Summary of Significant Accounting Policies

Nature of Operations

Palmetto Bancshares, Inc. (the "Company," we," "us" or "our") is a bank holding company organized in 1982 under the laws of South Carolina and is headquartered in Greenville, South Carolina. Through the Company's wholly-owned subsidiary, The Palmetto Bank (the "Bank"), which began operations in 1906, we specialize in providing personalized community banking services to individuals and small to mid-size businesses including retail banking (including mortgage and credit cards), commercial banking (including business banking, treasury management and merchant services) and wealth management (including trust, brokerage, financial planning and insurance) throughout our primary market area of northwest South Carolina (commonly referred to as "the Upstate").

Principles of Consolidation / Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of the Company, the Bank, and other subsidiaries of the Bank. In management's opinion, all significant intercompany accounts and transactions have been eliminated in consolidation, and all adjustments necessary for a fair presentation of the financial condition and results of operations for the periods presented have been included. Any such adjustments are of a normal and recurring nature. Assets held by the Company or the Bank in a fiduciary or agency capacity for clients are not included in the Company's Consolidated Financial Statements because those items do not represent assets of the Company or the Bank. The accounting and financial reporting policies of the Company conform, in all material respects, to accounting principles generally accepted in the United States of America and to general practices within the financial services industry.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet including the estimates inherent in the process of preparing financial statements. Unrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. The Company has reviewed events occurring through the issuance date of the Consolidated Financial Statements and no subsequent events have occurred requiring accrual or disclosure in these financial statements in addition to any included herein.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available and are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Public enterprises are required to report a measure of segment profit or loss, certain specific revenue and expense items for each segment, segment assets and information about the way that the operating segments were determined, among other items.

The Company considers business segments by analyzing distinguishable components that are engaged in providing individual products, services or groups of related products or services and that are subject to risks and returns that are different from those of other business segments. When determining whether products and services are related, the Company considers the nature of the products or services, the nature of the production processes, the type or class of client for which the products or services are designed and the methods used to distribute the products or provide the services.

Beginning in 2009 and continuing through 2011, we realigned our organizational structure and began the process of more specifically delineating our businesses. However, at this time, we do not yet have in place a reporting structure to separately report and evaluate our various lines of businesses. Accordingly, at December 31, 2011, the Company had one reportable operating segment, banking.

Use of Estimates

In preparing our Consolidated Financial Statements, the Company's management makes estimates and assumptions that impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements for the periods presented. Actual results could differ from these estimates and assumptions. Therefore, the results of operations for the year ended December 31, 2011 are not necessarily indicative of the results of operations that may be expected in future periods.

Reclassifications

Certain amounts previously presented in our Consolidated Financial Statements for prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior periods' net loss or shareholders' equity as previously reported.

Reverse Stock Split

On June 28, 2011, the Company completed a one-for-four reverse stock split of its common stock. In connection with the reverse stock split, every four shares of issued and outstanding common stock of the Company at the Effective Date were exchanged for one share of newly issued common stock of the Company. Fractional shares were rounded up to the next whole share. Other than the number of issued and outstanding shares of common stock disclosed in the Consolidated Balance Sheets and Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss), all prior period share amounts have been retroactively restated to reflect the reverse stock split. For additional disclosure regarding the reverse stock split, see Note 13, Shareholders' Equity.

Risk and Uncertainties

In the normal course of business, the Company encounters two significant types of overall risk: economic and regulatory. There are three main components of economic risk: credit risk, market risk and concentration of credit risk. Credit risk is the risk of default on the Company's loan portfolio resulting from borrowers' inability or unwillingness to make contractually required payments or default on repayment of investment securities. Market risk primarily includes interest rate risk. The Company is exposed to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or different bases, than its interest-earning assets. Market risk also reflects the risk of declines in the valuation of loans held for sale, the value of the collateral underlying loans and the value of real estate held by the Company. Concentration of credit risk refers to the risk that, if the Company extends a significant portion of its total outstanding credit to borrowers in a specific geographical area or industry or on the security of a specific form of collateral, the Company may experience disproportionately high levels of defaults and losses if those borrowers, or the value of such type of collateral, are adversely impacted by economic or other factors that are particularly applicable to such borrowers or collateral. Concentration of credit risk is also similarly applicable to the investment securities portfolio.

