PALMETTO BANCSHARES INC - 10-Q Quarterly Report

PALMETTO BANCSHARES, INC.
Consolidated Balance Sheets
(in thousands, except share data)

				June 30,		December 31,
				2003	2002	2002
				(unaudited)
ASSETS
Cash and due from banks				$ 28,387	32,939	32,608
Federal funds sold				1,880	21,316	5,485
Federal Home Loan Bank (FHLB) stock, at cost				1,868	1,733	1,733
Investment securities available for sale at fair value				115,380	102,101	115,108
Loans held for sale				12,963	4,147	11,851

Loans				666,627	570,283	625,542
	Less allowance for loan losses			(7,022)	(5,867)	(6,402)
		Loans, net		659,605	564,416	619,140

Premises and equipment, net				19,934	19,789	19,715
Accrued interest receivable				4,002	4,628	4,146
Other assets				15,937	12,505	15,206
			Total assets	$ 859,956	763,574	824,992

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
	Noninterest-bearing			$ 120,343	105,444	114,573
	Interest-bearing			624,062	558,949	607,418
		Total deposits		744,405	664,393	721,991

Securities sold under agreements to repurchase				12,750	17,306	12,831
Commercial paper (Master notes)				19,676	14,401	14,839
Federal funds purchased				5,900	-	-
Other liabilities				5,119	3,853	7,810
		Total liabilities		787,850	699,953	757,471

Shareholders' equity
Common stock - par value $5.00 per share; authorized
10,000,000 shares; issued and outstanding 6,351,339, 6,295,578
and 6,324,659 at June 30, 2003 and 2002 and December 31,
2002, respectively.				31,757	31,478	31,623
Capital surplus				225	44	50
Retained earnings				38,260	30,941	34,173
Accumulated other comprehensive income, net of tax				1,864	1,158	1,675
		Total shareholders' equity		72,106	63,621	67,521

			Total liabilities and shareholders' equity	$ 859,956	763,574	824,992


See accompanying notes to consolidated interim financial statements.


PALMETTO BANCSHARES, INC.
Consolidated Statements of Income
(in thousands, except share data)

					For the three months ended June 30,
					2003	2002
					(unaudited)
Interest income
	Interest and fees on loans				$ 10,772	$ 10,297
	Interest and dividends on investment securities available for sale
		U.S. Treasury and U.S. Government agencies			299	437
		State and municipal			391	498
		Mortgage-backed securities			181	107
	Interest on federal funds sold				28	153
	Dividends on FHLB stock				20	24
			Total interest income		11,691	11,516

Interest expense
	Interest on deposits, including retail repurchase agreements				2,688	3,035
	Interest on federal funds purchased				8	--
	Interest on commercial paper (Master notes)				29	37
			Total interest expense		2,725	3,072

			Net interest income		8,966	8,444

Provision for loan losses					900	1,000

			Net interest income after provision for loan losses		8,066	7,444

Noninterest income
	Service charges on deposit accounts				2,217	1,982
	Fees for trust and brokerage services				715	651
	Gains on sales of mortgage loans				335	193
	Gains on sales of investment securities				186	95
	Other				337	634
			Total noninterest income		3,790	3,555

Noninterest expense
	Salaries and other personnel				4,132	3,677
	Net occupancy				541	561
	Furniture and equipment				839	669
	Postage and supplies				409	328
	Marketing and advertising				253	275
	Telephone				188	197
	Cardholder processing				138	147
	Other				1,360	1,455
			Total noninterest expense		7,860	7,309

			Income before income taxes		3,996	3,690

Income tax provision					1,288	1,205

				Net income	$ 2,708	2,485

Share Data:
	Net income - Basic				$ 0.43	0.40
	Net income - Diluted				0.42	0.38
	Book value				11.35	10.11

	Weighted average common shares outstanding - Basic				6,346,105	6,293,765
	Weighted average common shares outstanding - Diluted				6,498,919	6,465,218


See accompanying notes to consolidated interim financial statements.

PALMETTO BANCSHARES, INC.
Consolidated Statements of Income
(in thousands, except share data)

					For the six months ended June 30,
					2003	2002
					(unaudited)
Interest income
	Interest and fees on loans				$ 21,494	$ 20,825
	Interest and dividends on investment securities available for sale
		U.S. Treasury and U.S. Government agencies			714	748
		State and municipal			774	1,133
		Mortgage-backed securities			390	238
	Interest on federal funds sold				63	211
	Dividends on FHLB stock				42	50
			Total interest income		23,477	23,205

Interest expense
	Interest on deposits, including retail repurchase agreements				5,492	6,343
	Interest on federal funds purchased				12	1
	Interest on commercial paper (Master notes)				52	71
			Total interest expense		5,556	6,415

			Net interest income		17,921	16,790

Provision for loan losses					1,800	1,900

			Net interest income after provision for loan losses		16,121	14,890

Noninterest income
	Service charges on deposit accounts				4,221	3,807
	Fees for trust and brokerage services				1,352	1,263
	Gains on sales of mortgage loans				674	418
	Gains on sales of investment securities				281	235
	Other				736	1,203
			Total noninterest income		7,264	6,926

