U. S. SECURITIES AND EXCHANGE
  COMMISSION
	WASHINGTON, D.C. 20549FORM 10-Q(X)
  QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT 
	OF 1934For the quarterly period ended March
  31, 2005OR(  )
  TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF 1934For the transition period from
  __________ to __________Commission file number  0-26016PALMETTO BANCSHARES, INC.(Exact name of registrant as
  specified in its charter)South Carolina
	(State or other jurisdiction of
  incorporation or organization)
  
  74-2235055
	(IRS Employer Identification No.)301 Hillcrest Drive, Laurens, South
  Carolina
	(Address of principal executive
  offices)
  
  29360
	(Zip Code)(864) 984-4551
	(Registrant's telephone number)
  
  www.palmettobank.com
	(Registrant's web site)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 __Indicate
  the number of shares outstanding of each of the issuer's classes of common
  stock, as of the latest
  practicable date.Class
	 -----------------------------
	Common stock, $5.00 par value
  
  Outstanding at May 4, 2005
	 -------------------------------
	6,313,535





PALMETTO BANCSHARES, INC. AND SUBSIDIARYTable of ContentsPage No.PART I.  FINANCIAL INFORMATION
  3Item 1.
  Financial Statements
  3Item 2.
  Management's Discussion and Analysis of Financial Condition and Results of Operations
  17Item 3.
  Quantitative and Qualitative Disclosures about Market Risk
  36Item 4.
  Controls and Proecedures
  36PART II.  OTHER INFORMATION
  37Item 1.
  Legal Proceedings
  37Item 2.
  Unregistered Sales of Equity 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
  37SIGNATURES
  38







PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

PALMETTO BANCSHARES, INC. AND SUBSIDIARYConsolidated Balance Sheets(dollars in thousands, except common share data)March 31,
			
			December 31,2005
			
			2004
			
			2004(unaudited)ASSETSCash and cash equivalentsCash and due from banks
			
			
			$        36,554
			
			26,406
			
			32,055Federal funds sold
			
			
			1,344
			
			10,090
			
			1,390Total cash and cash equivalents
			
			37,898
			
			36,496
			
			33,445Federal Home Loan Bank (FHLB) stock, at cost
			4,331
			
			2,122
			
			3,866Investment securities available for sale, at fair market value
			138,385
			
			106,373
			
			143,733Mortgage loans held for sale
			
			
			5,335
			
			6,353
			
			5,854Loans
			
			
			
			
			802,948
			
			706,999
			
			773,254Less allowance for loan losses
			
			(7,838)
			
			(7,692)
			
			(7,619)Loans, net
			
			
			795,110
			
			699,307
			
			765,635Premises and equipment, net
			
			
			22,384
			
			21,927
			
			22,141Accrued interest receivable
			
			
			4,452
			
			3,784
			
			4,285Other assets
			
			
			
			14,709
			
			15,598
			
			14,143Total assets
			
			
			$  1,022,604
			
			891,960
			
			993,102LIABILITIES AND SHAREHOLDERS' EQUITYLiabilitiesDepositsNoninterest-bearing
			
			
			$      124,251
			
			122,247
			
			124,489Interest-bearing
			
			
			706,922
			
			656,554
			
			702,958Total deposits
			
			
			831,173
			
			778,801
			
			827,447Retail repurchase agreements
			
			
			20,981
			
			18,126
			
			16,397Commercial paper (Master notes)
			
			
			18,993
			
			16,339
			
			17,051Federal funds purchased
			
			
			13,320
			
			-
			
			-Federal Home Loan Bank ("FHLB") borrowings
			52,000
			
			-
			
			46,000Other liabilities
			
			
			4,038
			
			4,039
			
			5,445Total liabilities
			
			
			940,505
			
			817,305
			
			912,340Commitments and contingencies (Note 9)Shareholders' EquityCommon stock - par value $5.00 per share;  authorized 10,000,000shares; issued and outstanding 6,313,535, 6,265,440, and 6,297,285at March 31, 2005, March 31, 2004, and December 31, 2004, respectively.
			31,567
			
			31,327
			
			31,486Capital surplus
			
			
			555
			
			268
			
			448Retained earnings
			
			
			50,324
			
			41,607
			
			47,923Accumulated other comprehensive income (loss), net of tax
			(347)
			
			1,453
			
			905Total shareholders' equity
			
			82,099
			
			74,655
			
			80,762Total liabilities and shareholders' equity
			$  1,022,604
			
			891,960
			
			993,102


See Notes to Consolidated Interim
Financial Statements.

3






|PALMETTO BANCSHARES, INC. AND SUBSIDIARY 
|-----------------------------------------
|Consolidated Statements of Income        
|(Dollars in thousands, except share data)
|                                         
|                                         
|                                         
|                                         
|Interest income                          
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Interest expense                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Provision for loan losses                
|                                         
|                                         
|                                         
|Noninterest income                       
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Noninterest expense                      
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Provision for income taxes               
|                                         
|                                         
|                                         
|Share Data:                              
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         

See Notes to Consolidated Interim
Financial Statements.

4






|PALMETTO BANCSHARES, INC. AND SUBSIDIARY                                           
|-----------------------------------------------------------------------------------
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
|(dollars in thousands, except common share data)                                   
|(unaudited)                                                                        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Balance at December 31, 2003                                                       
|                                                                                   
|Net income                                                                         
|Other comprehensive income, net of tax:                                            
|Unrealized holding gains (losses) arising during period, net                       
|of tax effect of $344                                                              
|Less:  reclassification adjustment included                                        
|in net income, net of tax effect of $42                                            
|Net unrealized gains on securities                                                 
|                                                                                   
|Comprehensive income                                                               
|                                                                                   
|Cash dividend declared and paid ($0.14 per share)                                  
|Stock option activity                                                              
|                                                                                   
|Balance at March 31, 2004                                                          
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Balance at December 31, 2004                                                       
|                                                                                   
|Net income                                                                         
|Other comprehensive income, net of tax:                                            
|Unrealized holding losses arising during period, net                               
|of tax effect of $804                                                              
|Less:  reclassification adjustment included                                        
|in net income, net of tax effect of $21                                            
|Net unrealized losses on securities                                                
|                                                                                   
|Comprehensive income                                                               
|                                                                                   
|Cash dividend declared and paid ($0.16 per share)                                  
|Stock option activity                                                              
|                                                                                   
|Balance at March 31, 2005                                                          
|                                                                                   
|                                                                                   
|                                                                                   

See Notes to Consolidated Interim
Financial Statements.

5




PALMETTO BANCSHARES, INC. AND SUBSIDIARYConsolidated Statements of Cash Flows(in thousands)For the three months ended March 31,2005
			
			2004Cash flows from operating activitiesNet income
			
			
			$                3,411
			
			3,030Adjustments to reconcile net income to net cashprovided by (used in) operating activitiesDepreciation and amortization
			800
			
			1,031Investment securities gains
			(54)
			
			(108)Provision for loan losses
			600
			
			750Origination of loans held for sale
			(15,353)
			
			(13,545)Proceeds from sale of loans held for sale
			16,075
			
			13,756Gain on sale of loans
			(203)
			
			(165)Change in accrued interest receivable
			(167)
			
			299Change in other assets, net
			316
			
			1,339Change in other liabilities, net
			(1,407)
			
			(2,910)Net cash provided by operating activities
			4,018
			
			3,477Cash flows from investing activitiesPurchase of investment securities available for sale
			(23,641)
			
			(3,035)Proceeds from maturities of investment securities available for sale
			325
			
			5,838Proceeds from sales and calls of investment securities available for sale
			22,357
			
			15,335Principal paydowns on mortgage-backed securities available for sale
			4,149
			
			5,031Purchase of Federal Home Loan Bank stock
			(465)
			
			(254)Net increase in loans outstanding
			(30,329)
			
			(15,433)Purchases of premises and equipment, net
			(711)
			
			(677)Net cash (used in) provided by investing activities
			(28,315)
			
			6,805Cash flows from financing activitiesNet increase in deposit accounts
			3,726
			
			7,053Net increase in securities sold under agreements to repurchase
			4,584
			
			4,601Net increase in commercial paper
			1,942
			
			169Net increase (decrease) in federal funds purchased
			13,320
			
			(18,000)Net increase in FHLB borrowings
			6,000
			
			-Proceeds from stock option activity
			188
			
			29Dividends paid
			
			(1,010)
			
			(877)Net cash (used in) provided by financing activities
			28,750
			
			(7,025)Net increase in cash and cash equivalents
			4,453
			
			3,257Cash and cash equivalents, beginning of the year
			33,445
			
			33,239Cash and cash equivalents, end of the year
			$              37,898
			
			36,496Supplemental InformationCash paid during the period for:Interest expense
			
			$                3,498
			
			2,603Income taxes
			
			
			1,867
			
			692Supplemental schedule of non-cash investing and financing transactionsChange in unrealized gain on investment securities availablefor sale, pretax
			$              (2,036)
			
			786Loans transferred to other real estate owned
			254
			
			1,126Loans charged-off
			
			403
			
			569


See Notes to Consolidated
Interim Financial Statements.

6




PALMETTO BANCSHARES, INC. AND
SUBSIDIARY
Notes To Consolidated Interim Financial Statements (unaudited)

Palmetto Bancshares,
Inc. is a regional financial services company headquartered in Laurens, South
Carolina and organized in 1982 under the laws of South Carolina. Through its
wholly owned subsidiary, The Palmetto Bank (the "Bank"), Palmetto Bancshares,
Inc. engages in the general banking business through 30 retail branch offices in
the upstate South Carolina markets of Laurens, Greenville, Spartanburg,
Greenwood, Anderson, Cherokee, Abbeville, and Oconee counties (the "Upstate").
Brokerage operations are conducted through the Bank's wholly owned subsidiary,
Palmetto Capital, Inc. ("Palmetto Capital"). The Bank was organized and
chartered under South Carolina law in 1906. Throughout this report, the
"Company" shall refer to Palmetto Bancshares, Inc. and its subsidiary, the Bank,
which includes its subsidiary, Palmetto Capital.

The industry in
which the Bank operates exists primarily to provide an intermediary service to
the general public with funds to deposit and, by using these funds, to originate
loans in the markets served. The Bank provides a full range of banking
activities, including, but not limited to, checking, savings, money market, and
other time deposits for a wide range of consumer and commercial depositors,
loans for business, real estate, and personal uses, safe deposit box rental,
electronic funds transfer services, telephone banking, and bank card services.
The Bank's indirect lending department establishes relationships with Upstate
automobile dealers to provide customer financing on qualifying automobile
purchases, and its mortgage-banking operation meets a range of customers'
financial service needs by originating, selling, and servicing mortgage loans.
The Bank also offers both individual and commercial trust services. Palmetto
Capital offers customers stocks, treasury and municipal bonds, mutual funds, and
insurance annuities, as well as college and retirement planning.

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting policies followed by the Company for
reporting within this quarterly report are consistent with the accounting
policies followed for annual financial reporting.  Additionally, the
unaudited Consolidated Interim Financial Statements included herein are prepared
in conformity with the Securities and Exchange Commission's instructions for
Quarterly Reports on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements are not included.  As such, the information contained
in this report should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.

Principles of
ConsolidationThe accompanying unaudited Consolidated Interim Financial Statements include
the accounts of Palmetto Bancshares, Inc., which includes its wholly owned
subsidiary, the Bank, and the Bank's wholly owned subsidiary, Palmetto Capital.
In Management's opinion, all significant intercompany accounts and transactions
have been eliminated in consolidation, and all adjustments necessary for a fair
presentation of the results for periods presented have been included.  Any
such adjustments are of a normal and recurring nature. The assets held by the
Company in a fiduciary or agency capacity for customers are not included in the
Company's audited Consolidated Interim Financial Statements as such items do not
represent assets of the Company.

