NORWOOD FINANCIAL CORP - FORM 8-K/A - EX-99.4 - EXHIBIT 99.4 - UNAUDITED PRO FOMA CONDENSED CONSOLIDASTED FINANCIAL STATEMENTS

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8-K/A - FORM 8-K/A 5-31-11 NORWOOD FINANCIAL CORP. - NORWOOD FINANCIAL CORP	f8ka_053111-0160.htm
EX-23 - EXHIBIT 23.1 - CONSENT OF J. H. WILLIAMS & CO., LLP - NORWOOD FINANCIAL CORP	ex23-1.htm

PRO FORMA DATA

The accompanying unaudited pro forma condensed combined financial statements present the pro forma combined financial position and results of operations of the combined company based upon the historical statements of Norwood Financial Corporation (“Norwood”) and North Penn Bancorp, Inc. (“North Penn”), after giving effect to the merger and adjustments described in the accompanying footnotes. The acquisition by Norwood of North Penn has been accounted for under the acquisition method of accounting under U.S. Generally Accepted Accounting Principles (“GAAP”). Under this method, North Penn’s assets and liabilities as of the date of the acquisition have been recorded at their respective fair values and added to those of Norwood. Any differences between the purchase price for North Penn and the fair value of the identifiable net assets acquired have been recorded as goodwill. The goodwill resulting from the acquisition will not be amortized to expense, but instead will be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to earnings. Core deposit and other intangibles with definite useful lives recorded by Norwood in connection with the acquisition will be amortized to expense over their estimated useful lives. The financial statements of Norwood issued after the acquisition will reflect the results attributable to the acquired operations of North Penn since May 31, 2011, the date of completion of the acquisition. The merger has been effected by the issuance of shares of Norwood common stock and cash to North Penn shareholders.

The unaudited pro forma combined financial information provides each share of North Penn common stock was exchanged for either 0.6829 shares of Norwood common stock or $19.12 in cash. All shareholder elections were subject to allocation and proration procedures set forth in the merger agreement which are intended to ensure that, in the aggregate, the total cash consideration (for common shares, options and unallocated shares held by the ESOP) will be $12,194,000. The shares of Norwood common stock issued illustrated in this pro forma were assumed to be recorded at $27.76 per share, the closing sale price of Norwood common stock on May 31, 2011. Former North Penn security holders own approximately 16.1% of the voting stock of the combined company after the merger.

The following unaudited pro forma combined consolidated balance sheet as of March 31, 2011 and unaudited pro forma combined consolidated statements of operations for the three months ended March 31, 2011 and the year ended December 31, 2010 combine the historical financial statements of Norwood and North Penn. The unaudited pro forma financial statements give effect to the merger as if it occurred on March 31, 2011 with respect to the balance sheet, and on January 1, 2011 and January 1, 2010 with respect to the statements of operations for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively. The unaudited pro forma financial statements were prepared with Norwood treated as the acquirer and North Penn as the acquiree under the acquisition method of accounting. Accordingly, the consideration paid by Norwood to complete the merger will be allocated to North Penn’s assets and liabilities based upon their fair values as of the date of completion of the merger. The recorded fair value adjustments made to the acquired assets and liabilities of North Penn are considered preliminary at this time and are subject to change as Norwood finalizes its fair value determinations. There can be no assurance that the final determination will not result in material changes from the amounts presented in these pro forma financial statements. The pro forma calculations, shown below, include a closing share price of $27.76, which represents the closing price of Norwood’s common stock on May 31, 2011.

Certain reclassification adjustments to pro forma financial statements were made to the pro forma financial statements to conform to Norwood’s financial statement presentation.

Norwood anticipates that the merger with North Penn will provide the combined company with financial benefits that include reduced operating expenses. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods.

The unaudited pro forma combined consolidated financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of Norwood and North Penn which are incorporated in this document by reference.

The unaudited pro forma stockholders’ equity and net income are qualified by the statements set forth under this caption and should not be considered indicative of the market value of Norwood common stock or the actual or future results of operations of Norwood for any period. Actual results may be materially different than the pro forma information presented.

