and these heightened charge-offs, charge-off
levels have declined. In 2001 net charged-off loans declined $970 thousand from
2000.  Net charged-off loans in 2002 declined $282 thousand from 2001.
Annualized (where applicable) net charge-offs as a percentage of average loans
excluding mortgage loans held for sale have declined from .61% for the six month
period ended June 30, 2002 to .37% for the six month period ended June 30,
2003.  Additionally, the sales finance portfolio has had relatively little
growth with a balance of $16.1 million at June 30, 2003, $14.7 million at
December 31, 2002 and $14.2 million at June 30, 2002.

Net charge-offs for the six months ended June 30, 2003 totaled $1.2 million,
a decline from $1.7 million for the six months ended June 30, 2002.  The
majority of the decline in net charge-offs over these periods was the result of
a decline of $314 thousand in the commercial and industrial loan category as
well as a decline in the installment loan category (excluding credit cards) of
$462 thousand.  Offsetting these declines was an increase in charge-offs
related to loans secured by real estate of $208 thousand.  Comparing the
same periods, net charge-offs related to credit card loans remained relatively
unchanged.  The decrease in charge-off activity within the commercial /
industrial and installment portfolios can be attributed to the low interest
rates environment, which has led to increased consumer debt incurrence and
refinancing.  Additionally, the decline in charge-off activity related to
the installment portfolio can also be attributed to the increased performance
related to the quality of the sales finance portfolio.  The increase in
charge-offs related to loans secured by real estate stems from the high levels
of mortgages in the foreclosure process. The rise in foreclosures paralleled
mounting job losses and personal bankruptcies in the first six months of
2003.

See "Credit Quality" for additional discussion of factors contributing to the
allowance for loan losses.

Other Assets

At June 30, 2003, other assets totaled $15.9 million compared with $15.2
million and $12.5 million at December 31, 2002 and June 30, 2002,
respectively.  This represents an increase of 4.8% from December 31, 2002
and 27.4% from June 30, 2002.

At June 30, 2003, major components of other assets included the Travelers
Express reserve (described below) totaling $1.9 million, net mortgage servicing
rights totaling $1.9 million, pension plan assets totaling $2.8 million, other
real estate owned totaling $2.2 million, and $4.2 million of intangible
assets.

At December 31, 2002, major components of other assets included the Travelers
Express reserve totaling $1.9 million, net mortgage servicing rights which
totaled $2.0 million, pension plan assets totaling $2.4 million, other real
estate owned totaling $2.5 million, and $4.3 million of intangible assets.

At June 30, 2002, large components contributing to the balance of $12.5
million of other assets included net mortgage servicing rights totaling $1.9
million, pension plan assets totaling $2.0 million, other real estate owned
totaling $1.9 million, and $4.2 million of intangible assets.

In August 2002, the Bank established a reserve account with Travelers
Express, its third party official check vendor.  Before then, Travelers
Express paid checks and the Bank remitted the forwarded balance the following
day, which resulted in payment of one day's interest to Travelers Express on the
forwarded monies.  Establishing this reserve account eliminated the need
for forwarded monies and therefore the interest payments to Travelers
Express.

The recent favorable interest rate environment as well as the addition of
mortgage loan originators

17

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has contributed to the increase in the loan portfolio at June 30, 2003 from
December 31, 2002 as well as June 30, 2002.  As noted in the "Loans"
section above, originations of mortgage loans held for sale in the six months
ended June 30, 2003 have totaled $92.4 million.  Since loans are typically
sold servicing retained, the increase in loans originated results in increased
additions to the mortgage servicing rights portfolio.  Amortization and
impairment of the rights as well as loan payoffs offset these additions.

Due to the low volume of properties within the other real estate owned
portfolio, the foreclosure of new property or the sale of an existing property
can cause the balance to fluctuate greatly on a monthly basis.  The other
real estate owned portfolio is often reviewed in terms of lending relationships,
which may contain of more than one parcel of real estate. During the first six
months of 2002, six relationships were added to the portfolio totaling $1.8
million while four properties were sold totaling $135 thousand.  At June
30, 2003 there were 9 relationships within the portfolio totaling $1.9
million.  At December 31, 2002 the other real estate owned portfolio
contained 12 relationships totaling $2.5 million.  From December 31, 2002
to June 30, 2003, six relationships were added to the portfolio totaling $608
thousand and five properties were sold totaling $821 thousand bringing the
portfolio total to $2.2 million at June 30, 2003.

As noted above in the "Allowance for Loan Losses" section, during mid-1999
management noted deterioration in the performance of the sales finance
portfolio. In the periods following these findings, charge-offs increased and
collateral was repossessed, in some cases, in conjunction with a portion of
these sales finance loans. Since this discovery and the related charge-offs, the
Bank has begun to experience a decrease in charge-offs (in part related to this
portfolio).  In addition, the balance of repossessed automobiles has begun
to decline.  Resulting from the review of the loans within the portfolio,
repossessed automobiles have declined from $472 thousand at June 30, 2002 to
$181 thousand at December 31, 2002 and to $151 thousand at June 30, 2003.
Additionally growth within the sales finance loan portfolio has been low during
this time frame.

See Note 3 of Notes To Consolidated Interim Financial Statements contained
herein for a summary of intangible assets.

Deposits

At June 30, 2003, traditional deposits totaled $744.4 million compared with
$722.0 million and $664.4 million at December 31, 2002 and June 30, 2002,
respectively.  This represents an increase of 3.1% from December 31, 2002
and 12.0% from June 30, 2002.  Deposits remain the Bank's primary source of
funds for loans and investments.  Traditional deposits provided funding for
95% of average earning assets for the six month periods ended June 30, 2003 and
2002.  Although deposit pricing competition remains very
stiff, the Company feels as though it is in a good competitive position.The
composition of the traditional deposit portfolio at June 30, 2003 follows: time
deposits 45%, interest-bearing demand deposits 33%, noninterest-bearing deposits
16%, and savings 6%.

Borrowed Funds

At June 30, 2003, total securities sold under agreement to repurchase totaled
$12.8 million compared with $12.8 million and $17.3 million at December 31, 2002
and June 30, 2002, respectively. This represents a decrease of 0.6% from
December 31, 2002 and a decrease of 26.3% from June 30, 2002.

At June 30, 2003, total commercial paper totaled $19.7 million compared with
$14.8 million and $14.4 million at December 31, 2002 and June 30, 2002,
respectively.  This represents an increase of 32.6% from December 31, 2002
and 36.6% from June 30, 2002.