ReclassificationsCertain amounts previously presented in consolidated financial statements
for prior periods have been reclassified to conform to current classifications.
All such reclassifications had no effect on the prior period net income or
retained earnings as previously reported.

Use of EstimatesThe 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 included herein, which are unaudited with the exception of those as
of the year ended December 31, 2004, 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 date of the
consolidated financial statements for the periods presented. Actual results
could differ from these estimates and assumptions. As such, the results of
operations for the three months ended March 31, 2005 are not necessarily
indicative of the results of operations that may be expected in future periods.

7




Recently Adopted Accounting PronouncementsThe following is a summary of recent authoritative pronouncements that
impact accounting, reporting, and disclosure of financial information by the
Company:

In December 2004, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), "Share-Based Payment".  SFAS No. 123(R)
will require companies to measure all employee stock-based compensation awards
using a fair value method and record such expense in its financial statements. 
In addition, the adoption of SFAS No. 123(R) requires additional accounting and
disclosure related to the income tax and cash flow effects resulting from
share-based payment arrangements. For public entities that do not file as small
business issuers, SFAS No. 123(R) was to become effective beginning as of the
first annual reporting period beginning after June 15, 2005.

In April 2005, the Securities and Exchange
Commission's Office of the Chief Accountant and its Division of Corporation
Finance released Staff Accounting Bulletin ("SAB") No.107 to provide guidance
regarding the application of FASB Statement No.123 (revised 2004).  SAB No.
107 provides interpretive guidance related to the interaction between Statement
No.123(R) and certain Securities and Exchange Commission rules and regulations,
as well as the staff's views regarding the valuation of share-based payment
arrangements for public companies.

Also during April
2005, the Securities and Exchange Commission (the "SEC") deferred the effective
date of SFAS No. 123(R) for many registrants.  Under the rule, SEC
registrants previously required to adopt the provisions of SFAS No. 123(R) at
the beginning of the first interimperiod after June 15, 2005 may now
adopt the provisions at the beginning of the first annual period beginning after
June 15, 2005. The new rule does not otherwise change the application of
Statement 123(R)'s recognition, measurement, disclosure, or transition
provisions. The Company is currently evaluating the impact that the adoption of
SFAS No. 123(R) will have on its financial position, results of operations, and
cash flows.  The cumulative impact of adoption, if any, will be measured
and recognized in the statement of operations on the date of adoption.

In November 2003,
the Emerging Issues Task Force ("EITF") reached a consensus that certain
quantitative and qualitative disclosures should be required for debt and
marketable equity securities classified as available for sale or held to
maturity under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and SFAS No. 124, "Accounting for Certain Investments Held by
Not-for-Profit Organizations" that are impaired at the balance sheet date but
for which other-than-temporary impairment has not been recognized. 
Accordingly the EITF issued EITF No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments."  This issue
addresses the meaning of other-than-temporary impairment and its application to
investments classified as either available for sale or held to maturity under
SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. 
The disclosure requirements of EITF No. 03-1 were effective for annual financial
statements for fiscal years ending after June 15, 2004.  The effective date
for the measurement and recognition guidance of EITF No. 03-1 has been delayed. 
The FASB staff has issued a proposed Board-directed FASB Staff Position ("FSP"),
FSP EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of
Issue No. 03-1." The proposed FSP would provide implementation guidance with
respect to debt securities that are impaired solely due to interest rates and /
or sector spreads and analyzed for other-than-temporary impairment under the
measurement and recognition requirements of EITF No. 03-1.  The delay of
the effective date for the measurement and recognition requirements of EITF No.
03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a. 
Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on
the Company's financial position or results of operations.

8




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 consolidated financial statements
upon adoption.

2.       INVESTMENT
SECURITIES AVAILABLE FOR SALE

The tables set forth
below summarize the amortized cost, gross unrealized gains, gross unrealized
losses, and fair market values of investment securities available for sale at
the dates indicated (in thousands).

March 31, 2005Amortized cost
			Unrealized gains
			Unrealized losses
			Fair valueUnited States Government agencies
			$       
			14,032
			-
			(143)
			13,889State and municipal
			61,662
			998
			(588)
			62,072Mortgage-backed
			63,255
			6
			(837)
			62,424Total
			$      138,949
			1,004
			(1,568)
			138,385December 31, 2004Amortized cost
			Unrealized gains
			Unrealized losses
			Fair valueUnited States Government agencies
			$       
			10,053
			6
			(38)
			10,021State and municipal
			68,198
			1,629
			(331)
			69,496Mortgage-backed
			64,010
			277
			(71)
			64,216Total
			$      142,261
			1,912
			(440)
			143,733


Investment
securities available for sale were impacted by purchases, proceeds from the
sale, maturity, and / or call of such securities as well as principal paydowns
of mortgage-backed securities, which is reflected in the Consolidated Statement
of Cash Flows. During the three months ended March 31, 2005, the Company had
realized gains of $118 thousand and realized losses amounting to $64 thousand on
sales of investment securities available for sale compared with realized gains
of $141 thousand and realized losses amounting to $33 thousand during the three
months ended March 31, 2004. Specific identification is the basis on which cost
is determined in computing realized gains and losses.

Changes in interest
rates and related prepayment activity impact yields and fair values of
securities, specifically mortgage-backed securities. In a rising interest rate
environment, related prepayment activity typically decreases thereby increasing
security duration. These factors contributed to the shift in the mortgage backed
security portfolio's unrealized position at March 31, 2005 over December 31,
2004.  Most mortgage-backed investment securities are either fully backed
or sponsored by the United States Government and provide income with less risk
than other investment options. In addition, generally such investments are
traded actively, so liquidity risk is minimal. Management believes that the
unrealized losses on mortgage-backed investment securities were attributable to
increases in interest rates, rather than credit quality. Since the Company has
the ability and intent to hold these investments until a market price recovery
or maturity, Management does not consider these investments to be
other-than-temporarily impaired.

9




Investment
securities available for sale with an aggregate carrying value of approximately
67% and 65% at March 31, 2005 and December 31, 2004, respectively, were pledged
to secure public deposits, securities sold under agreements to repurchase, and
for other purposes as required or permitted by law.

3.       LOANS

The table set forth
below summarizes loans, excluding those mortgage loans held for sale, by
classification at the dates indicated (dollars in thousands).

March 31,
			
			December 31,2005
			
			2004Commercial business
			$                
			92,109
			11.6%
			
			$                
			90,708
			11.8%Commercial real estate
			504,105
			63.4
			
			478,943
			62.6Installment
			18,611
			2.3
			
			19,910
			2.6Installment real estate
			52,895
			6.7
			
			51,846
			6.8Indirect
			18,470
			2.3
			
			16,383
			2.1Credit line
			1,854
			0.2
			
			2,012
			0.3Prime access
			48,093
			6.1
			
			45,655
			5.9Mortgage
			51,712
			6.5
			
			52,669
			6.9Bankcards
			10,561
			1.3
			
			10,930
			1.4Business manager
			377
			0.1
			
			552
			0.1Other
			1,776
			0.2
			
			1,473
			0.2Gross Loans
			$             
			800,563
			100.7%
			
			$             
			771,081
			100.7%Allowance for loan losses
			(7,838)
			(1.0)
			
			(7,619)
			(1.0)Loans in Process
			1,827
			0.2
			
			1,470
			0.2Deferred Loans Fees and costs
			558
			0.1
			
			703
			0.1Loans, net
			$             
			795,110
			100.0%
			
			$             
			765,635
			100.0%


Net loans increased
$29.5 million during the first three months of 2005.  Loans included in the
table are net of whole loans, participations sold, and mortgage loans serviced
for others. Mortgage loans serviced for the benefit of others amounted to $272.0
million and $265.7 million at March 31, 2005 and December 31, 2004,
respectively. Most of these mortgage loans are serviced for the Federal Home
Loan Mortgage Corporation.

As reflected in the
table above, the majority of the increase in net loans during the three months
ended March 31, 2005 was within commercial real estate loans. There were no
significant fluctuations in the mix of the loan portfolio when comparing
balances at December 31, 2004 with those at March 31, 2005.  
Management has continued its emphasis on loans secured by real estate during the
first three months of 2005 because such loans involve less inherent risk than
those secured by collateral other than real estate or loans that are unsecured.

The table set forth
below summarizes nonaccrual loans and loans past due 90 days and still accruing
interest at the dates indicated (in thousands).



March 31,
			December 312005
			2004Nonaccrual loans
			$            
			2,254
			2,323Loans past due 90 days and still
			accruing (1)
			147
			147$            
			2,401
			2,470(1) Substantially all of these loans are
			bankcard loans.


As of March 31,
2005, Management was aware of no potential problem loans that were not already
categorized as nonaccrual, past due, or restructured, that had borrower credit
problems causing Management to have serious doubt as to the ability of the
borrower to comply with the present loan repayment terms.



10






For the three months endedMarch 31,2005
			2004Balance, beginning of period
			$               
			7,619
			7,463Provision for loan losses
			600
			750Charged off loans
			403
			569Loan Recoveries
			22
			48Net charged off loans
			381
			521Balance, end of period
			$              
			7,838
			7,692


SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings,"
establishes standards of financial accounting and reporting by the debtor and by
the creditor for a troubled debt restructuring. This Statement requires
adjustments in payment terms from a troubled debt restructuring generally to be
considered adjustments of the yield (effective interest rate) of the loan. So
long as the aggregate payments (both principal and interest) to be received by
the creditor are not less than the creditor's carrying amount of the loan, the
creditor recognizes no loss, only a lower yield over the term of the
restructured debt. Similarly, the debtor recognizes no gain unless the aggregate
future payments (including amounts contingently payable) are less than the
debtor's recorded liability. Any troubled debt restructurings entered into by
the Company for the period ended March 31, 2005 were immaterial when considered
individually, or in the aggregate, with regard to the Company's Consolidated
Financial Statements.

The Company makes
contractual commitments to extend credit, which are legally binding agreements
to lend money to customers at predetermined interest rates for a specific period
of time. The Bank also provides standby letters of credit. See Note 9 for a
discussion of the Company's lending commitments.

The Company's
primary market area is the Upstate region of South Carolina. Management closely
monitors its credit concentrations and attempts to diversify the portfolio
within its primary market area. At March 31, 2005, except for the concentration
of a majority of the loan portfolio in the Company's primary market area, there
were no concentrations of loans in any type of industry, type of property, or to
one borrower.

4.      
MORTGAGE-SERVICING RIGHTS

The table set forth
below summarizes the changes in the carrying amount of capitalized
mortgage-servicing rights for the periods indicated (in thousands).

|                                               |                                                  | For the three months ended March 31,
|---------------------------------------------- | ------------------------------------------------ | ------------------------------------
|                                               |                                                  | 2005                                
|Mortgage-servicing rights, beginning of period | $   2,316                                        | 2,566                               
|Capitalized
		mortgage-servicing rights        | 175                                              | 150                                 
|Amortization                                   | (138)                                            | (189)                               
|Change in
		valuation allowance                | 18                                               | (50)                                
|                                               | Total
		mortgage-servicing rights, end of period | $   2,371                           

The aggregate fair
market value of mortgage-servicing rights at both March 31, 2005 and 2004 was
$2.3 million.