Unaudited Condensed Pro Forma Balance Sheet as of March 31, 2011

($ In Thousands, Except Per Share Data)

	Norwood			North Penn			Pro Forma				Pro Forma
	Financial Corp.			Bancorp, Inc.			Adjustments				Combined
Assets
Cash and due from banks	$	5,670		$	1,931		$	--			$	7,601
Interest bearing deposits with other banks		13,864			233			--				14,097
Federal funds sold		--			18,221			--				18,221
Cash and cash equivalents		19,534			20,385			--				39,919

Investment securities available for sale		143,104			13,938			(12,194	)	(1)(4)		144,848
Investment securities held to maturity		170			--			--				170
Loans		350,128			122,152			(967	)	(5)		471,313
Credit fair value of loans purchased		--			--			(2,558	)	(6)		(2,558	)
Loans, net of fair value adjustments		350,128			122,152			(3,525	)			468,755
Allowance for possible loan losses		(5,780	)		(1,574	)		1,574		(6)		(5,780	)
Loans, net		344,348			120,578			(1,951	)			462,975
Investment in FHLB Stock, at cost		3,193			998			--				4,191
Bank Premises, Equipment, Furniture		4,798			3,767			(783	)	(11)		7,782
Bank owned life insurance		8,333			3,195			--				11,528
Accrued interest receivable		2,191			608			--				2,799
Foreclosed real estate owned		948			--			--				948
Goodwill		--			--			11,521		(1)		11,521
Identifiable intangible assets		--			43			895		(3)		938
Other assets		4,807			2,164			1,629		(9)(10)		8,100
Total Assets	$	530,926		$	165,676		$	(883	)		$	695,719


Liabilities
Non-interest bearing demand	$	62,736		$	7,165		$	--			$	69,901
Interest-bearing		334,384			130,588			815		(7)		465,787
Total Deposits		397,120			137,753			815				535,688

Fed Funds Purchased and Repo’s		25,465			--			--				25,465
Other Borrowed Money		35,000			7,000			776		(8)		42,776
Accrued interest payable		1,343			218			--				1,560
Other Liabilities		3,424			829			2,658		(9)		6,911
Total liabilities		462,351			145,800			4,249				612,400

Equity Capital
Preferred Stock		--			--			--				--
Common Stock		284			158			(105	)	(1)(2)		337
Additional Paid-in Capital		9,867			13,764			927		(2)		24,558
Retained Earnings		59,507			9,068			(9,068	)	(2)		59,507
Less: cost of treasury stock		(2,388	)		(2,561	)		2,561		(2)		(2,388	)
Less: ESOP		--			(818	)		818		(2)		--
Accumulated Other Comprehensive Income		1,305			265			(265	)	(2)		1,305
Total Stockholders' Equity		68,575			19,878			(5,132	)			83,319
Total liabilities and equity	$	530,926		$	165,676		$	(883	)		$	695,719

Per Share Data
Shares Outstanding		2,761,912			1,335,524			(804,414	)	(1)		3,293,022
Book Value Per Share	$	24.83		$	14.88		$	--			$	25.30
Tangible Book Value Per Share	$	24.83		$	14.85		$	--			$	21.52

Consolidated Level

Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended March 31, 2011

(In Thousands, Except Per Share Data)

	Norwood		North Penn			Pro Forma				Pro Forma
	Financial Corp.		Bancorp, Inc.			Adjustments				Combined
Interest Income
Loans receivable, including fees	$	4,928	$	1,741		$	10		(5)(6)	$	6,679
Interest on investment securities		1,090		119			(138	)	(4)(9)		1,071
Other		8		21			--				29
Total interest income		6,026		1,881			(128	)			7,779

Interest Expense
Deposits		885		441			(120	)	(7)		1,206
Short-term borrowings		24		--			--				24
Other borrowings		336		81			(45	)	(8)		372
Total interest expense		1,245		522			(165	)			1,602

Net interest income		4,781		1,359			37				6,177
Provision for loan losses		220		45			--				265
Net interest income after provision for loan losses		4,561		1,314			37				5,912