The Company and the Bank are also subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. In addition, the Company and the Bank undergo periodic examinations by regulatory agencies, which may subject us to changes with respect to asset and liability valuations, amount of required allowance for loan losses, capital levels or operating restrictions.

Cash and Cash Equivalents

Cash and cash equivalents may include cash, interest-bearing bank balances and federal funds sold. Generally, both cash and cash equivalents have maturities of three months or less, and accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

FHLB Stock

FHLB stock is carried at its original cost basis, as cost approximates fair value, and there is no ready market for such investments. Historically, redemption of this stock has been at par value and at the discretion of the FHLB. Dividends are paid on this stock also at the discretion of the FHLB.

Investment Securities Available for Sale

The Company's investments are classified into three categories. Held-to-maturity investment securities include debt securities that the owner has the intent and ability to hold until maturity and are reported at amortized cost. Trading investment securities include debt and equity securities that are bought and held for the purpose of sale in the near-term and are reported at fair value with unrealized gains and losses included in earnings. Available for sale investment securities include debt and equity investment securities that the Company determines may be sold at a future date or that it does not have the intent or ability to hold to maturity. Available for sale investment securities are reported at fair value with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity, net of deferred income taxes. For additional disclosure regarding fair value estimates and methodologies, see Note 20, Disclosures Regarding Fair Value. Any other-than-temporary impairment related to credit losses is recognized through earnings while any other-than-temporary impairment related to other factors is recognized in other comprehensive income. Realized gains or losses on available for sale investment securities are computed on a specific identification basis.

Other-than-temporary impairment analysis is conducted on a quarterly basis or more often if a potential loss-triggering event occurs. Investment securities are considered to be impaired on an other-than-temporary basis if it is probable that the issuer will be unable to make its contractual payments or if the Company no longer believes the security will recover within the estimated recovery period. Other-than-temporary impairment is recognized by evaluating separately other-than-temporary impairment losses due to credit issues and losses related to all other factors. Other-than-temporary impairment exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. For debt securities, the Company also considers the cause of the price decline such as the general level of interest rates and industry and issuer-specific factors, the issuer's financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer's ability to service debt, any change in agencies' ratings at evaluation date from acquisition date and any likely imminent action, and for asset-backed securities, the credit performance of the underlying collateral including delinquency rates, cumulative losses to date and the remaining credit enhancement compared to expected credit losses. Additionally, in determining if there is evidence of credit deterioration, the Company evaluates the severity of decline in market value below cost, the period of time for which the decline in fair value has existed and the financial condition and near-term prospects of the issuer including any specific events which may influence the operations of the issuer.

Unamortized premiums and discounts are recognized in interest income over the contractual life of the security using the interest method. As principal repayments are received on securities (primarily mortgage-backed securities) a pro-rata portion of the unamortized premium or discount is recognized in interest income. Accretion of unamortized discounts is discontinued for investment securities that fall below investment grade.

Mortgage Loans Held for Sale

Residential mortgage loans originated with the intent of sale are reported at the lower of cost or estimated fair value on an aggregate loan basis. Net unrealized losses, if necessary, are provided for through a valuation allowance charged to income. Gains or losses realized on the sale of residential mortgage loans are recognized at the time of sale and are determined as the difference between the net sale proceeds and the carrying value of loans sold.

Commercial Loans Held for Sale

Commercial loans held for sale are classified as held for sale based on the Company's intent to sell such loans. These loans are carried at the lower of cost or fair value less estimated selling costs. A valuation allowance is recorded against the commercial loans held for sale for the excess of the recorded investment in the loan over the fair value less estimated selling costs. Loans which the Company subsequently determines will not be sold are transferred back to the loans held for investment portfolio at the lower of cost or fair value less estimated selling costs. For additional disclosure regarding fair value estimates and methodologies, see Note 20, Disclosures Regarding Fair Value.

