[Palmetto Bancshares, Inc. Logo Omitted] To Our Shareholders: As we complete the first quarter of another year, we are pleased to report on the excellent financial condition of Palmetto Bancshares, Inc. and improved operating results over the first quarter of last year. Net income for the first quarter of this year was $2.9 million, an increase of 18.2% over the $2.5 million posted for the first quarter of 2002. Net income per share on a fully diluted basis was $.45 compared with $.38 for the same period of 2002, an increase of 18.4%. Return on average assets improved to 1.42% for the first quarter of 2003 while return on average shareholders' equity increased to 17.01%. The Board of Directors approved an increased dividend payment for the quarter of $.12 per share reflecting the excellent operating results of the quarter. The boost in first quarter net income was achieved primarily from a 7.3% increase in net interest income, a 3.0% improvement in noninterest income, and relatively unchanged overhead expenses of $7.2 million compared with first quarter 2002. Growing our asset base is particularly strategic to bottom line results. We are pleased with a 15.6% growth in the total loan portfolio to $657.7 million at March 31, 2003 over the same period for 2002. In addition to good growth in consumer and commercial loans, strong gains in single family mortgage originations continued to boost interest income and mortgage servicing fees. The refinancing of mortgages has continued at a brisk rate in the first quarter of 2003 as a result of the lowest interest rates for mortgage financing in recent memory. Asset quality continues to receive close management attention. In the first quarter of 2003, net charged-off loans declined 35% from levels reported in the first quarter of 2002 to .34%, as a percentage of average loans, less those mortgage loans held for sale, reflecting improved loan quality even under challenging times for many of our local economies. We continue to see excellent progress toward developing a credit culture for Palmetto Bank that reflects a desire for the highest possible asset quality under present conditions. While non-performing loans as a percentage of the total loan portfolio are slightly ahead of first quarter last year, we expect improvement as we go further into the year. From our retail offices we continued to see strong deposit growth. Excellent growth in transaction balances partly reflects a shift to financial asset stability and safety from the poor performance of equity investments in recent years. We, of course, could expect this trend to reverse as equity markets improve. For the quarter, total deposits, including retail repurchase agreements and commercial paper, increased 10.7% over 2002 results and have provided adequate funding for total asset expansion of 11.6% at March 31, 2003. To date we have seen excellent operating results that support an improved share-trading price for your company. Recent trades in the $28.50 - $29.00 per share range continued to outperform the broad indexes for equity investments in the first three months of 2003. The exceptional performance of the first quarter is a direct result of the outstanding abilities and efforts of our employees and their desire to achieve superior long-term shareholder value for the company. As we enter the 97th year in our history and growth, we are mindful of the lessons and experiences of the past, yet are comfortable in the knowledge that we have assembled a staff of dedicated employees who individually understand a responsibility to shareholders, to customers, to each fellow employee, and to our communities. As shareholders, we are always mindful of your concerns, and we appreciate your continued loyal support. Sincerely, /s/ L. Lean Patterson L. Lean Patterson Chairman and Chief Executive Officer CONSOLIDATED BALANCE SHEETS (in thousands, except share data) March 31, 2003 2002 ---- ---- (unaudited) Assets Cash and due from banks $ 32,953 36,079 Federal funds sold 14,479 22,280 Federal Home Loan Bank (FHLB) stock, at cost 1,868 1,733 Investment securities available for sale at fair market value 113,138 104,873 Mortgage loans held for sale 11,093 13,363 Loans 646,628 555,660 Less allowance for loans losses (6,771) (5,744) -------- -------- Loans, net 639,857 549,916 Premises and equipment, net 19,805 19,522 Accrued interest receivable 4,114 4,740 Other assets 15,792 12,014 -------- -------- Total assets $853,099 764,520 ======== ======== Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing $116,615 