Bank Notes

KNIGHT APPOINTED TO SOUTH CAROLINA BANKERS ASSOCIATION Teresa W. Knight, executive vice president, bank administration, human resources and marketing, was elected as the first vice chairman of the South Carolina Bankers Association (SCBA). She was installed at the SCBA’s 2008 Annual Convention held June 12-15, 2008. OFFICER APPOINTMENT Cindi S. Adams was appointed to The Palmetto Bank as senior vice president, Rock Hill. A Rock Hill native, Adams attended Winthrop University. She has 26 years banking experience in business development, commercial lending, small business banking and retail management.

	To Our Shareholders:
	Since the last report to you, as of March 31, 2008, very little of positive news has occurred in the financial sector of the U.S. economy. Indeed, for the economy as a whole we are now challenged with slower growth and rising prices both of which impact consumer spending that accounts for roughly 70 percent of economic output. Consumers are closely watching disposable income and household budgets like never before. Additionally, the much reported mortgage crisis continues to unwind with much uncertainty still as to how long this will last. And, if this was not enough to cause concern, add stock market performance of recent months and we would conclude that the economy has seen better days. Financial reporting for the second quarter and at mid-year can be characterized as not good but not as bad as was expected in many cases. In spite of these conditions, we are pleased to issue this positive report for your company. Earlier we sent to you our press release on financial performance in the second quarter and for the six months period ended June 30. With the recent failure of a large FDIC insured savings bank in California we felt it important to show the strong capital position of your company and The Palmetto Bank at mid-year and what we feel has been excellent operating results in the current banking environment. We were pleased to report an increase of 6.5% in net income for the second quarter on a record total of $4.3 million earnings. And, for the six months period we reported a record total of $8.0 million in net income as compared with $7.8 million in the first six months of 2007. Year-to-date profitability ratios at June 30, 2008 were excellent with a return on average assets of 1.24% and a return on shareholder’s equity of 14.06%, both ratios showing improvement over the year-to-date first quarter 2008 ratios. Shareholders equity at June 30 stood at $114.7 million in a well-capitalized category for federal regulatory purposes.	Current stock values reflect real or perceived asset quality and to a lesser degree expected future earnings, which of course are impacted ultimately by credit quality. Thus, with some uncertainty over asset quality some publically traded bank stocks have been trading at 20% to 60% off their twelve month highs.  Palmetto Bancshares, most recently traded at $42.00 per share, we believe reflects the soundness of our balance sheet, the consistent growth in earnings over time and the excellent asset quality of our loan portfolio. Non-performing loans to total loans improved over the same period in 2007 with a decline to .56% as compared to 1.26% at June 30, 2007. The loan loss reserve is considered adequate for any future doubtful loans. Charge-offs of loans are running at a rate of .18% year-to-date, which we judge to be excellent performance at this time. Although cautious about the balance of this year, we remain optimistic about full year operating performance. These are unusual times for the U.S. economy although fluctuating business cycles are part of longer term economic trends. That is not new. Downturns wring out the bad unfortunately at the expense often of some good. It affords an opportunity to prepare and build for the future, and for those who are judged to be strong, an opportunity to take advantage of market weaknesses to create competitive advantage. We are pleased to announce construction soon to begin for a new Greer location to replace an older facility and that progress is being made toward the opening of the new Rock Hill Office. We are delighted to have staff in place under the leadership of Senior Vice President Cindi Adams and Vice President Liz Winterburn. Our Greenwood office on Montague Avenue will soon celebrate the grand completion of its multi-year renovation. And last, the new headquarters facility in downtown Greenville continues to move along on schedule. Dry walls are in place on all four floors and what we see exceeds our expectations. This building continues to draw much attention and interest to Greenville’s Gateway location. We appreciate your continued support as a shareholder and friend of the company. We hope you will help us spread the good news across Upstate South Carolina about The Palmetto Bank.   Sincerely, Leon Patterson Chairman and Chief Executive Officer