Loans, gross

Loans are reported at their outstanding principal balances net of any unearned income, charge-offs and unamortized deferred fees and costs on originated loans. Unearned income, deferred fees and cost, and discounts and premiums are amortized to income over the contractual life of the loan.

Past due and delinquent status is based on contractual terms. Interest on loans deemed past due continues to accrue until the loan is placed in nonaccrual status.

The accrual of interest is discontinued when it is determined there is a more than normal risk of future uncollectibility. In most cases, loans are automatically placed in nonaccrual status by the loan system when the loan payment becomes 90 days delinquent and no acceptable arrangement has been made between the Company and the borrower. The accrual of interest on some loans, however, may continue even after the loan becomes 90 days delinquent in special circumstances deemed appropriate by the Company. Loans may be manually placed in nonaccrual status if it is determined that some factor other than delinquency (such as imminent foreclosure or bankruptcy proceedings) causes the Company to believe that more than a normal amount of risk exists with regard to collectability. When the loan is placed in nonaccrual status, accrued interest receivable is reversed. Thereafter, any cash payments received on the nonaccrual loan are applied as a principal reduction until the entire amortized cost has been recovered. Any additional amounts received are reflected in interest income. Loans are returned to accrual status when the loan is brought current and ultimate collectability of principal and interest is no longer in doubt.

In situations where, for economic or legal reasons related to a borrower's financial difficulties, a concession to the borrower is granted that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring. The restructuring of a loan may include the transfer from the borrower to the Company of real estate, receivables from third parties, other assets or an equity interest in the borrower in full or partial satisfaction of the loan, a modification of the loan terms or a combination of the above. The accrual of interest continues on a troubled debt restructuring as long as the loan is performing in accordance with the restructured terms. If the restructured loan is not performing in accordance with the restructured terms, the loan will be placed on nonaccrual status and will retain its status as a troubled debt restructuring.

Nonrefundable fees and certain direct costs associated with the origination of loans are deferred and recognized as a yield adjustment over the contractual life of the related loans, or if the related loan is held for sale, until the loan is sold. Recognition of deferred fees and costs is discontinued on nonaccrual loans until they return to accrual status or are charged-off. Deferral of direct loan origination costs are reported as a reduction of Salaries and other personnel expense.

Allowance for Loan Losses

The allowance for loan losses represents an amount that the Company believes will be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. Assessing the adequacy of the allowance for loan losses is a process requiring considerable judgment. Such judgment is based on evaluations of the collectability of loans including consideration of factors such as the balance of impaired loans, the quality, mix, and size of the overall loan portfolio, economic conditions that may impact the overall loan portfolio or an individual borrower's ability to repay, the amount and quality of collateral securing the loans, its historical loan loss experience and borrower and collateral specific considerations for loans individually evaluated for impairment.

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents the Company's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance for loan losses is necessary to reserve for estimated probable loan losses inherent in the loan portfolio. The Company's allowance for loan losses methodology is based on historical loss experience by loan type, specific homogeneous risk pools and specific loss allocations. The Company's process for determining the appropriate level of the allowance for loan losses is designed to account for asset deterioration as it occurs. The provision for loan losses reflects loan quality trends including the levels of and trends related to nonaccrual loans, potential problem loans, criticized loans and loans charged-off or recovered, among other factors.

The level of the allowance for loan losses reflects the Company's continuing evaluation of specific lending risks, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions and unidentified losses inherent in the current loan portfolio. Lending risks are driven primarily by the type of loans within the portfolio.

Portions of the allowance for loan losses may be allocated for specific loans. However, the entire allowance for loan losses is available for any loan that, in the Company's judgment, should be charged-off. While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance for loan losses is dependent upon a variety of factors beyond its control including the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications and collateral valuation.

An allowance for loan losses on specific loans is recorded for an impaired loan when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Specific allowances for loans considered individually significant and that exhibit probable or observed weaknesses are determined by analyzing the borrower's ability to repay amounts owed, guarantor support, collateral deficiencies, the relative risk rating of the loan and economic conditions impacting the borrower's industry, among other things.