11




The table set forth
below summarizes the activity impacting the valuation allowance for impairment
of mortgage-servicing rights for the periods indicated (in thousands).



|                                                                         |                                      | For the three months ended March 31,
|------------------------------------------------------------------------ | ------------------------------------ | ------------------------------------
|                                                                         |                                      | 2005                                
|Valuation
		allowance, beginning of period                               | $        132                         | 40                                  
|Aggregate
		additions charged and reductions credited to   
		operations | (18)                                 | 50                                  
|                                                                         | Valuation
		allowance, end of period | $        114                        

Activity impacting
the Company's mortgage-servicing right portfolio, including mortgage loans
originated to be sold and sales, are reflected in the Consolidated Statement of
Cash Flows. Capitalized mortgage-servicing rights have increased for the three
month period ended March 31, 2005 over the same period of 2004 due to the
increase in mortgage loan sales when comparing the same periods. 
Amortization expense is calculated based on current available information
regarding loan payments and prepayments. During the period of low interest rates
in recent years, mortgage-servicing rights amortization were at higher than
historical levels mainly as a result of higher loan prepayment speeds. Since mid
2004, interest rates have begun to increase, and consequently, prepayment speeds
have declined resulting in a declining trend for amortization.

Although
amortization expense could change in future periods, the Company estimates
amortization expense related to mortgage-servicing rights of $620 thousand for
the year ended December 31, 2005, $485 thousand for the year ended December 31,
2006, $376 thousand for the year ended December 31, 2007, $289 thousand for the
year ended December 31, 2008, $220 thousand for the year ended December 31,
2009, and a total of $203 thousand in years thereafter.

5.       OTHER
INTANGIBLE ASSETS

The table set forth
below summarizes intangible assets, net of accumulated amortization, at the
dates indicated (in thousands).

March 31,
			
			December 31,2005
			
			2004Finite life intangible assetsIntangible assets from branch acquisitions
			$
			283
			
			320Infinite life intangible assetsIntangible
		assets from branch acquisitions
			
			3,691
			
			3,691Total other intangible assets
			$
			3,974
			
			4,011


The table set forth
below summarizes the activity of intangible assets with finite lives, which are
comprised of customer list intangibles, and the related amortization for the
years indicated (in thousands).

|                               |                          | For the three months ended March 31,
|------------------------------ | ------------------------ | ------------------------------------
|                               |                          | 2005                                
|Balance,
		beginning of period | $        320             | 464                                 
|Amortization                   | (37)                     | (36)                                
|                               | Balance, end
		of period | $        283                        

There were no changes in the carrying amount of
goodwill for the three months ended March 31, 2005.

The Company expects
to record amortization expense related to finite lived intangibles of $144
thousand for the year ended December 31, 2005, $48 thousand for the years ended
December 31, 2006 and 2007, $45 thousand for the year ended December 31, 2008,
and $33 thousand for the year ended December 31, 2009.

12




6.       DEPOSITS

The table set forth
below summarizes deposits, by type, at the dates indicated (in thousands).





March 31,2005
			
			December 31,2004Transaction
			deposit accounts
			Savings deposit accounts
			Money market deposit accounts
			Time deposit accounts
			$ 314,745
			47,701
			100,793
			367,934
			
			309,561
			44,972
			95,608
			377,306Total
			$ 831,173
			
			827,447


7.       NET INCOME
PER COMMON SHARE

Basic and diluted earnings per share have been
computed based on net income presented 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 March 31,
|-------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------
|                                                               |                                                                 | 2005                                
|                                                               |                                                                 |                                     
|Basic
		weighted average number of common shares outstanding   | 6,309,527                                                       | 6,264,069                           
|                                                               | Dilutive
		effect arising from potential common share issuances | 97,832                              
|Diluted
		weighted average number of common shares outstanding | 6,407,359                                                       | 6,365,180                           

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 as of that date.  At March 31, 2005 and March
31, 2004, there were no option shares that were excluded from the calculation of
diluted earnings, based on information available to Management at that time.

The Company paid cash dividends of $0.16 per
share for the quarter ended March 31, 2005 and $0.14 per share for the same
quarter of 2004.

8.       EMPLOYEE
BENEFIT PLANS

Postretirement
Benefits

The table set forth
below summarizes the combined adjusted postretirement benefit expense components
for the Company's its noncontributory defined benefit pension plan for the
periods indicated (in thousands).

|                                    
|------------------------------------
|                                    
|                                    
|Service cost                        
|Interest
		cost                     
|Expected
		return on plan assets    
|Amortization
		of prior service cost
|Amortization
		of the net loss      
|                                    

The Company expects
to contribute $1.2 million to the plan during 2005. During the three month
period ended March 31, 2005, $323 thousand was contributed.

Stock Based CompensationAt March 31, 2005, the Company had a stock-based employee and director
option plan, which is described more fully in Note 13 of Notes to Consolidated
Financial Statements included in its Annual Report on Form 10-K for the year
ended December 31, 2004.  SFAS No. 123, "Accounting for Stock-Based
Compensation," allows a company to either adopt the fair value method of
valuation or continue using the intrinsic valuation method presented under
Accounting Principles Bulletin ("APB") Opinion 25, "Accounting for Stock Issued
to Employees," to account for stock-based compensation. The Company has elected
to continue following APB Opinion 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if the
fair value-based method defined in SFAS No. 123 had been applied. As such, no
stock-based employee 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.

13




The table set forth
below summarizes the impact the fair market value recognition provisions of SFAS
No. 123 would have had on net income and earnings per common share if the
Company had applied these provisions to stock-based employee compensation for
the periods indicated (in thousands, except share data).

|                                                                                                                                                                                                         |              | For the three months ended March 31,
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------------------------------
|                                                                                                                                                                                                         |              | 2005                                
|Net income, as reported                                                                                                                                                                                  | $  
		3,411  | 3,030                               
|Deduct: Total stock-based employee and
		director
            
		compensation expense determined under
             fair
		value-based methods for all awards,
             net of
		related tax effects | 25           | 26                                  
|Pro forma net income                                                                                                                                                                                     | $  
		3,386  | 3,004                               
|                                                                                                                                                                                                         |              |                                     
|Earnings per share                                                                                                                                                                                       |              |                                     
|Basic - as reported                                                                                                                                                                                      |              | $    
		0.54                        
|Basic - pro forma                                                                                                                                                                                        | 0.54         | 0.48                                
|                                                                                                                                                                                                         |              |                                     
|Diluted - as reported                                                                                                                                                                                    | $    
		0.53 | 0.48                                
|Diluted - pro forma                                                                                                                                                                                      | 0.53         | 0.47                                
|                                                                                                                                                                                                         |              |                                     

In accordance with
its 1997 Stock Compensation Plan, the Company granted 34,000 options during the
first quarter of 2004 and 33,000 options during the first quarter of 2005. 
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 2004 and 2005, respectively: dividend yield
of 2.4% and 2.6%, expected volatility of 18% and 10%, average risk-free interest
rate of 4% for grants during both quarters, expected lives of 10 years, and a
vesting period of five years. The weighted average fair value of options granted
approximated $5.22 in the first quarter of 2004 and $3.71 in the first quarter
of 2005.

9.       COMMITMENTS
AND CONTINGENCIES

Legal ProceedingsThe Company is
currently the defendant in certain 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.

Lending
Commitments, Guarantees, and Off-Balance Sheet ArrangementsThe table set forth below summarizes the Company's contractual commitments
to extend credit at March 31, 2005 (in thousands).

Home equity
			loans
			$         
			42,381Credit cards
			42,001Commercial
			real estate development
			81,551Other unused
			lines of credit
			39,512Total
			contractural commitments to extend credit
			$       
				205,445


14




Outstanding
commitments on mortgage loans not yet closed, the majority of which include
interest rate lock commitments, amounted to approximately $4.7 million at March
31, 2005. These were principally single-family loan commitments. Commitments to
extend credit are agreements to lend to borrowers as long as there is no
violation of any condition established by the commitment letter. Commitments
generally have fixed expiration dates or other termination clauses. The majority
of the commitments will be funded within a 12-month period. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on Management's
credit evaluation of the borrower. Collateral held consists of residential
properties.

At March 31, 2005,
the Company had recorded no liability for the current carrying amount of the
obligation to perform as a guarantor and no contingent liability is considered
necessary, as the Company believes that it is not likely that it will have to
perform under such contracts. The maximum potential amount of undiscounted
future payments related to standby letters of credit at March 31, 2005 was $2.0
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 values of such guarantees are
deemed immaterial at March 31, 2005.

At March 31, 2005, the Company had no interests
in nonconsolidated special purpose entities nor is it involved in other
off-balance sheet contractual relationships (other than those discussed herein),
unconsolidated related entities that have off-balance sheet arrangements, or
transactions that could result in liquidity needs.

The Company
originates, sells, and services mortgage loans. All of the Company's loan sales
have been without provision for recourse. Mortgage loans serviced for the
benefit of others amounted to $272.0 million at March 31, 2005.

10.   REGULATORY CAPITAL REQUIREMENTS

At March 31, 2005,
the most recent notification from federal banking agencies categorized Palmetto
Bancshares and the Bank as "well capitalized" under the regulatory framework. To
be categorized as "well capitalized," minimum total risk-based capital, Tier 1
capital, and Tier 1 leverage ratios as set forth in the table below (dollars in
thousands) must be maintained. Since March 31, 2005, there have been no events
or conditions that Management believes have changed these categories.



To be well
		capitalized under
		prompt corrective
		action provisionsFor capital
		adequacy purposesActualamount
   
   ratio
   
   amount
   
   ratio
   
   amount
   ratioAt March 31, 2005Total capital to risk-weighted assetsPalmetto Bancshares
   $
   86,072
   
   10.28%
   
   $
   67,010
   
   8.00%
   
   
   N/A
   N/ABank
   
   85,389
   
   10.19
   
   
   67,010
   
   8.00
   
   $
   83,762
   10.00%Tier 1 capital to risk-weighted assetsPalmetto Bancshares
   $
   78,234
   
   9.34%
   
   $
   33,505
   
   4.00%
   
   
   N/A
   N/ABank
   
   77,551
   
   9.26
   
   
   33,505
   
   4.00
   
   $
   50,257
   6.00%Tier 1 capital to average assetsPalmetto Bancshares
   $
   78,234
   
   7.81%
   
   $
   40,091
   
   4.00%
   
   
   N/A
   N/ABank
   
   77,551
   
   7.74
   
   
   40,098
   
   4.00
   
   $
   50,122
   5.00%At December 31, 2004Total capital to risk-weighted assetsPalmetto Bancshares
   $
   83,234
   
   10.33%
   
   $
   64,434
   
   8.00%
   
   
   N/A
   N/ABank
   
   82,739
   
   10.27
   
   
   64,434
   
   8.00
   
   $
   80,542
   10.00%Tier 1 capital to risk-weighted assetsPalmetto Bancshares
   $
   75,615
   
   9.39%
   
   $
   32,217
   
   4.00%
   
   
   N/A
   N/ABank
   
   75,120
   
   9.33
   
   
   32,217
   
   4.00
   
   $
   48,325
   6.00%Tier 1 capital to average assetsPalmetto Bancshares
   $
   75,615
   
   7.76%
   
   $
   38,994
   
   4.00%
   
   
   N/A
   N/ABank
   
   75,120
   
   7.70
   
   
   39,005
   
   4.00
   
   $
   48,757
   5.00%




15




The Bank's total
capital to risk-weighted assets ratio declined from 10.27% at December 31, 2004
to 10.19% at March 31, 2005 primarily due to the growth of 100% risk weighed
assets at a faster rate than risk based capital.  The Company's 2005 Profit
Plan projected that total loans would grow by $55.9 million during 2005. 
Total loans grew by $29.2 million during the first three months of 2005. 
However, risk based capital did not experience the same percentage of growth
during the same period thereby negatively impacting the total capital to
risk-weighted assets ratio.  Management does not believe that these
conditions give rise to concern regarding the ratio due to the fact that as risk
based capital continues to increase toward the 2005 Profit Plan amount and as
loans continue to increase toward the year-end budgeted amount, but at a slower
pace than was experienced during the first quarter of 2005, the Bank's total
capital to risk-weighted assets ratio will return to balances typical for the
Bank.   Further, it should be noted that the Bank's Asset - Liability
Management Policy notes that in the event regulatory capital should fall below
the minimum levels to be "well-capitalized," adjustments will be made by
Management to return the Bank to the "well-capitalized" position. 
Management is currently exploring options for adjustments to ensure the Bank
remains in a  "well-capitalized" position.