18

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Other Liabilities

At June 30, 2003, other liabilities totaled $5.2 million compared with $7.8
million and $3.9 million at December 31, 2002 and June 30, 2002,
respectively.  This represents a decrease of 34.5% from December 31, 2002
and an increase of 32.9% from June 30, 2002.

The decrease in other liabilities at June 30, 2003 compared with December 31,
2002 of $2.7 million is the result of fluctuations in several accounts with the
majority of the change accumulated within two accounts.  Accrued expenses
decreased $730 thousand from December 31, 2002 to June 30, 2003 due to the
higher than usual occurrence of expenses at the end of the year as compared to
typical expenses incurred during the year.  The mortgage servicing clearing
account decreased $1.9 million at June 30, 2003 from December 31, 2002
constituting the majority of the fluctuation in the "other liabilities"
category.  When mortgage loans are sold, funds are recorded in this account
until all information is received for loan system entry.  Once all items
have been received, the loan is booked on the loan system and the resulting
funds are simultaneously transferred from this clearing account to the proper
loan account.  Therefore, fluctuations in this account are impacted by the
volume of mortgage loans held for sale, the timing of funding loans sold, and
clearing backlog.

The increase in other liabilities at June 30, 2003 compared with June 30,
2002 of $1.3 million results from the fluctuations in several accounts with the
majority of the change accumulated within three accounts. Taxes relating to the
unrealized gain on available for sale securities increased approximately $442
thousand due to an increase in the unrealized gain on available for sale
securities at June 30, 2003 from June 30, 2002. The remaining increase in other
liabilities between these two periods relates for the most part to increases in
mortgage lending related accounts.  The mortgage servicing clearing account
increased $450 thousand at June 30, 2003 from June 30, 2002.  As noted in
the preceding paragraph, the fluctuations in this account are due to
timing.  Additionally, the mortgage servicing remittance account increased
$524 thousand from June 30, 2002 to June 30, 2003.  The increase in this
account is also due to timing as the remittance of payments is dependent on the
timing of customer payments.  The increase in this account is also due in
part to the increase in serviced loans at June 30, 2003 over June 30, 2002
resulting in an increase of remittances.

Capital Resources and Dividends

Shareholders' equity totaled $72.1 million, $67.5 million, and $63.6 million
at June 30, 2003, December 31, 2002, and June 30, 2002, respectively. 
Shareholders' equity as a percentage of total assets was 8.38% at June 30, 2003,
8.18% at December 31, 2002 and 8.33% at June 30, 2002.   Increases in
shareholders' equity resulted from retention of earnings, unrealized gains in
the available for sale security portfolio, and stock option exercises offset by
dividends paid.

Book value per share was $11.35 at June 30, 2003 compared with $10.68 and
$10.11 at December 31, 2002 and June 30, 2002, respectively.

As of June 30, 2003, the Company and the Bank were in compliance with each of
the applicable regulatory capital requirements and met or exceeded the
"well-capitalized" regulatory guidelines.  Table 2 sets forth various
capital ratios for the Company and the Bank.  The Company and the Bank are
subject to certain regulatory restrictions on the amount of dividends they are
permitted to pay.

At June 30, 2003, the Bank had $2.8 million of excess capital available for
payment of dividends and still be considered "well-capitalized" related to the
total risk based capital ratio.

19

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Table 2Capital RatiosAs of 6/30/03
    Adequately Capitalized Requirement
    Well - Capitalized RequirementCompany:Total Risk-based Capital
    10.55%
    8.00%
    10.00%Tier 1 Risk-based Capital
    9.53
    4.00
    6.00Tier 1 Leverage Ratio
    7.78
    4.00
    5.00Bank:Total Risk-based Capital
    10.40%
    8.00%
    10.00%Tier 1 Risk-based Capital
    9.38
    4.00
    6.00Tier 1 Leverage Ratio
    7.66
    4.00
    5.00


For a complete discussion of capital matters see related topics in Palmetto
Bancshares' Annual Report on Form 10-K for the year ended December 31, 2002.

During May 2003 Palmetto Bancshares' Board of Directors approved a stock
repurchase transaction to acquire 100 thousand shares of Common Stock. During
July 2003 the transaction was consummated with Palmetto Bancshares repurchasing
100 thousand shares at a cost of $2.9 million.

Off-Balance Sheet Arrangements

The Company's off-balance sheet arrangements, which principally include
lending commitments, are described below. At June 30, 2003, December 31, 2002
and June 30, 2002, the Company had no interests in non-consolidated special
purpose entities. Neither Palmetto Bancshares nor the Bank is involved in other
off-balance sheet contractual relationships, unconsolidated related entities
that have off-balance sheet arrangements or transactions that could result in
liquidity needs or other commitments or significantly impact earnings.

Lending commitments include loan commitments, standby letters of credit, and
unused credit card lines. These instruments are not recorded in the consolidated
balance sheet until funds are advanced under the commitments. The Company
provides these lending commitments to customers in the normal course of
business. The Company applies essentially the same credit policies and standards
as it does in the lending process when making these commitments.

For commercial customers, loan commitments generally take the form of
revolving credit arrangements to finance customer's working capital
requirements. For retail customers, loan commitments are generally lines of
credit secured by residential property. Unused credit card lines are generally
used for short-term borrowings. At June 30, 2003, these commitments totaled
$119.4 million.

Standby letters of credit represent an obligation of the Company to a third
party contingent upon the

20

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failure of the Company's customer to perform under the terms of an underlying
contract with the third party or obligates the Company to guarantee or stand as
surety for the benefit of the third party.  The underlying contract may
entail either financial or nonfinancial obligations and may involve such things
as the customer's delivery of merchandise, completion of a construction
contract, release of a lien, or repayment of an obligation.  Under the
terms of a standby letter of credit, generally, drafts will be drawn only when
the underlying event fails to occur as intended.  The Company can seek
recovery of the amounts paid from the borrower; however, standby letters of
credit are generally not collateralized. In recent months the Company has
reflected in its policy regarding such commitments that collateral is encouraged
with exceptions requiring approvals. Commitments under standby letters of credit
are usually for one year or less.  At June 30, 2003, the Company has
recorded no liability for the current carrying amount of the obligation to
perform as a guarantor and no contingent liability is considered necessary, as
such amounts are not considered material.  The maximum potential amount of
undiscounted future payments related to standby letters of credit at June 30,
2003 was $1.7 million.  Past experience indicates that many of these
standby letters of credit will expire unused. However, through its various
sources of liquidity, the Company believes that it has the necessary resources
to meet these obligations should the need arise.  Additionally, current
fair value of such guarantees are deemed immaterial at June 30, 2003.