The starting point for the general component of the allowance is the historical loss experience of specific types of loans. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual loan net charge-offs to the total population of loans in the pool. The Company uses a five-year look-back period when computing historical loss rates. Given the increase in charge-offs beginning in 2009, the Company also utilized a three-year look-back period during 2011 for computing historical loss rates as an additional reference point in determining the allowance for loan losses.

Historical loss percentages are adjusted for qualitative environmental factors derived from macroeconomic indicators and other factors. Qualitative factors considered in the determination of the December 31, 2011 and 2010 allowance for loan losses include pervasive factors that generally impact borrowers across the loan portfolio (such as unemployment and consumer price index) and factors that have specific implications to particular loan portfolios (such as residential home sales or commercial development). Factors evaluated may include changes in delinquent, nonaccrual and troubled debt restructuring loan trends, trends in risk ratings and net loans charged-off, concentrations of credit, competition and legal and regulatory requirements, trends in the nature and volume of the loan portfolio, national and local economic and business conditions, collateral valuations, the experience and depth of lending management, lending policies and procedures, underwriting standards and practices, the quality of loan review systems and degree of oversight by the Board of Directors, peer comparisons and other external factors. The general reserve calculated using the historical loss rates and qualitative factors is then combined with the specific allowance on loans individually evaluated for impairment to determine the total allowance for loan losses.

Loans identified as losses by management, internal loan review and / or bank examiners are charged-off. Each impaired loan is reviewed on a loan-by-loan basis to determine whether the impairment should be recorded as a charge-off or a reserve based on an assessment of the status of the borrower and the underlying collateral. In general, for collateral dependent loans, any impairment is recorded as a charge-off unless the fair value was based on an internal valuation pending receipt of a third party appraisal or other extenuating circumstances. Consumer loan accounts are generally charged-off once they become 180 days past due.

In April 2011, the FASB issued Accounting Standards Update ("ASU") 2011-02 Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring ("ASU 2011- 02") which was adopted by the Company on January 1, 2011. Among other provisions, ASU 2011-02 requires the disclosure of qualitative information about how loan modifications are factored into the determination of the allowance for loan losses.

Loans that are determined to be troubled debt restructurings are considered impaired loans and are evaluated individually for potential impairment. Loans determined to be troubled debt restructuring that are performing in accordance with their restructured terms are evaluated for impairment based on discounted cash flows using the original contractual interest rate. Troubled debt restructuring loans that are no longer performing in accordance with their restructured terms and for which ultimate collection is based on foreclosure of the collateral are evaluated for impairment based on the collateral value less estimated costs to sell. Each troubled debt restructuring is reviewed individually to determine whether the impairment should be recorded as a charge-off or a reserve based on an assessment of the status of the borrower and the underlying collateral.

Reserve for Unfunded Commitments

The Company estimates probable losses related to unfunded lending commitments. The methodology to determine such losses is inherently similar to the methodology utilized in calculating the allowance for loan losses. However, commitments have fixed expiration dates and most of the Company's commitments to extend credit have adverse change clauses that allow the Bank to cancel the commitments based on various factors including deterioration in the creditworthiness of the borrower. Accordingly, many of the Company's loan commitments are expected to expire without being drawn upon, and, therefore, the total commitment amounts do not necessarily represent potential credit exposure. The reserve for unfunded lending commitments is included in Other liabilities in the Consolidated Balance Sheets. Changes to the reserve for unfunded commitments are recorded through Other noninterest expense in the Consolidated Statements of Income (Loss).

Mortgage-Servicing Rights and Mortgage-Banking Income

The Company recognizes a mortgage-servicing asset upon the sale of mortgage loans for which the Company retains the underlying servicing obligation. Mortgage-servicing assets are initially measured at fair value and amortized to expense over the estimated life of the servicing obligation.

