Note 7 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur.

The following tables provide information on stock-based compensation expense for the three and nine months ended September 30, 2016 and 2015.


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2016		2015		2016		2015
Stock-based compensation expense	$	85	$	41	$	262	$	232
Proceeds from issuance of common stock		50		3		53		3


	September 30,
(Dollars in thousands)	2016			2015
Unrecognized stock-based compensation
expense	$	132		$	55
Weighted average period unrecognized
expense is expected to be recognized		0.6	years		0.4	years

The following table summarizes restricted stock award activity for the Company under the 2006 Equity Plan and the 2016 Equity Plan for the nine months ended September 30, 2016 and 2015.


	Number of	Weighted Average Grant
September 30, 2016	Shares	Date Fair Value
Nonvested at beginning of period	12,488	$	8.74
Granted	25,315		11.48
Vested	(20,738)		9.83
Cancelled	-		-
Nonvested at end of period	17,065	$	11.46


	Number of	Weighted Average Grant
September 30, 2015	Shares	Date Fair Value
Nonvested at beginning of period	14,251	$	8.33
Granted	11,915		9.19
Vested	(13,678)		8.90
Cancelled	-		-
Nonvested at end of period	12,488	$	8.74

The fair value of restricted stock awards that vested during the first nine months of 2016 and 2015 was $204 thousand and $122 thousand, respectively.

The following table summarizes stock option activity for the Company under the 2006 Equity Plan and the 2016 Equity Plan for the nine months ended September 30, 2016 and 2015.


	Number of	Weighted Average Grant
September 30, 2016	Shares	Date Fair Value
Outstanding at beginning of period	61,327	$	8.05
Granted	12,443		11.12
Exercised	(11,684)		6.64
Expired/Cancelled	-		-
Outstanding at end of period	62,086	$	8.29

Exercisable at end of period	58,756	$	8.14


	Number of	Weighted Average Grant
September 30, 2015	Shares	Date Fair Value
Outstanding at beginning of period	27,108	$	6.64
Granted	34,219		9.18
Exercised	-		-
Expired/Cancelled	-		-
Outstanding at end of period	61,327	$	8.05

Exercisable at end of period	27,108	$	6.64

The weighted average fair value of stock options granted during 2016 was $5.03. 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 2016 and 2015.


	2016		2015
Dividend yield	0.73	%	0	%
Expected volatility	38.60	%	32	%
Risk-free interest rate	1.75	%	1.97	%
Expected contract life (in years)	10 years		7 years

At the end of the third quarter of 2016, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $253 thousand based on the $11.78 market value per share of the Company’s common stock at September 30, 2016. Similarly, the aggregate intrinsic value of the options exercisable was $232 thousand at September 30, 2016. The intrinsic value on options exercised in 2016 was $21 thousand based on the $11.35 and $11.88 market value per share of the Company’s common stock at February 8, 2016 and July 28, 2016. Since there were no options exercised during the first nine months of 2015, there was no intrinsic value associated with stock options exercised and no cash received on exercise of options. At September 30, 2016, the weighted average remaining contract life of options outstanding was 5.1 years.