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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

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  ¨    No  x

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 $168,239,821 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.

6,313,185 shares of the registrant’s common stock were outstanding as of March 3, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s Proxy Statement dated March 16, 2005 with respect to an Annual Meeting of Shareholders to be held April 19, 2005: Incorporated by reference in Part III of this Form 10-K.

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PALMETTO BANCSHARES, INC. AND SUBSIDIARY

2004 ANNUAL REPORT ON FORM 10-K

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Part I

Item 1.    Business

General

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

At December 31, 2004, the Company had total assets of $995.8 million, total traditional deposits of $827.4 million, total retail repurchase agreements of $16.4 million, total commercial paper of $17.1 million, total other borrowings of $46.0 million, and stockholders’ equity of $80.8 million. Net income for the years ended December 31, 2004, 2003, and 2002 totaled $12.1, $10.9, and $9.6 million, respectively. All revenues are derived from external customers. Total assets totaled $898.1 million and $825.0 million at December 31, 2003 and 2002, respectively. 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 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; electronic funds transfer services; telephone banking; and bankcard 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 its trust department. Palmetto Capital, the brokerage subsidiary of the Bank, offers customers brokerage services relating to 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. Size gives the larger financial institutions certain advantages in competing for business from larger corporations. These advantages include higher lending limits and the ability to offer services in larger market areas. As a result, the Bank does not generally attempt to compete for the banking relationships of larger corporations. Instead, the Bank concentrates its efforts on individuals and small and medium-size businesses.

The Bank has historically directly competed for savings deposits with commercial banks and other savings institutions, as well as credit unions, although in recent years, money market, stock, and fixed-income mutual funds have attracted an increasing share of household savings and are competitors of the Bank. Competition among various financial institutions is based on 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 Bank feels that it sets itself apart from its competitors by providing superior personal service through a variety of delivery channels and a full range of high quality financial products and services. The Bank believes it competes effectively in its market.

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Market Expansion

Although no new branches were opened during the twelve-month period ended December 31, 2004, the Bank anticipates the opening of a new branch in Easley, South Carolina during the third quarter of 2005. The Company expects that the Easley branch will facilitate the Bank’s expansion into Pickens County in Upstate, South Carolina. Management continually reviews opportunities for Upstate expansion that are believed to be in the best interest of the Company, its customers, and its shareholders.

Employees

At December 31, 2004, the Company had 374 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 employment program that includes medical, dental, and select vision benefits, life insurance, long-term disability coverage, a noncontributory defined benefit pension plan, and a 401(k) plan. The Company believes its employee relations are excellent.

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. The holding company is a legal entity separate and distinct from its subsidiary and depends on the payment of dividends from its subsidiary. 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 are 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, as well as other items. At December 31, 2004, the Company had one reportable operating segment, banking. As such, separate segment information is not presented herein as Management believes that the Consolidated Financial Statements contained in Item 8 herein summarize the Company’s segment information.

Concentrations of Credit Risk

The Bank makes loans, primarily throughout South Carolina, to individuals and small to medium-sized businesses for various personal and commercial purposes. Management believes that the Bank has a diversified loan portfolio, and that the borrowers’ ability to repay their loans is not dependent upon any specific economic segment. In addition, the Bank’s business is not dependent on any single customer or a few customers.

The Bank’s Lending Policy limits the amount of credit that the Bank may extend to any single borrower to 10% of the total amount of the Bank’s capital and surplus. However, the Board of Directors, by two-thirds vote, may increase this amount to a maximum of 15% of the Bank’s capital and surplus. At December 31, 2004, the largest aggregate amount of loans by the Bank to any one borrower, including direct and indirect interests, was approximately $11.9 million. All of these loans were performing according to their respective terms at December 31, 2004.

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Securities and Exchange Commission

The Company files reports with the Securities and Exchange Commission (the “SEC”) as required by the Securities Exchange Act of 1934. The Securities Exchange Act of 1934 grants the SEC broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation’s securities self-regulatory organizations. The Securities Exchange Act of 1934 also identifies and prohibits certain types of conduct in the securities markets and provides the SEC with disciplinary powers over regulated entities and persons associated with them. The Securities Exchange Act of 1934 also empowers the SEC to require periodic reporting of information by companies with publicly traded securities. Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports.

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. 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 reports electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file reports electronically. This site may be accessed at www.sec.gov. Filings filed by the Company electronically with the SEC may be accessed through this website.

Other Information

The Company does not currently make reports filed with the Securities and Exchange Commission available, free of charge, through its website www.palmettobank.com except that it offers a link to the Securities and Exchange Commission’s website. The Company is currently exploring options to make such reports available through its website. Such reports may be requested by sending written correspondence to 301 Hillcrest Drive, Laurens, South Carolina 29360 Attention: Vice President, Finance and Accounting.