Noninterest expense
	Salaries and other personnel				7,802	7,356
	Net occupancy				1,108	1,109
	Furniture and equipment				1,652	1,304
	Postage and supplies				805	710
	Marketing and advertising				437	530
	Telephone				372	390
	Cardholder processing				274	288
	Other				2,639	2,795
			Total noninterest expense		15,089	14,482

			Income before income taxes		8,296	7,334

Income tax provision					2,686	2,394

				Net income	$ 5,610	4,940

Share Data:
	Net income - Basic				$ 0.89	0.79
	Net income - Diluted				0.87	0.76
	Book value				11.35	10.11

	Weighted average common shares outstanding - Basic				6,336,455	6,290,529
	Weighted average common shares outstanding - Diluted				6,483,582	6,461,727


See accompanying notes to consolidated interim financial statements.

PALMETTO BANCSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
(in thousands, except share data) (unaudited)

					Accumulated
	Shares of				other
	common	Common	Capital	Retained	comprehensive
	stock	stock	surplus	earnings	income, net	Total
Balance at December 31, 2001	6,283,623	$ 31,418	26	27,386	238	59,068

Net income				4,940		4,940
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) arising during
period, net of tax effect of $667					1,065
Less: reclassification adjustment for gains included
in net income, net of tax effect of $90					(145)
Net unrealized gains (losses) on securities						920

Comprehensive income						5,860

Cash dividend ($.11 per share)				(1,385)		(1,385)
Stock option activity	11,955	60	18			78
Balance at June 30, 2002	6,295,578	$ 31,478	44	30,941	1,158	63,621


Balance at December 31, 2002	6,324,659	$ 31,623	50	34,173	1,675	67,521

Net income				5,610		5,610
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) arising during
period, net of tax effect of $227					362
Less: reclassification adjustment for gains included
in net income, net of tax effect of $108					(173)
Net unrealized gains on securities						189

Comprehensive income						5,799

Cash dividend ($.12 per share)				(1,523)		(1,523)
Stock option activity	26,680	134	175			309
Balance at June 30, 2003	6,351,339	$ 31,757	225	38,260	1,864	72,106

PALMETTO BANCSHARES, INC.
Consolidated Statements of Cash Flow
(in thousands)

				For the six months ended June 30,
				2003	2002
				(unaudited)
Cash flows from operating activities
	Net income			$ 5,610	4,940
	Adjustments to reconcile net income to net cash provided by (used in) operating activities
		Depreciation and amortization		2,616	938
		Gain on sale of investment securities		(281)	(235)
		Provision for loan losses		1,800	1,900
		Origination of loans held for sale		(78,032)	(40,456)
		Sale of loans held for sale		77,594	46,781
		Gain on sale of loans		(674)	(418)
		Change in accrued interest receivable		144	319
		Change in other assets		(1,264)	(56)
		Change in other liabilities, net		(2,809)	(1,245)

			Net cash provided by operating activities	4,704	12,468


Cash flows from investing activities
	Purchase of investment securities available for sale			(44,453)	(50,123)
	Proceeds from maturities of investment securities available for sale			12,278	17,743
	Proceeds from sale of investment securities available for sale			20,545	23,925
	Principal paydowns on mortgage-backed securities available for sale			11,331	2,928
	Purchase of Federal Home Loan Bank stock			(135)	--
	Net increase in loans outstanding			(42,873)	(19,996)
	Purchases of premises and equipment, net			(1,079)	(1,485)

			Net cash used in investing activities	(44,386)	(27,008)


Cash flows from financing activities
	Net increase in deposit accounts			22,414	19,093
	Net increase in securities sold under agreements to repurchase			(81)	1,993
	Net increase in commercial paper			4,837	3,325
	Net increase (decrease) in federal funds purchased			5,900	--
	Proceeds from issuance of common stock			309	78
	Dividends paid			(1,523)	(1,385)

			Net cash provided by financing activities	31,856	23,104


Net increase in cash and cash equivalents				(7,826)	8,564
Cash and cash equivalents at beginning of the period				38,093	45,691

Cash and cash equivalents at end of the period				$ 30,267	54,255

Supplemental Information
Cash paid during the period for:
	Interest expense			$ 5,675	6,741
	Income taxes			2,637	2,310

Supplemental schedule of non-cash investing and financing transactions
	Change in unrealized gain on investment securities available or sale, pre-tax			$ 307	1,496
	Loans transferred to other real estate owned			608	1,843
	Loans charged -off			1,262	1,770


See accompanying notes to consolidated interim financial statements.

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

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

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

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

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

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

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

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

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

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

PALMETTO BANCSHARES, INC.
Table of Contents

			Page No.

PART I. FINANCIAL INFORMATION			3
	Item 1.	Financial Statements	3
	Item 2.	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
	Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION			37
	Item 1.	Legal Proceedings	37
	Item 2.	Changes in Securities and Use of Proceeds	37
	Item 3.	Defaults Upon Senior Securities	37
	Item 4.	Submission of Matters to a Vote of Security Holders	37
	Item 5.	Other Information	37
	Item 6.	Exhibits and Reports on Form 8-K	37

SIGNATURES			39

PALMETTO BANCSHARES, INC.