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 412,500 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 66,000 shares for awards to outside directors. Under this plan, the Company granted 11,135 options to employees in 2015, 18,750 options to employees in 2014, and 42,900 options, which included 6,000 options granted to outside directors in 2013. No options were granted under this plan in 2017 or 2016. As of December 31, 2017, there were no shares available for future awards under this plan. All share information has been restated to reflect the 50% stock dividend declared in 2017.

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 375,000 shares of authorized but unissued Common Stock of the Company were reserved for future issuance under the Plan. This includes up to 60,000 shares for awards to outside directors. The Plan also authorized the Company to award restricted stock to officers and outside directors, limited to 63,000 shares of restricted stock awards for officers and 12,000 shares of restricted stock awards for outside directors. Under this plan, the Company granted 44,150 shares in 2017 which included 26,750 options to employees, 9,000 shares of restricted stock to officers, 8,000 options to directors and 400 shares of restricted stock to directors. In 2016, the Company granted 36,675 shares which included 24,000 options to employees, 9,000 shares of restricted stock to officers and 3,675 shares of restricted stock to directors. In 2015, the Company granted 20,591 shares which included 10,616 options to employees, 6,375 shares of restricted stock to officers and 3,600 shares of restricted stock to directors. In 2014, the Company granted 13,950 shares, which included 4,200 shares of restricted stock 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, 2017, there were 259,6535 shares available for future awards under this plan, which includes 219,510 shares available for officer awards and 40,125 shares available for awards to outside directors. Included in these totals are 28,875 shares available for restricted stock awards to officers and 125 shares available for restricted stock awards to outside directors. All share information has been restated to reflect the 50% stock dividend declared in 2017.

Total unrecognized compensation cost related to stock options was $237,000 as of December 31, 2017, $93,000 as of December 31, 2016 and $71,000 as of December 31, 2015. Salaries and employee benefits expense includes $93,000, $71,000 and $66,000 of compensation costs related to options for the years ended December 31, 2017, 2016 and 2015, respectively. Compensation costs related to restricted stock amounted to $143,000, $89,000 and $55,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The expected future compensation expense relating to non-vested restricted stock outstanding as of December 31, 2017 and 2016 was $744,000 and $579,000, respectively. Net income was reduced by $187,000, $130,000 and $92,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

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



	2017					2016					2015
		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	225,669	$	19.46			276,807	$	17.94			294,720	$	17.83
Granted	34,750		32.81			24,000		22.37			21,750		19.03
Exercised	(44,219)		23.53			(46,235)		18.23			(25,289)		17.46
Forfeited	(3,475)		21.71			(28,904)		18.57			(14,375)		18.01

Outstanding, end of year	212,725	$	20.76	$	2,604,097	225,669	$	19.46	$	931,963	276,807	$	17.94	$	362,754

Exercisable, end of year	177,975	$	18.41	$	2,597,494	216,644	$	17.59	$	931,963	270,032	$	17.85	$	359,854

Exercise prices for options outstanding as of December 31, 2017 ranged from $16.65 to $32.81 per share. The weighted average remaining contractual life is 6.1 years.

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



	Years Ended December 31,
	2017		2016		2015
Dividend yield		3.89%		3.93%		3.77%
Expected life		10 years		10 years		10 years
Expected volatility		29.11%		24.84%		24.35%
Risk-free interest rate		2.41%		2.44%		2.28%
Weighted average fair value of options granted	$	6.83	$	5.79	$	4.89

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 $1,040,000 in 2017. 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 2017, all the shares issued in connection with stock option exercises, 44,219 shares in total, were issued from available treasury shares. All share information has been adjusted to reflect the 50% stock dividend declared in 2017.

As of December 31, 2017, outstanding stock options consist of the following:



		Average				Average
	Options	Exercise		Remaining	Options	Exercise
	Outstanding	Price		Life, Years	Exercisable	Price
	9,075	$	16.67	1.0	9,075	$	16.67
	17,325		17.33	2.0	17,325		17.33
	15,675		16.83	3.0	15,675		16.83
	20,625		16.65	4.0	20,625		16.65
	29,700		18.03	5.0	29,700		18.03
	1,650		18.36	5.0	1,650		18.36
	3,000		19.30	5.8	3,000		19.30
	26,925		17.93	6.0	26,925		17.93
	14,250		19.39	6.9	14,250		19.39
	16,500		19.03	7.9	16,500		19.03
	23,250		22.37	9.0	23,250		22.37
	34,750		32.81	10.0	-		-

Total	212,725				177,975

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


	2017		2016
		Weighted-Average		Weighted-Average
	Number of	Grant Date	Number of	Grant Date
	Shares	Fair Value	Shares	Fair Value

Non-vested, beginning of year	28,035	$20.64	20,715	$19.21
Granted	9,400	32.81	12,675	22.37
Vested	(7,020)	20.37	(4,680)	19.23
Forfeited	-	-	(675)	19.20
Non-vested at December 31	30,415	$24.46	28,035	$20.64