[Palmetto Bancshares, Inc. Logo Omitted] To Our Shareholders: We are pleased to report the Bank's performance and operating results for the three and nine months ended September 30, 2003. Palmetto Bancshares, Inc. continued to post strong earnings increases for the third quarter 2003 with net income of $2,857,000, compared with $2,329,000 for the same quarter of 2002, a 23% increase. On a per share diluted basis, net income was $0.45 for the quarter ended September 30, 2003, compared with $0.36 for the same quarter of 2002. Contributing to the increase in third quarter net income was an increase in noninterest income of 12% offset partially by increases in noninterest expense of 2%. Net interest income for the quarter ended September 30, 2003 remained relatively unchanged compared with the quarter ended September 30, 2002 reflecting compressed margins with interest rates at historically low levels. For the nine months ended September 30, 2003, net income was $8,467,000, up 16% from $7,269,000 for the first nine months of 2002. Diluted per share earnings for the nine months ended September 30, 2003 were $1.32 compared with $1.12 for the same nine month period of 2002. Return on average shareholders' equity for the first nine months of 2003 was 16.08% compared with 15.42% for the first nine months of 2002. Return on average assets improved to 1.33% from 1.28% when comparing the same periods. Total deposits increased 9% to $805 million at September 30, 2003 over $736 million at September 30, 2002, and total loans increased 12% to $679 million from $608 million at September 30, 2002. High volumes of originations and refinancings within the residential mortgage loan portfolio continued to provide a positive impact on net income during the first nine months of 2003. Approximately 84% of these loans were sold in the secondary market for residential mortgages at origination. There are indications that the volume in the mortgage loan portfolio is slowing as a result of recent increases in rates for 15 and 30 year loans. Total Palmetto Bancshares, Inc. assets reached $883 million at September 30, 2003 compared with $809 million at the same date in 2002. Growing quality assets within our balance sheet remains a high priority in meeting year-end financial projections. We are pleased with the 9% total asset growth experienced over the end of third quarter 2002. While our efforts have been focused toward total loan growth over the last twelve months, our efforts to minimize credit risk have been as strong as our efforts to grow the loan portfolio. We have experienced a decline in net charge-offs during the first nine months of 2003 as compared with the first nine months of 2002. Net charge-offs as a percentage of average loans (excluding mortgage loans held for sale) declined from .59% as of September 30, 2002 to ..38% as of September 30, 2003. Over the same periods, we have increased our loan loss reserves in order to compensate for the growth experienced this year in our loan portfolio. Looking ahead to the fourth quarter we project operating results that should produce another record year in growth and profitability. We look forward to presenting this information to you in our annual report for 2003. Sincerely, /s/ L. Leon Patterson L. Leon Patterson Chairman and Chief Executive Officer [Palmetto Bancshares, Inc. Logo Omitted] Consolidated Balance Sheets (in thousands, except share data) September 30, 2003 2002 ---- ---- (unaudited) Assets Cash and due from banks $ 32,898 40,120 Federal funds sold 24,745 29,840 Federal Home Loan Bank (FHLB) stock, at cost 1,868 1,733 Investment securities available for sale at fair market value 110,506 97,074 Mortgage loans held for sale 8,363 8,747 Loans 670,850 599,594 Less allowance for loan losses (7,241) (6,252) -------- -------- Loans, net 663,609 593,342 Premises and equipment, net 21,378 19,726 Accrued interest receivable 3,880 4,535 Other assets 15,527 14,104 -------- -------- Total assets $882,774 809,221 ======== ======== Liabilities and shareholders' equity Liabilities Deposits Noninterest-bearing $118,710 113,887 Interest-bearing 648,771 590,333 -------- -------- Total deposits 767,481 704,220 Retail repurchase agreements 15,373 17,314 Commercial paper (Master notes) 21,750 16,226 Other liabilities 7,766 5,314 -------- -------- Total liabilities 812,370 743,074 -------- -------- Shareholders' equity Common stock-par value $5.00 per share; authorized 10,000,000 shares; issued and outstanding 6,256,624 and 6,303,778 at September 30, 2003 and 2002, respectively. 