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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

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 common equity held by non-affiliates of the registrant (computed by reference to the price at which the common equity was most recently sold) was $160,598,839 as of the last business day of the registrant’s most recently completed second fiscal quarter. There is no established public trading market for the shares. See Part II, Item 5.

6,265,210 shares of the registrant’s common stock was outstanding as of February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s Proxy Statement dated March 15, 2004 with respect to an Annual Meeting of Shareholders to be held April 20, 2004: Incorporated by reference in Part III of this Form 10-K.

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PALMETTO BANCSHARES AND SUBSIDIARY

2003 ANNUAL REPORT ON FORM 10-K

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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 Company earns no revenues from customers outside of the continental United States nor does it have any long-lived assets outside of the country. The Bank was organized and chartered under South Carolina law in 1906. At December 31, 2003, the Company had total assets of $898.1 million, total traditional deposits of $771.7 million, total other borrowings of $47.7 million, and stockholders’ equity of $72.0 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 served. 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 indirect lending 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.

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.

Market Expansion

In late 2000, the South Carolina State Board of Financial Institutions (the “State Board”) 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.

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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.

No new branches were opened during the twelve month period ended December 31, 2003, although Management continually reviews opportunities for Upstate expansion that it believes to be in the best interest of the Bank, its customers and its shareholders. Expansion opportunities are currently being evaluated in the market areas in which the Company currently serves as well as Pickens County in the Upstate.

Employees

At December 31, 2003, the Company had 370 full-time equivalent employees, none of whom were 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 401(k) plan. Management believes its relationship with its employees is excellent.

Dividends

The holders of Palmetto Bancshares, Inc.’s $5 par value common stock (“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 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.

Business Segments

The Company adheres to the provisions of the Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information.” Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. SFAS No. 131 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way that the operating segments were determined and other items. Due to the fact that the Company has only one reportable operating segment, The Palmetto Bank, the Company’s Consolidated Financial Statements contained in Item 8 herein and related financial information contained throughout this Annual Report on Form 10-K satisfy the requirements under SFAS No. 131.

Concentrations of Credit Risk

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily within its market area. The Company has a diversified loan portfolio, and the borrowers’ ability to repay their loans is not dependent upon any specific economic segment. The Company’s business is not dependent on any single customer, or a few customers.

Securities and Exchange Commission

The public may read and copy any materials filed in hard copy by the Company with the Securities and Exchange Commission at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.

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The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company files electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This site may be accessed at www.sec.gov. Filings filed by the Company electronically with the SEC may be accessed through this website. As such, the Company does not provide such reports on its website.

Supervision and Regulation

General

Bancshares and its subsidiary are extensively regulated under federal and state law. Lending activities and other investments must comply with various statutory and regulatory requirements. Bancshares and the Bank are examined regularly by regulators and file periodic reports concerning their activities and financial condition. In addition, the Bank’s relationship with its depositors and borrowers also is regulated to an extent by both federal and state laws, especially in such matters as the ownership of deposit accounts and the form and content of the Bank’s mortgage documents. 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 Bancshares and the Bank. The operations of both Bancshares and the Bank may be impacted by possible legislative and regulatory changes and by the monetary policies of the United States.

Supervision and Regulation of Bancshares

Bank Holding Company Act of 1956. 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 is authorized to merge with a bank headquartered in another state, as long as neither of the states has 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.

Responsibilities with Respect to the Bank.    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 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. 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

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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.

South Carolina State Board of Financial Institutions.    As a bank holding company registered under the South Carolina Bank Holding Company Act, Bancshares also is subject to regulation by the State Board. Bancshares must file with the State Board periodic reports with respect to its financial condition and operations, its, 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.

Capital Adequacy.    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 determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk-weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. 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 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%.

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

Supervision and Regulation of the Bank

Federal Home Loan Bank (“FHLB”) System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board (“FHFB”). The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB based generally upon the Bank’s balances of residential mortgage loans and FHLB advances. The Bank was in compliance with this requirement with an investment in FHLB stock of $1.9 million at December 31, 2003.

Among other benefits, the FHLB provides a central credit facility primarily for member institutions, funded from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB.

