NOTE 12. STOCK-BASED COMPENSATION

As of December 31, 2013, the Company maintained the Shore Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (“2006 Equity Plan”) under which Shore Bancshares, Inc. may issue shares of its common stock or grant other equity-based awards. Under the 2006 Equity Plan, stock-based awards may be granted periodically to the Company’s directors, executive officers, and key employees at the discretion of the Compensation Committee of the Board of Shore Bancshares, Inc. Stock-based awards granted to date under the 2006 Equity Plan are generally time-based, vesting on each anniversary of the grant date over a three- to five-year period of time and, in the case of stock options, expiring 10 years from the grant date. Stock-based compensation expense is recognized ratably over the requisite service period for all awards, is based on the grant date fair value and reflects forfeitures as they occur. The 2006 Equity Plan originally reserved 631,972 shares of common stock for grant, and 506,702 shares remained available for grant at December 31, 2013.

The following tables provide information on stock-based compensation expense for 2013, 2012 and 2011.

(Dollars in thousands)	2013		2012		2011
Stock-based compensation expense	$	78	$	209	$	338
Excess tax expense related to stock-based compensation		26		106		45

		December 31,
(Dollars in thousands)	2013		2012		2011
Unrecognized stock-based compensation expense	$	136	$	143	$	167
Weighted average period unrecognized expense is expected to be recognized		1.7 years		2.1 years		8.5 months

The following table summarizes restricted stock award activity for the Company under the 2006 Equity Plan for the two years ended December 31, 2013.

	Year Ended December 31, 2013			Year Ended December 31, 2012
		Weighted Average			Weighted Average
	Number	Grant Date		Number	Grant Date
	of Shares	Fair Value		of Shares	Fair Value
Nonvested at beginning of year	6,548	$	14.89	45,779	$	13.20
Granted	13,930		8.33	-		-
Vested	(6,548)		14.89	(39,231)		12.92
Cancelled	-		-	-		-

Nonvested at end of year	13,930	$	8.33	6,548	$	14.89

The total fair value of restricted stock awards that vested was $36 thousand in 2013 and $245 thousand in 2012.

The following table summarizes stock option activity for the Company under the 2006 Equity Plan for the two years ended December 31, 2013.

	Year Ended December 31, 2013			Year Ended December 31, 2012
	Number	Weighted Average		Number	Weighted Average
	of shares	Exercise Price		of shares	Exercise Price
Outstanding at beginning of year	54,216	$	6.64	-	$	-
Granted	-		-	54,216		6.64
Exercised	-		-	-		-
Expired/Cancelled	(13,554)		6.64	-		-
Outstanding at end of year	40,662	$	6.64	54,216	$	6.64

Exercisable at end of year	-	$	-	-	$	-

The weighted average fair value of stock options granted during 2012 was $3.44. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2012.

Dividend yield	0.60	%
Expected volatility	58.65	%
Risk-free interest rate	1.69	%
Expected contract life (in years)	5.83

At December 31, 2013, the aggregate intrinsic value of the options outstanding under the 2006 Equity Plan was $105 thousand based on the $9.22 market value per share of Shore Bancshares, Inc.’s common stock at December 31, 2013. Since there were no options exercised during 2013 or 2012, there was no intrinsic value associated with stock options exercised and no cash received on exercise of options. No stock options vested in 2013 or 2012. At December 31, 2013, the weighted average remaining contract life of options outstanding was 8.2 years.