15.

Equity Based Compensation

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. However, the termination did not impact options previously granted under the 1997 Plan. All outstanding options expire at various dates through December 31, 2016. All stock option awards granted have a five-year vesting term and an exercise period of ten years. The Board determined the terms of the options on the grant date. The option exercise price was at least 100% of the fair value of the Company’s common stock as of the grant date. Options granted to teammates were incentive stock options, while options granted to non-teammates were nonqualified stock options.

The Company estimates the grant date 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, 2010		30,003	$	91.72
Forfeited		—		—

Outstanding at March 31, 2011		30,003		91.72
Forfeited		—		—

Outstanding at June 30, 2011		30,003		91.72
Forfeited		1,800		106.40

Outstanding at September 30, 2011		28,203		90.79
Forfeited		9,500		85.16

Outstanding at December 31, 2011		18,703		93.65
Forfeited		6,000		93.20

Outstanding at March 31, 2012		12,703		93.86
Forfeited		—		—

Outstanding at June 30, 2012		12,703		93.86
Forfeited		750		109.20

Outstanding at September 30, 2012		11,953	$	92.89

The following table summarizes information regarding stock options under the 1997 Plan that are outstanding and exercisable at September 30, 2012.


					Options outstanding and exercisable
Exercise price or range of exercise prices					Number of stock options outstanding and exercisable		Weighted- average remaining contractual life (years)		Weighted- average exercise price
		$	80.00			5,503		0.25	$	80.00
$	93.20		to	$106.40		2,500		1.35		94.52
$	109.20		to	$121.60		3,950		3.30		109.83

				Total		11,953		1.49		92.89

At September 30, 2012 and 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.

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
2012 Grants		(17,613	)		5.11
2012 Forfeitures		350			168.00

Remaining shares available for issuance at September 30, 2012		13,543

Of the 48,957 shares of restricted stock granted under the 2008 Plan, net of forfeitures, vesting conditions relative to 35,620 shares had been met as of September 30, 2012.

During the first quarter 2012, 17,613 shares of restricted stock with a total fair value of $90 thousand were granted to the non-management members of the Board of Directors of the Company as compensation for their annual Board retainers. Prior to 2011, restricted stock granted to directors under the 2008 Plan generally had a five-year vesting period. Beginning in 2011, with the exception of annual retainer grants that vest immediately, restricted stock granted to directors under the 2008 Plan generally had a three-year vesting period designed to coincide with director service terms. Beginning in 2012, restricted stock awards to directors upon initial appointment and reelection to the Board will continue to be granted with vesting periods to coincide with director service terms but have been changed to require a director to purchase shares of the Company’s common stock on the open market to be eligible to receive a matching grant of restricted stock awards. The matching grants at initial appointment and reelection are capped at an economic value of $10 thousand.

Restricted stock awards to teammates under the 2008 Plan are generally subject to a five-year vesting period.

2011 Stock Incentive Plan

The 2011 Stock Incentive Plan (the “2011 Plan”) was approved by shareholders at the 2011 Annual Meeting of Shareholders and 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 the Company’s common stock on the date of grant.

Under the 2011 Plan, the Board, at its discretion, determines the amount of equity awards to be granted, vesting conditions, type of award and any other terms and conditions. No options are 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 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
2012 Grants		(8,020	)		8,020		6.50		—		—

Remaining shares available for issuance at September 30, 2012		18,978

During the nine months ended September 30, 2012, 8,020 shares of restricted stock were awarded to certain teammates in recognition of performance. These awards are subject to both future performance and service conditions and, assuming these conditions are met, will vest from 2015 to 2017. Total future compensation expense of $52 thousand associated with these awards is expected to be recognized through May 2017.

The following table summarizes information regarding stock options under the 2011 Plan that were outstanding at September 30, 2012. No options were exercisable under the 2011 Plan at September 30, 2012.


	Options outstanding
Exercise price	Number of stock options outstanding at September 30, 2012		Weighted- average remaining contractual life (years)		Weighted- average exercise price
$ 10.40		312,501		8.62	$	10.40
$ 11.00		70,750		8.78		11.00

Total		383,251		8.65	$	10.51

At September 30, 2012, 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 Relating to Equity Based Compensation

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 for stock options charged against pretax loss for the 1997 Plan during the three and nine months ended September 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. All compensation expense relative to grants under the 1997 Plan had been recognized as of December 31, 2011. As such, there was no compensation expense relative to grants under the 1997 Plan during the three and nine months ended September 30, 2012.

The following table summarizes compensation expense for the 2008 Plan and the 2011 Plan charged against pretax income (loss) for the periods indicated (in thousands).


	For the three months ended September 30,				For the nine months ended September 30,
	2012		2011		2012		2011
Compensation expense
2008 Plan	$	47	$	71	$	279	$	290
2011 Plan		193		189		573		270

Total compensation expense	$	240	$	260	$	852	$	560


Income tax benefit	$	—	$	—	$	—	$	—

Forfeitures are accounted for by eliminating compensation expense for unvested shares as forfeitures occur. At September 30, 2012, based on equity awards outstanding at that time, the total unrecognized pretax compensation expense related to unvested equity awards granted under the 2008 Plan and 2011 Plan was $406 thousand and $1.9 million, respectively. This expense is expected to be recognized through 2016 under the 2008 Plan and 2017 under the 2011 Plan.