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Donegal in $85M deal to sell banking subsidiary to Northwest

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Northwest Bancshares Inc. is taking a bigger leap into the Lancaster County banking market.

The western Pennsylvania bank said today it plans to acquire Donegal Financial Services Corp., parent of Union Community Bank in Mount Joy, in a cash and stock deal valued at roughly $85 million. 

The transaction is expected to close early next year, said Jeffrey Miller, executive vice president and CFO of Donegal Group Inc., the East Donegal Township-based parent of Donegal Financial.

"It was a strategic decision we felt made sense from a timing perspective relative to the banking environment," Miller said.

The merger has been in the works since the beginning of the year, according to Miller.

It promises to make Northwest a bigger player in the Lancaster County market, which has attracted multiple banks over the last few years following the sale of Susquehanna Bancshares Inc. to BB&T Corp., among other deals.

Once the deal with Donegal closes, Northwest’s presence in Lancaster will jump from six offices to 16, and it will be the county's sixth-largest bank as ranked by deposits. Northwest was 13th as of June 2017, according to statistics from the Federal Deposit Insurance Corp.

Union has 14 branches in Lancaster but Northwest said in a press release it expects to consolidate four branches with nearby offices following the merger.

William J. Wagner, chairman and CEO of Northwest, declined to specify which branches will be consolidated. 

The merger will bring Northwest to 182 branches in three states: Pennsylvania, Ohio and New York after the deal closes. In addition to Lancaster, it has branches in Dauphin, Lebanon and York counties. 

Northwest said its deposits in Lancaster will increase to $640 million from $150 million as a result of the deal.

It also expects that the acquisition, combined with other organic growth, will push the bank above $10 billion in assets in 2019, according to the release. Crossing the threshold triggers additional regulatory requirements.

"This merger will provide bottom-line earnings that exceed the loss of transaction income we will incur as mandated by the Dodd-Frank Act when we cross the $10 billion asset threshold. We believe we would have exceeded this asset threshold in 2019 due to normal internal growth," Wagner said in a statement.

Under the terms of the agreement, payment will be 50 percent cash and 50 percent stock, with the stock portion consisting of a fixed exchange of 137.84 Northwest shares for each of Donegal Financial's 17,864 outstanding shares. 

The deal's final value depends on the price for Northwest shares just prior to the closing, but is fixed at between $80.75 million and $89.25 million.

Under the agreement, Donegal Financial also will pay a dividend of approximately $30 million to its two shareholders, Donegal Group and Donegal Mutual Insurance Co., immediately before closing the merger.

Completion of the transaction is subject to customary closing conditions, including regulatory approvals.

According to its most recent earnings report, Donegal Financial had total assets of $577 million. Union Community, meanwhile, had net income of nearly $1.5 million in the first quarter of 2018, up from $607,000 in the first quarter of 2017, according to FDIC records.

Headquartered in Warren, Northwest has assets of $9.5 billion. It had net income of $25 million in the first quarter of 2018, up from net income of $17.8 million in the first quarter of 2018, according its most recent earnings report.

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Shelby White

Shelby White covers banking and finance, law and Lancaster County for the Central Penn Business Journal. For tips, email her at swhite@cpbj.com.

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