Pro Forma Post Acquisition Form 8K

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 and ("Delaware"), after giving effect to the merger and adjustments described in the accompanying footnotes. The acquisition by Norwood of Delaware has been accounted for under the acquisition method of accounting under U.S. Generally Accepted Accounting Principles ("GAAP"). Under this method, Delaware'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 Delaware 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 Delaware beginning on the date of completion of the acquisition. The merger has been effected by the issuance of shares of Norwood common stock and cash to Delaware shareholders.

 

The unaudited pro forma combined financial information provides each share of Delaware common stock was exchanged for either 0.6221 shares of Norwood common stock (and cash in lieu of fractional shares) or $16.68 in cash.   All shareholder elections were subject to allocation and proration procedures set forth in the merger agreement. The shares of Norwood common stock issued illustrated in this pro forma were assumed to be recorded at $28.15 per share, the closing sale price of Norwood common stock on July 29, 2016.  Former Delaware shareholders own approximately 10.5% of the voting stock of the combined company after the merger.

 

The following unaudited pro forma combined consolidated balance sheet as of March 31, 2016 and unaudited pro forma combined consolidated statements of operations for the three months ended March 31, 2016 and the year ended December 31, 2015 combine the historical financial statements of Norwood and Delaware. The unaudited pro forma financial statements give effect to the merger as if it occurred on March 31, 2016 with respect to the balance sheet, and on January 1, 2016 and January 1, 2015 with respect to the statements of operations for the three months ended March 31, 2016 and the year ended December 31, 2015, respectively. The unaudited pro forma financial statements were prepared with Norwood treated as the acquirer and Delaware as the acquiree under the acquisition method of accounting. Accordingly, the consideration paid by Norwood to complete the merger will be allocated to Delaware'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 Delaware 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 $28.15, which represents the closing price of Norwood's common stock on July 29, 2016.

 

Norwood anticipates that the merger with Delaware will provide the combined company with financial benefits that include increased operating efficiencies. 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 increased operating efficiencies or opportunities to earn additional revenue and, accordingly, does not attempt to predict or

 

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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 Delaware 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.

 

	Consolidated Company Level
	Unaudited Combined Pro Forma Balance Sheets as of March 31, 2016
	($ In Thousands, Except Per Share Data)
		Norwood				Delaware			Pro Forma			Pro Forma
		Financial Corp.				Bancshares, Inc.			Adjustments			Combined
ASSETS
	Cash and due from banks	$	8,709			$	12,319		$	-		$	21,028
	Interest bearing deposits with banks		254				16,337			-			16,591
	Cash and cash equivalents		8,963				28,656			-			37,619
	Securities held-to-maturity		-				4,401			-			4,401
	Securities available-for-sale		143,948				201,888			(15,561)	(4)		330,275
	Total Securities		143,948				206,289			(15,561)			334,676
	Loans receivable		565,787				114,245			(951)	(5)		679,081
	Less:  Allowance for Loan Losses		(7,642)				(1,640)			1,640	(6)		(7,642)
	Net loans receivable		558,145				112,605			689			671,439
	Regulatory stock, at cost		2,982				313			-			3,295
	Premises and equipment, net		6,390				4,085			3,053	(10)		13,528
	Bank owned life insurance		18,951				14,632			-			33,583
	Accrued interest receivable		2,487				1,432			-			3,919
	Foreclosed real estate owned		2,855				-			-			2,855
	Goodwill		9,715				6,322			(4,237)	(1)		11,800
	Other intangibles		260				1,401			(952)	(3)		709
	Deferred tax asset		3,456				1,813			(749)	(9)		4,520
	Other assets		1,952				5,849			(818)	(12)		6,983
	TOTAL ASSETS	$	760,104			$	383,397		$	(18,576)		$	1,124,925
LIABILITIES
	Deposits
	Non-interest bearing demand	$	113,225			$	65,112		$	-		$	178,337
	Interest-bearing		447,266				266,939			252	(7)		714,457
	Total Deposits		560,491				332,051			252			892,794
	Short term borrowings		52,672				2,533			-	(8)		55,205
	Other borrowings		38,856				11,695			(11,695)	(8)		38,856
	Junior subordinated debentures		-				8,248			-	(8)		8,248
	Accrued interest payable		925				178			-			1,103
	Other liabilities		4,462				5,562			5,303	(10)(11)		15,327
	TOTAL LIABILITIES		657,406				360,267			(6,140)			1,011,533
STOCKHOLDERS' EQUITY
Common Stock			373				1,396			(1,303)	(1)(2)		416
Surplus			35,390				8,315			3,792	(1)(2)		47,497
Retained earnings			66,143				19,237			(20,693)	(2)(11)		64,687
Accumulated other comprehensive income			1,779				(1,052)			1,052	(2)		1,779
Treasury stock at cost			(987)				(4,716)			4,716	(2)		(987)
	TOTAL STOCKHOLDERS' EQUITY		102,698				23,130			(12,436)			113,392
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	760,104			$	383,397		$	(18,576)		$	1,124,925
	Per Share Data
	Shares Outstanding		3,689,019				925,499			(493,894)	(1)		4,120,624
	Book Value Per Share	$	27.88			$	24.99		$			$	27.52
	Tangible Book Value Per Share	$	25.13			$	16.65		$			$	24.48

