NOTE 12. STOCK-BASED COMPENSATION

As of December 31, 2015, the Company maintained the Shore Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (“2006 Equity Plan”) under which it may issue shares of common stock or grant other equity-based awards. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date over a three- to five-year period of time, and, in the case of stock options, expire 7 years from the grant date. On July 1, 2015, the Company's board of directors (the "Board") also adopted a form of performance share/restricted stock unit award agreement that will be used to grant performance equity incentive awards pursuant to and subject to the provisions of the 2006 Equity Plan. 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 456,182 shares remained available for grant at December 31, 2015.

The following tables provide information on stock-based compensation expense for 2015, 2014, and 2013.

(Dollars in thousands)	2015		2014		2013
Stock-based compensation expense	$	283	$	87	$	78
Excess tax expense related to stock-based compensation		3		-		26

	December 31,
(Dollars in thousands)	2015		2014		2013
Unrecognized stock-based compensation expense	$	14	$	59	$	136
Weighted average period unrecognized expense is expected to be recognized		0.3 years		0.8 years		1.7 years

The following table summarizes restricted stock award activity for the Company under the 2006 Equity Plan for the three years ended December 31, 2015.

	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
	Number		Weighted Average Grant Date		Number		Weighted Average Grant Date		Number		Weighted Average Grant Date
	of Shares		Fair Value		of Shares		Fair Value		of Shares		Fair Value
Nonvested at beginning of year		14,251	$	8.51		13,930	$	8.33		6,548	$	14.89
Granted		12,647		9.21		3,654		9.57		13,930		8.33
Vested		(14,410)		8.93		(3,333)		8.93		(6,548)		14.89
Cancelled		-		-		-		-		-		-

Nonvested at end of year		12,488	$	8.74		14,251	$	8.51		13,930	$	8.33

The total fair value of restricted stock awards that vested was $129 thousand in 2015, $30 thousand in 2014, and $36 thousand in 2013.

The following table summarizes stock option activity for the Company under the 2006 Equity Plan for the three years ended December 31, 2015.

	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
	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		27,108	$	6.64		40,662	$	6.64		54,216	$	6.64
Granted		34,219		9.18		-		-		-		-
Exercised		-		-		(3,593)		6.64		-		-
Expired/Cancelled		-		-		(9,961)		6.64		(13,554)		6.64
Outstanding at end of year		61,327	$	8.05		27,108	$	6.64		40,662	$	6.64

Exercisable at end of year		44,218	$	7.62		-	$	-		-	$	-

The weighted average fair value of stock options granted during 2015 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 2015.

Dividend yield	0	%
Expected volatility	32	%
Risk-free interest rate	1.97	%
Expected contract life (in years)	7

At December 31, 2015, the aggregate intrinsic value of the options outstanding under the 2006 Equity Plan was $173 thousand based on the $10.88 market value per share of Shore Bancshares, Inc.’s common stock at December 31, 2015. Since there were no options exercised during 2015, there was no intrinsic value associated with stock options exercised and no cash received on exercise of options. For 2015 and 2014 the amount of stock options vested totaled 44,218 and 13,554, respectively. At December 31, 2015, the weighted average remaining contract life of options outstanding was 6.3 years.