Note 10 - 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 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 636,465 shares remained available for grant at September 30, 2019.

The following tables provide information on stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018.


	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Stock-based compensation expense	$	61	$	168	$	92	$	474
Excess tax benefits related to stock-based compensation		2		11		5		146


	As of
	September 30,
(Dollars in thousands)	2019			2018
Unrecognized stock-based compensation expense	$	90		$	530
Weighted average period unrecognized expense is expected to be recognized		0.5	years		0.8	years

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2019 and 2018.


	Nine Months Ended September 30, 2019
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Nonvested at beginning of period	—	$	—
Granted	15,702		15.36
Vested	—		—
Cancelled	—		—
Nonvested at end of period	15,702	$	15.36

The fair value of restricted stock awards that vested during the first nine months of 2019 and 2018 was $0 and $520 thousand, respectively.

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

In the second quarter of 2019, the Long-Term Incentive Plan culminating December 31, 2020 was terminated by the Board’s Compensation Committee and all outstanding RSUs were forfeited as presented in the table below. To replace this compensation incentive plan, the Compensation Committee elected to institute individual Supplemental Executive Retirement Plans (“SERPs”) which will be executed in the beginning of 2020, with the exception of three SERPs which began on July 19, 2019 for Lloyd L. Beatty, Jr., President and Chief Executive Officer, Edward C. Allen, Executive Vice President and Chief Financial Officer and Donna J. Stevens, Executive Vice President and Chief Operating Officer. These individuals also forfeited their RSUs in the LTI culminating December 31, 2019.

During 2017, the Company entered into a long-term incentive plan agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019. Assuming the performance metric is achieved, these awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 6,178 shares and 24,726 shares, assuming a certain performance metric is met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

During 2016, the Company entered into a long-term incentive plan agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2018. Based on the results for the year ended December 31, 2018, 15,577 shares were vested.

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 Equity Plan for the nine months ended September 30, 2019.


	Nine Months Ended September 30, 2019
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Outstanding at beginning of period	38,562	$	14.69
Granted	—		—
Vested	(15,577)		11.68
Forfeited	(16,807)		16.78
Outstanding at end of period	6,178	$	16.57

The fair value of restricted stock units that vested during the first nine months of 2019 and 2018 was $241 thousand and $383 thousand.

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2019 and 2018.


	Nine Months Ended September 30, 2019
		Weighted Average
	Number of	Grant Date
	Shares	Exercise Price
Outstanding at beginning of period	27,249	$	9.68
Granted	—		—
Exercised	(15,578)		10.01
Expired/Cancelled	—		—
Outstanding at end of period	11,671	$	9.25

Exercisable at end of period	11,671	$	9.25

There were no stock options granted during the three and nine months ended September 30, 2019 and September 30, 2018. 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.

At the end of the third quarter of 2019, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $72 thousand based on the $15.41 market value per share of the Company’s common stock at September 30, 2019. Similarly, the aggregate intrinsic value of the options exercisable was $72 thousand at September 30, 2019. The intrinsic value on options exercised during the nine months ended September 30, 2019 was $72 thousand based on the $14.66 market value per share of the Company’s common stock at January 15, 2019. The intrinsic value on options exercised in 2018 was $365 thousand based on the $17.92 market value per share of the Company’s common stock at January 31, 2018. At September 30, 2019, the weighted average remaining contract life of options outstanding and exercisable was 5.0 years.