The fair value of mortgage-servicing rights is determined at the date of sale using the present value of estimated future net servicing income using assumptions that market participants use in their valuation estimates. The Company presents its servicing assets gross at the lower of cost or fair value in the Consolidated Balance Sheets. Gain or loss on sale of mortgage loans is based on proceeds received, the value of any mortgage-servicing rights recognized, the previous carrying amount of the loans transferred and any interests the Company continues to hold based on relative fair value at the date of transfer. Mortgage-servicing rights are included in Other assets in the Consolidated Balance Sheets.

The Company utilizes a third party specialist to assist with the quarterly determination of the fair value of its mortgage-servicing rights as well as capitalization, impairment and amortization rates. Estimates of the amount and timing of prepayment rates, loan loss experience, costs to service loans and discount rates are used in the estimate of fair value. Amortization of mortgage-servicing rights is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized. Projected net servicing income is determined based on the estimated future balance of the underlying mortgage loan portfolio as it declines over time from prepayments and scheduled loan amortization. Future prepayment rates are estimated based on current interest rate levels, other economic conditions, market forecasts and relevant characteristics of the mortgage-servicing rights portfolio such as loan types, interest rate stratification and recent prepayment experience. The Company reviews the modeling techniques and assumptions used and believes that they are reasonable.

Impairment valuations are based on projections using a discounted cash flow method that includes assumptions regarding prepayments, interest rates, servicing costs and other factors. Impairment is measured on a disaggregated basis for each stratum of the mortgage-servicing rights, which is segregated based on predominate risk characteristics including interest rate and loan type. Subsequent increases in value are recognized to the extent of the previously recorded impairment.

Premises and Equipment, net

Land is reported at cost. Buildings and improvements, furniture and equipment and software are carried at cost less accumulated depreciation computed principally by the straight-line method based on the estimated useful lives of the related asset. Estimated lives range from 12 to 39 years for buildings and improvements and from five to 12 years for furniture and equipment. Estimated lives range from three to five years for computer software. Estimated lives of Bank automobiles are typically five years. Leasehold improvements are generally depreciated over the lesser of the lease term or the estimated useful lives of the improvements.

Maintenance and repairs of such premises and equipment are expensed as incurred. Improvements that extend the useful lives of the respective assets are capitalized.

Impairment of Long-Lived Assets

The Company periodically reviews the carrying value of its long-lived assets for impairment when events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is the amount by which the carrying amount of a long-lived asset exceeds its fair value.

Long-lived assets to be sold are classified as held for sale and are no longer depreciated. Certain criteria must be met in order for the long-lived asset to be classified as held for sale including that a sale is probable and expected to occur within a one-year period. Long-lived assets classified as held for sale are recorded at the lower of carrying amount or fair value less estimated costs to sell and are included in Other assets in the Consolidated Balance Sheets.

Goodwill and Core Deposit Intangibles

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and is then tested for impairment at least annually or on an interim basis if an event occurs or circumstances arise that would more likely than not reduce the fair value of the reporting unit below its carrying value. The first step of the Company's goodwill impairment test, used to identify potential impairment, compares the fair value of its reporting unit with its carrying amount including goodwill. If the fair value of its reporting unit exceeds its carrying amount, goodwill is considered not impaired thus the second step of the impairment test is unnecessary. If the carrying amount of its reporting unit exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Once an impairment loss is recognized, future increases in fair value do not result in the reversal of previously recognized losses. Based on an impairment assessment during the year ended December 31, 2010, the Company wrote-off the entire balance of its goodwill through a $3.7 million impairment charge.

Other intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company's intangible assets related to core deposit intangibles were fully amortized in 2009.

Foreclosed Real Estate

Foreclosed real estate is initially recorded at fair value less estimated selling costs, establishing a new cost basis. Fair value of foreclosed real estate is reviewed regularly on a property-by-property basis and writedowns are recorded as a valuation allowance when it is determined that the carrying value of the real estate exceeds the fair value less estimated costs to sell. Subsequent increases in the fair value of foreclosed real estate are recognized through a reduction of the specific valuation allowance to the extent of previous writedowns. Writedowns resulting from the periodic re-evaluation of such properties, costs related to holding such properties and gains and losses on the sale of foreclosed properties are charged to expense. Costs relating to the development and improvement of such property are capitalized.