Supervision and Regulation

General

The holding company and the Bank are extensively regulated under federal and state law. The holding company and the Bank are examined regularly by regulators and each file periodic reports regarding their activities and financial condition. In conjunction with such regular examinations, federal and state agencies prepare reports for the consideration of the Company’s Board of Directors on any deficiencies that they find in its operations. In addition, the Bank’s relationship with its depositors and borrowers is regulated 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 impact on the current and potential business of the holding company and the Bank. In addition, the operations of both may be impacted by possible legislative and regulatory changes and by the monetary policies of the United States.

Supervision and Regulation of the Holding Company

Bank Holding Company Act of 1956.    As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), the holding company is subject to regulation and supervision by the Federal Reserve. Under the BHCA, the holding company’s 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, and / or managing or controlling banks as to be a proper incident thereto. The BHCA prohibits the holding company from acquiring direct or indirect control of more than 5% of any class of outstanding voting

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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 the holding company 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 the holding company 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. 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 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 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 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 (the “State Board”).    As a bank holding company registered under the South Carolina Bank Holding Company Act, the holding company is subject to regulation by the State Board. The holding company must file with the State Board periodic reports with respect to its financial condition and operations, management, and relationships between the holding company and its subsidiary. Additionally, the holding company 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 interests 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 (as determined under applicable rules) to average total consolidated assets of at least 3% in the case of bank holding companies that have the highest regulatory examination ratios and are not contemplating significant growth or expansion. All other bank holding companies are required to maintain a Tier 1 (leverage) capital ratio of at least 4%.

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

Supervision and Regulation of the Bank

Federal Home Loan Bank (“FHLB”) System.    The Federal Home Loan Banks were created by Congress pursuant to the Federal Home Loan Bank Act to provide secured advances to their members in an effort to promote liquidity in the housing finance markets. Under the Federal Home Loan Bank Act and implementing regulations of the Federal Housing Finance Board, the Federal Home Loan Bank is required to ensure that borrowing members have sufficient qualifying collateral at all times to secure outstanding advances.

The Federal Home Loan Bank generally establishes credit availability for each creditworthy institution. Credit availability is not a formal commitment to extend credit but an indication of the amount of credit the FHLB is willing to extend to a member. The FHLB monitors each member’s credit availability on a periodic basis and may make adjustments to the credit availability as needed. The amount of a member’s credit availability is contingent upon a number of factors, including, but not limited to, continued financial soundness of the member and adequacy of the amount of collateral available to secure new advances.

The FHLB has established an overall credit limit for each member. This limit is designed to mitigate the FHLB’s credit exposure to an individual member while encouraging members to diversify their funding sources. Generally, this credit limit is 40 percent of the member’s total assets. However, a member’s eligibility to borrow in excess of 30 percent of assets is subject to its meeting eligibility criteria. Under certain circumstances, a member approved for a 40 percent credit limit may request approval to exceed the credit limit on an “over line” basis.

Qualifying collateral may include various types of mortgage loans, securities, and deposits. The member has certain obligations to the FHLB for its pledged collateral. These obligations include periodic reporting on eligible, pledged collateral and adherence to the FHLB’s collateral verification review procedures.

A member’s FHLB capital stock requirement is an amount equal to the sum of a membership requirement and an activity-based requirement, as described in the FHLB’s Capital Plan. The Bank was in compliance with this requirement with an investment in FHLB capital stock of $3.9 million at December 31, 2004. Dividends on FHLB capital stock have yielded returns of 3.5% and 3.7% for the years ended December 31, 2004 and 2003, respectively. A member’s capital stock is pledged to the FHLB as additional collateral to secure the member’s indebtedness.

Federal Deposit Insurance Corporation (“FDIC”).    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 the Holding Company—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 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 and may also impose special

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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 on the balance of insured deposits held during the preceding two quarters and 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 0 to 27 basis points. SAIF and BIF insured institutions are also required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature. This rate is set quarterly and may change during the year. For the years ended December 31, 2004, 2003, and 2002, respectively, premiums paid by the Bank for FDIC insurance totaled $116,000, $116,000 and $112,000, respectively.

As insurer of the Bank’s deposits, the FDIC has examination, supervisory, and enforcement authority over the Bank. In addition to imposing deposit insurance premiums, the FDIC is authorized to conduct examinations of and to require reporting by FDIC insured institutions. The FDIC also may prohibit any FDIC insured institution from engaging in any activity determined 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 and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, 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. At December 31, 2004, Management was not 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 try 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.

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 the Holding Company—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-chartered, 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 Tier 1 (leverage) capital ratio of 3%. All other banks are required to maintain an absolute minimum Tier 1 (leverage) capital ratio of not less than 4%.