The table set forth below represents the Bank's issued commitments to extend
credit and unused credit card lines at June 30, 2003 (in thousands).

Home equity loans
    $   23,913Credit cards
    37,616Commercial real estate development
    27,005Other unused lines of credit
    30,892Total unused commitment and unused credit card
      lines
    $ 
      119,426


Generally, mortgage loan commitments are at adjustable rates that fluctuate
with prime rate or are at fixed rates that approximate market rates. The current
amounts of these commitments approximate their fair value and are not deemed
material.

Liquidity

Liquidity management ensures that adequate funds are available to meet
deposit withdrawals, fund loan and capital expenditure commitments, maintain
reserve requirements, pay operating expenses, provide funds for dividends, and
manage operations on an ongoing basis.  Funds are primarily provided by the
Bank through customer deposits, principal and interest payments on loans, loan
sales, securities available for sale, maturities of securities, and
earnings.

Proper liquidity management is crucial to facilitate the Company's ability to
take advantage of new opportunities as well as meet the demands of its
customers.  In this process, the Company focuses on assets and liabilities
and on the manner in which they combine to provide adequate liquidity to meet
the Company's needs. Investment securities are an important tool to the
Company's liquidity management.  Securities classified as available for
sale may be sold in response to changes in interest rates, liquidity needs,
and/or significant prepayment risk. Net cash provided by operations and
deposits from customers have been the primary sources of liquidity for the
Company.  Liquidity is also enhanced by the ability to acquire new deposits
through the Bank's established network of 30 branches in South Carolina.

The Bank has access to borrowings from the FHLB and maintains short-term
lines of credit. At June 30, 2003, the Bank had approximately $85 million of
unused borrowing capacity from the FHLB. The Bank has pledged assets to be used
as collateral if the Bank takes advantage of the FHLB line of credit.  At
June 30, 2003, the Bank had unused short-term lines of credit totaling
approximately $31.1

21

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million (which are withdrawable at the lender's option). Management believes
that these sources are adequate to meet its liquidity needs and to maintain the
liquidity ratio within policy guidelines.The Company's cash needs
include general operating expenses and the payment of dividends and interest on
borrowings.  The Company currently has no long-term debt outstanding and
has declared and paid cash dividends totaling $0.12 per share in the three month
period ended June 30, 2003 and $0.24 per share in the six month period ended
June 30, 2003.  Although there can be no guarantee that additional
dividends will be paid in 2003, the Company plans to continue its quarterly
dividend payments.

In the normal course of business, to meet the financial needs of its
customers, the Company, principally through the Bank, enters into agreements to
extend credit. For amounts and types of such agreements at June 30, 2003, see
"Off-Balance Sheet Arrangements." Increased demand for funds under these
agreements would reduce the Company's liquidity and could require additional
sources of liquidity.

Credit Quality

A willingness to take credit risk is inherent in the decision to grant
credit. Prudent risk-taking requires a credit risk management system based on
sound policies and control processes that ensure compliance with those policies.
Adherence to underwriting standards is managed through a multi-layered credit
approval process and review of loans approved by lenders. Through loan review,
reviews of exception reports, and ongoing analysis of asset quality trends,
compliance with loan monitoring policies is managed.

Table 3 presents information pertaining to nonperforming assets.

Table 3Nonperforming Loans and Assets(dollars in thousands)June 30,
    December 31,2003
    2002
    2002Nonaccrual loans
    $  4,108
    2,697
    2,500Total nonperforming loans
    4,108
    2,697
    2,500Other real estate owned
    2,215
    1,875
    2,468Repossessed automobiles
    151
    472
    181Total nonperforming assets
    $  6,474
    5,044
    5,149Loans past due 90 days and still accruing
(1)
    $    196
    366
    233Total nonperforming loans as a percentage of loans
      (2)
    .62%
    .47
    .40Total nonperforming assets as a percentage of loans, other
      real estate owned, and repossessed automobiles (2)
    .97
    .88
    .82Allowance for loan losses as a percentage of nonperforming
      loans
    1.71x
    2.18
    2.56(1) Substantially all of these loans are credit card
      loans.(2) Calculated using loans, net of unearned, excluding
      mortgage loans held for sale.


Similar to other parts of the country, in recent years the markets served by
the Company have experienced a moderately slowing economy with higher bankruptcy
filings and higher delinquency

22

---



rates.  Although there have been signs of a recovery, the rise in
foreclosures of the first six months of 2003 paralleled mounting job losses and
personal bankruptcies. Until sectors of the economy improve (employment,
consumer spending, etc), credit quality indicators will remain volatile. While
current economic data seems to be signaling improvement (The Consumer Confidence
Index remained steady at 83.5 in June, following a revised 83.6 in May and two
previous monthly increases), the outlook remains uncertain.

Other real estate owned increased $340 thousand at June 30, 2003 from June
30, 2002.  This increase is attributed to several properties acquired in
settlement of loans that have not yet been sold due to market conditions.
Additionally, nonaccrual loans have increased $1.4 million over the same time
frame. Prior to recent times that have seen increased bankruptcies and job
losses, more flexibility was given for borrowers to make payments when they
became delinquent. Since that time, the Company has been applying more strict
collection policies to such loans.  The Company believes in most of these
nonaccrual loan cases, collateral is sufficient to cover any potential
losses.  As a result, the Company has been more proactive in advancing
loans to nonaccrual status as a step toward foreclosure, and has ceased payment
negotiations that typically took place in the past.

The Bank uses an allowance model that takes into account loan risk grades,
delinquency trends, and charge-off ratios as well as loan growth. Assessing the
adequacy of the allowance requires considerable judgment. Management's judgments
are based on numerous assumptions about current events, which management
believes to be reasonable. Management believes, however, that, although the
Company has seen an increase in both nonaccrual loans and other real estate
owned at June 30, 2003 from June 30, 2002, loss exposure in the Company's loan
portfolio is identified, adequately reserved in a timely manner, and closely
monitored to ensure that changes are promptly addressed in its analysis of
allowance adequacy. Accordingly, management believes the allowance as of June
30, 2003 is adequate, based on its assessment of probable losses, and available
facts and circumstances then prevailing. Additionally, management believes that
there will always remain a core level of delinquent loans and real estate and
personal property acquired in settlement of loans from normal lending
operations.  With this in mind, long term Bank goals include the management
of problem assets.