16




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

WEBSITE AVAILABILITY OF REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION

The Bank's website, www.palmettobank.com,
includes a link to the Securities and Exchange Commission's Electronic Data
Gathering, Analysis, and Retrieval ("EDGAR") system which makes various reports
filed with the Securities and Exchange Commission by the Company, including, but
not limited to, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Ownership Reports filed in conjunction with Section
16, and amendments to such reports, available, free of charge.  These
reports are made available as soon as reasonably practicable after these reports
are filed with, or furnished to, the Securities and Exchange Commission. 
The Securities and Exchange Commission's EDGAR database may also be accessed
through its website, www.sec.gov.

FORWARD-LOOKING STATEMENTS

The Company makes
forward-looking statements in this report and in other reports and proxy
statements filed with the SEC. In addition, certain statements in future filings
by the Company with the Securities and 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. Broadly speaking, forward-looking statements include, but are not
limited to, projections of the Company's revenues, income, earnings per common
share, capital expenditures, dividends, capital structure, or other financial
items, descriptions of plans or objectives of Management for future operations,
products or services, forecasts of the Company's future economic performance,
and descriptions of assumptions underlying or relating to any of the foregoing.

Forward-looking
statements discuss matters that are not historical facts. Because such
statements discuss future events or conditions, forward-looking statements often
include words such as "anticipate," "believe," "estimate," "expect," "intend,"
"plan," "project," "target," "can," "could," "may," "should," "will," "would,"
or similar expressions. Do not unduly rely on forward-looking statements. Such
statements give expectations about the Company's future and are not guarantees.
Forward-looking statements speak only as of the date for which they are made,
and the Company might not update them to reflect changes that occur after the
date they are made.

There are several factors, many beyond the Company's
control, that could cause results to differ significantly from expectations.
Some of these factors include, but are not limited to,

- 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
	(the "Allowance") and the assessment of classified loans;
- the ability of the Company 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;
- 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 impact of litigation; and
- recently-enacted or proposed legislation.

17




Many of these
factors, as well as other factors, such as credit, market, operational,
liquidity, interest rate, and other risks, are discussed in more detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. Any
factor described in this Quarterly Report on Form 10-Q or in that Annual Report
on Form 10-K could by itself, or together with one or more factors, adversely
affect the business, financial condition, and / or results of operations of the
Company. Additionally, there are factors that may not be described in this
report that could cause actual results to differ from expectations.

COMPANY OVERVIEW

Palmetto Bancshares,
Inc. is a bank holding company organized under the laws of South Carolina in
1982. The Palmetto Bank (the "Bank"), a wholly owned subsidiary of the holding
company, was organized and chartered under South Carolina law in 1906. The
Company's corporate offices are located at 301 Hillcrest Drive, Laurens, South
Carolina. The Bank is a full-service bank and trust company. At March 31, 2005,
the Bank had thirty full-service branches in the Upstate region of South
Carolina within the following counties: Laurens County (4), Greenville County
(10), Spartanburg County (5), Greenwood County (5), Anderson County (3),
Cherokee County (2), and Oconee County (1). In addition to branch locations, at
March 31, 2005, the Bank had 30 ATM locations (including three at nonbranch
locations) and five-limited service branches located in retirement centers in
the Upstate. The Bank engages in investment services through its wholly owned
subsidiary, Palmetto Capital, Inc. ("Palmetto Capital"). Throughout this report,
the "Company" shall refer to Palmetto Bancshares, Inc. and its subsidiary.

The Company's
primary market area is located within South Carolina in the foothills region of
Greenville, including Greenville County and its surrounding counties. Primary
business sectors in the region include banking and finance, manufacturing,
health care, retail, telecommunications, government services, and education. The
Company believes that it is not dependent on any one or a few types of commerce
due to the area's diverse economic base.

No new branches were opened during the three month
period ended March 31, 2005, although Management continually reviews
opportunities for Upstate expansion that it believes to be in the best interest
of the Company, its customers, and its shareholders. Expansion opportunities are
currently being evaluated in the market areas in which the Company currently
serves. During the second quarter of 2004, the Company closed on a real estate
site in Easley, South Carolina that will introduce the Company's presence into
Pickens County. Easley is a culturally diverse community with approximately
20,000 residents living within the city limits. Maintaining the Company's focus
on serving Upstate South Carolina, ground was broken on the new office in Easley
in December 2004, with the branch opening scheduled for third quarter 2005.

The business of the
Company consists primarily of acting as a financial intermediary by attracting
deposits from the general public and using such funds, together with borrowings
and other funds, to originate loans located in its primary market areas. The
Company also invests in investment securities. Through its direct subsidiary and
the subsidiary of the Bank, the Company also engages in full-service brokerage
activities and trust and fiduciary services.

The following discussion and analysis is
presented to assist in understanding the financial condition and results of
operations of the Company.  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 in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.  Results of operations for the
three month period ended March 31, 2005 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.



18




The Company's accounting and financial reporting
policies are in conformity with generally accepted accounting principles ("GAAP")
and with general practice within the banking industry. The preparation of
financial statements in conformity with such principles requires Management to
make estimates and assumptions that impact the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. During the annual financial reporting process,
Management, in conjunction with the Company's independent auditors, discusses
the development and selection of the critical accounting estimates with the
Audit Committee of the Board of Directors.  Additionally, the Audit
Committee reviews the Company's Quarterly Reports on Form 10-Q and the Annual
Reports on Form 10-K including all related disclosures.

The Company's
significant accounting policies are discussed in Item 8, Note 1 of Notes to
Consolidated Financial Statements of its Annual Report on Form 10-K for the year
ended December 31, 2004. Of these significant accounting policies, the Company
considers its policies regarding the accounting for the Allowance, pension plan,
mortgage-servicing rights, accounting for past acquisitions, and income taxes,
to be its most critical accounting policies due to the valuation techniques used
and the sensitivity of these financial statement amounts to the methods,
assumptions, and estimates underlying these balances. Accounting for these
critical areas requires a significant degree of judgment that could be subject
to revision as newer information becomes available. In order to determine the
Company's critical accounting policies, Management considers if the accounting
estimate requires assumptions about matters that were highly uncertain at the
time the accounting estimate was made and if different estimates that reasonably
could have been used in the current period, or changes in the accounting
estimate that are reasonably likely to occur from period to period, would have a
material impact on the presentation of financial condition, changes in financial
condition, or results of operations.

FINANCIAL CONDITION

OverviewAt March 31, 2005, the Company's assets totaled $1.0 billion, an increase of
$29.5 million or 3.0% over December 31, 2004. The increase in assets during the
first three months of 2005 resulted primarily from an increase in total loans of
$29.2 million. Average assets increased 7.8% during the first three months of
2005 over the year ended December 31, 2004.  Over the same period, average
interest-earning assets increased 7.8%. Total liabilities increased $28.2
million, or 3.1%, at March 31, 2005 over December 31, 2004, to a balance of
$940.5 million. This increase resulted primarily from an increase in other
borrowings, comprised of federal funds purchased and FHLB borrowings, of $19.3
million over the same periods. The remainder of the increase over the periods
was due in most part to the increases in traditional deposits, commercial paper,
and retail repurchase agreements over the periods noted.  Total deposits
and other borrowings were $936.5 million at March 31, 2005, up from $906.9
million at December 31, 2004. Total shareholders' equity at March 31, 2005
totaled $82.1 million, an increase of $1.3 million over December 31, 2004.

Investment Securities PortfolioThe securities portfolio, all of which is classified as available for sale,
is a component of the Company's asset-liability management strategy. Securities
available for sale are accounted for at fair value, with unrealized gains and
losses recorded net of tax as a component of other comprehensive income in
shareholders' equity. A third party determines the fair value of the securities
portfolio. The valuation is determined as of the date of the end of the
reporting period based on available quoted market prices or quoted market prices
for similar securities if a quoted market price is not available.

19




Investment
securities available for sale, excluding FHLB capital stock, totaled $138.4
million at March 31, 2005, a decrease of $5.3 million, or 3.7%, over December
31, 2004. The table set forth below summarizes the Company's investment
securities available for sale composition at the dates indicated (dollars in
thousands).

|                                  |                        | March 31,             |        | December 31,           |                       |        | 
|--------------------------------- | ---------------------- | --------------------- | ------ | ---------------------- | --------------------- | ------ | 
|                                  |                        | 2005                  |        | 2004                   |                       |        | 
|United States Government agencies | $            
		13,889 | 10.0%                 |        | $            
		10,021 | 7.0%                  |        | 
|State and municipalities          | 62,072                 | 44.9                  |        | 69,496                 | 48.3                  |        | 
|Mortgage-backed                   | 62,424                 | 45.1                  |        | 64,216                 | 44.7                  |        | 
|                                  | Total                  | $          
		138,385 | 100.0% |                        | $          
		143,733 | 100.0% | 
|                                  |                        |                       |        |                        |                       |        | 

See Consolidated
Statements of Cash Flows contained herein for a summary of how purchases,
proceeds from the sale, maturities, and / or calls of such investment securities
as well as principal paydowns of mortgage-backed securities impacted the
investment securities available for sale portfolio during the three month period
ended March 31, 2005.

At March 31, 2005,
the investment securities portfolio declined slightly to 13.5% of total assets
from 14.5% at December 31, 2004. The Company was in a gross unrealized loss
position on securities available for sale at March 31, 2005 of $564 thousand
compared to a gross realized gain position of $1.5 million at December 31, 2004.
At March 31, 2005, the Government agencies portfolio was in an unrealized loss
position of $143 thousand, the municipal portfolio had an unrealized gain
position of $410 thousand, and the mortgage-backed securities portfolio had an
unrealized loss position of $831 thousand.  Typically, a rising interest
rate environment negatively impacts the yield curve for the securities available
for sale portfolio thereby impacting the unrealized position of the portfolio
negatively.

The weighted average
life and duration of the securities portfolio is maintained to limit overall
exposure and to provide flexibility to proactively manage cash flow as market
conditions change. The average weighted life of the Company's securities
available for sale portfolio was 3.68 years at March 31, 2005 up from 3.57 years
at December 31, 2004. Although the portfolio's duration experienced a slight
increase, it remains in accordance with Management's decision to maintain the
portfolio with a shorter duration in a rising interest rate environment. 
Management attributes the slight increase in duration to the continued decline
in prepayments of mortgage-backed securities due to rising interest rates.

Average balances of
available for sale investment securities, excluding FHLB capital stock,
increased to $141.9 million for the first three months of 2005 compared with
$134.9 million for the year ended December 31, 2004.  The average portfolio
yield, including the unrealized gain or loss on available for sale securities,
increased for the three months ended March 31, 2005 to 3.81% from 3.46% for the
year ended December 31, 2004. The average portfolio yield, including the
unrealized gain or loss on available for sale securities, for the three months
ended March 31, 2004 was 3.33%

In accordance with the Company's investment
policy, all investment securities must be rated AA - A in order to minimize
credit risk. At March 31, 2005, while security ratings were in compliance with
the policy guidelines, approximately 90% of the securities portfolio was rated
AAA which constitutes the highest credit worthiness.  Additionally, at
March 31, 2005, the entire MBS portfolio was fixed rate.

