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Pennsylvania-based Orrstown Financial Services to acquire Mercersburg Financial

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Pennsylvania-based Orrstown Financial Services to acquire Mercersburg Financial

Shippensburg, Pa.-based Orrstown Financial Services Inc. is acquiring Mercersburg, Pa.-based Mercersburg Financial Corp.

Mercersburg Financial will merge into Orrstown Financial, and Mercersburg Financial shareholders will receive a combination of stock and cash valued at $32.4 million. In addition, Mercersburg Financial's shareholders may elect to receive either 1.5291 Orrstown Financial shares or $40.00 in cash for each Mercersburg Financial share owned, subject to proration so that a total of 85% of Mercersburg Financial's shares are converted into Orrstown Financial common shares and 15% of Mercersburg Financial's shares are exchanged for cash.

The deal has a one-day premium of 62.16%, based on Mercersburg Financial's May 30 closing price of $24.50, and a one-month premium of 69.42%, based on its May 1 closing price of $23.45.

On a per-share basis, the deal value is 156.0% of book and tangible book, and 35.7x earnings. It is also 17.49% of assets, 20.03% of deposits, and the tangible book premium-to-core deposits ratio is 8.49%.

For comparison, SNL valuations for bank and thrift targets in the mid-Atlantic region between May 31, 2017, and May 31, 2018, averaged 147.06% of book and 150.35% of tangible book, with a median of 32.63x last-12-months earnings, on a per-share basis.

The combined bank after the deal closes is expected to have about $2 billion in assets, $1.3 billion in loans and $1.6 billion in deposits. One current Mercersburg Financial board member will join the boards of both Orrstown Financial and unit Orrstown Bank. Mercersburg Financial President and CEO Robert Fignar will serve as market president for Orrstown Financial's operations in Franklin and Perry counties, Pa., and Washington County, Md.

Orrstown Financial expects the transaction to result in GAAP earnings-per-share accretion of approximately 8.7% in 2019, with an internal rate of return of about 18%, and a tangible book value earnback period of about three years. The company also expects an increase of 10 basis points in its return on assets and an increase of 100 basis points in its return on tangible common equity.

As of March 31, Orrstown Bank had $1.63 billion in assets, while Mercersburg Financial subsidiary First Community Bank of Mercersburg had total assets of $184.0 million.

The deal is expected to close in the fourth quarter and is intended to qualify as a tax-free reorganization for federal income tax purposes.

Orrstown Financial will expand in Franklin County, Pa., by six branches to be ranked third, with a 22.12% share of approximately $2.14 billion in total market deposits.

Hovde Group LLC served as financial adviser to Orrstown Financial, while Goodwin Procter LLP acted as the company's legal counsel. Ambassador Financial Group Inc. served as financial adviser to Mercersburg Financial, and Stevens & Lee PC served as legal counsel.

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