15.

Benefit Plans

401(k) Plan

Teammates are given the opportunity to participate in the Company's 401(k) plan which is designed to supplement a teammate's retirement income. Under the 401(k) plan, participants are able to defer a portion of their salary into the plan. During 2011, the Company matched teammate contributions at a rate of $0.60 per dollar up to 6% of a teammate's eligible compensation. Matching contributions are contributed to the plan prior to the end of each plan year. Prior to December 1, 2009, teammates were eligible to participate in this plan after completing one year of service and reaching age 21. Effective December 1, 2009, teammates are eligible to participate in the plan immediately when hired. During the years ended December 31, 2011, 2010 and 2009, the Company made matching contributions to the 401(k) plan totaling $392 thousand, $426 thousand, and $407 thousand, respectively. Effective January 1, 2012, the Company suspended its regular ongoing matching of teammate contributions and replaced it with a discretionary contribution based on attaining an appropriate level of profitability.

Until January 1, 2011, the Company's trust department administered the plan's assets. The plan's assets are now managed by a third party administrator. Contributions to the plan are made as required by the Employee Retirement Income Security Act of 1974.

Defined Benefit Pension Plan

Historically, the Company has offered a noncontributory, defined benefit pension plan that covered all full-time teammates having at least 12 months of continuous service and having attained age 21. In 2007, the Company notified teammates that it would cease accruing pension benefits for teammates with regard to the noncontributory, defined benefit pension plan. Although no previously accrued benefits were lost, teammates no longer accrue benefits for service subsequent to 2007.

The Company recognizes the funded status of the defined benefit postretirement plan in the Consolidated Balance Sheets. Gains and losses, prior service costs and credits, and any remaining transition amounts that had not yet been recognized through net periodic benefit cost as of December 31, 2007 are recognized in accumulated other comprehensive income, net of tax impacts, until they are amortized as a component of net periodic benefit cost.

Unless a business entity remeasures both its plan assets and benefit obligations during the fiscal year, the funded status it reports in its Consolidated Balance Sheets will be the same asset or liability recognized in the previous year-end Consolidated Balance Sheets adjusted for subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income and contributions to a funded plan, or benefit payments. The Company recorded a corresponding reduction of $2.0 million, after-tax, to accumulated other comprehensive income (loss) in shareholders' equity in order to recognize the underfunded status of its defined benefit pension plan at December 31, 2008, an additional reduction of $2.8 million, after-tax, to accumulated other comprehensive income (loss) in shareholders' equity in order to recognize the underfunded status of its defined benefit pension plan at December 31, 2009, an additional reduction of $577 thousand, after-tax, to accumulated other comprehensive income (loss) in shareholders' equity in order to recognize the underfunded status of its defined benefit pension plan at December 31, 2010, and an additional reduction of $1.2 million, after-tax, to accumulated other comprehensive income (loss) in shareholders' equity in order to recognize the underfunded status of its defined benefit pension plan at December 31, 2011.

Defined Benefit Pension Plan Funded Status. The following table summarizes the combined change in benefit obligation, defined benefit pension plan assets, and funded status of the Company's defined benefit pension plan at the dates and for the periods indicated (in thousands).


	At and for the years ended December 31,
	2011			2010			2009
Change in benefit obligation
Benefit obligation, beginning of period	$	19,082		$	16,908		$	11,270
Interest cost		1,002			1,015			923
Net actuarial loss		904			2,175			5,836
Benefits paid		(1,202	)		(1,016	)		(1,121	)

Benefit obligation, end of period		19,786			19,082			16,908
Change in plan assets
Fair value of plan assets, beginning of period		13,868			13,202			10,774
Return on plan assets		(575	)		1,604			1,748
Employer contribution		1,572			78			1,801
Benefits paid		(1,202	)		(1,016	)		(1,121	)

Fair value of plan assets, end of period		13,663			13,868			13,202

Underfunded status	$	(6,123	)	$	(5,214	)	$	(3,706	)

Net actuarial loss	$	(13,919	)	$	(12,066	)	$	(11,179	)
Income tax benefit		(4,871	)		(4,223	)		(3,913	)

Accumulated other comprehensive loss impact	$	(9,048	)	$	(7,843	)	$	(7,266	)

The Company's net accrued liability recognized at December 31, 2011 and 2010 is included in Other liabilities in the Consolidated Balance Sheets.

