14.

Equity Based Compensation

Effective June 28, 2011, the Company completed a one-for-four reverse split of its common stock. All share and per share amounts in this note have been restated to give effect to the reverse stock split.

1997 Stock Compensation Plan

Stock option awards have been granted under the Palmetto Bancshares, Inc. 1997 Stock Compensation Plan (the "1997 Plan"). The 1997 Plan terminated in 2007 and no options have been granted under the 1997 Plan since then. The termination did not impact options previously granted under the 1997 Plan. All outstanding options expire at various dates through December 31, 2016. Of these, 30,003 stock option awards remained outstanding at June 30, 2011 with exercise prices ranging from $60.00 to $121.60 per share. All stock option awards granted have a vesting term of five years and an exercise period of ten years. The following table summarizes stock option activity for the 1997 Plan for the periods indicated.


	Stock options outstanding			Weighted- average exercise price
Outstanding at December 31, 2009		36,803		$	87.22
Forfeited		(3,600	)		60.00

Outstanding at June 30, 2010		33,203		$	90.17


Outstanding at December 31, 2010		30,003		$	91.72
Forfeited		—			—

Outstanding at June 30, 2011		30,003		$	91.72

The following table summarizes information regarding stock options outstanding and exercisable at June 30, 2011.


Exercise price or range of exercise prices					Number of stock options outstanding at 6/30/11		Options outstanding Weighted- average remaining contractual life (years)		Weighted-average exercise price		Options exercisable
Exercise price or range of exercise prices					Number of stock options outstanding at 6/30/11				Weighted-average exercise price		Number of stock options exercisable at 6/30/11		Weighted-average exercise price
$	60.00	to	$	80.00		10,003		1.06	$	71.00		10,003	$	71.00
$	93.20	to	$	106.40		12,800		2.87		97.89		12,800		97.89
$	109.20	to	$	121.60		7,200		4.54		109.54		7,160		109.48

	Total					30,003		2.66		91.72		29,963		91.68

At June 30, 2011, the fair value of the Company's common stock did not exceed the exercise price of any options outstanding and exercisable, and therefore the stock options had no intrinsic value.

Compensation Expense. The compensation expense for stock options charged against pretax income (loss) during the three and six months ended June 30, 2011 was less than $1 thousand for both periods. There was no income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense. The compensation expense that was charged against pretax income during the same periods of 2010 for stock options was $8 thousand and $15 thousand, respectively. There was no income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense for the three months ended June 30, 2010 and $1 thousand for the six months then ended. Estimates of forfeitures are made at the time of grant and were not expected to be significant; therefore, compensation expense is being recognized for all equity based awards.

At June 30, 2011 and December 31, 2010, based on options outstanding at that time, the total compensation expense related to unvested stock option awards granted under the Company's stock option plan but not yet recognized was less than $1 thousand and $1 thousand, respectively, before the impact of income taxes. Stock option compensation expense is recognized on a straight-line basis over the vesting period of the option. This remaining compensation expense related to unvested stock option awards is expected to be fully recognized during 2011.

2008 Restricted Stock Plan

Under the 2008 Restricted Stock Plan (the "2008 Plan"), 62,500 shares of common stock have been reserved for issuance subject to its anti-dilution provisions. Forfeitures are returned to the available pool of common stock for future issuance. Generally, the recipient will have the right to receive dividends, if any, with respect to such shares of restricted stock, to vote such shares and to enjoy all other shareholder rights, except that the Company will retain custody of the stock certificate and the recipient may not sell, transfer, pledge or otherwise dispose of the restricted stock until the forfeiture restrictions have expired. The following table summarizes restricted stock activity at the date and for the periods indicated.


	Shares of restricted stock			Weighted- average grant price
Shares available for issuance under the 2008 Restricted Stock Plan		62,500
2009 Grants		(13,761	)	$	142.50
2009 Forfeitures		2,500			168.00
2010 Grants		(4,625	)		10.40
2010 Forfeitures		700			168.00
2011 Grants		(17,033	)		10.40
2011 Forfeitures		525			168.00

Remaining shares available for issuance at June 30, 2011		30,806

Of the net 31,694 shares of restricted stock granted under the 2008 Plan, vesting conditions relative to 12,262 shares had been met by June 30, 2011.

During the first quarter of 2011, 8,658 shares of restricted stock with a total value of $90 thousand were granted to the nine non-management directors of the Company as compensation for their annual Board retainers. During the second quarter of 2011, 8,375 shares of restricted stock with a total value of $87 thousand were granted to three non-management directors upon their re-election to the Board in May 2011 and two members of senior management.