	Consolidated Balance Sheets
	(dollars in thousands, except common and per share data) (unaudited)
					June 30,			June 30,
					2008			2007
	Assets
	Cash and cash equivalents
		Cash and due from banks			$	37,978		33,986
		Federal funds sold			-			9,272
			Total cash and cash equivalents		37,978			43,258
	Federal Home Loan Bank ("FHLB") stock, at cost				5,913			2,527
	Investment securities available for sale, at fair value				133,199			104,708
	Mortgage loans held for sale				3,801			1,294
	Loans, gross				1,114,522			986,529
		Less: allowance for loan losses			(7,645)			(8,515)
			Loans, net		1,106,877			978,014
	Premises and equipment, net				26,395			24,952
	Goodwill, net				3,691			3,691
	Core deposit intangibles, net				57			102
	Accrued interest receivable				6,257			6,201
	Other				18,187			15,843
				Total assets	$	1,342,355		1,180,590
	Liabilities and shareholders' equity
	Liabilities
	Deposits
		Noninterest-bearing			$	144,959		137,182
		Interest-bearing			905,720			864,643
			Total deposits		1,050,679			1,001,825
	Retail repurchase agreements				15,579			12,145
	Commercial paper (Master notes)				32,401			27,737
	Other short-term borrowings				67,671			24,500
	Long-term borrowings				52,000			-
	Accrued interest payable				1,709			1,523
	Other				7,602			6,748
			Total liabilities		1,227,641			1,074,478
	Shareholders' equity
	Common stock - par value $5.00 per share;  authorized 10,000,000
		shares; issued and outstanding 6,442,090 and 6,389,660
		at June 30, 2008 and 2007, respectively			32,211			31,948
	Capital surplus				2,013			1,391
	Retained earnings				84,521			73,531
	Accumulated other comprehensive loss, net of tax				(4,031)			(1,479)
			Total shareholders' equity		114,714			105,391
				Total liabilities and shareholders' equity	$	1,342,355		1,179,869
		SIGNIFICANT CAPITAL RATIOS
		Total shareholders' equity as a percentage of total assets			8.55		%	8.93
		Tier 1 risk-based capital			9.57			9.63
		Total risk-based capital			10.21			10.43
		Tier 1 leverage ratio			8.71			8.85
		SIGNIFICANT CREDIT QUALITY RATIOS
		Nonaccrual loans as a percentage of total assets			0.48		%	1.05
		OTHER INFORMATION
		Full-time equivalent employees			421			413
		Banking offices			29			32
		Automatic teller machines			37			39

	Consolidated Statements of Income
	(dollars in thousands, except common and per share data) (unaudited)
						For the three month				For the six month
						periods ended June 30,				periods ended June 30,
						2008			2007	2008	2007
	Interest income
		Interest earned and fees on loans				$	18,290		19,301	37,341	38,067
		Interest earned on investment securities available for sale				1,661			1,130	2,751	2,301
		Dividends paid on FHLB stock				86			38	143	75
		Interest earned on federal funds sold				10			211	47	419
		Interest earned on cash and due from banks				3			16	8	32
				Total interest income		20,050			20,696	40,290	40,894
	Interest expense
		Interest paid on deposits				5,653			7,437	12,769	14,664
		Interest paid on retail repurchase agreements				57			130	169	276
		Interest paid on commercial paper				87			289	231	527
		Interest paid on other short-term borrowings				258			54	509	83
		Interest paid on long-term borrowings				373			78	441	173
				Total interest expense		6,428			7,988	14,119	15,723
					Net interest income	13,622			12,708	26,171	25,171
	Provision for loan losses					687			433	1,175	800
					Net interest income after provision for loan losses	12,935			12,275	24,996	24,371
	Noninterest income
		Service charges on deposit accounts, net				2,127			1,991	4,294	3,899
		Fees for trust and investment management and brokerage services				755			826	1,511	1,522
		Mortgage-banking income, net				384			171	637	519
		Investment securities gains				1			-	1	-
		Other				1,293			956	2,806	1,903
				Total noninterest income		4,560			3,944	9,249	7,843
	Noninterest expense
		Salaries and other personnel				6,070			6,057	12,265	12,194
		Occupancy				803			722	1,608	1,430
		Furniture and equipment				985			894	1,929	1,833
		Marketing				291			219	623	487
		Amortization of core deposit intangibles				11			12	22	24
		Other				2,666			2,046	5,546	4,191
				Total noninterest expense		10,826			9,950	21,993	20,159
					Net income before provision for income taxes	6,669			6,269	12,252	12,055
	Provision for income taxes					2,340			2,204	4,277	4,229
					Net income	$	4,329		4,065	7,975	7,826
	Common share data
		Net income - basic				$	0.67		0.64	1.24	1.23
		Net income - diluted				0.66			0.63	1.22	1.21
		Cash dividends				0.20			0.19	0.40	0.38
		Book value				17.81			16.49	17.81	16.49
		Weighted average common shares outstanding - basic				6,435,515			6,385,483	6,433,343	6,382,019
		Weighted average common shares outstanding - diluted				6,521,169			6,499,649	6,518,299	6,480,454
		SIGNIFICANT OPERATING RATIOS BASED ON EARNINGS
		Return on average assets				1.32		%	1.40	1.24	1.36
		Return on average shareholders' equity				15.08			15.50	14.06	15.22
		Net interest margin				4.39			4.64	4.33	4.65
		SIGNIFICANT CAPITAL RATIOS
		Average total shareholders' equity as a percentage of average total assets				8.74		%	9.02	8.84	8.93
		SIGNIFICANT CREDIT QUALITY RATIOS
		Net loans charged-off as a percentage of average loans less
			mortgage loans held for sale			0.19		%	0.16	0.18	0.17