Loans Held for Sale
Loans held for sale consists primarily of 15 and 30 year mortgages which the
Company intends to sell as whole loans. Loans held for sale are carried at the
lower of aggregate cost or fair market value. The fair value of mortgage loans
held for sale is based on the fair market value for such outstanding commitments
to sell these loans. Typically, the carrying amount approximates fair value due
to the short-term nature of these instruments. Loans held for sale were $5.3
million and $5.9 million at March 31, 2005 and December 31, 2004, respectively.
Loans held for sale were impacted by originations and sales activity, which are
reflected in the Consolidated Statement of Cash Flows. No valuation allowance to
reduce these loans to lower of cost or fair market value was required at March
31, 2005 or December 31, 2004.

20






Loan Portfolio
General. As loans represent the most significant component of interest-earning
assets, the Company strives to maintain a diversified loan portfolio in an
effort to spread risk and reduce exposure to economic downturns that may occur
within different segments of the economy, geographic locations, or in particular
industries. The loan portfolio consists principally of commercial loans,
commercial real estate loans, consumer loans, indirect dealer loans, and
mortgage loans. The loan portfolio is diversified, and the Bank's business is
not dependent on any single customer or industry, or a few customers or
industries. Although loans may be originated outside of South Carolina, the
majority of the loan portfolio is originated in the market area of Upstate South
Carolina. Certain risks are inherent within any loan portfolio.  For a
discussion of characteristics of the loan portfolio, including such risks, see
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

At March 31, 2005, loans outstanding, excluding
mortgage loans held for sale, were $802.9 million, which equaled 79% of total
assets.  Total loans outstanding at December 31, 2004 totaled $773.3
million.

Credit Quality. At March 31, 2005, there were
$4.1 million of loans designated "special mention," $11.1 million of loans
designated as "substandard," $1.4 million of loans designated as "doubtful," and
$1 thousand of loans designated as "loss." At December 31, 2004, there were $3.2
million of loans designated "special mention," $10.6 million of loans designated
as "substandard," $1.6 million of loans designated as "doubtful," and $1
thousand of loans designated as "loss." At March 31, 2004, there were $5.6
million of loans designated "special mention," $13.0 million of loans designated
as "substandard," $1.1 million of loans designated as "doubtful," and $240
thousand of loans designated as "loss."

The Company's loan
portfolio is periodically reviewed and loans are, in the opinion of Management,
appropriately classified, and Allowances have been established against all
assets requiring classification.

The table set forth
below summarizes trends in problem assets and other asset quality indicators at
the dates indicated (dollars in thousands).



March 31,
			
			December 31,
			September 30,
			June 30,
			March 31,2005
			
			2004
			2004
			2004
			2004Nonaccrual loans
			$         
			2,254
			
			2,323
			3,456
			3,044
			3,236Real estate acquired in settlement of
			loans
			2,346
			
			2,413
			2,085
			3,074
			3,239Repossessed automobiles
			229
			
			282
			276
			207
			166Total nonperforming assets
			4,829
			
			5,018
			5,817
			6,325
			6,641Loans past due 90 days and still
			accruing (1)
			147
			
			147
			101
			91
			104Total nonperforming assets and loans
			past due 90 days and still accruing
			$         
			4,976
			
			5,165
			5,918
			6,416
			6,745Ending loans (2)
			$      802,948
			
			773,254
			747,010
			719,043
			706,999Nonaccrual loans as a percentage of
			loans (2)
			0.28
			%
			0.30
			0.46
			0.42
			0.46Nonperforming assets as a percentage oftotal assets
			0.47
			%
			0.51
			0.60
			0.67
			0.74Allowance for loan losses to nonaccrual
			loans
			3.48
			x
			3.28
			2.36
			2.62
			2.38(1)
			Substantially all of these loans are
			bankcard loans(2)
			Calculated using loans excluding
			mortgage loans held for sale, net of unearned, excluding the
			Allowance


As the economy has
begun to gain strength, markets served by the Company have seen improvements in
unemployment rates, bankruptcy filings, and delinquency rates.  Such trends
have contributed to the improving trend of asset quality ratios noted above.

21




Little change was
experienced relative to the mix of nonaccrual loans at March 31, 2005 when
compared with those at December 31, 2004. At December 31, 2004, nonperforming
loans were comprised of 73.4% of loans secured by real estate, 15.2% of
commercial and industrial loans, and 11.4% of loans to individuals for
household, family, and other personal expenditures. At March 31, 2005,
nonperforming loans were comprised of 71.4% of loans secured by real estate,
17.7% of commercial and industrial loans, and 10.9% of loans to individuals for
household, family, and other personal expenditures. In addition to the factors
noted above, Management believes the decreasing trend experienced in total
nonperforming loans is a reflection of Management's more aggressive approach to
managing loans.

Based on information
available to Management at March 31, 2005, real estate and automobiles acquired
as a result of repossession, foreclosure, or by deed in lieu of foreclosure were
recorded at the lower of cost or estimated fair market value less cost to sell.

The table set forth
below summarizes the changes in the real estate acquired in settlement of loans
portfolio for the periods indicated (in thousands).

For the three
			
			For themonths ended
			
			year endedMarch 31, 2005
			
			December 31, 2004Balance, beginning of period
			$         
			2,413
			
			2,170AddNew real estate acquired in settlement
			of loans
			154
			
			2,468LessSales / recoveries of real estate
			acquired in settlement of loans
			(161)
			
			(2,001)Provision charged to expense
			(60)
			
			(224)Balance, end of period
			$          
			2,346
			
			2,413


Management believes
that the properties within the portfolio are marketable and the recent
improvement within both the local and national economy will positively impact
the sale of the remaining properties within the portfolio.  Management also
believes that consumers' ability to better service their debt resulted in the
Company's relatively low additions to real estate acquired in settlement of
loans during the quarter ended March 31, 2005.

As of March 31,
2005, Management was aware of no potential problem loans that were not already
categorized as nonaccrual, past due, or restructured that had borrower credit
problems causing Management to have serious doubt as to the ability of the
borrower to comply with the present loan repayment terms.

Any troubled debt
restructurings entered into by the Company for the quarter ended March 31, 2005
were immaterial when considered individually, or in the aggregate, with regard
to the Company's unaudited Consolidated Interim Financial Statements.

While the Company
believes that current economic data suggests that the United States economy is
improving, the pace of that improvement is difficult to predict and credit
quality indicators remain unpredictable. Management believes, however, that
because the Company's loan portfolio is closely monitored, changes are promptly
addressed in its analysis of Allowance adequacy. 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 Company goals include the management of
the quality of loans within its loan portfolio.



22




The Allowance totaled $7.8 million and $7.6 million
at March 31, 2005 and December 31, 2004, respectively representing 0.98% and
0.99% of loans, less mortgage loans held for sale, for the same periods.

The fair market
value of mortgage loans held for sale is based on prices for outstanding
commitments to sell these loans. Typically, the carrying amount approximates
fair market value due to the short-term nature of these instruments. Likewise,
such instruments are not included in the assumptions related to the Allowance
model.

The table set forth
below summarizes the activity in the Allowance at the dates and for the periods
indicated (dollars in thousands). Losses and recoveries are charged or credited
to the Allowance at the time realized.

|                                                    |                                                                                                           |                           | For the three months ended |         | For the year ended |      
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------- | ------- | ------------------ | -----
|                                                    |                                                                                                           |                           | March 31,                  |         | December 31,       |      
|                                                    |                                                                                                           |                           | 2005                       | 2004    |                    | 2004 
|                                                    | Balance, beginning of period                                                                              | $              7,619      | 7,463                      |         | 7,463              |      
|                                                    |                                                                                                           | Provision for loan losses | 600                        | 750     |                    | 2,150
|                                                    |                                                                                                           |                           |                            |         |                    |      
|                                                    | Loans charged-off                                                                                         | 403                       | 569                        |         | 2,150              |      
|                                                    | Loan Recoveries                                                                                           | 22                        | 48                         |         | 156                |      
|                                                    |                                                                                                           | Net loans charged-off     | 381                        | 521     |                    | 1,994
|                                                    |                                                                                                           |                           |                            |         |                    |      
|                                                    | Balance, end of period                                                                                    | $              7,838      | 7,692                      |         | 7,619              |      
|                                                    |                                                                                                           |                           |                            |         |                    |      
|Loans (1)                                           |                                                                                                           | $         
		802,948      | 706,999                    |         | 773,254            |      
|Average loans (1)                                   | 785,755                                                                                                   | 697,478                   |                            | 725,555 |                   
|Net charge-offs to average loans
		(annualized) (1) | 0.20%                                                                                                     | 0.30                      |                            | 0.27    |                   
|Allowance for loan losses to loans                  | 0.98%                                                                                                     | 1.09                      |                            | 0.99    |                   
|                                                    |                                                                                                           |                           |                            |         |                    |      
|(1)                                                 | Calculated using loans excluding mortgage
		loans held for sale, net of unearned, excluding the Allowance |                          

For discussion of
the decline in the provision for loan losses from the first quarter of 2004 to
the first quarter of 2005, see Earnings Review-Provision for Loan Losses.

Total loan charged-offs decreased when comparing
the quarter ended March 31, 2005 to the quarter ended March 31, 2004.  This
fluctuation was impacted by an increase in loan charged-offs within the single
family real estate and credit card loan categories offset by declines in loans
charged-off relative to multifamily and nonfarm real estate, commercial and
industrial, and other consumer loan categories.

23




Based on the current
economic environment and other factors that impact the assessment of the
Company's Allowance as discussed above, Management believes that the Allowance
at March 31, 2005 was maintained at a level adequate to provide for estimated
probable losses in the loan portfolio. However, assessing the adequacy of the
Allowance is a process that requires considerable judgment. Management's
judgments are based on numerous assumptions, which it believes to be reasonable,
but which may or may not be valid. Thus, there can be no assurance that loan
losses in future periods will not exceed the current Allowance amount or that
future increases in the Allowance will not be required. No assurance can be
given that Management's ongoing evaluation of the loan portfolio, in light of
changing economic conditions and other relevant circumstances, will not require
significant future additions to the Allowance, thus adversely impacting the
results of operations of the Company.

Deposits
Retail deposits have traditionally been the primary source of funds for the
Company and also provide a customer base for the sale of additional financial
products and services. The Company faces stiff competition from other banking
and financial services companies in gathering deposits.

Traditional deposit
accounts, which include noninterest-bearing and interest-bearing transaction,
money market, savings, and time deposit accounts, increased $3.7 million during
the first three months of 2005. At March 31, 2005, traditional deposits as a
percentage of liabilities were 88.4% compared with 90.7% at December 31, 2004. 
The table set forth below summarizes the Company's deposit composition at the
dates indicated (dollars in thousands).

March 31, 2005
   
   December 31, 2004Total
   
   % of Total
   
   Total
   
   % of TotalTransaction deposit accounts
   $
   314,745
   
   37.8%
   
   309,561
   
   37.4Money market deposit accounts
   
   100,793
   
   12.3
   
   95,608
   
   11.6Savings deposit accounts
   
   47,701
   
   5.7
   
   44,972
   
   5.4Time deposit accounts
   367,934
   
   44.2
   
   377,306
   
   45.6Total
   $
   831,173
   
   100.0%
   
   827,447
   
   100.0


Core deposits, which
include transaction, money market, and savings deposit accounts, grew by $13.1
million during the first three months of 2005. This increase in core deposits
resulted from programs and deposit promotions offered during the period. For
example, to facilitate growth in core deposit accounts, during third quarter
2004 an enhancement was made to the existing Seniority Club checking product.
Through this promotion, accounts qualifying for Seniority Club status receive
the Internet bill pay option at no additional charge. This increase was also
impacted by the Company's continued ability to attract deposits through pricing
adjustments, expansion of its geographic market area, providing quality customer
service, and through the Company's reputation among the communities it serves.

