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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

For the transition period from            to            

Commission file number 0-26016

PALMETTO BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $5.00 per share

(Title of class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2).    Yes  x    No  ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant (computed by reference to the price at which the stock was most recently sold) was $154,314,104 as of February 28, 2003. There is no established public trading market for the shares. See Part II, Item 5.

6,329,909 shares of the registrant’s common stock were outstanding as of February 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s Proxy Statement dated March 18, 2003 with respect to an Annual Meeting of Shareholders to be held April 22, 2003: Incorporated by reference in Part III of this Form 10-K.

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PALMETTO BANCSHARES, INC. AND SUBSIDIARY

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Part I

Item 1.    Business

General

Palmetto Bancshares (“Bancshares”) is a bank holding 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”), and the Bank’s wholly owned subsidiary, Palmetto Capital, Inc. (“Palmetto Capital”), (collectively Palmetto Bancshares, Inc., or the “Company”), the Company 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”). The Bank was organized and chartered under South Carolina law in 1906. At December 31, 2002 the Company had total assets of $825.0 million, total deposits of $750.0 million, and stockholders’ equity of $67.5 million.

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 in which they serve. The Bank provides a full range of banking activities, including such services as 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; various electronic funds transfer services; telephone banking; and bank card services. The Bank’s sales finance department establishes relationships with Upstate automobile dealers to provide customer financing on qualifying automobile purchases, and the Bank’s mortgage banking operation meets a range of its customers’ financial service needs by originating, selling, and servicing mortgage loans. The Bank also offers both individual and commercial trust services through an active trust department. Palmetto Capital, the brokerage subsidiary of the Bank, offers customers stocks, treasury and municipal bonds, mutual funds and insurance annuities, as well as college and retirement planning.

Impact of Inflation

The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Virtually all of the assets and liabilities of the Company are monetary in nature and, as a result, its operations can be significantly affected by interest rate fluctuations.

Competition

The Upstate is a highly competitive banking market in which most of the largest financial institutions in the state are represented. As a result, the Bank faces strong competition when attracting deposits and originating loans. The competition among the various financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of service rendered and the convenience of banking facilities. The Company feels that it sets itself apart from its competitors by providing a level of consistently superior personal service. This is accomplished through a variety of delivery channels marketing a full range of high quality financial products and services. The Company believes it competes effectively in its market.

South Carolina legislation permits banks and bank holding companies in certain states to acquire banks in South Carolina to the extent that such other states have reciprocal legislation applicable to South Carolina banks and bank holding companies. As a result, a number of the Company’s competitor banks have been and continue to be purchased by large, out-of-state bank holding companies. Size gives the larger banks certain advantages in competing for business from larger corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and the region. As a result, the Company does not generally attempt to compete for the banking relationships of larger corporations, but concentrates its efforts on small and medium-size businesses and individuals.

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Market Expansion

In late 2000, the South Carolina State Board of Financial Institutions approved the Bank’s application to open a branch in Travelers Rest, South Carolina, located in Greenville County. The Travelers Rest office was opened in January 2002.

During 2001, the Company began making plans to enter into the Oconee County market and opened a branch in Seneca, South Carolina in March 2002.

Management continually reviews opportunities for Upstate expansion that it believes to be in the best interest of the Bank, its customers and its shareholders.

Employees

At December 31, 2002, the Company had 368 full-time equivalent employees, none of whom are subject to a collective bargaining agreement. Employees, depending on their level of employment, are offered a comprehensive program that includes medical and dental benefits, life insurance, long-term disability coverage, a noncontributory defined benefit pension plan, and a 401k plan. Management believes its relationship with its employees is excellent.

Supervision and Regulation

General

Bancshares and its subsidiary is extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws may have a material effect on the business and prospects of the Company. The operations of the Company may be affected by possible legislative and regulatory changes and by the monetary policies of the United States.