Cost of Defined Benefit Pension Plan. The following table summarizes the net periodic expense components for the Company's defined benefit pension plan, which is included in Salaries and other personnel expense in the Consolidated Statements of Income (Loss), for the periods indicated (in thousands).


	For the years ended December 31,
	2011			2010			2009
Interest cost	$	1,002		$	1,015		$	923
Expected return on plan assets		(1,162	)		(1,023	)		(899	)
Amortization of net actuarial loss		788			708			725

Net periodic pension expense	$	628		$	700		$	749

As a result of the Company's decision to curtail the plan effective January 1, 2008, no costs relative to service costs have been necessary since that date as teammates no longer accrue benefits for services rendered.

Actuarial gains and losses are the unanticipated change in the unfunded liability over a given year, i.e. the excess of the actual unfunded liability over the predicted unfunded liability resulting from unanticipated events. Actuarial gains and losses result from actual asset returns deviating from the assumed rate, changes in the discount rate used to measure plan obligations, and other variances in demographic experience such as retirements and mortality.

Defined Benefit Pension Plan Assumptions. One of the principal components of the net periodic pension expense calculation is the expected long-term rate of return on plan assets. The use of an expected long-term rate of return on plan assets may cause the Company to recognize pension income returns that are greater or less than the actual returns of plan assets in any given year. The expected long-term rate of return is designed to approximate the actual long-term rate of return over time and is not expected to change significantly. Therefore, the pattern of income / expense recognition should match the stable pattern of services provided by the Company's teammates over the life of the Company's pension obligation. To ensure that the expected rate of return is reasonable, the Company considers such factors as long-term historical return experience for major asset class categories and considers any material forward-looking return expectations for these major asset classes. Differences between expected and actual returns in each year, if any, are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income. The Company generally amortizes any net actuarial gain or loss in excess of a pre-determined corridor in net periodic pension expense calculations. Expected returns on defined benefit pension plan assets are developed by the Company in conjunction with input from external advisors and take into account the investment policy, actual investment allocation, and long-term expected rates of return on the relevant asset classes.

The Company uses a discount rate to determine the present value of its future benefit obligations. The discount rate is determined in consultation with the third party actuary and is set by matching the projected benefit cash flow to a yield curve consisting of the 50% highest yielding issuances within each defined maturity tranche of a AA-only universe of bonds monitored by the third party actuary. Prior to 2011, the Company based the discount rate on the Citigroup pension yield curve, which was used by the third party actuary. The Company revised this assumption to the AA-only yield curve in 2011 as this curve provides greater transparency with respect to the underlying bonds and provides a better matching to the payment of benefits. The yield curve reflects the plan specific duration.

The pension plan includes common stock of the Company, which, prior to August 18, 2011, was not traded on an exchange and the value of which is subject to change based on the Company's financial results. At December 31, 2011, the fair value of Company common stock included in the plan was 0.1% of total fair value of assets of the plan. Additionally, the Company periodically evaluates other assumptions involving demographic factors, such as retirement age, mortality, and turnover and updates such factors to reflect experience and expectations for the future.

The following table summarizes the assumptions used in computing the benefit obligation and the adjusted net periodic expense (income) for the periods indicated.


	For the years ended December 31,
	2011			2010			2009
Assumptions used in computing benefit obligation:
Discount rate		5.02	%		5.35	%		5.90	%
Rate of increase in compensation levels		n/a			n/a			n/a
Assumptions used in computing net periodic benefit cost:
Discount rate		5.35			5.90			5.70
Expected long-term rate of return on plan assets		8.00			8.00			8.00
Rate of compensation increase		n/a			n/a			n/a

Defined Benefit Pension Plan Assets. The following table summarizes the fair value of defined benefit pension plan assets by major category at the dates indicated (in thousands).