Time deposit
accounts decreased by $9.4 million during the first three months of 2005.
Promotional certificate of deposit accounts offered beginning during the first
quarter of 2002 began to mature during the first quarter of 2005.  The Bank
has successfully retained a large portion of these maturing funds.  The
decline in time deposits during the first three months of 2005 is due in large
part to the funds that the Bank was unable to retain.

The Company's
increase in core deposits reflects its efforts to enhance its deposit mix by
working to attract lower-cost deposit accounts. As noted above, core deposits
grew by $13.1 million during the first three months of 2005 while higher-cost
time balances decreased by $9.4 million during the same period. The Company's
average cost of core deposits for the quarter ended March 31, 2005 was 0.57%
compared with 0.34% for the same period ended March 31, 2004. The Company's
average cost of core deposits for the year ended December 31, 2004 was 0.36%. 
The Company's average cost of time deposits for the quarter ended March 31, 2005
was 2.77% compared with 2.53% for the for the same period ended March 31, 2004.
The Company's average cost of time deposits for the year ended December 31, 2004
was 2.56%.



24




March 31,
		
		December 31,2005
		
		2004Retail repurchase agreements
		$      
		20,981
		19.9%
		
		$      
		16,397
		20.6%Commercial paper
		18,993
		18.0%
		
		17,051
		21.5%Federal funds purchased
		13,320
		12.7%
		
		-
		0.0%FHLB borrowings
		52,000
		49.4%
		
		46,000
		57.9%Total borrowings
		$    105,294
		100.0%
		
		$       79,448
		100.0%


Borrowings increased
during the first three months of 2005 to fund increases in interest-earning
assets in times of declines in alternative funding sources.

At March 31, 2005,
of its approximately $208 million available credit based on qualifying loans
available to serve as collateral against borrowings from the FHLB, the Company
employed $52.0 million in borrowings, $30.0 million of which constitutes
long-term debt. The Company did not take any additional long-term advances
during the three month period ended March 31, 2005.  The increase in FHLB
borrowings over this period was due to an increase in short-term borrowings. 
In addition to the increase in short term FHLB borrowings, the Company
experienced an increase in short term federal funds purchased from December 31,
2004 to March 31, 2005.  As noted above, the increase in short-term
borrowings was used to fund growth in interest-earning assets.

The table set forth below summarizes the
Company's average borrowing costs for the periods indicated.

|                              | For the three          |   | For the years     
|----------------------------- | ---------------------- | - | ------------------
|                              | months ended March 31, |   | ended December 31,
|                              | 2005                   |   | 2004              
|Retail repurchase agreements  | 1.63                   | % | 0.50              
|Commercial paper              | 1.58                   |   | 0.59              
|Federal funds purchased       | 2.22                   |   | 1.23              
|FHLB advances                 | 2.57                   |   | 1.23              
|Security repurchase agreement | -                      |   | -                 

Rates paid for the
quarter ended March 31, 2005 increased from those paid for the quarter ended
March 31, 2004 and the year ended December 31, 2004. One reason for the changes
in the rates paid on interest-bearing liabilities has been the action of the
Federal Reserve Open Market Committee, which has increased rates since the
second quarter of 2004. The increases in the Company's borrowings costs over the
periods presented can be attributed to these increasing rates as well as to the
Company's growing utilization of long-term FHLB borrowings that are generally at
rates higher than those for other funding sources.

Capital Resources
The objective of
effective capital management is to generate above market returns on equity to
shareholders while maintaining adequate regulatory capital ratios. The Company
uses capital to fund growth, pay dividends, and, from time to time, repurchase
its common stock.

Shareholders' equity totaled $82.1 million and
$80.8 million at March 31, 2005 and December 31, 2004, respectively. 
Shareholders' equity as a percentage of total assets was 8.0% at March 31, 2005
and 8.1% at December 31, 2004.  During the first three months of 2005,
shareholders' equity was impacted by the retention of earnings, the payment of
cash dividends, stock option activity, and fluctuations in the unrealized
position on investment securities available for sale. The Consolidated
Statements of Changes in Shareholders' Equity and Comprehensive Income
contained herein provides detail of the changes in stockholders' equity
components during the first three months of 2005.



25




Palmetto Bancshares and the Bank are required to
meet regulatory capital requirements, which currently include several measures
of capital. At March 31, 2005, Palmetto Bancshares and the Bank were each
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. For further discussion of the Bank's and Palmetto Bancshares'
capital regulatory requirements, see Note 10 of Notes to unaudited Consolidated
Interim Financial Statements contained herein.

The Bank's total capital to risk-weighted assets ratio
declined from 10.27% at December 31, 2004 to 10.19% at March 31, 2005 primarily
due to the growth of 100% risk weighed assets at a faster rate than risk based
capital.  The Company's 2005 Profit Plan projected that total loans would
grow by $55.9 million during 2005.  Total loans grew by $29.2 million
during the first three months of 2005.  However, risk based capital did not
experience the same percentage of growth during the same period thereby
negatively impacting the total capital to risk-weighted assets ratio. 
Management does not believe that these conditions give rise to concern regarding
the ratio due to the fact that as risk based capital continues to increase
toward the 2005 Profit Plan amount and as loans continue to increase toward the
year-end budgeted amount, but at a slower pace than was experienced during the
first quarter of 2005, the Bank's total capital to risk-weighted assets ratio
will return to balances typical for the Bank.   Further, it should be
noted that the Bank's Asset - Liability Management Policy notes that in the
event regulatory capital should fall below the minimum levels to be
"well-capitalized," adjustments will be made by Management to return the Bank to
the "well-capitalized" position.  Management is currently exploring options
for adjustments to ensure the Bank remains in a  "well-capitalized"
position.

During the first
three months of 2005, the dividend payout ratio was 29.6% compared with a payout
ratio of 28.9% during the same period of 2004. For the year ended December 31,
2004 the dividend payout ratio was 30.1%. Cash dividends per share for the three
months ended March 31, 2005 totaled $0.16, an increase over dividends per share
for the same quarter of 2004 of $0.14. The amount of dividends per share
declared is dependent on the Company's earnings, financial condition, capital
position, and such other factors, as the Board may deem relevant. Palmetto
Bancshares and the Bank are subject to certain regulatory restrictions on the
amount of dividends they are permitted to pay as described in its Annual Report
on Form 10-K for the year ended December 31, 2004.The ability of the
Company to pay dividends depends primarily on the ability of the Bank to pay
dividends.

Palmetto Bancshares' book value per share was
$13.00 at March 31, 2005 compared with $12.82 at December 31, 2004.

See Investment Securities Portfolio for
discussion of the fluctuations in the unrealized position on available for sale
securities.

DISCLOSURES REGARDING MARKET RISK

Market risk reflects the risk of economic loss
resulting from adverse changes in market price and interest rates. This risk of
loss can be reflected in diminished current market values and/or reduced
potential net interest income in future periods.

The Company's market risk arises primarily from
interest rate risk inherent in its lending, deposit-taking, and other funding
activities. The structure of the Company's loan, investment, deposit, and
borrowing portfolios is such that a significant increase in interest rates may
adversely impact net market values and net interest income. The Company does not
maintain a trading account nor is it subject to currency exchange risk or
commodity price risk. Responsibility for monitoring interest rate risk rests
with the Asset Liability Management Committee, which is comprised of Senior
Management. The Asset Liability Management Committee regularly reviews the
Company's interest rate risk position and adopts balance sheet strategies that
are intended to optimize net interest income while maintaining market risk
within a set of Board-approved guidelines.

As of March 31, 2005, Management believes that there
have been no significant changes in market risk as disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.

One tool the Company utilizes in assessing
asset-liability management is a simulation model that is used to analyze
interest sensitivity gap (the difference between the amount of
interest-sensitive assets maturing or repricing within a specific time period
and the amount of interest-sensitive liabilities maturing or repricing within
the same time period). The Company's gap position, while not a complete measure
of interest sensitivity, is reviewed periodically to provide insights related to
the static repricing structure of the Company's assets and liabilities.

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



March 31, 2005Interest-earning assets maturing or repricing within one year
   $
   462,199Interestbearing liabilities maturing or repricing within one year
   
   (690,978)Cumulative gap
   $
   (228,779)Gap as a percentage of total assets
   
   22.4%


26




Typically, a
negative gap indicates that cumulative interest-sensitive liabilities exceed
cumulative interest-sensitive assets and suggests that net interest income would
decline if market interest rates increased. A positive gap would suggest the
reverse. This relationship is not always ensured due to the repricing attributes
of both interest-sensitive assets and interest-sensitive liabilities.

An important aspect
of achieving satisfactory net interest income is the composition and maturities
of rate-sensitive assets and liabilities. It must be understood, however, that
the static gap position is limited because it does not take into account changes
in interest rates or changes in Management's expectations or intentions. In
addition, such an analysis is as of the date noted. Therefore, Management
reviews simulated earnings statements on a monthly basis to more accurately
anticipate sensitivity to changes in interest rates. The earnings statements
reviewed monthly by Management simulate the Company's Consolidated Balance
Sheets and Consolidated Statements of Income under several different rate
scenarios over a twelve month period. Each reports variations that occur when
rates gradually increase and decrease in increments of 100 basis points up to
300 basis points over the coming twelve-month period when compared with the
Company's "most likely" scenario. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, and loan prepayments, and should not
be relied upon as indicative of actual results. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.

According to the
model at March 31, 2005, if interest rates rose by 300 basis points over the
coming twelve-month period,
net interest income would be adversely impacted by approximately $7.7 million,
or 17.3%. This model also shows that if interest rates rose by 100 or 200 basis
points over the coming twelve-month period, net interest income would be
adversely impacted by approximately $1.9 million, or 4.3%, and $4.6 million, or
10.3%, respectively. The model also shows that if interest rates dropped 300
basis points over the coming twelve month period, net interest income would be
adversely impacted by approximately $2.3 million, or 5.1%. If interest rates
dropped by 200 points over the coming twelve-month period, net interest income
would be negatively impacted by approximately $78 thousand, or 0.2%. If interest
rates dropped by 100 points over the coming twelve-month period, net interest
income would be positively impacted by approximately $890 thousand, or 2.0%.
Current parameters and guidelines of the Company's Asset Liability Management
Committee include maintaining the projected impact on the Company's net interest
income for the twelve-month period at an amount not to exceed 20%. The projected
impact on the Company's net interest income for the twelve-month period does not
exceed the 20% threshold prescribed by the Asset Liability Management
Committee's policy.

DERIVATIVES AND HEDGING ACTIVITIES

Derivative transactions may be used by the
Company to better manage its interest rate sensitivity to reduce risks
associated with its lending, deposit taking, and borrowing activities. The
Company recognizes any derivatives as either assets or liabilities on the
consolidated balance sheets and reports these instruments at fair value with
realized and unrealized gains and losses included in either earnings or in other
comprehensive income, depending on the purpose for which the derivative is used
and whether the derivative qualifies for hedge accounting in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."



27






The Company engages in rate lock risk related to
commitments to originate fixed-rate mortgage loans held for sale. Generally, the
purchasing party undertakes such rate lock risk, and accordingly, no interest
rate risk is involved in such transactions. Commitments are generally recorded
at their fair value at the date of contract.  The fee collected for such
commitments determines such fair values.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course
of business, the Company engages in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in
its financial statements or are recorded in amounts that differ from the
notional amounts. These transactions involve elements of credit, interest rate,
and liquidity risk.

The Company's
off-balance sheet arrangements principally include lending commitments. At March
31, 2005, the Company had no interests in nonconsolidated special purpose
entities.

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.