23

---



EARNINGS REVIEW

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2003 AND 2002

Overview

Net income for the three months ended June 30, 2003 totaled $2.7 million, up
9.0% compared with $2.5 million for the second quarter of 2002. Earnings per
diluted share for second quarter 2003 were $0.42, a 10.5% increase from $0.38
per diluted share in the second quarter 2002. Earnings per basic share for the
second quarter 2003 were $0.43, a 7.5% increase from $0.40 per basic share for
second quarter 2002.

Average common shares outstanding on a diluted basis were 6,498,919 for
second quarter 2003, up 0.52% from 6,465,218 for second quarter 2002. Average
common shares outstanding on a basic basis were 6,346,105 for second quarter
2003, up slightly from 6,293,765 for second quarter 2002.

Net interest income after the provision for loan losses for the three months
ended June 30, 2003 and 2002 was $8.1 million and $7.4 million, respectively, an
increase of 8.4%.  Noninterest income for the three months ended June 30,
2003 totaled $3.8 million, up 6.6% compared with $3.6 million for second quarter
2002. Noninterest expense for the three months ended June 30, 2003 increased
$551 thousand from the three month period ended June 30, 2002.

Net Interest Income

Net interest income is the difference between gross interest and fees on
earning assets, primarily loans and investment securities and interest paid on
deposits and other interest-earning liabilities. The net interest margin
measures how effectively a company manages the difference between the yield on
earning assets and the rate paid on funds to support those assets. Fully
tax-equivalent net interest income adjusts the yield for assets earning tax
exempt income to a comparable yield on a taxable basis.  Table 4 presents
average balance sheets and a net interest income analysis on a tax-equivalent
basis for the three months ended June 30, 2003 and 2002.

Fully tax-equivalent net interest income for second quarter 2003 increased
$461 thousand, or 5.3%, to $9.2 million from $8.7 million for second quarter of
2002. The fully tax-equivalent net interest margin decreased to 4.64% in the
second quarter of 2003 from 4.93% in the second quarter of 2002.

Average earning assets grew $84.3 million, or 11.9%, to $791.4 million for
second quarter 2003 from $707.1 million for second quarter of 2002, primarily
from the growth of loans and investment securities offset by a decline in
federal funds sold. Average loans, including mortgage loans held for sale, were
$668.6 million for second quarter 2003 compared with $567.4 million for second
quarter 2002. Average investment securities, including the average net
unrealized securities gains, increased from $101.9 million for second quarter of
2002 to $111.5 million for second quarter 2003.

Average earning traditional deposits increased from $560.1 million for second
quarter 2002 to $622.0 million for second quarter 2003. Average other
interest-earning liabilities increased to $36.0 million for second quarter 2003
from $33.6 million for second quarter 2002.

24

---



Table 4Comparative Average
      Balance - Yields and Costs(dollars in
      thousands)For the three months
      ended June 30,2003
    
    2002AverageBalance
    Income
      /Expense
    Yield
      /Rate
    
    AverageBalance
    Income
      /Expense
    Yield
      /RateASSETSEarning assetsFederal funds sold
    $        9,170
    $         
      28
    1.22
    %
    $  
      35,610
    $        153
    1.72
    %Federal Home Loan Bank stock and
      deposits
    2,149
    20
    3.73
    
    2,057
    24
    4.68Nontaxable investment securities (2)
      (3)
    36,949
    575
    6.24
    
    43,117
    743
    6.91Taxable investment securities
      (2)
    74,508
    480
    2.58
    
    58,825
    544
    3.71Loans, net of unearned (1)
    668,588
    10,772
    6.46
    
    567,446
    10,297
    7.28Total earning assets
    791,364
    11,875
    6.02
    
    707,055
    11,761
    6.67Nonearning assetsCash and due from banks
    25,760
    
    
    
    26,675Allowance for loan losses
    (6,975)
    
    
    
    (5,740)Premises and equipment, net
    19,884
    
    
    
    19,791Accrued interest
    4,040
    
    
    
    4,396Other assets
    16,105
    
    
    
    12,549Total nonearning assets
    58,814
    
    
    
    57,671Total assets
    $    850,178
    
    
    
    $ 
      764,726LIABILITIES AND
      SHAREHOLDERS' EQUITYLiabilitiesEarning
    liabilitiesDemand deposits
    $   
      248,357
    $        307
    0.50
    %
    $  229,457
    $        432
    0.76
    %Savings
    41,865
    37
    0.35
    
    38,042
    62
    0.65Time
    
    331,762
    2,324
    2.81
    
    293,265
    2,491
    3.41Total earning deposits
    621,984
    2,668
    1.72
    
    560,764
    2,985
    2.14Other earning liabilities
    35,992
    57
    0.64
    
    33,554
    87
    1.04Total earning liabilities
    657,976
    2,725
    1.66
    
    594,318
    3,072
    2.07Nonearning
      liabilitiesNonearning deposits
    113,289
    
    
    
    103,182Other nonearning
liabilities
    7,491
    
    
    
    4,591Total nonearning
liabilities
    120,780
    
    
    
    107,773Total liabilities
    778,756
    
    
    
    702,091Shareholders'
    equity
    71,422
    
    
    
    62,635Total liabilities and shareholders'
      equity
    $    850,178
    
    
    
    $ 
      764,726NET INTEREST MARGIN
      (FTE)
    
    $     9,150
    4.64
    %
    
    $     8,689
    4.93
    %Tax-equivalent adjustment
      (3)
    
    $        184
    
    
    
    $        245(1)
    Nonaccrual loans are included in
      average balances for yield computations.  The effect of foregone
      interest incomeas 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.(3)
    The tax-equivalent adjustment to net
      interest income adjusts the yield for assets earning tax-exempt
      incometo a comparable yield on a taxable
      basis.  Yields on nontaxable securities are stated on a fully taxable
      equivalentbasis, assuming the effective rate
      for the respective period.  The adjustments made to convert
      nontaxable investments to a fullytaxable equivalent basis were $184
      and $245 for the 2003 and 2002 periods, respectively.


25

---



The underlying factor for the changes in the yields and rates on earning
assets and costing liabilities has been the action of the Federal Reserve Open
Market Committee during the past 30 months. From January 2001 through the end of
June 2003, the Federal Reserve cut interest rates 5.50%.  Variable rate
loans typically repriced immediately following changes in interest rates by the
Federal Reserve. During second quarter 2003 as compared with second quarter
2002, the net interest margin declined  primarily from decreasing yields of
the loan and securities portfolios which was a direct result of the interest
rate environment only partially offset by repricing certificates of deposits at
lower rates.   The weighted average yield of the loan portfolio
decreased from 7.28% for second quarter 2002 to 6.46% for second quarter 2003.
The weighted average yield of the securities portfolio decreased from 5.06% for
second quarter 2002 to 3.79% for second quarter 2003.   As the Company
reduced its interest rates during the year, the decline in the earning asset
yield outpaced the decline in the funding source rate.