Accumulated Other Comprehensive Income (Loss)

The Company discloses changes in comprehensive income (loss) in the Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss). Comprehensive income (loss) includes all changes in shareholders' equity during a period except those resulting from transactions with shareholders.

The following table summarizes the components of accumulated other comprehensive loss, net of tax impact, at the dates and for the periods indicated (in thousands).


	For the years ended December 31,
	2011			2010			2009
Net Unrealized Gains on Investment Securities Available for Sale
Balance, beginning of period	$	1,264		$	306		$	(1,621	)
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period		8,882			(64	)		3,211
Income tax benefit (expense)		(3,371	)		24			(1,216	)
Less: Reclassification adjustment for net gains included in net loss		(157	)		1,608			(104	)
Income tax (benefit) expense		60			(610	)		36

		5,414			958			1,927

Balance, end of period		6,678			1,264			306

Net Unrealized Losses on Impact of Defined Benefit Pension Plan
Balance, beginning of period		(7,843	)		(7,266	)		(4,496	)
Other comprehensive loss:
Impact of FASB ASC 715		(1,853	)		(887	)		(4,261	)
Income tax benefit		648			310			1,491

		(1,205	)		(577	)		(2,770	)

Balance, end of period		(9,048	)		(7,843	)		(7,266	)

Accumulated other comprehensive income (loss), net	$	(2,370	)	$	(6,579	)	$	(6,960	)

Total other comprehensive income (loss), end of period	$	4,209		$	381		$	(843	)
Net loss		(23,400	)		(60,202	)		(40,085	)

Comprehensive loss	$	(19,191	)	$	(59,821	)	$	(40,928	)

The Company made contributions to its defined-benefit pension plan totaling $1.6 million during the year ended December 31, 2011, which are reflected as a reduction of the unfunded pension plan liability. Changes in the market value of investment securities available for sale are recorded through accumulated other comprehensive income (loss) on a monthly basis, and changes in the market value of pension plan assets are recorded through accumulated other comprehensive income (loss) annually.

Income Taxes

The Company files consolidated federal and state income tax returns. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The Company accounts for income taxes based on two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions, if any. Deferred income taxes are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax impacts of the differences between the book and tax bases of assets and liabilities and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to the Company's judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties, if any, are recognized as a component of income tax expense.

The Company reviews the deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income available under tax law including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, projections of future operating results, cumulative tax losses over the past three years, tax loss deductibility limitations and available tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance against the deferred tax asset must be established with a corresponding charge to income tax expense. The deferred tax assets and valuation allowance are evaluated each quarter, and a portion of the valuation allowance may be reversed in future periods. The determination of how much of the valuation allowance that may be reversed and the timing is based on future results of operations and the amount and timing of actual loan charge-offs and asset writedowns.

Net Income (Loss) per Common Share

Basic income (loss) per common share is based on net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock that share in the income (loss) of the Company.

Potential common shares are not included in the denominator of the diluted per share computation when inclusion would be anti-dilutive. Accordingly, no potential common shares were included in the computation of the diluted per share amount for the years ended December 31, 2011, 2010 or 2009 due to the net losses incurred for those years.

Teammate Benefit Plan—Defined Benefit Pension Plan

Prior to 2008, the Company offered a noncontributory, defined benefit pension plan that covered all full-time teammates having at least twelve months of continuous service and having attained age 21. The plan was originally designed to produce a designated retirement benefit, and benefits were fully vested after five years of service. No vesting occurred until five years of service had been achieved. In the fourth quarter of 2007, the Company notified teammates that, effective 2008, it would cease accruing pension benefits for teammates with regard to its noncontributory, defined benefit pension plan. Although no previously accrued benefits were lost, teammates no longer accrue benefits for service subsequent to 2007.

The Company's trust department administers the defined benefit pension plan's assets.

The Company accounts for the plan using an actuarial model. This model allocates pension costs over the service period of teammates in the plan. The underlying principle is that teammates render services ratably over this period and, therefore, the income statement impacts of pension benefits should follow a similar pattern.