31,283 31,519 Capital surplus (2,156) 84 Retained earnings 40,367 32,577 Accumulated other comprehensive income, net of tax 910 1,967 -------- -------- Total shareholders' equity 70,404 66,147 -------- -------- Total liabilities and shareholders' equity $882,774 809,221 ======== ======== Consolidated Statements of Income (in thousands, except share data) For the three months For the nine months ended September 30, ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- (unaudited) (unaudited) Interest income Interest and fees on loans $ 10,633 10,584 $ 32,127 31,409 Interest and dividends on investment securities available for sale 690 971 2,567 3,090 Interest on federal funds sold 48 96 111 307 Dividends on FHLB stock 17 22 60 72 -------- ------- -------- -------- Total interest income 11,388 11,673 34,865 34,878 Interest expense Interest on deposits, including retail repurchase agreements 2,641 2,946 8,134 9,289 Interest on federal funds purchased 8 - 19 1 Interest on commercial paper (Master notes) 28 44 80 115 -------- ------- -------- -------- Total interest expense 2,677 2,990 8,233 9,405 -------- ------- -------- -------- Net interest income 8,711 8,683 26,632 25,473 Provision for loan losses 900 1,200 2,700 3,100 -------- ------- -------- -------- Net interest income after provision for loan losses 7,811 7,483 23,932 22,373 Noninterest income Service charges on deposit accounts 2,196 2,052 6,417 5,859 Fees for trust and brokerage services 701 576 2,053 1,839 Mortgage banking income 219 85 305 457 Gains on sales of investment securities 81 114 362 349 Other 673 615 1,996 1,864 -------- ------- -------- -------- Total noninterest income 3,870 3,442 11,133 10,368 Noninterest expense Salaries and other personnel 3,992 3,854 11,794 11,210 Net occupancy 582 563 1,691 1,672 Furniture and equipment 884 698 2,536 2,002 Postage and supplies 318 397 1,123 1,107 Marketing and advertising 195 180 632 710 Telephone 186 204 557 594 Cardholder processing 138 132 412 420 Other 1,294 1,384 3,932 4,179 -------- ------- -------- -------- Total noninterest expense 7,589 7,412 22,677 21,894 -------- ------- -------- -------- Income before income taxes 4,092 3,513 12,388 10,847 Income tax provision 1,235 1,184 3,921 3,578 -------- ------- -------- -------- Net income $ 2,857 2,329 $ 8,467 7,269 ======== ======= ======== ======== Share Data Net income - Basic $ 0.46 0.37 $ 1.34 1.15 Net income - Diluted 0.45 0.36 1.32 1.12 Cash dividends 0.12 0.11 0.36 0.33 Book value 11.25 10.49 11.25 10.49 Weighted average common shares outstanding-Basic 6,273,780 6,301,974 6,315,334 6,294,386 Weighted average common shares outstanding-Diluted 6,370,340 6,469,441 6,410,952 6,464,048 [Palmetto Bancshares, Inc. Logo Omitted] 3RD QUARTER REPORT 2003 Selected Financial Ratios For the nine months ended September 30, 2003 2002 ---- ---- (unaudited) Significant Operating Ratios Based on Earnings Return on average assets 1.33 % 1.28 Return on average equity 16.08 15.42 Net interest margin 4.50 4.85 Efficiency ratio 59.76 60.17 Significant Capital Ratios Average equity to average assets 8.27 % 8.28 Equity to assets at year end 7.98 8.17 Tier 1 risk based capital 9.32 9.90 Total risk based capital 10.36 10.93 Tier 1 leverage ratio 7.50 7.79 Significant Credit Quality Ratios Nonaccrual loans to total assets 0.59 % 0.44 Net charge-offs to average loans less mortgage loans held for sale 0.38 0.59 BANK NOTES - -------------------------------------------------------------------------------- - - Leon Patterson, chairman and chief executive officer of The Palmetto Bank, has announced the graduation of five officers from this year's South Carolina Bankers School. This year's graduates included Randall Traynham, who was awarded the Lillie H. Magalis Award, presented to the graduating third-year student with the highest cumulative grade average for the three-year period. Scott Tollison, who served as the 2003 class president, Liz Avery, whose bank simulation team received the top honor of achievement, Marty Cobb and Panessa Dean.