Other Income
Service charges and fees		549		31			--				580
Income from fiduciary activities		113		--			--				113
Net realized gains (losses) on sales of securities		212		(8	)		--				204
Gain on sale of loans and servicing rights		143		--			--				143
Other		191		54			--				245
Total other income		1,208		77			--				1,285

Other Expense
Salaries and employee benefits		1,701		603			--				2,304
Occupancy, furniture & equipment, net		398		167			(7	)	(11)		558
Data processing related		215		43			--				258
Taxes, other than income		129		21			--				150
Professional fees		134		77			--				211
Merger related expenses		267		77			(344	)	(9)		--
FDIC insurance assessment		120		51			--				171
Other real estate owned		19		19			--				38
Amortization of intangibles		--		2			41		(3)		43
Other operating expenses		551		102			--				653
Total other expenses		3,534		1,162			(310	)			4,386

Income before taxes		2,235		229			347				2,811
Applicable income taxes		575		102			118		(10)		795
Net income	$	1,660	$	127		$	229			$	2,016

Per Share Data
Basic earnings per share	$	0.60	$	0.10		$	--			$	0.61
Diluted earnings per share	$	0.60	$	0.09		$	--			$	0.61
Basic EPS weighted average shares outstanding		2,767		1,287			(756	)	(1)		3,298
Diluted EPS weighted average shares outstanding		2,770		1,388			(857	)	(1)		3,301

Consolidated Level

Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2010

($ In Thousands, Except Per Share Data)

	Norwood		North Penn			Pro Forma				Pro Forma
	Financial Corp.		Bancorp, Inc.			Adjustments				Combined
Interest Income
Loans receivable, including fees	$	21,101	$	7,130		$	45		(5)(6)	$	28,276
Interest on investment securities		4,529		601			(551	)	(4)(9)		4,579
Other		57		77			--				134
Total interest income		25,687		7,808			(506	)			32,989

Interest Expense
Deposits		4,283		1,980			(402	)	(7)		5,861
Short-term borrowings		117		--			--				117
Other borrowings		1,623		484			(182	)	(8)		1,925
Total interest expense		6,023		2,464			(584	)			7,903

Net interest income		19,664		5,344			78				25,086
Provision for loan losses		1,000		384			--				1,384
Net interest income after provision for loan losses		18,664		4,960			78				23,702

Other Income
Service charges and fees		2,231		225			--				2,456
Income from fiduciary activities		405		--			--				405
Net realized gains on sales of securities		448		(54	)		--				394
Gain on sale of loans and servicing rights		307		123			--				430
Other		673		178			--				851
Total other income		4,064		472			--				4,536

Other Expense
Salaries and employee benefits		6,507		2,484			--				8,991
Occupancy, furniture & equipment, net		1,560		593			(26	)	(11)		2,127
Data processing related		803		114			--				917
Taxes, other then income		524		86			--				610
Professional fees		650		326			--				976
FDIC insurance assessment		474		186			--				660
Other real estate owned		41		28			--				70
Amortization of intangibles		52		4			163		(3)		219
Merger related expenses		--		164			(164	)	(9)		--
Other operating expenses		2,142		518			--				2,660
Total other expenses		12,753		4,504			(27	)			17,230

Income before taxes		9,975		928			105				11,008
Applicable income taxes		2,662		214			36		(10)		2,912
Net income	$	7,313	$	714		$	69			$	8,096

Per Share Data
Basic earnings per share	$	2.65	$	0.53		$	--			$	2.46
Diluted earnings per share	$	2.64	$	0.52		$	--			$	2.42
Basic EPS weighted average shares outstanding		2,762		1,339			(804	)	(1)		3,297
Diluted EPS weighted average shares outstanding		2,766		1,383			(804	)	(1)		3,345

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The acquisition was effected by the issuance of shares of Norwood common stock and cash to North Penn’s shareholders. Each share of North Penn common stock was exchanged for either 0.6829 shares of Norwood common stock or $19.12 in cash. All shareholder elections were subject to allocation and proration procedures set forth in the merger agreement which were intended to ensure that, in the aggregate, the total cash consideration (for common shares, options and unallocated shares held by the ESOP) will be $12,194,000. The shares of Norwood common stock issued illustrated in this pro forma were assumed to be recorded at $27.76 per share, the closing sale price of Norwood common stock on May 31, 2011.