Provision for Loan Losses

The allowance for loan losses is increased by charges to current period
operations, through the provision for loan losses, when, based on the Company's
allowance model, the balance is deemed insufficient to absorb probable losses in
the portfolio at the balance sheet date.  The provision for loan losses was
$900 thousand for second quarter 2003 as compared with $1.0 million for second
quarter 2002. The provision is adjusted each month to reflect loan volume growth
and allow for loan charge‐offs, recoveries and other factors that impact
management's assessment of the adequacy of the allowance for loan losses. 
Management's objective is to maintain the allowance for loan losses at an
adequate level to cover probable losses in the portfolio.  Additions to the
allowance for loan losses are based on management's evaluation of the loan
portfolio under current economic conditions, past loan loss experience, and such
other factors, which in management's judgment deserve recognition in estimating
loan losses.

During mid-1999 management noted deterioration in the performance of the
sales finance portfolio that resulted in increased charge-offs during 1999 and
2000. Higher charge-offs in this portfolio contributed to the increase in the
provision for loan losses in recent years. However, annualized second quarter
net charge-offs as a percentage of average loans excluding mortgage loans held
for sale have begun to decline and were .40% for the quarter ended June 30, 2003
compared with .63% for the quarter ended June 30, 2002.  This decline in
charge-offs effects historical charge-off ratios, which are factors within the
Company's allowance model. See "Allowance for Loan Losses" for discussion of
such factors and their effects on the allowance for loan losses and the
provision for loan losses.

While management uses the best information available to make evaluations,
future adjustments to the allowance in the form of provisions through the income
statement may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation.  The allowance for loan losses
is subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment, based upon information that is available to them at the
time of their examination.

NonInterest Income and Expense

Noninterest income for second quarter 2003 increased $235 thousand, or 6.6%,
to $3.8 million from $3.6 million for second quarter 2002.  Noninterest
expense for second quarter 2003 increased $551 thousand, or 7.5%, to $7.9
million at the end of second quarter 2003.

Major contributors to the increase in noninterest income for the three months
ended June 30, 2003 from the same period ended 2002 were increases in service
changes on deposit accounts totaling $235 thousand and gains on sales of
mortgage loans totaling $142 thousand.  The increase in gains on sales of
loans in second quarter 2003 as well as higher levels of gains in recent
previous quarters are attributable to the increased originations and refinances
of mortgage loans resulting from low mortgage loan interest rates.  Should
interest rates increase, the level of originations and refinances of mortgage
loans may decline which may result in gains on sales of mortgage loans being
lower than

26

---



recent results.  Offsetting these increases was a decline in other
noninterest income totaling $297 thousand.  The main component of the
decline in other noninterest income was the increase in mortgage servicing
rights amortization, which reduces servicing fee income, during second quarter
2003 from the same period of 2002.  Due to several factors including, but
not limited to, the increased prepayment speeds attributable to current market
interest rates, amortization expense on servicing rights increased $354 thousand
in the quarter ended June 30, 2003 from the quarter ended June 30, 2002. 
Additionally, the Company recorded an impairment reserve against the carrying
value of servicing rights during the 2003 quarter of $87 thousand, an increase
of $79 thousand from the second quarter 2002 impairment of $8 thousand.

The increase within noninterest expense for the three months ended June 30,
2003 from the three months ended June 30, 2002 was the result of fluctuations in
several accounts with the majority of the change accumulated within two
financial statement line items, salaries and other personnel expense and
furniture and equipment expense, which increased $455 thousand and $170
thousand, respectively for the three months ended June 30, 2003 from the same
period ended June 30, 2002.

The increase in salaries and other personnel expense for the three month
period ended June 30, 2003 compared with the same period of 2002 is due to
increased staffing in various operation and retail areas as well as annual
raises. The increase in furniture and equipment expense is due to additional
expense related to new item processing hardware, software, and the related
installations the first payment of which was made in July 2002.

Income Taxes

Income tax expense attributable to income from continuing operations
increased to $1.3 million for second quarter 2003 from $1.2 million for second
quarter 2002. The effective income tax rate was 32% for second quarter 2003 and
33% for second quarter 2002.

27

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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
2003 AND 2002

Overview

Net income for the six month period ended June 30, 2003 totaled $5.6 million,
up 13.6% compared with $4.9 million for the same six month period of 2002.
Earnings per diluted share for the six month period ended June 30, 2003 were
$0.87, a 14.5% increase from $0.76 per diluted share in the same period of 2002.
Earnings per basic share for the six month period ended June 30, 2003 were
$0.89, a 12.7% increase from $0.79 per basic share for the same six month period
of 2002.

Average common shares outstanding on a diluted basis were 6,483,582 for the
six month period ended June 30, 2003, up 0.34% from 6,461,727 for the same six
month period of 2002. For the six month period ended June 30, 2003 average
common shares outstanding on a basic basis were 6,336,455, up slightly from
6,290,529 for the first six months of 2002.

Net interest income after the provision for loan losses for the six months
ended June 30, 2003 and 2002 was $16.1 million and $14.9 million, respectively,
an increase of 8.3%.  Noninterest income for the six months ended June 30,
2003 totaled $7.3 million, up 4.9 % compared with $6.9 million for the first six
months of 2002. Noninterest expense for the six months ended June 30, 2003
increased $607 thousand from the six month period ended June 30, 2002.

Net Interest Income

Net interest income is the difference between gross interest and fees on
earning assets, primarily loans and investment securities and interest paid on
deposits and other interest-earning liabilities. The net interest margin
measures how effectively a company manages the difference between the yield on
earning assets and the rate paid on funds to support those assets. Fully
tax-equivalent net interest income adjusts the yield for assets earning tax
exempt income to a comparable yield on a taxable basis.  Table 5 presents
average balance sheets and a net interest income analysis on a tax-equivalent
basis for the six months ended June 30, 2003 and 2002.

Fully tax-equivalent net interest income for the first six months of 2003
increased $937 thousand, or 5.4%, to $18.3 million from $17.3 million for the
first six months of 2002. The fully tax-equivalent net interest margin decreased
to 4.73% for the first half of 2003 from 5.02% for the first half of 2002.