Shares of restricted stock granted to employees and directors under the Plan are subject to vesting provisions based on continuous employment and service for a specified time period following the date of grant as follows:


		Vesting Period
Issued to directors in connection with annual retainer		Immediate
Issued to directors in connection with election to the Board		Length of Board term (currently 3 years)
Issued to employees		5 years

During this period, the holder is entitled to full voting rights and dividends as described above.

Compensation Expense. The value of the restricted stock awarded is established as the fair value of the stock at the time of the grant. The Company measures compensation expense for restricted stock awards at fair value and recognizes compensation expense over the service period for grants that have time / service-based vesting provisions. The compensation expense that was charged against pretax income (loss) during the three and six months ended June 30, 2011 for the 2008 Plan was $148 thousand and $220 thousand, respectively. There was no income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense. For the three and six months ended June 30, 2010, compensation expense for restricted stock awards was $85 thousand and $170 thousand, respectively and the income tax benefit with regard to the deductible portion of this compensation expense was $30 thousand and $60 thousand for the same periods. Forfeitures are accounted for by eliminating compensation expense for unvested shares as forfeitures occur. At June 30, 2011, based on restricted stock awards outstanding at that time, the total pretax compensation expense related to unvested restricted stock awards granted under the 2008 Plan but not yet recognized was $793 thousand. This expense is expected to be recognized through 2016.

Palmetto Bancshares, Inc. 2011 Stock Incentive Plan

At the May 19, 2011 Annual Meeting of Shareholders, , the Company's shareholders approved the Palmetto Bancshares, Inc. 2011 Stock Incentive Plan (the "2011 Plan") to further support the alignment of management and shareholder interests. The 2011 Plan allows the Board to grant a total of 500 thousand stock options and / or restricted stock awards to employees and directors. The 2011 Plan requires that stock options be issued at or above the fair market value per share on the date of grant. Stock options granted to participants under the 2011 Plan may be either incentive stock options or nonqualified options. The Board at its discretion determines the number of option shares, the term of the option, the exercise price (subject to the minimum price described above), the vesting schedule and performance conditions (if any), and any other terms and conditions. No option will be exercisable more than 10 years after the date of grant.

Under the 2011 Plan, the Board, at its discretion, determines the amount of equity awards granted, the vesting conditions, type of award and any other terms and conditions. Generally, the recipient will have the right to receive dividends, if any, with respect to such shares of restricted stock, to vote such shares and to enjoy all other shareholder rights, except that the Company will retain custody of the stock certificate and the recipient may not sell, transfer, pledge or otherwise dispose of the restricted stock until the forfeiture restrictions have expired. Forfeitures of restricted stock are returned to the available pool of common stock for future issuance. The following table summarizes the 2011 Plan stock option and restricted stock activity at the date and for the periods indicated.


	Total shares		Shares of restricted stock		Weighted-average grant price		Stock options outstanding		Weighted-average exercise price
Shares available for issuance under the 2011 Plan		500,000
2011 Grants		457,752		89,751	$	10.48		368,001	$	10.49

Remaining shares available for issuance at June 30, 2011		42,248

During the second quarter of 2011, 89,751 shares of restricted stock with an estimated fair value of $940 thousand and 368,001 stock options with an estimated fair value of $1.9 million were granted to certain members of senior management. Both the restricted shares and stock options are subject to time and performance based restrictions. The time based restrictions require continuous employment over a five-year period and the performance based restrictions require removal of the Consent Order and two consecutive quarters of net income. Assuming the time and performance based restrictions are satisfied, the awards vest ratably in years three, four and five. If the performance restrictions are not met, all of the awards are forfeited. Details related to the 2011 Plan are available in the Company's 2011 definitive proxy statement filed with the SEC on April 14, 2011.

Determining Fair Value. The following table summarizes fair value of each stock option award granted as estimated on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions used for the determination of fair value of such grants.


	May 16, 2011 Grants			June 16, 2011 Grants
Option price	$	10.40		$	11.00
Fair value of stock option awards granted	$	5.16		$	5.40
Expected dividend yields		—	%		—	%
Expected volatility		45			45
Risk-free interest rate		2.51			2.22
Contractual term (years)		10			10
Expected term (years)		7			7
Vesting period (years)		5			5

Compensation Expense. The Company measures compensation expense for restricted stock and stock option awards at fair value and recognizes compensation expense over the service period for grants that have time / service-based vesting provisions. The compensation expense that was charged against pretax income for the three months ended June 30, 2011 for restricted stock awards under the 2011 Plan was $81 thousand. There was no income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense. Compensation expense is adjusted to reflect awards forfeited prior to vesting. At June 30, 2011, based on awards outstanding at that time, the total pretax compensation expense related to unvested equity awards granted under the 2011 Plan but not yet recognized was $2.8 million. This expense is expected to be recognized through 2016.