The unaudited pro forma financial information has been prepared to include the estimated adjustments necessary to record the assets and liabilities of North Penn at their fair values and represents management’s best estimate based upon the information available at this time. The recorded fair value adjustments made to the acquired assets and liabilities of North Penn are considered preliminary at this time and are subject to change as Norwood finalizes its fair value determinations. The unaudited pro forma combined financial statements for the acquisition are included only as of and for the three months ended March 31, 2011 and the year ended December 31, 2010. The unaudited pro forma combined financial information presented herein does not necessarily provide an indication of the combined results of operations or the combined financial position that would have resulted had the consolidation actually been completed as of the assumed consummation date, nor is it indicative of the results of operations in future periods or the future financial position of the combined company.

The following table provides the calculation and allocation of the purchase price used in the pro forma financial statements and a reconcilement of pro forma shares to be outstanding:

Summary of Purchase Price Calculation and Goodwill Resulting from Merger

And Reconciliation of Pro Forma Shares Outstanding at March 31, 2011

				March 31,
($ in thousands except per share data)				2011

Purchase Price Consideration in Common Stock (1)
North Penn common shares settled for stock		777,727
Exchange Ratio		0.6829
Norwood shares to be issued		531,110
Value assigned to Norwood common share	$	27.76
Purchase price assigned to North Penn common shares exchanged for Norwood stock				$	14,744

Purchase Price Consideration - Cash for Common Stock (1)
North Penn shares exchanged for cash		471,446
Purchase price paid for each North Penn common share exchanged for cash	$	19.12
Aggregate purchase price assigned to North Penn common shares exchanged for cash					9,014

Purchase Price Consideration - Cash for Outstanding Options
North Penn options outstanding		157,246
Weighted average strike price	$	9.29
Options settlement price	$	19.12
In-the-money value for North Penn options cashed out	$	9.83
Purchase price assigned to North Penn options settled for cash					1,546

Purchase Price Consideration - Cash for Unallocated ESOP Shares (1)
North Penn Unallocated ESOP Shares Outstanding		85,471
Unallocated ESOP Shares settlement price per share	$	19.12
Purchase price assigned to North Penn unallocated ESOP shares settled for cash					1,634

Total Purchase Price					26,938

Net Assets Acquired:

North Penn shareholders’ equity	$	19,876
North Penn goodwill and intangibles		—

Estimated adjustments to reflect assets acquired at fair value:
Investments		—
Loans		(3,525	)
Allowance for loan losses		1,574
Core deposit intangible		895
Premises & equipment		(783	)
Deferred tax assets		1,629

Estimated adjustments to reflect liabilities acquired at fair value:
Time deposits		(815	)
Borrowings		(776	)
Transaction merger liabilities accrued at closing		(2,658	)
					15,417
Goodwill resulting from merger				$	11,521

(1) Common shares outstanding at March 31, 2011 total 1,287,278 which include 85,471 unallocated ESOP shares. The agreement required the unallocated ESOP shares to be paid in cash. The agreement also required 47,366 of restricted stock awards that are not included in the outstanding shares to paid out in accordance with the election procedures and are included above as shares to be settled for cash and common stock.

Adjustment to reflect the issuance of common shares of Norwood common stock with a $0.10 par value in connection with the merger and the adjustments to shareholders’ equity for the reclassification of North Penn historical equity accounts (common stock, accumulated other comprehensive income, cost of treasury stock, and earnings) into additional paid-in capital.

Adjustment of $895 thousand to core deposit intangible to reflect the fair value of this asset and the related amortization adjustment based upon an expected life of ten years and using a sum of the years digits method. The amortization of the core deposit intangible is expected to increase pro forma pre-tax non-interest expense by $163 thousand in the first year following consummation.