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

Prompt Corrective Action.    Current law provides 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 determined to be “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

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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 “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). A bank is considered “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%. A bank is considered “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 applicable Bank 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 referred to as 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, 2004 relating to these safety and soundness standards that would require submission of a plan of compliance.

Brokered Deposits.    Current federal law regulates the acceptance of brokered deposits to permit only a “well capitalized” 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), and “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. See Supervision and Regulation—Supervision and Regulation of the Bank—Prompt Corrective Action for a discussion of these provisions.

Legislation

Federal Deposit Insurance Corporation Improvement Act Of 1991(“FDICIA”). 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 require, among other things, 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 regarding 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:

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The GLBA adopted a system of functional regulation under which the Federal Reserve is 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-chartered, nonmember bank affiliates. The GLBA also imposed 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 (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.

Section 312 of the Act required financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. Effective December 25, 2001, financial institutions were prohibited from establishing, maintaining, administering, or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country). In addition, financial institutions are subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.

Pursuant to Section 352, all financial institutions were required to establish anti-money laundering programs that include, at minimum, internal policies, procedures, and controls, specific designation of an anti-money laundering compliance officer, ongoing employee training programs, and an independent audit function to test the anti-money laundering program.

Section 326 of the USA Patriot Act authorized the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations providing minimum standards with respect to customer identification at the time new accounts are opened.

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In addition, the USA Patriot Act directed bank regulators to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

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 accounting scandals at that time such as Enron and WorldCom. The stated goals of the Sarbanes-Oxley Act of 2002 were 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 generally applies to all companies, both United States and non-United States companies, 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.

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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, 2004, 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 two Palmetto Capital offices independent of branch locations, 30 automatic teller machine (“ATM”) locations (including three at nonbranch locations), and five limited service branches located in retirement centers in the Upstate. One principal branch office is located in each of Laurens, Greenville, Spartanburg, Greenwood, and Anderson Counties.

Branch offices range in size from approximately 800 to 15,000 square feet. The Corporate Center location is approximately 55,000 square feet. Facilities are protected by alarm and security systems that meet or exceed regulatory standards. Eleven full service branch offices are leased, and the Bank owns the remaining branch office properties. Additionally, the Bank has entered into nine grounds and / or parking lot leases including those applicable to ATMs at nonbranch locations. The Bank also owns properties for potential future branch locations, one of which is currently being leased to a third party.

At December 31, 2004 and 2003, the total net book value of the premises and equipment owned was $22.1 million and $21.7 million, respectively.

Management 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. Management believes all of the locations are 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 premises and equipment and Note 15 of Notes to Consolidated Financial Statements contained in Item 8 herein for further details on minimum rental commitments under 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 impact the Company’s consolidated financial condition 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, 2004.

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Part II

Item 5.    Market For Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities

The Internal Revenue Service often defines fair market value as the price at which 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 stock is less useful when the market that exists for the stock is either nonexistent or “thinly” traded. Unlike the value of publicly traded stock, the fair market value of closely held stock is often difficult to ascertain because no active trading market for the stock exists.

The Company is closely held and there is no established public trading market for the Company’s stock.. The Company’s Secretary facilitates stock trades of Company common 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. The Company believes that many trades are between buyers and sellers that are family members, that are family members of Company employees, and that are members of the community who may be willing to pay a premium for the common stock of a Company headquartered in their community. Because of these factors, the Company does not believe that the prices at which the trades recorded by its Secretary occur can be considered fair market value.

The last known trading price of the Company’s common stock, based on information available to its Management, was $32.00 per common share on December 31, 2004. Management is aware of a number of transactions in which the Company’s common stock traded at this price. However, Management has not ascertained that these transactions were a result of arm’s 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, 2004, the Company had 1,272 shareholders representing 6,297,285 shares outstanding. The table set forth below summarizes high and low trading prices of the Company’s common stock by quarter for the periods presented and dividend information for the same periods, based on information available to its Management.

The Company or its predecessor, the Bank, has paid regular dividends on common stock since 1909. The amount of the dividend 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 of Directors may deem relevant. For the years ended December 31, 2004, 2003, and 2002, cash dividends were paid of $3.6 million or $0.58 per common share, $3.2 million or $0.51 per common share, and $2.8 million or $0.45 per common share, respectively. The

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Company has historically paid dividends on a quarterly basis. These dividends equate to dividend payout ratios of 30.07%, 29.49%, and 29.46% in 2004, 2003, and 2002, respectively. Although there can be no guarantee that additional dividends will be paid in future periods, the Company plans to continue its quarterly dividend payments.

For information with respect to current restrictions on dividend payments, see Item 1, Business—Dividends.

The table set forth below summarizes compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2004. Security holders previously approved all equity compensation plans of the Company in existence at December 31, 2004.

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Item 6.    Selected Financial Data