U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number  0-26016

PALMETTO BANCSHARES, INC. (Exact name of registrant as specified in its charter)

South Carolina (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)

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

Outstanding at November 6, 2003

Common stock, $5.00 par value

6,257,624

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

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PALMETTO BANCSHARES, INC.
Consolidated Statements of Income
(in thousands, except share data)
							For the nine months  ended September 30,
							2003		2002
							(unaudited)
Interest income
	Interest and fees on loans						$     32,127		$     31,409
	Interest and dividends on investment securities available for sale
		U.S. Treasury and U.S. Government agencies					893		1,218
		State and municipal					1,182		1,545
		Mortgage-backed securities					492		327
	Interest on federal funds sold						111		307
	Dividends on FHLB stock						60		72
			Total interest income				34,865		34,878
Interest expense
	Interest on deposits, including retail repurchase agreements						8,134		9,289
	Interest on federal funds purchased						19		1
	Interest on commercial paper (Master notes)						80		115
			Total interest expense				8,233		9,405
			Net interest income				26,632		25,473
Provision for loan losses							2,700		3,100
			Net interest income after provision for loan losses				23,932		22,373
Noninterest income
	Service charges on deposit accounts						6,417		5,859
	Fees for trust and brokerage services						2,053		1,839
	Mortgage banking income						305		457
	Gains on sales of investment securities						362		349
	Other						1,996		1,864
			Total noninterest income				11,133		10,368
Noninterest expense
	Salaries and other personnel						11,794		11,210
	Net occupancy						1,691		1,672
	Furniture and equipment						2,536		2,002
	Postage and supplies						1,123		1,107
	Marketing and advertising						632		710
	Telephone						557		594
	Cardholder processing						412		420
	Other						3,932		4,179
			Total noninterest expense				22,677		21,894
			Income before income taxes				12,388		10,847
Income tax provision							3,921		3,578
				Net income			$      8,467		7,269
Share Data:
	Net income - Basic						$        1.34		1.15
	Net income - Diluted						1.32		1.12
	Book value						11.25		10.49
	Weighted average common shares outstanding - Basic						6,315,334		6,294,386
	Weighted average common shares outstanding - Diluted						6,410,952		6,464,048
See accompanying notes to consolidated interim financial statements.

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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					7,269		7,269
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) arising during
period, net of tax effect of $1,217						1,944
Less:  reclassification adjustment for gains included
in net income, net of tax effect of $134						(215)
Net unrealized gains (losses) on securities							1,729
Comprehensive income							8,998
Cash dividend ($.11 per share)					(2,078)		(2,078)
Stock option activity		20,155	101	58			159
Balance at September 30, 2002		6,303,778	$   31,519	84	32,577	1,967	66,147
Balance at December 31, 2002		6,324,659	$   31,623	50	34,173	1,675	67,521
Net income					8,467		8,467
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) arising during
period, net of tax effect of $340						(542)
Less:  reclassification adjustment for gains included
in net income, net of tax effect of $140						(223)
Net unrealized gains on securities							(765)
Comprehensive income							7,702
Cash dividend ($.12 per share)					(2,273)		(2,273)
Stock repurchase activity		(100,000)	(500)		(2,400)		(2,900)
Stock option activity		31,965	160	194			354
Balance at September 30, 2003		6,256,624	$   31,283	244	37,967	910	70,404

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PALMETTO BANCSHARES, INC.
Consolidated Statements of Cash Flow
(in thousands)
						For the nine months ended September 30,
						2003		2002
						(unaudited)
Cash flows from operating activities
	Net income					$      8,467		7,269
	Adjustments to reconcile net income to net cash provided by (used in) operating activities
		Depreciation and amortization				4,134		1,358
		Gain on sale of investment securities				(362)		(349)
		Provision for loan losses				2,700		3,100
		Origination of loans held for sale				(113,755)		(65,546)
		Sale of loans held for sale				117,548		67,417
		Gain on sale of loans				(305)		(564)
		Change in accrued interest receivable				266		412
		Change in other assets				(1,304)		(1,295)
		Change in other liabilities, net				436		(291)
			Net cash provided by operating activities			17,825		11,511
Cash flows from investing activities
	Purchase of investment securities available for sale					(67,353)		(50,123)
	Proceeds from maturities of investment securities available for sale					13,078		23,202
	Proceeds from sale of investment securities available for sale					32,144		24,039
	Principal paydowns on mortgage-backed securities available for sale					24,693		3,696
	Purchase of Federal Home Loan Bank stock					(135)		--
	Net increase in loans outstanding					(47,846)		(50,351)
	Purchases of premises and equipment, net					(2,980)		(1,857)
			Net cash used in investing activities			(48,399)		(51,394)
Cash flows from financing activities
	Net increase in deposit accounts					45,490		58,920
	Net increase in securities sold under agreements to repurchase					2,542		2,001
	Net increase in commercial paper					6,911		5,150
	Proceeds from issuance of common stock					354		159
	Repurchase of common stock					(2,900)		--
	Dividends paid					(2,273)		(2,078)
			Net cash provided by financing activities			50,124		64,152
Net increase in cash and cash equivalents						19,550		24,269
Cash and cash equivalents at beginning of the period						38,093		45,691
Cash and cash equivalents at end of the period						$    57,643		69,960
Supplemental Information
Cash paid during the period for:
	Interest expense					$      8,308		9,733
	Income taxes					3,637		3,555
Supplemental schedule of non-cash investing and financing transactions
	Change in unrealized gain on investment securities available or sale, pre-tax					$      (1,245)		2,811
	Loans transferred to other real estate owned					677		2,072
	Loans charged -off					1,995		2,689
See accompanying notes to consolidated interim financial statements.

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Palmetto Bancshares, Inc.
Notes To Consolidated Interim Financial Statements

1.  GENERAL

Principles of Consolidation and Nature of Operations

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

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

Basis of Presentation

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

Summary of Significant Accounting Policies

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

Accounting Estimates and Assumptions

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

Risks and Uncertainties

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

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

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

Reclassifications

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

Website Availability of Reports Filed with the Securities and Exchange Commission

The Company'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, including 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.

2.       PER SHARE INFORMATION

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