Since all investments were recorded as available for sale and at fair value no balance sheet adjustment is necessary. Statement of operation adjustments reflect amortization of the available for sale premium which will be prospectively amortized based on the expected life. This investment adjustment is expected to decrease pro forma pre-tax interest income by $120 thousand in the first year following consummation. Balance sheet adjustment includes $12.2 million pro form adjustment to reflect the use of cash to fund the acquisition. Lost interest income of $365 thousand is expected, assuming a 3.0% investment rate.

Adjustment of $967 thousand, decreasing the balance of loans acquired to reflect fair values of loans based on current interest rates of similar loans, net of existing unamortized deferred loan origination fees and costs. The adjustment will be recognized using the level yield amortization method based upon the expected life of the loans. This adjustment is expected to decrease pro forma pre-tax interest income by $456 thousand in the first year following consummation.

6)	Adjustments to reflect the fair value of loans include:

·	Adjustment of $1.6 million to reflect the removal of the allowance for loan losses in connection with applying acquisition accounting under ASC 805.

Adjustment of $384 thousand for loans within the scope of ASC 310-30. As result of a detailed analysis by management of all criticized loans, $1.9 million of loans were determined to be within the scope of and evaluated under ASC 310-30. This review considered payment history, relevant collateral values, debt service ratios and other factors to identify loans which evidenced deterioration of credit quality since origination and which management determined that it was probable, at acquisition, that the collection of all contractually required payments receivable would not be possible. The contractually required payments receivable related to ASC 310-30 loans is approximately $3.6 million with excepted cash flow to be collected of $1.9 million. The estimated fair value of such loans is $1.6 million, with a nonaccretable difference of $1.7 million and accretable yield of $329 thousand. The fair value of loans falling within the scope of ASC 310-30 was determined in accordance with guidelines of ASC 310. Fair value represents the calculated accretable yield (based on comparison of expected cash flows and contractual cash flows) deducted from the expected cash flows analysis. Assumptions utilized in the above calculations included an adjustment to collateral value after consideration of available appraisal documentation and the expected cash flows available for future reduction in debt payment.

Adjustment of $2.2 million for all remaining loans determined not to be within the scope of ASC 310-30. Loans which are not within the scope of ASC 310-30 totaled $119.8 million. The credit quality adjustment will be recognized using the effective yield method over the life of the loans. This adjustment is expected to increase pro forma pre-tax interest income by $387 thousand in the first year following completion of the acquisition.

In determining the fair value of the loans which are not within the scope of ASC 310-30, the acquired loan portfolio was evaluated based on risk characteristics and other credit and market criteria to determine a credit quality adjustment to the fair value of the loan acquired. The acquired loan balance was reduced by the aggregate amount of the credit quality adjustment in determining the fair value of the loans.

Adjustment of $815 thousand to reflect the fair values of interest-bearing time deposit liabilities based on current interest rates for similar instruments. The adjustment will be recognized using a level yield amortization method based upon the maturities of the deposit liabilities. This adjustment is expected to decrease pro forma pre-tax interest expense by $402 thousand in the first year following consummation.

Adjustment of $776 thousand to reflect fair values of long-term debt which consists primarily of FHLB advances at various terms and maturities, net of previous unamortized balances. The adjustment will be substantially recognized using a level yield amortization method based upon the maturities of the debt. This adjustment is expected to decrease pro forma pre-tax interest expense by $182 thousand in the first year following consummation.

Adjustment relates to recognition of estimated merger obligations and cost of $2.7 million recorded as a liability on the closing date. The adjustment to the statements of operations relates to the removal of direct incremental transaction costs recorded in the historical financial statements of both companies. Interest income has been reduced for the cost to fund the after tax cash outlay (estimated at $2.7 million) related to these charges, which approximates $65 thousand annually following consummation assuming a 3.0% cost of funds.

10)

Adjustment to reflect the net deferred tax at a rate of 34% related to fair value adjustments on the balance sheet and a statutory tax rate of 34% for book tax expense. It is noted that a tax benefit was not taken for certain merger obligations and costs that were considered to be not tax deductable.

11)

Adjustment of $783 thousand to reflect a decrease in fair value for premises and equipment. The amortization of the fair value adjustment is presented over a 30 year period. The adjustment is expected to decrease pro forma occupancy and equipment expense by $26 thousand in the first year of consummation.

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