Federal Deposit Insurance Corporation.    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 (see Supervision and Regulation—Supervision and Regulation of Bancshares—South Carolina State Board of Financial Institutions). 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

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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 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”). The FDIC maintains the BIF and the SAIF by assessing depository institutions an insurance premium twice a year. The FDIC is authorized to increase assessment rates on a semi-annual basis. The FDIC may also impose special assessments on members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. The amount each institution is assessed is based both on the balance of insured deposits held during the preceding two quarters as well as on the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the BIF or the SAIF. In order to assess premiums on individual institutions, the FDIC places each institution in one of nine risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory subgroup assignment). The premium schedule for BIF and SAIF insured institutions ranges from zero to twenty-seven basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to approximately 1.54 basis points for each $100 in domestic deposits for SAIF and BIF insured institutions. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature during 2017 through 2019. The assessment rate for the first quarter of 2004 was 0.0154% (annualized) for insured deposits. This rate is set quarterly and may change during the year. For the years ended December 31, 2003, 2002 and 2001, premiums paid for FDIC insurance amounted to $116,000, $112,000 and $110,000, respectively.

As insurer of the Bank’s deposits, the FDIC has examination, supervisory and enforcement authority over the Bank. 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. The FDIC also 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 is not currently aware of any practice, condition or violation that might lead to termination of deposit insurance.

Community Reinvestment Act (“CRA”).    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.

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 qualified as “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

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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 that 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%, (ii) a Tier 1 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%.

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

Other Safety and Soundness Regulations.    The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits (collectively the “Guidelines”). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If it is determined that the Bank fails to meet any standard prescribed by the Guidelines, the Bank may be required to submit an acceptable plan to achieve compliance with the standard. Management is aware of no conditions at December 31, 2003 relating to these safety and soundness standards that would require submission of a plan of compliance.

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 Federal Deposit Insurance Corporation Improvement Act (“FDICIA”). For further discussion of FDICIA see Supervision and Regulation—Legislation—FDICIA Regulations.

Capital Adequacy.    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 in Supervision and Regulation—Supervision and Regulation of Bancshares—Capital Adequacy. 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 requirement, state nonmember banks that receive the highest rating during the examination process and 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 are required to maintain an absolute minimum leverage ratio of not less than 4%.

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

Legislation

FDICIA Regulations.    To facilitate the early identification of problems, FDICIA required the federal banking agencies to prescribe more stringent reporting requirements. The FDIC’s final regulations implementing

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those provisions, among other things, require that Management report on the institution’s responsibility for preparing financial statements, 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 Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”). On November 12, 1999, the GLBA was signed into law. The purpose of this legislation was 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 adopted 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.

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 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 took 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 imposed the following requirements with respect to financial institutions:

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Sarbanes-Oxley Act of 2002.    President Bush signed the Sarbanes-Oxley Act of 2002 into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals at that time such as Enron and WorldCom. The stated goals of the Sarbanes-Oxley Act of 2002 are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act of 2002 is the most far-reaching United States securities legislation enacted in some time. The Sarbanes-Oxley Act of 2002 generally applies to all companies, both United States and non-United States, that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934. The Sarbanes-Oxley Act of 2002 includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act of 2002 represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

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Item 2.    Properties

The Company’s operations center is located at 301 Hillcrest Drive, Laurens, South Carolina. The Company owns these premises.

At December 31, 2003, 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 one Palmetto Capital office, 27 automatic teller machine (“ATM”) locations (including two at non-branch locations) and five limited service branches located in various retirement centers located in the Upstate. One principal branch office is located in each of Laurens, Greenville, Spartanburg, Greenwood, and Anderson Counties.

Offices range in size from branch locations of approximately 800 to 15,000 square feet to the Operations 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. The Company owns the remaining branch office properties. Additionally, the Bank has entered into seven ground and / or parking lot leases. The ATMs located at non-branch locations are leased from third parties. The Company also owns land for potential future branch locations, one of which is currently being leased to a third party.

At December 31, 2003 and 2002, the total net book value of the premises and equipment owned by the Company was $21.7 million and $19.7 million, respectively.