See Note 9 of Notes
To unaudited Consolidated Interim Financial Statements for a discussion of these
off balance sheet arrangements.

LIQUIDITY

GeneralManagement
determines the desired level of liquidity for the Company in conjunction with
the Company's Asset-Liability Committee. The level of liquidity is based on
Management's strategy for the Company, commitments to make loans, and the
Committee's assessment of the Company's ability to generate funds.

Proper liquidity
management is crucial to ensure that the Company is able to take advantage of
new business 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.

The Company's
liquidity is impacted by its ability to attract and retain deposit accounts,
activity within and sales from its investment securities and loan portfolios,
alternative sources of funds, and current earnings. Competition for deposits is
intense in the markets served by the Company. However, the Company has been able
to attract deposits as needed through pricing adjustments, expansion of its
geographic market area, providing quality customer service, and through the
Company's reputation among the communities it serves. The deposit base is
comprised of diversified customer deposits with no one deposit or type of
customer accounting for a significant portion. Therefore, the Company does not
expect that withdrawals will fluctuate from historical levels in the near term.
The loan portfolio of the Company is a source of liquidity through maturities
and repayments by existing borrowers. Loan demand has been relatively constant,
and loan originations can be controlled through pricing decisions. The
investment securities portfolio is also an avenue for liquidity through
scheduled maturities, sales of investment securities, and prepayment of
principal on mortgage-backed securities.



28




If needed,
alternative funding sources have been arranged through federal funds lines at
correspondent banks and through the Federal Reserve Discount Window. At March
31, 2005, the Company had unused short-term lines of credit totaling of $26.7
million (which are withdrawable at the Company's option).

In addition, the
Company utilizes borrowings from the FHLB to fund increases in interest-earning
assets in times of declines in alternative funding sources. FHLB borrowings are
an alternative to other funding sources with similar maturities. The FHLB has an
overall credit limit for each member. The FHLB allows securities, qualifying
loans, deposits, and stock of the FHLB owned by the Company to be pledged to
secure any advances from the FHLB. At March 31, 2005, of its approximately $208
million available credit based on qualifying loans available to serve as
collateral against borrowings from the FHLB, the Company employed $52.0 million
in both short-term and long-term borrowings.

To review factors
that impacted liquidity for the three month period ended March 31, 2005, see Consolidated
Statements of Cash Flow contained herein.

The liquidity ratio
is an indication of a company's ability to meet its short-term funding
obligations. The Company's policy is
to maintain a liquidity ratio between 10%-25%. At March 31, 2005, the Company's
liquidity ratio was 14%. Based on Management's liquidity analysis, which
analyzes the forward-looking twelve-month period, it was concluded that the
Company's sources of liquidity appear adequate to meet operational needs and to
maintain the liquidity ratio within policy guidelines.

The Company's
long-term debt obligation position, including long-term borrowings and real
property operating lease obligations, at March 31, 2005 has remained unchanged
from the Company's position at December 31, 2004.  The Company's
obligations with regard to pension obligations are discussed in Note 13 of Notes
to Consolidated Financial Statements of the Annual Report on Form 10-K for the
year ended December 31, 2004.

Lending
Commitments

The table set forth below summarizes the
Company's contractual commitments to extend credit at March 31, 2005 (in
thousands).

Home equity loans
			$                 
			42,381Credit cards
			42,001Commercial real estate
development
			81,551Other unused lines of
credit
			39,512Total contractural
commitments to extend credit
			$               
205,445


Outstanding
commitments on mortgage loans not yet closed, the majority of which include
interest rate lock commitments, amounted to approximately $4.7 million at March
31, 2005. These were principally single-family loan commitments. Commitments to
extend credit are agreements to lend to borrowers as long as there is no
violation of any condition established by the commitment letter. Commitments
generally have fixed expiration dates or other termination clauses. The majority
of the commitments will be funded within a 12-month period. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on Management's
credit evaluation of the borrower. Collateral held consists of residential
properties.

At March 31, 2005,
the Company has recorded no liability for the current carrying amount of the
obligation to perform as a guarantor for standby letters of credit and no
contingent liability is considered necessary, as the Company believes it is
unlikely that it will have to perform under such contracts. The maximum
potential amount of undiscounted future payments related to standby letters of
credit at March 31, 2005 was $2.0 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 values of such guarantees are deemed immaterial at March 31, 2005.



29




At March 31, 2005, the Company had no interests
in nonconsolidated special purpose entities nor is it involved in other
off-balance sheet contractual relationships (other than those discussed herein),
unconsolidated related entities that have off-balance sheet arrangements, or
transactions that could result in liquidity needs.

The Company
originates, sells, and services mortgage loans. All of the Company's loan sales
have been without provision for recourse. Mortgage loans serviced for the
benefit of others amounted to $272.0 million at March 31, 2005.

Palmetto
BancsharesThe holding company
conducts its business through its banking subsidiary by offering commercial
paper as an alternative investment tool for its commercial customers (master
note program). The commercial paper is issued only in conjunction with the
automated sweep account customer agreement on deposits at the Bank level. At
March 31, 2005, the holding company had $19.0 million in commercial paper with a
weighted average rate paid during the year of 1.58%, as compared to $17.1
million at December 31, 2004 with a weighted average paid during the year of
0.75%.

Potential sources
for the holding company's payment for its periodic stock purchases and dividends
include dividends from the Bank and funds received through stock option
exercises. At March 31, 2005, the holding company had cash reserves of $483
thousand compared with $495 thousand at December 31, 2004. The increase between
the two periods is due primarily to the receipt of funds in conjunction with
stock option transactions during the first three months of 2005.

Current federal law
prohibits, except under certain circumstances and with prior regulatory
approval, an insured depository institution, such as the Bank, from paying
dividends or making any other capital distribution if, after making the payment
or distribution, the institution would be considered "undercapitalized," as that
term is defined in applicable regulations. In addition, as a South
Carolina-chartered bank, the Bank is subject to legal limitations on the amount
of dividends it is permitted to pay. Such restrictions have not had and are not
expected to have an impact on the ability of the holding company to meet its
cash obligations.

For a complete
discussion of capital distribution regulations, refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.

EARNINGS REVIEW

OverviewNet income totaled $3.4 million, or $0.53 per
diluted share, for the three months ended March 31, 2005, compared to net income
of $3.0 million, or $0.48 per diluted share, for the same period in 2004. Net
income per basic share was $0.54 for the quarter ended March 31, 2005 compared
to $0.48 for the same quarter of 2004.

Net income for the quarter ended March 31, 2005
increased $381 thousand over the quarter ended March 31, 2004.  
Contributing to this increase over the periods was an increase in net interest
income of $1.1 million and a decrease in the provision for loan losses of $150
thousand.  Offsetting these increases in net income were increases in
noninterest expense totaling $553 thousand and the provision for income taxes
totaling $282 thousand.

The Company's net interest margin declined to
4.66% for the quarter ended March 31, 2005 from 4.73% for the quarter ended
March 31, 2004.  Average interest-earning assets increased by $113.3
million over these periods.



30




During the first quarter of 2005, the Company's
nontraditional banking services generated revenue growth over the first quarter
of 2004. Over the periods indicated, net fees for trust and brokerage services
increased 12.2%, or $82 thousand, and mortgage-banking income increased 70.9%,
or $117 thousand.  Offsetting this growth was a decline in investment
security gains of $54 thousand.

Noninterest expense increased by 6.7% to $8.8
million for the quarter ended March 31, 2005 from $8.2 million for the quarter
ended March 31, 2004 due primarily to an increase of $328 thousand in salaries
and other personnel expense over the periods resulting from the additional of
several new officer positions within the Bank, annual salary increases, and the
hiring of new employees in anticipation of the opening of the new Easley branch
during third quarter 2005.

Income tax expense increased $282 thousand during
the quarter ended March 31, 2005 over the quarter ended March 31, 2004 due to an
increase in projected taxable income relative to nontaxable adjustments.

First quarter 2005 earnings resulted in a return
on average assets of 1.37% and a return on average shareholders' equity of
16.74% compared with 1.30% and 15.82%, respectively for the year ended December
31, 2004, and 1.37% and 16.48% at the end of the first quarter of 2004.

Net Interest IncomeNet interest income
for the quarter ended March 31, 2005 increased $1.1 million, or 11.0%, to $10.8
million from $9.7 million for the quarter ended March 31, 2005. The yield on
interest-earning assets increased to 6.16% for the quarter ended March 31, 2005
from 5.96% for the quarter ended March 31, 2004. The cost of interest-bearing
liabilities increased to 1.78% for the quarter ended March 31, 2005 from 1.45%
for the quarter ended March 31, 2004.

The table set forth
below summarizes the Company's yields earned, rates paid, average
interest-earning assets, and average interest-bearing liabilities for the
periods presented (dollars in thousands). Weighted average yield on
interest-earning assets and weighted average cost of interest-bearing
liabilities are derived by dividing interest income and expense by the weighted
average balances on interest-earning assets or interest-bearing liabilities.



31




For the quarters ended March 31,2005
		
		2004Average
		Income/
		Yield/
		
		Average
		Income/
		Yield/Balance
		Expense
		Rate
		
		Balance
		Expense
		RateASSETSInterest-earnings assetsFederal funds sold
		$       
		3,647
		$       
		21
		2.34
		%
		$      5,838
		$       
		15
		1.03
		%Federal Home Loan Bank stock and deposits
		4,574
		43
		3.81
		
		2,606
		19
		2.93Nontaxable investment securities (1)
		66,679
		618
		3.76
		
		54,757
		510
		3.75Taxable investment securities (1)
		75,199
		716
		3.86
		
		60,540
		446
		2.96Loans, net of unearned (2)
		790,453
		12,891
		6.61
		
		703,536
		11,271
		6.44Total interest-earning assets
		940,552
		14,289
		6.16
		
		827,277
		12,261
		5.96Noninterest-earning assetsCash and due from banks
		31,649
		
		
		
		27,514Allowance for loan losses
		(7,648)
		
		
		
		(7,493)Premises and equipment, net
		22,274
		
		
		
		21,876Accrued interest
		4,321
		
		
		
		3,827Other assets
		15,350
		
		
		
		15,080Total noninterest-earning assets
		65,946
		
		
		
		60,804Total assets
		$ 1,006,498
		
		
		
		$  888,081LIABILITIES AND SHAREHOLDERS' EQUITYLiabilitiesInterest-bearing liabilitiesDemand deposits
		$    284,638
		$      431
		0.61
		%
		$  263,526
		$      225
		0.34
		%Savings
		
		45,878
		32
		0.28
		
		44,207
		31
		0.28Time
		
		371,997
		2,538
		2.77
		
		349,993
		2,201
		2.53Total interest-bearing deposits
		702,513
		3,001
		1.73
		
		657,726
		2,457
		1.50Other interest-bearing liabilities
		90,140
		475
		2.14
		
		40,139
		65
		0.65Total interest-bearing liabilities
		792,653
		3,476
		1.78
		
		697,865
		2,522
		1.45Noninterest-bearing liabilitiesNoninterest-bearing deposits
		126,636
		
		
		
		112,755Other noninterest-bearing liabilities
		4,616
		
		
		
		3,524Total noninterest-bearing liabilities
		131,252
		
		
		
		116,279Total liabilities
		923,905
		
		
		
		814,144Shareholders' equity
		82,593
		
		
		
		73,937Total liabilities and shareholders' equity
		$ 1,006,498
		
		
		
		$  888,081NET INTEREST INCOME / NET YIELD ON
		
		$ 10,813
		4.66
		%
		
		$   9,739
		4.73
		%INTEREST-EARNING ASSETS(1)
		The average balances for investment
		securities include the unrealized gain or loss recorded for available
		for sale securities.(2)
		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.


