ACQUISITION OF LUZERNE NATIONAL BANK CORPORATION

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

ACQUISITION OF LUZERNE NATIONAL BANK CORPORATION

ACQUISITION OF LUZERNE NATIONAL BANK CORPORATION

On June 1, 2013, the Company closed on a merger transaction pursuant to which Penns Woods Bancorp, Inc. acquired Luzerne National Bank Corporation in a stock and cash transaction.  The acquisition extended the Company’s footprint into Luzerne and Lackawanna Counties, Pennsylvania.

Luzerne National Bank Corporation was the holding company for Luzerne Bank, a Pennsylvania bank that conducted its business from a main office in Luzerne, Pennsylvania with eight branch offices in Luzerne County and one loan production office in Lackawanna County, all in northeastern Pennsylvania. Since June 1, 2013, the loan production office in Lackawanna County has been closed.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Luzerne National Bank Corporation for a total purchase price of approximately $42,612,000.  As a result of the acquisition, the Company issued 978,977 common shares, or 20.62% of the total shares outstanding as of December 31, 2015, to former shareholders of Luzerne National Bank Corporation.  Luzerne Bank is operating as an independent bank under the Penns Woods Bancorp, Inc. umbrella.

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, appraised collateral values, expected cash flows, and historical loss factors of Luzerne 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 Luzerne Bank based on management’s evaluation of the cost of such deposits relative to alternative funding sources.  The Company also recorded an identifiable intangible asset representing the trade name of Luzerne Bank based on management’s evaluation of the value of the name in the market.  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 determine the fair value of investment securities.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. Luzerne 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 non-accretable difference. At the acquisition date, the Company recorded $1,211,000 of purchased credit-impaired loans subject to a non-accretable difference of $842,000. 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.

Luzerne’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, Luzerne’s loan portfolio without evidence of deterioration totaled $249,789,000 and was recorded at a fair value of $249,500,000.

The following table summarizes the purchase of Luzerne National Bank Corporation as of June 1, 2013: 

(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Luzerne National Bank Corporation common shares settled for stock	630,216
Exchange Ratio	1.5534
Penns Woods Bancorp, Inc. shares issued	978,977
Value assigned to Penns Woods Bancorp, Inc. common share	$	40.59
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for Penns Woods Bancorp, Inc.				$	39,736
Purchase Price Consideration - Cash for Common Stock
Luzerne National Bank Corporation shares exchanged for cash	46,480
Purchase price paid to each Luzerne National Bank Corporation common share exchanged for cash	$	61.86
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for cash				2,876
Total Purchase Price				42,612
Net Assets Acquired:
Luzerne National Bank Corporation shareholders’ equity	$	27,371
Adjustments to reflect assets acquired at fair value:
Investments	33
Loans
Interest rate	2,680
General credit	(3,206		)
Specific credit - non-amortizing	(58		)
Specific credit - amortizing	(40		)
Core deposit intangible	1,882
Trade name intangible	133
Owned premises	1,138
Leased premises contracts	122
Deferred tax assets	(603		)
Adjustments to reflect liabilities acquired at fair value:
Time deposits	(912		)
				28,540
Goodwill resulting from merger				$	14,072

Results of operations for Luzerne National Bank Corporation prior to the acquisition date are not included in the Consolidated Statement of Income.  Due to the significant amount of fair value adjustments, historical results of Luzerne National Bank Corporation are not relevant to the Company’s results of operations.  Therefore, no pro forma information is presented.