8-K: Orrstown Financial and Codorus Valley Bancorp Address Shareholder Concerns with Supplemental Merger Disclosures

Orrstown Financial Services and Codorus Valley Bancorp have released supplemental disclosures to their joint proxy statement/prospectus in response to shareholder demand letters regarding their proposed merger.

Summary

• Orrstown Financial Services, Inc. (ORRF) and Codorus Valley Bancorp, Inc. (CVLY) are proceeding with their planned merger, with ORRF as the surviving entity.
• Following the merger, CVLY's subsidiary, PeoplesBank, will merge into Orrstown Bank.
• Shareholder meetings to vote on the merger are scheduled for May 30, 2024.
• Between April 4, 2024 and May 23, 2024, ORRF received three and CVLY received eight demand letters from shareholders alleging omissions of material information in the joint proxy statement/prospectus.
• To avoid delays and costs, ORRF and CVLY have provided supplemental disclosures, while denying any wrongdoing or legal necessity for these disclosures.
• The supplemental disclosures include revised financial analysis data, such as updated selected company comparisons and discounted cash flow analysis.
• The merger is still expected to proceed as planned, with no changes to the merger consideration or meeting dates.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the merger is expected to be accretive to earnings, the need for supplemental disclosures and the dilutive effect on tangible book value temper the overall positive outlook. The companies are taking steps to address shareholder concerns, which is a positive sign.

Positives

• The merger is projected to be accretive to ORRF's 2024 and 2025 earnings per share.
• The supplemental disclosures address shareholder concerns and aim to avoid delays in the merger process.
• The pro forma discounted cash flow analysis indicates a positive implied value per share for the combined company.
• The merger is still expected to proceed as planned, with no changes to the merger consideration or meeting dates.

Negatives

• The merger is projected to be dilutive to ORRF's tangible book value per share at closing.
• The demand letters from shareholders indicate potential concerns about the initial disclosures.
• The need for supplemental disclosures suggests potential weaknesses in the original proxy statement/prospectus.

Risks

• There is a risk of further demand letters being received before the merger is completed.
• The merger could be more expensive to complete than anticipated.
• Revenues following the merger may be lower than expected.
• There is a risk of potential adverse reactions or changes to business or employee relationships.
• The integration of the two companies may present challenges.
• The merger is subject to regulatory and shareholder approvals, which may not be obtained or may result in conditions that could adversely affect the combined company.
• The dilution caused by ORRF's issuance of additional shares of its capital stock in connection with the proposed transaction could impact shareholders.

Future Outlook

The document includes forward-looking statements regarding the financial condition, results of operations, business plans and the future performance of ORRF and CVLY, but cautions that these statements are subject to risks and uncertainties. The merger is expected to be completed, but the timing and success are not guaranteed.

Management Comments

• ORRF and CVLY believe that the allegations in the Demand Letters are meritless and no additional disclosure is required in the joint proxy statement/prospectus.
• ORRF, the ORRF Board of Directors, CVLY, and the CVLY Board of Directors deny any liability or wrongdoing in connection with the joint proxy statement/prospectus.

Industry Context

This merger is part of a broader trend of consolidation in the regional banking sector, as institutions seek to achieve economies of scale and improve profitability. The supplemental disclosures highlight the importance of transparency and addressing shareholder concerns in such transactions.

Comparison to Industry Standards

• The document provides detailed comparisons to selected peer companies, including Arrow Financial Corporation, The First of Long Island Corporation, and others, using metrics like price-to-tangible book value and price-to-earnings ratios.
• The analysis also includes comparisons to selected transactions, with ranges for transaction price-to-tangible book value multiples, core deposit premiums, and transaction price-to-LTM EPS multiples.
• The multiples used in the discounted cash flow analysis, ranging from 8.5x to 10.5x, are within the typical range for regional bank valuations.
• The discount rates used in the discounted cash flow analysis, ranging from 10.1% to 15.3%, are based on industry standards and professional judgment.

Legal Proceedings

• ORRF and CVLY received demand letters from shareholders alleging omissions of material information in the joint proxy statement/prospectus.

Related Party Transactions

• KBW received aggregate fees of approximately $430,000 from CVLY in the past two years for financial advisory services related to an activist shareholder campaign.

Stakeholder Impact

• Shareholders of ORRF and CVLY will vote on the merger.
• Employees of both companies may be affected by the integration process.
• Customers of both banks will be impacted by the merger of the two entities.
• The merger is expected to create a larger, more competitive financial institution.

Next Steps

• Shareholder meetings will be held on May 30, 2024, to vote on the merger.
• The merger is expected to close following shareholder and regulatory approvals.
• The integration of the two companies will commence after the merger is completed.

Key Dates

Keywords

merger, acquisition, Orrstown Financial Services, Codorus Valley Bancorp, proxy statement, shareholder, financial analysis, discounted cash flow, accretive, dilutive, banking