Bancshares.    As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), Bancshares is subject to regulation and supervision by the Federal Reserve. Under the BHCA, Bancshares’ activities and those of its subsidiary are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiary or engaging in any other activity that the Federal Reserve determines to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. The BHCA prohibits Bancshares from acquiring direct or indirect control of more than 5% of any class of outstanding voting stock, or substantially all of the assets of any bank, or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. The BHCA also prohibits Bancshares from engaging in or from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve to be closely related to banking or managing or controlling banks.

Until September 29, 1995, the BHCA prohibited Bancshares from acquiring control of any bank operating outside the State of South Carolina, unless the statutes of the state where the bank to be acquired was located specifically authorized such action. Additionally, as of June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss exposure to the

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depositors of such depository institutions and to the Federal Deposit Insurance Corporation (“FDIC”) insurance funds in the event the depository institution becomes in danger of defaulting or in default under its obligations to repay deposits. For example, under current federal law, to reduce the likelihood of receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) was signed into law. The purpose of this legislation is to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Generally, the GLBA:

The GLBA adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates. The GLBA also imposes certain obligations on financial institutions to develop privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data. These privacy provisions were implemented by regulations that were effective on November 12, 2000. Compliance with the privacy provisions was required by July 1, 2001.

As a bank holding company registered under the South Carolina Bank Holding Company Act, Bancshares also is subject to regulation by the South Carolina State Board of Financial Institutions (“State Board”). Bancshares must file with the State Board periodic reports with respect to its financial condition and operations, management and intercompany relationships between Bancshares and its subsidiary. Additionally, if applicable, Bancshares must obtain approval from the State Board prior to engaging in acquisitions of banking or nonbanking institutions or assets.

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The Bank.    The Bank is a FDIC-insured, state-chartered banking corporation and is subject to various statutory requirements and rules and regulations promulgated and enforced primarily by the FDIC and the State Board. These statutes, rules and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the business of the Bank. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. In addition, federal law imposes a number of restrictions on state-chartered, FDIC-insured banks and their subsidiaries. These restrictions range from prohibitions against engaging as a principal in certain activities to the requirement of prior notification of branch closings. The Bank is not a member of the Federal Reserve System.

The Bank is subject to the requirements of the CRA. The CRA requires that financial institutions have an affirmative and ongoing obligation to meet the credit needs of their local communities, including low-income and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs are evaluated as part of the examination process pursuant to twelve assessment factors. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

Dividends

The holders of the Company’s common stock are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available for such dividends. Bancshares is a legal entity separate and distinct from the Bank and Palmetto Capital and depends for its revenues on the payment of dividends from the Bank. Current federal law would prohibit, 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.

For discussion of the amount currently available for the payment of dividends, see Item 5, “Market for Registrant’s Common Stock and Related Shareholder Matters.”

Capital Adequacy

Bancshares.    The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. Under these guidelines, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be “Tier 1 capital,” principally consisting of common shareholders’ equity, noncumulative preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier 1 (leverage) capital ratio under which a bank holding company must maintain a minimum level of Tier 1 capital (as determined under applicable rules) to average total consolidated assets of at least 3% in the case of bank holding companies which have the highest regulatory examination ratios and are not contemplating significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 4%. At December 31, 2002, Bancshares exceeded both the risk-based capital guidelines and the minimum leverage capital ratio.

The Bank.    The Bank is subject to capital requirements imposed by the FDIC. The FDIC requires state-chartered nonmember banks to comply with risk-based capital standards substantially similar to those required by the Federal Reserve, as described above. The FDIC also requires state-chartered nonmember banks to maintain a minimum leverage ratio similar to that adopted by the Federal Reserve. Under the FDIC’s leverage capital

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requirement, state nonmember banks that (i) receive the highest rating during the examination process and (ii) are not anticipating or experiencing any significant growth are required to maintain a minimum leverage ratio of 3% of tier 1 capital to total assets; all other banks, including the Bank, are required to maintain an absolute minimum leverage ratio of not less than 4%. As of December 31, 2002, the Bank exceeded each of the applicable regulatory capital requirements.

See Note 18 of Notes to Consolidated Financial Statements contained in Item 8 herein for a summary of all applicable capital requirements.

