11. Acquisition of North Penn Bancorp, Inc.

On May 31, 2011, the Company closed on a merger transaction pursuant to which Norwood Financial Corp acquired North Penn Bancorp, Inc. in a stock and cash transaction. The acquisition is an in-market transaction that will expand the Company's existing footprint in Monroe County, Pennsylvania and extends its footprint into Lackawanna County, Pennsylvania.

North Penn Bancorp, Inc. was the holding company for North Penn Bank, a Pennsylvania savings bank that conducted its business from a main office in Scranton, Pennsylvania and four branch offices in the northeastern Pennsylvania counties of Lackawanna and Monroe.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of North Penn Bancorp, Inc. for a total purchase price of approximately $25.4 million. North Penn Bank has been merged into Wayne Bank, with Wayne as the surviving entity.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of North Penn Bank. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of North Penn Bank based on management's evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels and the cost of servicing various depository products. Management used market quotations to fair value investment securities and FHLB advances.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. North Penn Bank's loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. At the acquisition date, the Company recorded $1.9 million of purchased credit-impaired loans subject to a nonaccretable difference of $1.7 million. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

North Penn Bank's loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management's

best estimates of default rates and payment speeds. At acquisition, North Penn's loan portfolio without evidence of deterioration totaled $119.8 million and was recorded at a fair value of $116.7 million.

The following table summarizes the purchase of North Penn Bancorp, Inc. as of May 31, 2011:

($ In thousands except per share data)


Purchase Price Consideration in Common Stock (1)
North Penn common shares settled for stock		777,927
Exchange Ratio		0.6829
Norwood shares issued		531,246
Value assigned to Norwood common share	$	27.76
Purchase price assigned to North Penn common shares exchanged for Norwood stock				$	14,748

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

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					25,396

Net Assets Acquired:

North Penn shareholders' equity	$	18,195
North Penn goodwill and intangibles		-

Adjustments to reflect assets acquired at fair value:
Investments		-
Loans		(3,525	)
Allowance for loan losses		1,570
Core deposit intangible		895
Premises & equipment		(783	)
Deferred tax assets		1,152

Adjustments to reflect liabilities acquired at fair value:
Time deposits		(815	)
Borrowings		(776	)
					15,913
Goodwill resulting from merger				$	9,483

The following condensed statement reflects the values assigned to North Penn Bancorp's net assets as of the acquisition date:

Total purchase price				$	25,396

Net Assets Acquired:
Cash	$	15,192
Securities held to maturity		-
Securities available for sale		12,671
Restricted investments		985
Loans		118,336
Accrued interest receivable		566
Premises & equipment, net		2,931
Core deposit intangible		895
Deferred tax assets		2,947
Other assets		5,403
Time deposits		(51,936	)
Deposits other than time deposits		(83,498	)
Borrowings		(7,776	)
Accrued interest payable		(203	)
Other liabilities		(600	)
					15,913
Goodwill resulting from North Penn Merger				$	9,483

The Company recorded goodwill and other intangibles associated with the purchase of North Penn Bancorp, Inc. totaling $10.4 million. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the quarter ended June 30, 2011. The carrying amount of the goodwill at June 30, 2011 was $9.5 million.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the quarter ended June 30, 2011, no such adjustments were recorded. The identifiable intangible asset consists of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset. The gross carrying amount of the core deposit intangible at June 30, 2011 was $895,000 with $13,000 accumulated amortization as of that date.

As of June 30, 2011, the current year and estimated future amortization expense for the core deposit intangible was:

2011	$	95,000
2012		153,000
2013		137,000
2014		121,000
2015		104,000
2016		88,000
2017		72,000
2018		56,000
2019		39,000
2020		23,000
2021		7,000
	$	895,000

Results of operations for North Penn prior to the acquisition date are not included in the Consolidated Statement of Income for the three and six month periods ended June 30, 2011. Due to the significant amount of fair value adjustments historical results of North Penn are not relevant to the Company's results of operations. Therefore, no pro forma information is presented.