Average earning assets grew $83.5 million, or 12.0%, to $779.8 million for
the first six months of 2003 from $696.2 million for the first six months of
2002, primarily from the growth of loans and investment securities offset by a
decline in federal funds sold. Average loans, including mortgage loans held for
sale, were $655.6 million for the first six months of 2003 compared with $566.5
million for same period of 2002. Average investment securities, including the
average net unrealized securities gains, increased from $102.7 million for the
first half of 2002 to $111.7 million for the same period of 2003.

Average earning traditional deposits increased from $556.0 million for first
six months of 2002 to $616.5 million for first six months of 2003. Average other
interest-earning liabilities increased to $35.0 million for the six months ended
June 30, 2003 from $31.8 million for the same period of 2002.

28

---



Table 5Comparative Average
      Balance - Yields and Costs(Dollars in
      thousands)For the six months
      ended June 30,2003
    
    2002AverageBalance
    Income
      /Expense
    Yield
      /Rate
    
    AverageBalance
    Income
      /Expense
    Yield
      /RateASSETSEarning assetsFederal funds sold
    $  
      10,358
    $         
      63
    1.23
    %
    $  
      25,011
    $        211
    1.70
    %Federal Home Loan Bank stock and
      deposits
    2,138
    42
    3.96
    
    2,044
    50
    4.93Nontaxable investment securities (2)
      (3)
    35,660
    1,138
    6.44
    
    48,902
    1,691
    6.97Taxable investment securities
      (2)
    76,041
    1,104
    2.93
    
    53,756
    986
    3.70Loans, net of unearned (1)
    655,596
    21,494
    6.61
    
    566,535
    20,825
    7.41Total earning assets
    779,793
    23,841
    6.17
    
    696,248
    23,763
    6.88Nonearning assetsCash and due from banks
    27,652
    
    
    
    28,248Allowance for loan losses
    (6,957)
    
    
    
    (5,723)Premises and equipment, net
    19,832
    
    
    
    19,606Accrued interest
    4,273
    
    
    
    4,561Other assets
    15,940
    
    
    
    11,907Total nonearning assets
    60,740
    
    
    
    58,599Total assets
    $ 
      840,533
    
    
    
    $ 
      754,847LIABILITIES AND
      SHAREHOLDERS' EQUITYLiabilitiesEarning
    liabilitiesDemand deposits
    $  244,250
    $        611
    0.50
    %
    $  228,002
    $        872
    0.77
    %Savings
    40,578
    76
    0.38
    
    36,697
    128
    0.70Time
    
    331,657
    4,764
    2.90
    
    291,266
    5,252
    3.64Total earning deposits
    616,485
    5,451
    1.78
    
    555,965
    6,252
    2.27Other earning liabilities
    35,037
    105
    0.60
    
    31,750
    163
    1.04Total earning liabilities
    651,522
    5,556
    1.72
    
    587,715
    6,415
    2.20Nonearning
      liabilitiesNonearning deposits
    110,631
    
    
    
    100,638Other nonearning
liabilities
    8,065
    
    
    
    4,683Total nonearning
liabilities
    118,696
    
    
    
    105,321Total liabilities
    770,218
    
    
    
    693,036Shareholders'
    equity
    70,315
    
    
    
    61,811Total liabilities and shareholders'
      equity
    $ 
      840,533
    
    
    
    $ 
      754,847NET INTEREST MARGIN
      (FTE)
    
    $    18,285
    4.73
    %
    
    $    17,348
    5.02
    %Tax-equivalent adjustment
      (3)
    
    $        364
    
    
    
    $        558(1)
    Nonaccrual loans are included in
      average balances for yield computations.  The effect of foregone
      interest incomeas 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.(3)
    The tax-equivalent adjustment to net
      interest income adjusts the yield for assets earning tax-exempt
      incometo a comparable yield on a taxable
      basis.  Yields on nontaxable securities are stated on a fully taxable
      equivalentbasis, assuming the effective rate
      for the respective period.  The adjustments made to convert
      nontaxable investments to a fullytaxable equivalent basis were $364
      and $558 for the 2003 and 2002 periods, respectively.


29

---



The underlying factor for the changes in the yields and rates on earning
assets and costing liabilities has been the action of the Federal Reserve Open
Market Committee during the past 30 months. From January 2001 through the end of
June 2003, the Federal Reserve cut interest rates 5.50%.  Variable rate
loans typically repriced immediately following changes in interest rates by the
Federal Reserve. During the six months ended June 30, 2003 as compared with the
same period of 2002, the net interest margin declined primarily from decreasing
yields of the loan and securities portfolios which was a direct result of the
interest rate environment only partially offset by repricing certificates of
deposits at lower rates. The weighted average yield of the loan portfolio
decreased from 7.41% for the six month period ended June 30, 2002 to 6.61% for
the same period of 2003. The weighted average yield of the securities portfolio
decreased from 5.26% for the six month period ended June 30, 2002 to 4.05% for
the same period of 2003.   As the Company reduced its interest rates
during the year, the decline in the earning asset yield outpaced the decline in
the funding source rate.

Provision for Loan Losses

The allowance for loan losses is increased by charges to current period
operations, through the provision for loan losses, when, based on the Company's
allowance model, the balance is deemed insufficient to absorb probable losses in
the portfolio at the balance sheet date.  The provision for loan losses was
$1.8 million for first six months of 2003 as compared with $1.9 million for the
first six months of 2002. The provision is adjusted each month to reflect loan
volume growth and allow for loan charge‐offs, recoveries and other factors that
impact management's assessment of the adequacy of the allowance for loan
losses.  Management's objective is to maintain the allowance for loan
losses at an adequate level to cover probable losses in the portfolio. 
Additions to the allowance for loan losses are based on management's evaluation
of the loan portfolio under current economic conditions, past loan loss
experience, and such other factors, which in management's judgment deserve
recognition in estimating loan losses.

During mid-1999 management noted deterioration in the performance of the
sales finance portfolio that resulted in increased charge-offs during 1999 and
2000. Higher charge-offs in this portfolio contributed to the increase in the
provision for loan losses in recent years. However, annualized year-to-date net
charge-offs as a percentage of average loans excluding mortgage loans held for
sale have begun to decline and were .61% for the six month period ended June 30,
2002 compared with .37% for the six month period ended June 30, 2003.  This
decline in charge-offs effects historical charge-off ratios, which are factors
within the Company's allowance model. See "Allowance for Loan Losses" for
discussion of such factors and their effects on the allowance for loan losses
and the provision for loan losses.

NonInterest Income and Expense

Noninterest income for the six month period ended June 30, 2003 increased
$338 thousand, or 4.9%, to $7.3 million from $6.9 million for the six month
period ended June 30, 2002.  Noninterest expense for first six months of
2003 increased $607 thousand, or 4.2%, to $15.1 million at the end of the six
month period ended June 30, 2003.