Deposit Insurance Assessments

The Bank is subject to insurance assessments imposed by the FDIC. The FDIC maintains two separate insurance funds: the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”). As insurer of the Company’s deposits, the FDIC has examination, supervisory and enforcement authority over the Company. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. Additionally, the FDIC has the authority to initiate enforcement actions against savings institutions and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Company does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Effective January 1, 1993, the FDIC implemented a risk-based assessment schedule where the actual assessment to be paid by each FDIC-insured institution is based on the institution’s assessment risk classification. This classification is determined based on whether the institution is considered “well capitalized,” “adequately capitalized” or “undercapitalized,” as such terms have been defined in applicable federal regulations adopted to implement the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The assessment rate for the first quarter 2003 was 0.0168% (annualized) for insured deposits. This rate is set quarterly and may change during the year. For the years ended December 31, 2002, 2001 and 2000, premiums paid for FDIC insurance amounted to $112,000, $110,000 and $111,000, respectively.

Other Safety and Soundness Regulations

Prompt Corrective Action.    Current law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A CAMELS rating is a score given to a financial institution by its primary regulator which represents a composite rating of the various areas examined: Capital adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to market risk. A bank is considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (B) “significantly undercapitalized” if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1

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risk-based capital ratio of less than 3%, or (iii) a leverage ratio of less than 3%; and (C) “critically undercapitalized” if the bank has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2002, Bancshares and the Bank each currently meet the definition of “well capitalized.”

Brokered Deposits.    Current federal law also regulates the acceptance of brokered deposits by insured depository institutions to permit only a “well capitalized” depository institution to accept brokered deposits without prior regulatory approval. Under FDIC regulations, “well capitalized” insured depository institutions may accept brokered deposits without restriction, “adequately capitalized” insured depository institutions may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions on payments of interest rates), while “undercapitalized” insured depository institutions may not accept brokered deposits. The regulations provide that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of FDICIA (as described in the applicable preceding paragraph). The Company does not believe that these regulations will have a material adverse effect on its current operations.

Transactions between Bancshares Its Subsidiary and Affiliates

Bancshares’ subsidiary is subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Aggregate limitations on extensions of credit also may apply. Bancshares’ subsidiary also is subject to certain lending limits and restrictions on overdrafts to such persons.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its nonbank subsidiary, on investments in their securities and on the use of their securities as collateral for loans to any borrower. Such restrictions may limit Bancshares’ ability to obtain funds from its bank subsidiary for its cash needs, including funds for acquisitions, interest and operating expenses.

In addition, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, a subsidiary may not generally require a customer to obtain other services from any other subsidiary or Bancshares, and may not require the customer to promise not to obtain other services from a competitor, as a condition to an extension of credit to the customer.

Additional Regulation

FDICIA Regulations

To facilitate the early identification of problems, FDICIA required the federal banking agencies to prescribe more stringent reporting requirements. The FDIC final regulations implementing those provisions, among other things, require that management report on the institution’s responsibility for preparing financial statements and establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness, and that independent auditors attest to and report separately on assertions in management’s reports concerning compliance with such laws and regulations, using FDIC approved audit procedures. These regulations apply to financial institutions with greater than $500 million in assets at the beginning of their fiscal year. Accordingly, the Bank is subject to these regulations.

The USA Patriot Act

In response to the terrorist events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gave the federal government additional

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powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

To date, it has not been possible to predict the impact the USA PATRIOT Act and its implementing regulations may have on the Bank.

Monetary Policy

The results of operations of the Company are affected by credit policies of monetary authorities, particularly the Federal Reserve. An important function of the Federal Reserve is regulation of the money supply. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. The Federal Reserve uses these methods in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits. The use of these methods may also affect interest rates charged on loans or paid on deposits.

The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In light of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company.

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Item 2.     Properties

The Company’s principal executive offices are located at 301 Hillcrest Drive, Laurens, South Carolina (“Corporate Center”). The Company owns these premises. The main office of the Bank is located at 101 West Main Street, Laurens, South Carolina, which also contains a three lane drive-in facility.