The funded status of the Company's pension plan is recognized on the Consolidated Balance Sheets. The funded status is the difference between the plan assets and the projected benefit obligation at the balance sheet date. For additional disclosure regarding the defined benefit pension, see Note 15, Benefit Plans.

Equity Based Compensation—Stock Option and Restricted Stock Plans

The Company accounts for teammate stock options as compensation expense in the Consolidated Statements of Income (Loss) based on the fair value of the stock options on the measurement date, which, for the Company, is the date of the grant. Compensation expense is recognized over the vesting period of the related stock options. Fair value of stock options is estimated using an option pricing model that takes into account fair value of the Company's common stock, volatility measures, the level of interest rates, the term of the option and estimated pre-vesting forfeiture rates.

The value of restricted stock awards is established as the fair value of the common stock at the time of the grant. Compensation expense for restricted stock awards is measured at fair value and recognized as compensation expense over the service period. Forfeitures are accounted for by eliminating compensation expense for unvested shares as forfeitures occur. Shares of restricted stock are subject to pro rata restrictions as to continuous employment for a specified time period following the date of grant. In addition, certain shares of restricted stock are also subject to restrictions as to specified performance objectives. During these restriction periods, the holder is entitled to full voting rights and dividends.

Derivative Financial Instruments

The Company recognizes all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting. The Company did not apply hedge accounting to any of its derivative instruments for the years ended December 31, 2011, 2010 or 2009.

The Company originates certain residential loans with the intention of selling these loans. Between the time that it enters into an interest rate lock commitment to originate a residential loan with a potential borrower and the time the closed loan is sold, the Company is subject to variability in market prices related to these commitments. The Company also enters into forward sale agreements of "to be issued" loans. The commitments to originate residential loans and forward sales commitments are freestanding derivative instruments and are recorded on the Consolidated Balance Sheets at fair value. Changes in fair value are recorded within Mortgage-banking income in the Consolidated Statements of Income (Loss).

Fair Valuation Measurements

The Company provides disclosures about the fair value of assets and liabilities recognized in the Consolidated Balance Sheets in periods subsequent to initial recognition including whether the measurements are made on a recurring basis (for example, investment securities available for sale) or on a nonrecurring basis (for example, impaired loans).

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Under the fair value hierarchy, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs are used to measure fair value:

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Level 1 – quoted prices in active markets for identical assets or liabilities,

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Level 2 – observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and

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Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Disclosures about the fair value of all financial instruments whether or not recognized in the Consolidated Balance Sheets for which it is practicable to estimate that value are required. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly impacted by the assumptions used including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. For additional disclosure regarding fair value estimates and methodologies, see Note 20, Disclosures Regarding Fair Value.

Valuation of the Company's Common Stock

On a periodic basis, the Company utilizes the market price of its common stock within various valuations and calculations relating to the defined benefit pension plan assets, trust department assets under management, teammate retirement accounts, granting of awards under its restricted stock plan, the calculation of diluted earnings per share and the valuation of such stock serving as loan collateral.

Prior to August 18, 2011, the Company's common stock was not listed on a national securities exchange or quoted on the OTC Bulletin Board. The Company's common stock was, however, quoted on the Pink Sheets under the symbol PLMT.PK. Although the Company's common stock was quoted on the Pink Sheets, there was only a limited public trading market of the Company's common stock, and private trading also was limited. The Company also maintained the Private Trading System, a passive mechanism hosted on its website that was previously used by buyers and sellers to facilitate trades of the Company's common stock. Accordingly, the Company normally determined the value of its common stock based on the last five trades of the common stock as reported on the Pink Sheets or facilitated by the Company through the Private Trading System.

On August 18, 2011, shares of the Company's common stock began trading on the NASDAQ Capital Market. Concurrent with the listing, the Private Trading System was terminated. The Company now uses the closing price of its common stock as reported on NASDAQ to obtain the value of its common stock as of each valuation date.