 

 

 

 

Consolidated Level
Unaudited Pro Forma Combined Statement of Operations for the Twelve Months Ended December 31 2015
($ In Thousands, Except Per Share Data)
				Norwood			Delaware			Pro Forma			Pro Forma
				Financial Corp.			Bancshares, Inc.			Adjustments			Combined
INTEREST INCOME
	Loans receivable, including fees			$	24,002		$	5,343		$	78	(5)	$	29,423
	Securities				3,761			5,460			(552)	(4)(8)		8,669
	Other				16						-			16
	Total Interest Income				27,779			10,803			(474)			38,108
INTEREST EXPENSE
	Deposits				2,421			992			(145)	(7)		3,268
	Short-term borrowings				85			41			-			126
	Other borrowings				752			665			(665)	(8)		752
	Junior subordinated debentures				-			615			-			615
	Total Interest Expense				3,258			2,313			(810)			4,761
	Net interest income				24,521			8,490			335			33,346
PROVISION FOR LOAN LOSSES					4,580			150			-			4,730
	Net interest income after provision for loan losses				19,941			8,340			335			28,616
OTHER INCOME
	Service charges and fees				2,440			1,002			-			3,442
	Income from fiduciary activities				439			31			-			470
	Net realized gains on sales of securities				626			956			-			1,582
	Gain on sales of loans and servicing rights, net				104			-			-			104
	Earnings and proceeds on bank owned life insurance policies				665			326			-			991
	Other				425			925			-			1,350
	Total Other Income				4,699			3,240			-			7,939
OTHER EXPENSES
	Salaries and employee benefits				8,535			5,489			-			14,024
	Occupancy, furniture and equipment, net				2,082			1,467			108	(10)		3,657
	Data processing				943			1,019			-			1,962
	Taxes other than income				711			-			-			711
	Professional fees				730			790			-			1,520
	Federal Deposit Insurance Corporation insurance				411			234			-			645
	Foreclosed real estate				911			11			-			922
	Amortization of intangibles				105			280			(198)	(3)		187
	Other				2,672			2,264			(63)	(8)		4,873
	Total Other Expenses				17,100			11,554			(153)			28,501
	Income Before Income Taxes				7,540			26			489			8,055
INCOME TAX (BENEFIT)  EXPENSE					1,632			(565)			171	(9)		1,238
	Net income			$	5,908		$	591		$	318		$	6,817
EARNINGS PER SHARE
BASIC				$	1.60		$	0.64					$	1.66
DILUTED				$	1.60		$	0.64					$	1.65
	Basic EPS weighted average shares outstanding				3,673,032			925,499			(493,894)	(1)		4,104,637
	Diluted EPS weighted average shares outstanding				3,691,406			925,499			(493,894)	(1)		4,123,011

 

 

