NOTE 11 - STOCK OPTION PLANS

The Company's shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual Meeting on April 26, 2006. An aggregate of 250,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 40,000 shares for awards to outside directors. Under this plan, the Company granted 29,000 options, which included 4,500 options granted to outside directors in 2011, 28,000 options, which included 4,000 options granted to outside directors in 2010, and 24,000 options, which included 4,000 options granted to outside directors in 2009.

Total unrecognized compensation cost related to nonvested options under the Plan was $130,000 as of December 31, 2011, $165,000 as of December 31, 2010 and $158,000 as of December 31, 2009. Salaries and employee benefits expense includes $170,000, $163,000 and $134,000 of compensation costs related to options for the years ended December 31, 2011, 2010 and 2009, respectively. Net income was reduced by $163,000, $153,000 and $127,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

A summary of the Company's stock option activity and related information for the years ended December

31 follows:

				2011							2010							2009
				Weighted							Weighted							Weighted
				Average							Average							Average
				Exercise		Intrinsic					Exercise		Intrinsic					Exercise		Intrinsic
	Options			Price		Value		Options			Price		Value		Options			Price		Value

Outstanding, beginning of year		189,639		$	28.52				170,915		$	28.07				176,443		$	25.78
Granted		29,000			27.43				28,000			27.74				27,000			28.60
Exercised		(2,575	)		19.69				(9,276	)		17.68				(32,528	)		15.83
Forfeited		(6,150	)		30.25				—			—				—			—

Outstanding, end of year		209,914		$	28.43	$	113,352		189,639			28.52	$	146,361	$	170,915			28.07	$	286,464

Exercisable, end of year		180,914		$	28.59	$	112,152		161,639			28.66		145,471		146,915		$	27.98	$	259,461

Exercise prices for options outstanding as of December 31, 2011 ranged from $19.05 to $31.50 per share. The weighted average remaining contractual life is 6.3 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing with the following weighted average assumptions:

	Years Ended December 31,
	2011			2010			2009
Dividend yield		3.30	%		3.04	%		2.89	%
Expected life	7 years			7 years			7 years
Expected volatility		25.35	%		27.18	%		27.39	%
Risk-free interest rate		1.39	%		2.72	%		3.11	%
Weighted average fair value of options granted	$	4.70		$	6.12		$	6.77

The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company's history and expectation of dividend payouts.

Proceeds from stock option exercises totaled $51,000 in 2011. Shares issued in connection with stock options exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. During 2011, all the shares issued in connection with stock option exercises, 2,575 shares in total, were issued from available treasury shares.

As of December 31, 2011, outstanding stock options consist of the following:

	Options Outstanding		Average Exercise Price		Remaining Life, Years		Options Exercisable		Average Exercise Price

		6,298	$	19.05		1.0		6,298	$	19.05
		16,616		23.95		2.0		16,616		23.95
		18,900		30.00		3.0		18,900		30.00
		23,100		30.38		4.3		23,100		30.38
		21,000		31.50		5.0		21,000		31.50
		21,000		31.25		6.0		21,000		31.25
		23,000		27.50		7.0		23,000		27.50
		1,000		28.90		7.3		1,000		28.90
		22,500		28.59		8.0		22,500		28.59
		1,000		26.88		8.2		1,000		26.88
		26,500		27.77		9.0		26,500		27.77
		1,000		26.27		9.5		—		—
		28,000		27.47		10.0		—		—
Total		209,914	$	28.43		6.3		180,914	$	28.59