Recently Issued Authoritative Pronouncements

In January 2010, the FASB issued ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements ("ASU 2010-06") to increase the transparency in financial reporting of fair value measurements. ASU 2010-06 amended Accounting Standards Codification 820-10 to require new disclosures related to transfers in and out of Levels 1 and 2 and clarified existing disclosures related to the level of disaggregation, as well as disclosures about inputs and valuation techniques. In addition, ASU 2010-06 required new disclosures related to activity in Level 3 measurements. The disclosures required by ASU 2010-06 were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the provisions of ASU 2010-06 on January 1, 2011 and has presented the required disclosures herein.

In July 2010, the FASB issued ASU 2010-20 Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses which expanded disclosures related to allowance for credit losses and the credit quality of financing receivables. The amendments require the allowance and other credit quality disclosures to be provided on a disaggregated basis. The Company adopted the provisions of this amendment as of December 31, 2010 (see Note 1, Summary of Significant Accounting Policies and Note 4, Loans). Disclosures about troubled debt restructurings required by ASU 2010-20 were deferred by the FASB in ASU 2011-01 Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 ("ASU 2011-01") issued in January 2011. The adoption of ASU 2010-20 had no impact on the Company's financial position, results of operations or cash flows.

Disclosures about troubled debt restructurings originally required by ASU 2010-20 were deferred by the FASB in ASU 2011-01 issued in January 2011. In April 2011, the FASB issued ASU 2011-02. ASU 2011-02 amends Topic 310 of the FASB Accounting Standards Codification to clarify when creditors should classify loan modifications as troubled debt restructurings. For public entities, the amendments promulgated by ASU 2011-02 were effective for the first interim or annual period beginning on or after June 15, 2011 and were required to be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, entities applied the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company adopted the provisions of ASU 2011-02 on July 1, 2011 and has presented the required disclosures herein.

In April 2011, the FASB issued ASU 2011-03 Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements ("ASU 2011-03") to amend the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the Accounting Standards Codification. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012. The Company is evaluating the impact that the adoption of ASU 2011-03 will have on its financial position, results of operations and cash flows.

In May 2011, the FASB issued ASU 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04") to amend the Fair Value Measurement topic of the Accounting Standards Codification by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments are effective for the Company beginning January 1, 2012. The Company is evaluating the impact that the adoption of ASU 2011-04 will have on its financial position, results of operations and cash flows.

In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income ("ASU 2011-05"). This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in shareholders' equity and is intended to enhance comparability between entities that report under U.S. GAAP and those that report under International Financial Reporting Standards ("IFRS") and to provide a more consistent method of presenting nonowner transactions that impact an entity's equity. ASU 2011-05 requirements are effective for the Company as of January 1, 2012 and interim and annual periods thereafter. The adoption of ASU 2011-05 is not expected to have an impact on the Company's financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11") which is intended to enhance disclosures resulting in improved information being available to users of financial information about financial instruments and derivative instruments that are subject to offsetting ("netting") in statements of financial position whether the statements are prepared using U.S. GAAP or IFRS. ASU 2011-11 requires disclosure of both gross information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a master netting agreement. In addition to the quantitative disclosures, reporting entities also are required to provide a description of rights of setoff associated with recognized assets and recognized liabilities subject to enforceable master netting arrangements or similar agreements. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The required disclosures should be provided retrospectively for all comparative periods presented. The Company is evaluating the impact that the adoption of ASU 2011-11 will have on its financial position, results of operations and cash flows.

In December 2011, the FASB issued ASU 2011-12 Comprehensive Income(Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12") which deferred the effective date of the requirement under ASU 2011-05 to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. The deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. The FASB has not yet established a timetable for its reconsideration. Entities are still required to present reclassification adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements. The requirement under ASU 2011-05 to present comprehensive income in either a single continuous statement or two consecutive condensed statements remains.

Applicable Authoritative Pronouncements Issued Subsequent to December 31, 2011

No authoritative pronouncements effective for financial reporting periods subsequent to December 31, 2011 have been issued that will have a material impact on the Company's financial position, results of operations or cash flows.