NOTE 11 - STOCK BASED COMPENSATION

The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual Meeting on April 26, 2006. An aggregate of 275,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 44,000 shares for awards to outside directors. Under this plan, the Company granted 7,423 options to employees in 2015, 12,500 options to employees in 2014, and 28,600 options, which included 4,000 options granted to outside directors in 2013. As of December 31, 2015, there were 4,057 shares available for stock option awards to outside directors.

At the Annual Meeting held on April 22, 2014, the Company’s shareholders approved the Norwood Financial Corp 2014 Equity Incentive Plan. 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. The Plan also authorized the Company to award restricted stock to officers and outside directors, limited to 42,000 shares of restricted stock awards for officers and 8,000 shares of restricted stock awards for outside directors. Under this plan, the Company granted 13,727 shares in 2015 which included 7,077 options to employees, 4,250 shares of restricted stock to officers and 2,400 shares of restricted stock to directors. In 2014, the Company granted 9,300 shares, which included 2,800 shares to outside directors. All shares granted in 2014 were for restricted stock. The restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock under the company’s restricted stock plan. Management recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of December 31, 2015, there were 226,973 shares available for future awards under this plan, which includes 192,173 shares available for officer awards and 34,800 shares available for awards to outside directors. Included in these totals are 31,250 shares available for restricted stock awards to officers and 2,800 shares available for restricted stock awards to outside directors.

Total unrecognized compensation cost related to stock options was $71,000 as of December 31, 2015, $66,000 as of December 31, 2014, and $157,000 as of December 31, 2013. Salaries and employee benefits expense includes $66,000, $154,000 and $162,000 of compensation costs related to options for the years ended December 31, 2015, 2014 and 2013, respectively. Compensation costs related to restricted stock amounted to $55,000, $0 and $0 for the years ended December 31, 2015, 2014 and 2013, respectively. The expected future compensation expense relating to non-vested restricted stock outstanding as of December 31, 2015 and 2014 was $398,000 and $271,000 respectively. Net income was reduced by $92,000, $146,000 and $154,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

A summary of the Company’s stock option activity and related information for the years ended December 31 follows:



	2015					2014					2013
		Weighted					Weighted					Weighted
		Average		Average			Average		Average			Average		Aggregate
		Exercise		Intrinsic			Exercise		Intrinsic			Exercise		Intrinsic
	Options	Price		Value		Options	Price		Value		Options	Price		Value

Outstanding, beginning of year	206,463	$	26.74			219,540	$	26.64			225,670	$	26.27
Granted	14,500		28.55			12,500		29.08			28,600		27.07
Exercised	(16,859)		26.19			(25,577)		27.05			(24,127)		23.83
Forfeited	(9,583)		27.02			-		-			(10,603)		28.92

Outstanding, end of year	194,521	$	26.91	$	362,754	206,463	$	26.74	$	477,640	219,540	$	26.64	$	146,970

Exercisable, end of year	180,021	$	26.78	$	359,854	193,963	$	26.59	$	477,640	190,940	$	26.58	$	146,900

Exercise prices for options outstanding as of December 31, 2015 ranged from $24.44 to $29.08 per share. The weighted average remaining contractual life is 5.2 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,
	2015		2014		2013
Dividend yield		3.77%		3.57%		3.49%
Expected life		10 years		10 years		10 years
Expected volatility		24.35%		24.97%		25.91%
Risk-free interest rate		2.28%		2.17%		3.01%
Weighted average fair value of options granted	$	4.89	$	5.30	$	5.72

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 $441,000 in 2015. Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. During 2015, all the shares issued in connection with stock option exercises, 16,859 shares in total, were issued from available treasury shares.

All share and per share data have been adjusted to give retroactive effect to the 10% stock dividend declared in 2013.

As of December 31, 2015, outstanding stock options consist of the following:



		Average				Average
	Options	Exercise		Remaining	Options	Exercise
	Outstanding	Price		Life, Years	Exercisable	Price
	16,174		27.62	0.3	16,174		27.62
	15,400		28.64	1.0	15,400		28.64
	15,400		28.41	2.0	15,400		28.41
	15,400		25.00	3.0	15,400		25.00
	14,397		25.99	4.0	14,397		25.99
	1,100		24.44	4.2	1,100		24.44
	18,700		25.25	5.0	18,700		25.25
	22,200		24.97	6.0	22,000		24.97
	23,100		27.05	7.0	23,100		27.05
	1,100		27.55	7.0	1,100		27.55
	2,000		28.95	7.7	2,000		28.95
	23,250		26.90	8.0	23,250		26.90
	12,000		29.08	9.0	12,000		29.08
	14,500		28.55	10.0	-		-
Total	194,521				180,021

A summary of the Company’s restricted stock activity and related information for the years ended December 31 is as follows:


	2015		2014
		Weighted-Average		Weighted-Average
	Number of	Grant Date	Number of	Grant Date
	Shares	Fair Value	Shares	Fair Value

Non-vested, beginning of year	9,300	$29.08	-	$0.00
Granted	6,650	28.55	9,300	29.08
Vested	(1,860)	29.08	-	-
Forfeited	(280)	29.08	-	-
Non-vested at December 31	13,810	$28.82	9,300	$29.08