	December 31,
	2011		2010
Investments, at fair value
Interest-bearing cash	$	725	$	787
U.S. government and agency securities		309		513
Municipal securities		785		738
Corporate bonds		4,063		3,211
Corporate stocks		1,279		1,734
Palmetto Bancshares, Inc. common stock		20		42
Pooled funds		6,482		6,805
Accrued interest receivable		—		38

Total assets	$	13,663	$	13,868

The Company's trust department administered the defined benefit pension plan's assets. The investment objectives of the defined benefit pension plan assets are designed to maintain full funding with respect to the projected benefit obligation and to maximize returns in order to minimize contributions within reasonable and prudent levels of risk. The precise amount for which these obligations will be settled depends on future events, including the life expectancy of the defined benefit pension plan's participants. The obligations are estimated using actuarial assumptions based on the current economic environment. The defined benefit pension plan's investment strategy balances the requirement to generate return, using higher-returning assets, with the need to control risk using less volatile assets. Risks include, but are not limited to, inflation, volatility in equity values, and changes in interest rates that could cause the defined benefit pension plan to become underfunded, thereby increasing the defined benefit pension plan's dependence on contributions from the Company.

Plan assets are managed by professional investment firms as well as by investment professionals that are teammates of the Company as approved by the Board of Directors. The Compensation Committee of the Board of Directors is responsible for maintaining the investment policy of the defined benefit pension plan, approving the appointment of the investment manager, and reviewing the performance of the defined benefit pension plan assets at least annually.

Investments within the defined benefit pension plan are diversified with the intent to minimize the risk of large losses to the defined benefit pension plan. The total portfolio is constructed and maintained to provide prudent diversification within each investment category, and the Company assumes that the volatility of the portfolio will be similar to the market as a whole. The asset allocation ranges represent a long-term perspective. Therefore, rapid unanticipated market shifts may cause the asset mix to fall outside the policy range. Such divergences should be short-term in nature.

Fair Value Measurements. Following is a description of the valuation methodology used in determining fair value measurements of the defined benefit pension plan.

•

Interest-bearing cash. Valued at the net asset value of units held by the pension plan at year-end.

•

U.S. government and agency securities. Valued at the closing price reported in the active market in which the individual securities are traded.

•

Municipal securities. Valued at the closing price reported in the active market in which the individual securities are traded.

•

Corporate bonds. Valued at the closing price reported in the active market in which the bond is traded.

•

Corporate stocks (including Palmetto Bancshares, Inc.). Valued at the closing price reported in the active market in which the individual securities are traded.

•

Pooled funds. Valued at the net asset value of units held by the pension plan at year-end.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table summarizes the defined benefit pension plan assets measured at fair value at the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


	December 31, 2011
	Level 1		Level 2		Level 3		Total
Defined benefit pension plan assets	$	1,299	$	12,364	$	—	$	13,663


	December 31, 2010
	Level 1		Level 2		Level 3		Total
Defined benefit pension plan assets	$	1,734	$	12,092	$	42	$	13,868

The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis at the dates and for the period indicated (in thousands).


	Palmetto Bancshares, Inc. common stock
Balance, December 31, 2010	$	42
Total unrealized losses		(1	)
Transfers out of Level 3		(41	)

Balance, December 31, 2011	$	—

Palmetto Bancshares, Inc. common stock was transferred from Level 3 during 2011 as a result of changes in the observability of significant inputs due to its listing on the NASDAQ Stock Exchange in August 2011.

Current and Future Expected Contributions. The Pension Protection Act of 2006 imposed a number of burdens on pension plans with an asset to liability ratio of less than 80% with additional burdens imposed if the asset to liability ratio falls below 60%. Due primarily to the utilization of a lower discount rate for determining the present value of the liabilities (provided by the IRS based on the 24 month average of bond yields), the Company's plan was 73% funded at January 1, 2011 and, as a result, in March 2011, the Company contributed $1.3 million to the pension plan. This contribution increased the Company's asset to liability ratio to the 80% threshold level. Additional contributions of $307 thousand were made during the 2011 plan year. During January 2012, the Company made its final employer contributions for the 2011 plan year in the amount of $94 thousand.

Expected Future Defined Benefit Pension Plan Payments. The following table summarizes the benefits expected to be paid for the next 10 years in thousands.


During the years ended December 31,
2012	$	889
2013		926
2014		980
2015		1,032
2016		1,067
2017—2021		6,250

The expected benefits to be paid are based on the same assumptions used to measure the Company's benefit obligation at December 31, 2011.

Key Man Life Insurance

The Company has purchased life insurance policies on certain key teammates. Such policies are recorded in Other assets in the Consolidated Balance Sheets at the cash surrender value less applicable surrender charges. At both December 31, 2011 and 2010, the cash surrender value of such policies totaled $1.6 million.