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 six months ended June 30, 2016 and 2015.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2016		2015		2016		2015
Stock-based compensation expense	$	66	$	53	$	177	$	191
Proceeds from issuance of common stock		-		2		3		2

	June 30,
(Dollars in thousands)	2016		2015
Unrecognized stock-based compensation expense	$	179	$	96
Weighted average period unrecognized expense is expected to be recognized		0.8 years		0.6 years

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

June 30, 2016	Number		Weighted Average Grant
	of Shares		Date Fair Value
Nonvested at beginning of period		12,488	$	8.74
Granted		23,239		11.47
Vested		(18,662)		9.63
Cancelled		-		-
Nonvested at end of period		17,065	$	11.46

June 30, 2015	Number		Weighted Average Grant
	of 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	$	8.34

The fair value of restricted stock awards that vested during the first six months of 2016 and 2015 was $180 thousand and $122 thousand, respectively.

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

June 30, 2016			Weighted
	Number		Average
	of Shares		Exercise Price
Outstanding at beginning of period		61,327	$	8.05
Granted		12,443		11.12
Exercised		(450)		6.64
Expired/Cancelled		-		-
Outstanding at end of period		73,320	$	8.58

Exercisable at end of period		69,990	$	8.46

June 30, 2015			Weighted
	Number		Average
	of Shares		Exercise Price
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 second quarter of 2016, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $232 thousand based on the $11.75 market value per share of the Company’s common stock at June 30, 2016. Similarly, the aggregate intrinsic value of the options exercisable was $230 thousand at June 30, 2016. The intrinsic value on options exercised in 2016 was $2 thousand based on the $11.35 market value per share of the Company’s common stock at February 8, 2016. Since there were no options exercised during the first six months of 2015, there was no intrinsic value associated with stock options exercised and no cash received on exercise of options. At June 30, 2016, the weighted average remaining contract life of options outstanding was 5.7 years.