101,945 Interest-bearing 622,144 565,695 -------- -------- Total deposits 738,759 667,640 Retail repurchase agreements 16,261 16,798 Commercial paper (Master notes) 16,965 13,154 Other liabilities 11,358 6,225 -------- -------- Total liabilities 783,343 703,817 -------- -------- Shareholders' equity Common stock - par value $5.00 per share; authorized 10,000,000 shares; issued and outstanding 6,329,909 and 6,291,578 at March 31, 2003 and 2002, respectively 31,650 31,458 Capital surplus 89 29 Retained earnings 36,314 29,148 Accumulated other comprehensive income, net of tax 1,703 68 -------- -------- Total shareholders' equity 69,756 60,703 -------- -------- Total liabilities and shoareholders' equity $853,099 764,520 ======== ======== CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data) For the three months ended March 31, 2003 2002 ---- ---- (unaudited) Interest income Interest and fees on loans $ 10,722 10,528 Interest and dividends on investment securities available for sale 1,006 1,077 Interest on federal funds sold 35 58 Dividends on FHLB stock 23 26 --------- -------- Total interest income 11,786 11,689 Interest expense Interest on deposits, including retail 2,804 3,308 repurchase agreements Interest on federal funds purchased 4 1 Interest on commercial paper (Master notes) 23 34 --------- -------- Total interest expense 2,831 3,343 --------- -------- Net interest income 8,955 8,346 --------- -------- Provision for loan losses 900 900 --------- -------- Net interest income after provision for loan losses 8,055 7,446 --------- -------- Noninterest income Service charges on deposit accounts 2,004 1,825 Fees for trust and brokerage services 637 612 Gains on sales of mortgage loans 339 225 Gains on sales of investment securities 95 140 Other 398 569 --------- -------- Total noninterest income 3,473 3,371 Noninterest expense Salaries and other personnel 3,670 3,679 Net occupancy 567 548 Furniture and equipment 813 635 FDIC assessment 39 28 Postage and supplies 396 382 Marketing and advertising 184 255 Telephone 184 193 Cardholder processing 136 141 Sales finance losses 11 24 Other 1,228 1,288 --------- -------- Total noninterest expense 7,228 7,173 --------- -------- Income before income taxes 4,300 3,644 --------- -------- Income tax provision 1,398 1,189 --------- -------- Net income $ 2,902 2,455 ========= ======== Share Data Net income - Basic $ 0.46 0.39 Net income - Diluted 0.45 0.38 Cash dividends 0.12 0.11 Book value 11.02 9.65 Highest trading price during period 29.00 27.00 Weighted average common shares 6,326,698 6,287,279 outstanding - Basic Weighted average common shares 6,482,699 6,473,816 outstanding - Diluted Selected Financial Ratios FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 ---- ---- (unaudited) Significant Operating Ratios Based on Earnings Return on average assets 1.42% 1.34 Return on average equity 17.01 16.33 Net interest margin 4.73 4.94 Efficiency ratio 57.88 60.29 Significant Capital Ratios Average equity to average assets 8.33% 8.19 Equity to assets at year end 8.18 7.94 Tier 1 risk based capital 9.50 9.94 Total risk based capital 10.53 10.96 Tier 1 leverage ratio 7.59 7.61 Significant Credit Quality Ratios Nonaccrual loans to total assets 0.42% 0.36 Net charge-offs to average loans less 0.34 0.59 mortgage loans held for sale BANK NOTES - - We hope that you have had an opportunity to see The Palmetto Bank's commercials on WYFF Channel 4, as we have made a commitment to sponsor the Money Matters segment of the news. Recently, two additional commercial spots highlighting banking conveniences - the Telephone Banking Center and Early Bird Hours - were shot to rotate with the existing spot, which focuses on The Palmetto Bank overall. We are always looking for ways to market our fine organization, its products, and excellent service, thus boosting exposure, building our business across the Upstate, and increasing your shareholder value. - - As a Bank of Promise, we are committed to investing into the youth of our communities. The Palmetto Bank recently submitted a story describing a five-hour Saturday class taught by a group of five Palmetto Bank employees to Old 96 Girl Scout troops. The class, called CentsAbility, was designed to teach kids the importance of good personal finance. The Palmetto Bank was selected as the "featured Bank of Promise" and the article submitted has been posted on the national ABA Bank of Promise web site. We invite you to read the article by accessing the following link on-line at http://www.aba.com/About+ABA/ap_main.htm.