Consolidated Level
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended March 31, 2016
($ In Thousands, Except Per Share Data)
						Norwood							Delaware		Pro Forma				Pro Forma
INTEREST INCOME						Financial Corp.						Bancshares, Inc.			Adjustments			Combined
	Loans receivable, including fees					$				6,135		$	1,347		$	20	(5)	$	7,502
	Securities									890			1,248			(138)	(4)(8)		2,000
	Other									1						-			1
	Total Interest Income									7,026			2,595			(119)			9,502
INTEREST EXPENSE
	Deposits									581			236			(36)	(7)		781
	Short-term borrowings									39			3			-			42
	Other borrowings									231			163			(166)	(8)		228
	Junior subordinated debentures									-			152			-			152
	Total Interest Expense									851			554			(202)			1,203
	Net interest income									6,175			2,041			84			8,300
PROVISION FOR LOAN LOSSES										450			-			-			450
	Net interest income after provision for loan losses									5,725			2,041			84			7,850
OTHER INCOME
	Service charges and fees									574			246			-			820
	Income from fiduciary activities									102			6			-			108
	Net realized gains on sales of securities									64			43			-			107
	Gain on sales of loans and servicing rights, net									30			-			-			30
	Earnings and proceeds on bank owned life insurance policies									167			78			-			245
	Other									130			243			-			373
	Total Other Income									1,067			616			-			1,683
OTHER EXPENSES
	Salaries and employee benefits									2,303			1,240			-			3,543
	Occupancy, furniture and equipment, net									495			354			27	(10)		876
	Data processing									271			258			-			529
	Taxes other than income									205			-			-			205
	Professional fees									151			374			-			525
	Federal Deposit Insurance Corporation insurance									115			61			-			176
	Foreclosed real estate									31			7			-			38
	Amortization of intangibles									24			63			(50)	(3)		37
	Other									754			501			(16)	(8)		1,239
	Total Other Expenses									4,349			2,858			(38)			7,169
	Income Before Income Taxes									2,443			(201)			122			2,364
INCOME TAX (BENEFIT)  EXPENSE										567			(166)			43	(9)		444
	Net income						$			1,876		$	(35)		$	79		$	1,920
EARNINGS PER SHARE
BASIC							$			0.51		$	(0.04)					$	0.47
DILUTED							$			0.51		$	(0.04)					$	0.47
	Basic EPS weighted average shares outstanding									3,686,425			925,499			(493,894)	(1)		4,118,030
	Diluted EPS weighted average shares outstanding									3,690,479			925,499			(493,894)	(1)		4,122,084

 

1)

The acquisition was effected by the issuance of shares of Norwood common stock and cash to Delaware's shareholders. Pursuant to the terms of the merger agreement, shareholders of Delaware received for each share of Delaware stock they own, either 0.6221 shares of Norwood common stock or $16.68 in cash.  All shareholder elections were subject to allocation and proration procedures set forth in the merger agreement that were intended to ensure that, in the aggregate, 75% of the outstanding shares of the Delaware common stock will be converted into Norwood common stock and 25% will be converted into cash. In the merger 694,114 of the 925,499 shares of Delaware common stock would be exchanged for Norwood common stock, with the balance of the outstanding Delaware shares being exchanged for cash. The 431,605 shares of Norwood common stock issued illustrated in this pro forma were recorded at $28.15 per share, the closing sale price of Norwood common stock on July 29, 2016.

The unaudited pro forma financial information has been prepared to include the estimated adjustments necessary to record the assets and liabilities of Delaware 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 Delaware 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, 2016 and for the year ended December 31, 2015. 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 total estimated purchase price for the purpose of this pro forma financial information is $16.0 million.  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:

 

 

 

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2)

Adjustment to reflect the issuance of 431,605 shares of Norwood common stock with a $0.10 par value in connection with the acquisition and the adjustments to shareholders' equity for the reclassification of Delaware historical equity accounts (common stock, accumulated other comprehensive loss, cost of treasury stock, and undivided profits) into surplus and adjustment for goodwill created in the transaction.