The average yield on
interest-earning assets increased by 20 basis points while the rate paid on
average interest-bearing liabilities increased by 33 basis points. Average
interest-earning assets increased over the same periods by $113.3 million while
interest-bearing liabilities increased $94.8 million.

32






The following rate /
volume analysis depicts the increase (decrease) in net interest income
attributable to interest rate and volume fluctuations when comparing the three
months ended March 31, 2005 to the three months ended March 31, 2004 (in
thousands).

For the quarter ended March 31, 2005
		compared with the quarter ended March 31, 2004Volume
		Rate
		TotalInterest-earnings assetsFederal funds sold
		$               
		  (9)
		15
		6Federal Home Loan Bank stock and deposits
		16
		8
		24Nontaxable investment securities
		111
		(3)
		108Taxable investment securities
		124
		146
		270Loans, net of unearned
		1,405
		215
		1,620Total interest-earning assets
		$           
		1,647
		381
		2,028Interest-bearing liabilitiesDemand deposits
		$                
		25
		181
		206Savings
		1
		-
		1Time
		144
		193
		337Total interest-bearing deposits
		170
		374
		544Other interest-bearing liabilities
		172
		238
		410Total interest-bearing liabilities
		$              
		342
		612
		954NET INTEREST INCOME
		$           
		1,305
		(231)
		1,074


The Federal Reserve increased the federal funds
target rate by 25 basis points in seven moves starting in June of 2004 and
ending in March 2005. In spite of these rate increases, funding source rate
changes often take more time to filter into the net interest margin, primarily
because of the timed maturities of certificates of deposit and borrowings.

Provision for Loan LossesThe provision for
loan losses is a charge to earnings in a given period in order to maintain the
Allowance at an adequate level defined by the Company's Allowance model. The
provision for loan losses is adjusted each month to reflect loan growth and to
allow for loans charged-offs, recoveries, and other factors that impact
Management's assessment of the adequacy of the Allowance. Management's objective
is to maintain the Allowance at an adequate level to cover probable losses in
the portfolio. Additions to the Allowance are based on Management's evaluation
of the loan portfolio under current economic conditions, past loan loss
experience, and such other factors that, in Management's judgment, deserve
consideration in estimating loan losses. The provision for loan losses was $600
thousand and $750 thousand for the three months March 31, 2005 and 2004,
respectively.  The Allowance at March 31, 2005, December 31, 2004, and
March 31, 2004 was $7.8 million, $7.6 million, and $7.7 million, respectively
and represented 0.98%, 0.99%, and 1.09% of loans excluding mortgage loans held
for sale, net of unearned and excluding the Allowance for the same dates,
respectively.

The provision for
loan losses declined from the three months ended March 31, 2004 to the same
period of 2005 primarily as a result of decreases in net loans charged- off,
nonperforming loans, and classified assets. Net loans charged-off during the
three months ended March 31, 2005 totaled $381 thousand, down from $521 thousand
during the three months ended March 31, 2004. Nonperforming assets declined from
$6.6 million at March 31, 2004 to $4.8 million at March 31, 2005. Additionally,
classified assets declined from $19.9 million at March 31, 2004 to $16.6 million
at March 31, 2005. These factors were offset slightly by the impact of the
growth of the loan portfolio over the periods.

33






See Financial
Condition-Loan Portfolio and Allowance for Loan Losses, and Note 3 of Notes to
Consolidated Interim Financial Statements contained herein for additional
discussion including factors impacting the Allowance and thus the provision for
loan losses as well as the methodology for analyzing the adequacy of the
Allowance.

Noninterest IncomeNoninterest income
for the three months ended March 31, 2005 totaled $3.7 million, down $8 thousand
compared with the first quarter of 2004. Contributing to the decrease in
noninterest income for the quarter ended March 31, 2005 over the quarter ended
2004 were decreases in service charges on deposit accounts and investment
securities gains offset by increases in net fees for trust and brokerage
services and mortgage-banking income.

Service charges on
deposit accounts comprise a significant component of other noninterest income
and comprised 49.7% of noninterest income during the first quarter of 2005
compared with 56.0% of noninterest income during the first quarter of 2004.
Management believes that the decline in service charges on deposit accounts are
partially the result of more options being offered to customers with regard to
potential overdraft and nonsufficient funds situations.  As such, customers
have been able to reduce costs incurred relative to such situations.  The
Company periodically monitors competitive fee schedules and examines alternative
opportunities to ensure that the Company realizes the maximum profits from this
area.

Net fees for trust
and brokerage services include fees earned through the Bank's subsidiary,
Palmetto Capital and the
trust department. At March 31, 2005, assets under Palmetto Capital's management
totaled $145.9 million as compared with the assets under management at March 31,
2004 of $123.8 million. At March 31, 2005, assets under the trust department's
management totaled $252.7 million as compared with the assets under management
at March 31, 2004 of $264.7 million. The decline in assets under the management
of the trust department is due to the liquidation of two relationships over the
periods noted. The increase in fees earned correlates to the level of assets
under management. Levels of assets under management are a function of the flow
of money into and out of the fund, as well as the change in market valuation.

The Company sells a
large portion of the mortgage loans it originates in the secondary market and
retains the servicing rights. At March 31, 2005 the servicing portfolio for
loans sold had an aggregate principal balance of $272.1 million, up from $265.7
million at December 31, 2004. The loan portfolio serviced for others at March
31, 2005 was relatively unchanged from the balance at March 31, 2004. The servicing
portfolio has remained relatively unchanged over these periods due to
prepayments of loans being offset by new originations. At March 31, 2005, the
total servicing portfolio, including serviced portfolio loans, had an aggregate
principal balance of $323.7 million, up slightly from $318.3 million at December
31, 2004. At March 31, 2004 such loans totaled $323.3 million relatively
unchanged from such loans at March 31, 2005.

The table set forth
below summarizes the balances that comprise the mortgage-banking income
component of noninterest income for the periods indicated (in thousands).



For the quarters ended March 31,2005
   
   2004Loan sale gains
   $
   203
   
   210Mortgage-servicing fees
   
   167
   
   168Mortgage-servicing rights amortization
   
   (135)
   
   (199)Mortgage-servicing rights recapture (impairment)
   
   15
   
   (40)Other mortgage-banking income
   
   32
   
   26Total mortgage-banking income
   $
   282
   
   165




34




Activity impacting
the Company's mortgage-servicing rights portfolio, including mortgage loans
originated to be sold and sales of such loans, are reflected in the Consolidated
Statement of Cash Flows contained herein.

The relatively
unchanged gains from loan sales and mortgage servicing fees during the quarter
ended March 31, 2005 over the quarter ended March 31, 2004 was attributable to
an almost unchanged volume of mortgage loan held for sale originations and
sales.  Additionally, the portfolio of such serviced loans remained
relatively unchanged from March 31, 2004 to March 31, 2005. Mortgage-servicing
rights amortization was at higher than historical levels during recent years
mainly as a result of higher loan prepayment speeds. As these prepayment speeds
slowed beginning in mid 2004, a reduction has been seen in mortgage servicing
rights amortization.

Investment security
gains declined by $54 thousand to $54 thousand during the first quarter of 2005
over the same quarter of 2004.  Once factor in this decline was the decline
in available gains within the portfolio due to the rising interest rate
environment over the periods.  Another factor in the decline was the
reduction in calls of securities at premiums since the first quarter of 2004
also as a factor of the rising interest rate environment.

The increase in other noninterest income for the
three months ended March 31, 2005 from the three months ended March 31, 2004 was
the result of changes in several accounts, none of which constitute material
fluctuations but that in the aggregate resulted in an increase of $83 thousand.

Noninterest ExpenseIn the more
competitive financial services market of recent years, Management has recognized
the importance of controlling noninterest expense to maintain and improve
profitability. Management also recognizes that there are operational costs that
continue to increase as a result of the present operating climate for regulated
financial institutions. The technical and operating environment for financial
institutions continues to require a well-trained and motivated staff, superior
operating systems, and sophisticated marketing efforts.

Noninterest expense
for the quarter ended March 31, 2005 increased $553 thousand, or 6.7%, to $8.8
million from $8.2 million in the quarter ended March 31, 2004. Contributing to
the increase in noninterest expense for the quarter ended March 31, 2005 over
the quarter ended March 31, 2004 was an increase in salaries and other personnel
expense and other noninterest expense.

Salaries and other
personnel expense comprises a significant component of noninterest expense.
Comprising 56.4% of noninterest expense in the first quarter of 2005 and 56.2%
of noninterest expense in the first quarter of 2004, salaries and other
personnel expense increased by $328 thousand to $5.0 million in the first
quarter of 2005 from $4.6 million in the first quarter of 2004. The majority of
the increase was due to increases in employee and officer salaries as well as
the officer incentive plan.  These increases, in turn, resulted in an
increased FICA tax expense.  Employee salaries increased $55 thousand, or
3.2%, during the first quarter of 2005 over the first quarter of 2004 primarily
as a result of annual merit raises, which were budgeted to be approximately 3.5%
during 2005.  Officer salaries increased $142 thousand, or 9.8%, during the
first quarter of 2005 over the first quarter of 2004. In addition to annual
merit raises, officer salaries increased over the periods noted due to the
addition of new officer positions including those positions created in
anticipation of the opening of the new Easley branch during third quarter 2005.
Resulting from these salary increases was an increase in the Company's FICA tax
expense of $23 thousand over the periods discussed.  The Company also
continued to experience increasing medical insurance premiums during the first
quarter of 2005 compared with the first quarter of 2004.  Medical insurance
expense increased $23 thousand over these periods.





35






Other noninterest expense increased $174 thousand
during the first three months of 2005 to $1.4 million over the first three
months of 2004. This increase was the result of changes in several accounts,
none of which constitute material fluctuations.

Income TaxesIncome tax expense totaled $1.7 million for the quarter ended March 31,
2005, compared with $1.4 million for the quarter ended March 31, 2004. The
Company's effective tax rate was 33.5% and 32.1% for the three months ended
March 31, 2005 and 2004, respectively.

ACCOUNTING AND REPORTING MATTERS

See footnote 1 of
Item 1, Financial Statements for a discussion regarding accounting
pronouncements recently adopted by 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 consolidated financial statements
upon adoption.

Item 3.  Quantitative and Qualitative
Disclosures about Market Risk

See Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Disclosures Regarding Market
Risk for quantitative and qualitative disclosures about market risk.

Item 4.  Controls and Procedures

Evaluation of
Disclosure Controls and ProceduresAn evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act
of 1934) was carried out under the supervision and with the participation of the
Company's Chairman and Chief Executive Officer and the Company's President and
Chief Operating Officer (Chief Accounting Officer) as of the end of the period
covered by this Quarterly Report (the "Evaluation Date"). The Company's Chairman
and Chief Executive Officer and the Company's President and Chief Operating
Officer (Chief Accounting Officer) concluded as of the Evaluation Date that
disclosure controls and procedures were effective in providing reasonable
assurance that the information required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934 is (i)
accumulated and communicated to Management (including the Company's Chairman and
Chief Executive Officer and the Company's President and Chief Operating Officer
(Chief Accounting Officer)) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.

Changes in
Internal ControlsDuring the first quarter of 2005, the Company did not make any change in its
internal control over financial reporting or other factors that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.











36




PART II. 
OTHER INFORMATION

Item 1.  Legal Proceedings

See Note 9 of the Notes To Consolidated Interim
Financial Statements for a discussion of legal proceedings.

Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities

None

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

None

Item 5.  Other Information

There was no information required to be disclosed
by the Company in a report on Form 8-K during the first quarter of 2005 that was
not so disclosed.

Item 6.  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











37




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)

Dated:  
May 9, 2005













38