16.

Equity Based Compensation

1997 Stock Compensation Plan

Stock option awards have been granted under the Palmetto Bancshares, Inc. 1997 Stock Compensation Plan. The Plan terminated in 2007 and no options have been granted under the Plan since then. However, the termination did not impact options previously granted under the Plan. All outstanding options expire at various dates through December 31, 2016. Of these, 18,703 stock option awards remained outstanding at December 31, 2011 with exercise prices ranging from $80.00 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 Board determined the terms of the options on the grant date. The option price was at least 100% of fair value of the Company's common stock as of the grant date, and the term of the options was not greater than 10 years. Under the Plan, the Company could grant nonqualified stock options and incentive stock options. Options granted to teammates were considered incentive stock options, while options granted to nonteammates were nonqualified stock options.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The estimated grant-date fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Black-Scholes option-pricing model estimates the fair value of a stock option based on inputs and assumptions such as the expected volatility of the Company's stock price, the level of risk-free interest rates, dividend yields, and expected option term.

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, 2008		42,333		$	83.92
Forfeited		(4,530	)		52.00
Exercised		(1,000	)		106.40

Outstanding at December 31, 2009		36,803			87.22
Forfeited		(6,800	)		69.32

Outstanding at December 31, 2010		30,003			91.72
Forfeited		(11,300	)		88.54

Outstanding at December 31, 2011		18,703			93.65

The following table summarizes information regarding stock options under the 1997 Plan that are outstanding and exercisable at December 31, 2011.


	Options outstanding			Options exercisable
Exercise price or range of exercise prices	Number of stock options outstanding at December 31, 2011	Weighted-average remaining contractual life (years)	Weighted-average exercise price	Number of stock options exercisable at December 31, 2011	Weighted-average exercise price
$80.00	5,503	1.00	$80.00	5,503	$80.00
$93.20 to $106.40	8,500	2.03	93.59	8,500	93.59
$109.20 to $121.60	4,700	4.04	109.73	4,700	109.73

Total	18,703	2.23	93.65	18,703	93.65

At December 31, 2011 and December 31, 2010, 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. The total intrinsic value of stock options exercised during the years ended December 31, 2009 was $62 thousand.

Compensation Expense. The compensation expense for stock options charged against pretax loss during the year ended December 31, 2011 was less than $1 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. The compensation expense that was charged against pretax loss during 2010 for stock options within the 1997 Stock Compensation Plan was $30 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 for 2010. The compensation expense that was charged against pretax net loss during 2009 for stock options was $64 thousand. The total income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense was $6 thousand. 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 December 31, 2011, there was no unrecognized compensation expense related to unvested stock option awards granted under the 1997 Plan. At December 31, 2010, based on options outstanding at that time, the total compensation expense related to unvested stock option awards granted under the 1997 Plan but not yet recognized was slightly less than $1 thousand, before the impact of income taxes. Stock option compensation expense is recognized on a straight-line basis over the vesting period of the option.

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 date fair value
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 December 31, 2011		30,806

Of the 31,694 shares of restricted stock granted under the 2008 Plan, net of forfeitures, vesting conditions relative to 15,090 shares had been met as of December 31, 2011.

During 2011, 10,658 shares of restricted stock with a total value of $106 thousand were granted to the nonmanagement directors of the Company as compensation for their annual Board retainers and upon their reelection to the Board in May 2011. During 2011, 6,875 shares of restricted stock with a total value of $76 thousand were granted to two members of senior management. In the first quarter 2012, 17,613 shares of restricted stock with a total value of $90 thousand were granted to the nonmanagement directors of the Company as compensation for their annual Board retainers.

Shares of restricted stock granted to teammates and directors under the 2008 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 teammates		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 loss during the year ended December 31, 2011 for the 2008 Plan was $360 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. For the year ended December 31, 2010, compensation expense for restricted stock awards was $297 thousand and the income tax benefit with regard to the deductible portion of this compensation expense was $1 thousand for the same period. The compensation expense that was charged against pretax loss during 2009 for restricted stock awards was $253 thousand. The total income tax benefit recognized in the Consolidated Statements of Income (Loss) with regard to the deductible portion of this compensation expense for the same periods was $89 thousand. Forfeitures are accounted for by eliminating compensation expense for unvested shares as forfeitures occur. At December 31, 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 $654 thousand. This expense is expected to be recognized through 2016.

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 500,000 stock options and / or restricted stock awards to teammates and directors. The 2011 Plan requires that stock options be issued with a strike price at or above the fair market value per share of Palmetto Bancshares, Inc. common stock on the date of grant. Stock options granted to participants under the 2011 Plan may be either incentive stock options or nonqualified stock options.

Under the 2011 Plan, the Board, at its discretion, determines the amount of equity awards to be granted, the vesting conditions, type of award and any other terms and conditions. No option will be exercisable more than 10 years after the date of grant. Generally, the recipient will have the right to receive dividends, if any, with respect to any shares of restricted stock granted, 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 date fair value		Stock options outstanding		Weighted- average exercise price
Shares available for issuance under the 2011 Plan		500,000
2011 Grants		473,002		89,751	$	10.48		383,251	$	10.51

Remaining shares available for issuance at December 31, 2011		26,998

During 2011, 89,751 shares of restricted stock with an estimated fair value of $940 thousand and 383,251 stock options with an estimated fair value of $2.0 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.

The following table summarizes information regarding stock options under the 2011 Plan that were outstanding at December 31, 2011. No options were exercisable under the 2011 Plan at December 31, 2011.


	Options outstanding
Exercise price	Number of stock options outstanding at December 31, 2011		Weighted- average remaining contractual life (years)		Weighted- average exercise price
$ 10.40		312,501		9.39	$	9.39
$ 11.00		70,750		9.54		11.00

Total		383,251		9.42		9.69

At December 31, 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.

Determining Fair Value. The following table summarizes fair value of each stock option award granted under the 2011 Plan 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			October 20, 2011 Grant
Option price	$	10.40		$	11.00		$	11.00
Fair value of stock option awards granted	$	5.16		$	5.40		$	3.10
Expected dividend yield		—	%		—	%		—	%
Expected volatility		45			45			45
Risk-free interest rate		2.51			2.22			1.45
Contractual term (years)		10			10			10
Expected term (years)		7			7			7
Vesting period (years)		5			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 loss for the year ended December 31, 2011 for awards under the 2011 Plan was $461 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 December 31, 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 $2.4 million. This expense is expected to be recognized through 2016.