The Company evaluates, on an ongoing 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 are capable of handling increased volume. Additionally, all of the locations are considered suitable and adequate for their intended purposes.

See Note 5 of Notes to Consolidated Financial Statements contained in Item 8 herein for further details on the Company’s properties and Note 14 of Notes to Consolidated Financial Statements contained in Item 8 herein for further details on the Company’s noncancelable lease commitments which include the Company’s leases for office facilities.

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 financial position or results of operations.

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, 2003.

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Part II

Item 5.    Market For Registrant’s Common Stock And Related Shareholder Matters

The Internal Revenue Service often defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. However, this market oriented definition of the value of a company’s stock is frequently of little use in the value determination process when the market that exists for the company’s shares is either nonexistent or extremely “thin” in its trading activity. Unlike the value of publicly traded stock, the fair market value of closely held stock is often difficult to ascertain because it is not able to be determined readily through market trading.

Stock is publicly traded if you can buy or sell it on an established securities market or through some other system that acts as the equivalent of a securities market. In general, the stock market determines the value of publicly traded stock. However, if the stock is extremely “thin” in its trading activity, this approach to fair market value may not be appropriate.

Bancshares is a closely held, publicly traded company, although not on a securities exchange, and its common stock is considered to be “thin” in its trading activity. Bancshares’ Secretary facilitates stock trades of Palmetto Bancshares, Inc. stock by matching willing buyers and sellers that contact her with their intent to buy or sell. However, trades can be and are made that are not facilitated through the Secretary between willing buyers and sellers of which the Company may have no record. Additionally, many of these transactions do not constitute arm’s length transactions as many of the transactions are between buyers and sellers with relationships that may lead to a sale at a price other than fair market value. Many trades are between buyers and sellers that are family members, that are family members of Company employees, that are members of the community willing to pay premiums for the stock as the Company is headquartered in their community with leaders from the community managing the Company, as well as other factors. Because of the low trading volume, the fact that the Company’s list of trading activity may not be all inclusive since some traders do not go through the Corporate Secretary, as well as the fact that some of the documented trades may not be considered arm’s length transactions, the Company does not believe that the prices at which these recorded trades occur can be considered fair market value. Management believes that there is a strong element of subjectivity required in determining the fair market value of Bancshares’ common stock, and, as a result, annually, a third party fair market valuation is performed in order to determine the fair market value of its $5 par value common stock.

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As of December 31, 2003 the last known trading price of Bancshares’ common stock, based on information available to Management, was $30.00 per share. Management is aware of a number of transactions in which the Bancshares’ stock traded at this price. However, Management has not ascertained that these transactions were 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 fair market value of the common stock. At December 31, 2003, the Company had 1,184 shareholders representing 6,263,210 shares outstanding. The table set forth below reflects high and low trading prices and dividend information of the Company’s common stock by quarter for each of the last two fiscal years based on information available to its Management.

Bancshares or its predecessor, the Bank, has paid regular dividends on its common stock since 1909. The amount of the dividend to be paid is determined by the Board of Directors and is dependent upon the Company’s earnings, financial condition, capital position, and such other factors as the Board may deem relevant. For the years ended December 31, 2003, 2002 and 2001, cash dividends were paid of $3.2 million or $0.51 per share, $2.8 million or $0.45 per share, and $2.6 million or $0.41 per share, respectively. During its December meeting, the Board of Directors of Bancshares approved a special dividend, in addition to the quarterly dividend of $0.12 per share, of $0.03 per share. These dollars equate to dividend payout ratios of 29.49%, 29.46%, and 30.58% in 2003, 2002, and 2001, respectively.

Please refer to Dividends contained in Item 1 herein for information with respect to current restrictions on dividend payments.

The Bank’s total risk-based capital ratio at December 31, 2003 was 10.20%. 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, 2003, the Bank had $1.4 million of excess capital available for payment of dividends and still be considered “well-capitalized” related to the total risk-based capital ratio.

Set forth below is information regarding compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2003. Security holders previously approved all equity compensation plans of the Company in existence at December 31, 2003.

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Item 6.    Selected Financial Data