3)

Adjustment to reverse the existing Delaware core deposit intangible asset (and historical amortization expense) and create a new Delaware core deposit intangible to reflect the fair value of $449 thousand and the new related amortization and the related amortization adjustment based upon an expected life of 10 years. The amortization of the new core deposit intangible is expected to increase pro forma pre-tax amortization expense by $82 thousand in year one.

4)

Securities held-to-maturity fair value approximated book value at March 31, 2016 and no balance sheet or income statement adjustment was needed. Securities available-for-sale were recorded at fair value at March 31, 2016, therefore no balance sheet adjustment is necessary. Income statement adjustment includes prospective reclassification of existing available-for-sale securities fair value adjustment to an accreting discount which will be accreted into income based on the expected life.  This investment adjustment is expected to decrease pro forma pre-tax interest income by $319 thousand in the first year following consummation.

The securities available-for-sale balance sheet adjustment also includes a $3.9 million pro forma reduction of investments to be liquidated by Norwood to fund the cash portion of the Delaware common stock purchased, and an $11.7 million pro forma reduction of securities available-for-sale by Norwood for the cash needed to pay off other borrowings of Delaware (see note 8). The income statement adjustments includes the loss of interest income of $233 thousand in year one related to the cash used to purchase Delaware common stock and pay off Delaware other borrowings; assuming a 1.5% investment rate.

5)

The balance sheet adjustment includes a positive adjustment of $1.5 million to reflect a fair value loan premium for Delaware of loans based on current interest rates of similar loans. This adjustment will be substantially recognized over approximately the expected life of the loans and is expected to decrease pro forma pre-tax interest income in year one by $438 thousand. The balance sheet also includes negative adjustments of $1.6 million fair value general credit risk loan discount and a $0.5 million fair value specific credit discount.   The general credit adjustment will be substantially recognized over approximately the expected life of the loans and is expected to increase pro forma pre-tax interest income in year one by $442 thousand. The accretable portion of the specific credit adjustment is expected to increase pro forma year one pre-tax interest income by $74 thousand.  The balance sheet adjustment also includes the reversal of existing loan premiums of $324 thousand related to loans purchased which have no fair value to Norwood.

6)	The balance sheet adjustment for the reversal of the Delaware allowance for loan losses as of March 31, 2016 in accordance with acquisition method of accounting for the acquisition.

7)

The balance sheet adjustment of $252 thousand to reflect the fair values of certain interest-bearing time deposit liabilities based on current interest rates for similar instruments. The adjustment will be recognized using an amortization method based upon the maturities of the deposit liabilities. This adjustment is expected to decrease pro forma pre-tax interest expense by $145 thousand in year one.

8)

No fair value adjustments were deemed necessary for short term borrowings or junior subordinated debentures. Balance sheet adjustment of $11.7 million reflects liquidation of investments by Norwood to pay off $11.7 million of other borrowings. The other borrowings of Delaware are collateralized by 100% of NBDC Bank's common stock and to effectuate this merger the other borrowings were paid off at closing by Norwood. The income statement reflects lost investment interest income of $175 thousand in year one, assuming a 1.5% yield on investments liquidated to pay down the other borrowing and lower other borrowing interest expense by $665 thousand in year one. The adjustment for other noninterest expense represents the elimination of deferred other borrowing costs of $63,000 annually related to the $11.7 million pay off mentioned in this footnote.

9)

Adjustment to reflect the net deferred tax at a rate of 35% related to fair value adjustments on the balance sheet and an effective tax rate of 35% for book tax expense. The balance sheet includes a reversal of $1.3 million related to reversal of deferred tax assets in which Norwood would not be able to utilize.

 

 

11)

Balance sheet adjustment to reflect the accrual of one-time estimated merger charges for Norwood and Delaware: a) Norwood's pre-tax charge of $1.9 million ($1.5 million after-tax) included as a pro forma liability with the after-tax costs as a reduction of retained earnings; and b) Delaware's pre-tax charge of $3.7 million ($2.6 million after-tax) included as a pro forma fair value liability accrual. There were no significant merger expenses included in the historical financial statements of either Norwood or Delaware.

12)	Balance sheet adjustment to reverse prepaid expenses that have no fair value to Norwood.