Stock Based Compensation

12 Months Ended

Dec. 31, 2020

NOTE 12 - STOCK BASED COMPENSATION

At the Annual Meeting held on April 22, 2014, the Company’s stockholders 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. At the Annual Meeting held on April 24, 2018, the Company’s stockholders approved an amendment to the 2014 Equity Incentive Plan to ease certain restrictions on restricted stock awards to outside directors. As a result of this amendment, the number of shares available for restricted stock awards to officers was reduced by 300 shares to 62,700, while the number of shares available for restricted stock awards to outside directors was increased by 20,300 to 32,300 shares. Under this plan, the Company granted 245,465 shares which included 148,365 options to employees, 10,400 options to directors, 56,625 shares of restricted stock to officers and 30,075 shares of restricted stock to directors. The restricted shares vest over five years. 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, 2020, there were 129,535 shares available for future awards under this plan, which includes 110,010 shares available for officer awards and 19,525 shares available for awards to outside directors. Included in these totals are 6,075 shares available for restricted stock awards to officers and 2,225 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 $214,000 as of December 31, 2020 and $203,000 as of December 31, 2019. Salaries and employee benefits expense includes $204,000 and $208,000 of compensation costs related to options for the years ended December 31, 2020 and 2019, respectively. Compensation costs related to restricted stock amounted to $334,000 and $289,000 for the years ended December 31, 2020 and 2019, respectively. The expected future compensation expense relating to non-vested restricted stock outstanding as of December 31, 2020 and 2019 was $1,202,000 and $1,146,000, respectively.

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



	2020					2019
		Weighted					Weighted
		Average		Average			Average		Average
		Exercise		Intrinsic			Exercise		Intrinsic
	Options	Price		Value		Options	Price		Value
Outstanding, beginning of year	199,825	$	24.78			208,700	$	22.54
Granted	33,750		26.93			26,750		36.02
Exercised	(15,530)		17.25			(32,350)		19.71
Forfeited	(2,075)		16.83			(3,275)		24.31

Outstanding, end of year	215,970	$	25.73	$	742,738	199,825	$	24.78	$	2,822,470

Exercisable, end of year	182,220	$	25.51	$	742,738	173,075	$	23.04	$	2,745,430

Exercise prices for options outstanding as of December 31, 2020 ranged from $16.65 to $36.02 per share. The weighted average remaining contractual life is 6.0 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,
	2020		2019
Dividend yield		3.55%		3.59%
Expected life		10 years		10 years
Expected volatility		34.15%		29.08%
Risk-free interest rate		0.91%		1.92%
Weighted average fair value of options granted	$	6.34	$	7.61

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 $268,000 in 2020. Shares issued in connection with stock option exercises are issued from available treasury shares or from available authorized shares. During 2020, for the shares issued in connection with stock option exercises, 15,530 shares in total, all shares were issued from available authorized shares.

As of December 31, 2020, outstanding stock options consist of the following:



		Average				Average
	Options	Exercise		Remaining	Options	Exercise
	Outstanding	Price		Life, Years	Exercisable	Price
	18,000	$	16.65	1.0	18,000	$	16.65
	23,100		18.03	2.0	23,100		18.03
	1,650		18.36	2.0	1,650		18.36
	3,000		19.30	2.8	3,000		19.30
	20,125		17.93	3.0	20,125		17.93
	8,250		19.39	3.9	8,250		19.39
	9,375		19.03	4.9	9,375		19.03
	16,120		22.37	6.0	16,120		22.37
	29,500		32.81	7.0	29,500		32.81
	26,350		32.34	8.0	26,350		32.34
	26,750		36.02	9.0	26,750		36.02
	33,750		26.93	10.0	—		—

Total	215,970				182,220

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


	2020		2019
		Weighted-Average		Weighted-Average
	Number of	Grant Date	Number of	Grant Date
	Shares	Fair Value	Shares	Fair Value
Non-vested, beginning of year	36,195	31.65	34,615	27.82
Granted	14,500	26.93	13,100	36.02
Vested	(11,560)	32.89	(11,520)	25.12
Forfeited	—	—	—	—
Non-vested at December 31	39,135	30.72	36,195	31.65