NOTE 12. STOCK-BASED COMPENSATION

As of December 31, 2014, 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 503,048 shares remained available for grant at December 31, 2014.

The following tables provide information on stock-based compensation expense for 2014, 2013 and 2012.

(Dollars in thousands)	2014			2013		2012
Stock-based compensation expense	$	87	(1)	$	78	$	209
Excess tax expense related to stock-based compensation		-			26		106

	December 31,
(Dollars in thousands)	2014		2013		2012
Unrecognized stock-based compensation expense	$	59	$	136	$	143
Weighted average period unrecognized expense is expected to be recognized		0.8 years		1.7 years		2.1 years

The following table summarizes restricted stock award activity for the Company under the 2006 Equity Plan for the two years ended December 31, 2014.

	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
		Weighted Average			Weighted Average			Weighted Average
	Number	Grant Date		Number	Grant Date		Number	Grant Date
	of Shares	Fair Value		of Shares	Fair Value		of Shares	Fair Value
Nonvested at beginning of year	13,930	$	8.33	6,548	$	14.89	45,779	$	13.20
Granted (1)	3,654		9.57	13,930		8.33	-		-
Vested	(3,333)		8.93	(6,548)		14.89	(39,231)		12.92
Cancelled	-		-	-		-	-		-

Nonvested at end of year	14,251	$	8.51	13,930	$	8.33	6,548	$	14.89

The total fair value of restricted stock awards that vested was $30 thousand in 2014, $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, 2014.

	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
	Number	Weighted Average		Number	Weighted Average		Number	Weighted Average
	of shares	Exercise Price		of shares	Exercise Price		of shares	Exercise Price
Outstanding at beginning of year	40,662	$	6.64	54,216	$	6.64	-	$	6.64
Granted (1)	-		-	-		-	54,216		-
Exercised	(3,593)		6.64	-		-	-		-
Expired/Cancelled	(9,961)		6.64	(13,554)		6.64	-		-
Outstanding at end of year	27,108	$	6.64	40,662	$	6.64	54,216	$	6.64

Exercisable at end of year	-	$	-	-	$	-	-	$	-

(1)

On January 7, 2015 restricted stock and options were granted to executive officers in the amount of $62 thousand in restricted stock awards and $117 thousand in option awards. The restricted stock and options immediately vested 50% on the grant date of January 7, 2015, in which the amount of $90 thousand was accrued at December 31, 2014 and recorded as an other liability. On January 7, 2015 the liability for the restricted shares and the options was reclassified to additional paid-in-capital. The January 7, 2015 awarded grants are excluded from the tables above because including them would not properly reflect the outstanding shares at December 31, 2014.

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, 2014, the aggregate intrinsic value of the options outstanding under the 2006 Equity Plan was $73 thousand based on the $9.34 market value per share of Shore Bancshares, Inc.’s common stock at December 31, 2014. There were 3,593 shares exercised in 2014 through a cashless exchange of stock options, which required the forfeiture of 9,961 options on October 27, 2014. The intrinsic value on the options exercised in 2014 was $8 thousand based on the $8.99 market value per share of Shore Bancshares Inc.’s common stock at October 27, 2014. Since there were no options exercised during 2013, there was no intrinsic value associated with stock options exercised and no cash received on exercise of options. For 2014 and 2013 the amount of stock options vested totaled 13,554 and 0, respectively. At December 31, 2014, the weighted average remaining contract life of options outstanding was 7.2 years.