Major contributors to the increase in noninterest income for the six months
ended June 30, 2003 from the same period ended 2002 were increases in service
changes on deposit accounts totaling $414 thousand and gains on sales of
mortgage loans totaling $256 thousand.  The increase in gains on sales of
loans during the first six months of 2003 as well as higher levels of gains in
recent previous quarters are attributable to the increased originations and
refinances of mortgage loans resulting from low mortgage loan interest
rates.  Should interest rates increase, the level of originations and
refinances of mortgage loans may decline which may result in gains on sales of
mortgage loans being lower than recent results.  Offsetting these increases
was a decline in other noninterest income totaling $467 thousand.  The main
component of the decline in other noninterest income was the increase in
mortgage servicing rights amortization, which reduces servicing fee income,
during the first six months of 2003 from the same period of 2002.  Due to
several factors including, but not

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limited to, the increased prepayment speeds attributable to current market
interest rates, amortization expense on servicing rights increased $578 thousand
in the six month period ended June 30, 2003 from the six month period ended June
30, 2002.  Additionally, the Company recorded an impairment reserve against
the carrying value of servicing rights during the first six months of 2003 of
$133 thousand, an increase of $89 thousand from the same period of 2002
impairment of $44 thousand.

The increase within noninterest expense for the six month period ended June
30, 2003 from the six month period ended June 30, 2002 was the result of
increases in several accounts with the majority of the change accumulated within
two financial statement line items, salaries and other personnel expense and
furniture and equipment expense, offset by a decrease in other noninterest
expense.  Salaries and other personnel expense increased $446 thousand
during the six month period ended June 30, 2003 compared with the same of period
of 2002. Furniture and equipment expense increased $348 thousand during the six
month period ended June 30, 2003 compared with the same of period of
2002.   Offsetting these increases was a decrease in other noninterest
expense of $156 thousand when comparing the same periods. The increase in
salaries and other personnel expense for the six month period ended June 30,
2003 compared with the same period of 2002 is due to increased staffing in
various operation and retail areas as well as annual raises.  The increase
in furniture and equipment expense is due to additional expense related to new
item processing hardware, software, and the related installations the first
payment of which was made in July 2002.

Income Taxes

Income tax expense attributable to income from continuing operations
increased to $2.7 million for the six months ended June 30, 2003 from $2.4
million for same period of 2002. The effective income tax rate was 32% for six
months ended June 30, 2003 and 33% for same period of 2002.

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ACCOUNTING AND REPORTING MATTERS

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This Interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others," which is being superseded. FIN
No. 45 requires that the initial recognition and initial measurement provisions
of the Interpretation be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. Disclosure requirements of the Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the
disclosure requirements effective as of December 31, 2002. No contingent
liability was determined to be necessary relating to Company's obligation to
perform as a guarantor, since such amounts are not considered material.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted this standard effective December 31, 2002 and has included the required
disclosures in this Quarterly Report on Form 10-Q for the quarter ended June 30,
2003. As of June 30, 2003, the Company has not elected the fair value treatment
of stock-based compensation. Therefore, the adoption of this standard had no
impact on the financial position or the results of operations of the
Company.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which addresses consolidation by
business enterprises of variable interest entities. Under FIN 46, an enterprise
that holds significant variable interest in a variable interest entity but is
not the primary beneficiary is required to disclose the nature, purpose, size,
and activities of the variable interest entity, its exposure to loss as a result
of the variable interest holder's involvement with the entity, and the nature of
its involvement with the entity and date the involvement began. The primary
beneficiary of a variable interest entity is required to disclose the nature,
purpose, size, and activities of the variable interest entity, the carrying
amount and classification of consolidated assets that are collateral for the
variable interest entity's obligations, and any lack of recourse by creditors
(or beneficial interest holders) of a consolidated variable interest entity to
the general creditors (or beneficial interest holders) of a consolidated
variable interest entity to the general creditor of the primary beneficiary. FIN
46 is effective for the first fiscal year or interim period beginning after June
15, 2003. The impact to the Company upon adoption is currently not known.

In April 2003, the FASB issued SFAS No. 149, "*Amendment of Statement 133
on Derivative Instruments and Hedging Activities*." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement amends Statement 133 for decisions made (1) as part
of the Derivatives Implementation Group process that effectively required
amendments to Statement 133, (2) in connection with other Board projects dealing
with

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financial instruments, and (3) in connection with implementation issues
raised in relation to the application of the definition of a derivative, in
particular, the meaning of an initial net investment that is smaller than would
be required for other types of contracts that would be expected to have a
similar response to changes in market factors, the meaning of underlying, and
the characteristics of a derivative that contains financing components. The
changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. In addition, except as stated below, all provisions of this Statement
should be applied prospectively. The provisions of this Statement that relate to
Statement 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, provisions of the statement
which relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. At June 30, 2003, the
Company has no embedded derivative instruments.  The Company has
freestanding derivative instruments consisting of fixed rate conforming loan
commitments.  The commitments to originate fixed rate conforming loans were
not material at June 30, 2003. The Company does not currently engage in hedging
activities.  The Company adopted the provisions of SFAS No. 149 on June 30,
2003, which had no impact on the financial position or results of operations of
the Company.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances.) Many of
those instruments were previously classified as equity. SFAS No. 150 is
generally effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted the
provisions of SFAS No. 150, which did not have a material impact on the
financial position or results of operations of the Company.

In June 2003, the American Institute of Certified Public Accountants (AICPA)
issued an exposure draft of a proposed Statement of Position (SOP), "Allowance
for Credit Losses." The proposed SOP addresses the recognition and measurement
by creditors of the allowance for credit losses related to all loans, as that
term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." The proposed SOP provides that the allowance for credit losses reported
on a creditor's balance sheet should consist only of (1) a component for
individual loan impairment recognized and measured pursuant to FASB Statement
No. 114 and (2) one or more components of collective loan impairment recognized
pursuant to FASB Statement No. 5, "Accounting for Contingencies," and measured
in accordance with the guidance in the proposed SOP. The provisions of the
proposed SOP would be effective for financial statements for fiscal years
beginning after December 15, 2003, with earlier application permitted. The
effect of initially applying the provisions of the proposed SOP would be
reported as a change in accounting estimate.  Comments on the exposure
draft are due by September 19, 2003.  Although the effect on the financial
position or results of operations of the Company related to the adoption of this
proposed SOP have not been determined, adoption is expected to have a material
impact on the Company.

Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the financial position or the
results of operations of the Company upon adoption.

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Item 3.  Quantitative and Qualitative Disclosures about Market
Risk

Market risk is the risk of loss from adverse changes in market prices and
rates.  The Company's market risk arises principally from interest rate
risk inherent in its lending, deposit, borrowing and investing activities. 
Management actively monitors and manages its inherent rate risk exposure.
Although the Company manages other risks, such as credit quality and liquidity
risk, in the normal course of business, management considers interest rate risk
to be its most significant market risk. This risk could potentially have the
largest material effect on the Company's financial condition and results of
operations.  Other types of market risks, such as foreign currency exchange
rate risk and commodity price risk, do not arise in the normal course of the
Company's business activities.

The Company's profitability is affected by fluctuations in interest
rates.  Management's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings.  A sudden and
substantial increase or decrease in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent or on the same basis.  The Company monitors the impact of
changes in interest rates on its net interest income using several tools.

At June 30, 2003, management believes that there have been no significant
changes in market risk as disclosed in Palmetto Bancshares' Annual Report on
Form 10-K for the year ended December 31, 2002.

The Bank's goal is to minimize interest rate risk between interest-bearing
assets and liabilities at various maturities through its Asset-Liability
Management ("ALM").  ALM involves managing the mix and pricing of assets
and liabilities in the face of uncertain interest rates and an uncertain
economic outlook.  It seeks to achieve steady growth of net interest income
with an acceptable amount of interest rate risk and sufficient liquidity. 
The process provides a framework for determining, in conjunction with the profit
planning process, which elements of the Company's profitability factors can be
controlled by management.  Understanding the current position and
implications of past decisions is necessary in providing direction for the
future financial management of the Company.  The Company uses an
asset-liability model to determine the appropriate strategy for current
conditions.

Interest sensitivity management is part of the asset-liability management
process.  Interest sensitivity gap ("GAP") is the difference between total
rate sensitive assets and rate sensitive liabilities in a given time
period.  The Company's rate sensitive assets are those repricing within one
year and those maturing within one year.  Rate sensitive liabilities
include insured money market accounts, savings accounts, interest-bearing
transaction accounts, time deposits and borrowings.  The profitability of
the Company is influenced significantly by management's ability to manage the
relationship between rate sensitive assets and liabilities.

The following table is a summary of the Company's one year gap (dollars in
thousands):

June 30,
      2003Interest-earning assets maturing or repricing within one
      year
    $ 356,276Interest-bearing liabilities maturing or repricing within
      one year
    365,887Cumulative gap
    $      9,611Gap as a percentage of total assets
    1.12 %


The above analysis does not take in to account any prepayments on mortgages,
consumer or other loans, or securities.  All maturities are stated in
contractual terms.  The Company's current GAP analysis reflects that in
periods of increasing or decreasing interest rates, rate sensitive assets will
reprice slower than rate sensitive liabilities. The Company's GAP analysis also
shows that at the interest repricing of one year, the Company's net interest
margin would be adversely impacted by an increase in market interest rates. This
analysis, however, does not take into account the dynamics of the
marketplace.  GAP is a static measurement that assumes that if the prime
rate increases by 1.00%, all assets and liabilities that are due to reprice will
increase by 1.00% at the next opportunity.

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Because the Company's management feels that GAP analysis is a static
measurement, it manages its interest income through its asset/liability
strategies that focus on a net interest income model based on management's
projections.  The Company has a targeted net interest income range of plus
or minus twenty percent based on a 3.00% change over twelve months.  
The asset/liability committee meets weekly to address interest pricing issues,
and this model is reviewed monthly.  Management will continue to monitor
its liability sensitive position in times of increasing interest rates, which
might adversely affect its net interest margin.

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Item 4.  Controls and Procedures

Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Accounting Officer,
the effectiveness of the design and operation of the Company's disclosure
controls and procedures has been evaluated within 90 days of the filing date of
this quarterly report, and, based on such evaluation, our Chief Executive
Officer and Chief Accounting Officer have concluded that these controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.

Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that are filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that are filed or submitted under the Exchange Act is accumulated
and communicated to the Company's management, including the Chief Executive
Officer and Chief Accounting Officer, as appropriate to allow timely decisions
regarding required disclosure.

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Item 1.  Legal Proceedings

The Company is currently subject to various legal proceedings and claims that
have arisen in the ordinary course of its business. In the opinion of management
based on consultation with external legal counsel, any reasonably foreseeable
outcome of such current litigation would not materially affect the Company's
consolidated financial position or results of operations.

Item 2.  Changes in Securities and Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Securities
Holders

The annual shareholders' meeting of Palmetto Bancshares, Inc. was held on
April 22, 2003.  5,275,326 shares were present in person or by proxy of the
shares of common stock entitled to vote at the Annual Meeting.

Proposal #1 - Election of Directors.  The shareholders elected L. Leon
Patterson, J. David Wasson, Jr., Sam B. Phillips, Jr., and William S. Moore as
directors of the Company for three year terms ending in 2006.  At the
meeting the following directors were elected for the terms specified:

Term to Expire in 2006
    Number of Votes For
    Number of Votes WithheldL. Leon Patterson
    4,983,179
    292,147J. David Wasson, Jr.
    4,982,979
    292,347Sam B. Phillips, Jr.
    4,987,979
    287,347William S. Moore
    4,987,979
    287,347


Proposal #2 - Proposal to Adopt the Amendment to Palmetto Bancshares, Inc.
1997 Stock Compensation Plan.  The shareholders approved an amendment to
Palmetto Bancshares, Inc. 1997 Stock Compensation Plan to increase the shares
available for issuance by 100,000 shares with 4,738,715 shares voting in favor,
490,546 shares voting against, and 46,065 shares abstaining.

Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8‐K

(a)  Exhibits

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

31.2      Paul W. Stringer's Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

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

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(b)  Reports on Form 8-K

On July 16, 2003, the Company filed a Form 8-K announcing the earnings
release dated July 14, 2003, which included selected financial data for the
quarter ended June 30, 2003 and for select other previously reported
periods.

On July 31, 2003, the Company filed a Form 8-K announcing the mailing of its
quarterly earnings overview to shareholders dated August 7, 2003, which included
selected financial data for the quarter ended June 30, 2003 and for select other
previously reported periods.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PALMETTO BANCSHARES, INC.

By:

/s/      L. Leon
Patterson

L. Leon Patterson Chairman and Chief Executive Officer

/s/      Paul W. Stringer

Paul W. Stringer

President and Chief Operating Officer(Chief Accounting Officer)

Date:   August 14, 2003

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