At December 31, 2002, the Bank had thirty full-service branches in the Upstate region of South Carolina in 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 one Palmetto Capital office, 29 ATM locations (including three at non-branch locations) and five limited service branches located in various retirement centers located in the Upstate.

Offices range in size from branch locations of approximately 800 to 10,000 square feet, to the Corporate Center location of approximately 55,000 square feet. Facilities are protected by alarm and security systems that meet or exceed regulatory standards.

Nine of the Bank’s full service branch offices are leased. Additionally, the Bank has entered into seven grounds and / or parking lot leases. Two of the three ATMs located at non-branch locations are leased from third parties. Reference is made to Note 14 of Notes to Consolidated Financial Statements contained in Item 8 herein for information relating to minimum lease commitments under the Company’s leases for office facilities.

At December 31, 2002 and 2001, the total net book value of the premises and equipment owned by the Company was $19.7 million and $19.2 million, respectively. Reference is made to Note 5 of Notes to Consolidated Financial Statements contained in Item 8 herein for further details on the Company’s properties.

The Company evaluates on a continuing basis the suitability and adequacy of all of its facilities, including branch offices and service facilities, and has active programs of relocating, remodeling or closing any as necessary to maintain efficient and attractive facilities. The Company believes its present facilities are in good condition and capable of handling increased volume. Additionally, all of the locations are considered suitable and adequate for their intended purposes.

Item 3.     Legal Proceedings

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

In its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, the Company disclosed a legal proceeding between the Bank and M. Snyder’s, Inc., an automobile dealership, relating to sales finance contracts that M. Snyder’s sold to the Bank. The Bank, in turn, filed a counterclaim against M. Snyder and a third party complaint against a M. Snyder’s Inc. employee. In December 2002, the Bank and M. Snyder’s Inc. entered into a final settlement agreement, in connection with which Progressive Casualty Insurance Company paid $150,000 to M. Snyder’s Inc. in full and final settlement of all claims made against the Bank.

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.

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Part II

Item 5.     Market for Registrant’s Common Stock and Related Shareholder Matters

There is no public market for the common stock of the Company, and it is not traded on any established public trading market. The last known trading price of the Company common stock, based on information available to its management, was $28.00 per share on December 31, 2002. Management is aware of a number of transactions in which the Company’s stock traded at this price. However, management has not ascertained that these transactions are a result of arms length negotiations between the parties and, because of the limited number of shares involved, these prices may not be indicative of the market value of the common stock. As of December 31, 2002, the Company had 1,107 shareholders representing 6,324,659 shares outstanding.

The Company or its predecessor, the Bank, has paid regular dividends on common stock since 1909. For the years ended December 31, 2002, 2001 and 2000, cash dividends were paid of $2.8 million or $.45 per share, $2.6 million or $0.41 per share, and $2.3 million or $0.37 per share, respectively. These dollars equate to dividend payout ratios (dividends declared divided by net income) of 29.46%, 30.58% and 33.12% in 2002, 2001 and 2000, respectively.

Set forth below is information concerning high and low sales prices by quarter for each of the last two fiscal years and dividend information for the same periods. The Company acts as its own transfer agent, and the information concerning sales prices set forth below is derived from the Company’s stock transfer records.

Sales Prices and Dividends by Quarter

The Bank’s total risk-based capital ratio at December 31, 2002 was 10.57%. Reference is made to Note 18 of Notes to Consolidated Financial Statements contained in Item 8 herein for information relating to regulatory capital requirements. At December 31, 2002, the Bank had $3.6 million of excess capital available for payment of dividends and still be considered “well-capitalized” related to the total risk based capital ratio.

Please refer to “Item 1. Business—Supervision and Regulation—Dividends” for information with respect to current restrictions on the Bank’s ability to pay dividends to Bancshares.

Set forth below is information required under Regulation S-K regarding compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2002. All equity compensation plans of the Company in existence at December 31, 2002 were previously approved by security holders.

Equity Compensation Plan Information

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Item 6.     Selected Financial Data