On January 10, 2025, Clearfield, PA-based CNB Financial Corporation (NASDAQ: CCNE) (“CNB”), parent company of CNB Bank, and Stroudsburg, PA-based ESSA Bancorp, Inc. (NASDAQ: ESSA) (“ESSA”), parent company of ESSA Bank & Trust (“ESSA Bank”), jointly announced that they had entered into a definitive agreement pursuant to which ESSA would merge with and into CNB and ESSA Bank would merge with and into CNB Bank. The transaction, valued at $214 million (P/TBV: 0.99x), is an all-stock deal expected to close in 3Q25 pending regulatory approval. Under the agreement, CNB and CNB Bank will each add three directors from ESSA to their respective board of directors including Gary S. Olson, current President, CEO, and Director of ESSA, Robert C. Selig Jr., current Chairman of the Board of ESSA, and Daniel J. Henning, ESSA Director.

In our view, the proposed acquisition is in line with CNB's overall growth strategy of expansion into contiguous markets through both acquisitive and organic means. The transaction allows CCNE to expand its footprint in Pennsylvania, notably in the Greater Lehigh Valley and Scranton markets, while providing solid opportunities for commercial growth and expansion of its fee-based business lines. The acquisition is expected to add approximately $2 billion in assets to CCNE's balance sheet at close, with proforma $8 billion in total assets, $6 billion in loans, and $7 billion in deposits, as well as adding 20 branch locations in Pennsylvania. The combined entity will have the seventh largest deposit market share in the state of Pennsylvania amongst banks headquartered in Pennsylvania, excluding banks greater than $100 billion in assets. The company’s combined financial projections include strong profitability metrics following the close of the transaction, in part, due to pre-tax cost savings of $20.5 million, with 50% of the savings recognized in 2025 and the remainder achieved in the year thereafter. In addition to the cost savings, earnings should receive a temporary boost from accretion income, with CCNE reporting an estimated $94 million in interest rate marks on the loan portfolio (accreted over six years) and roughly $14 million in interest marks on the investment portfolio (accreted over four years). Furthermore, CCNE expects to reposition the balance sheet through various transactions, including the sale of approximately $200 million in lower-yielding loans, favorably impacting earnings long-term. The proforma loan portfolio is not expected to change materially as both institutions have complementary loan mixes, with CRE remaining the largest component at 41% of total loans, followed by residential loans at 33% and C&I at 24%. While investor CRE relative to total risk based capital is expected to increase upon closing, CRE concentration will remain well below the 300% guidance (proforma 262%). With respect to deposit mix, while ESSA maintains a higher proportion of CDs (36% of deposits at 3Q24 vs. 13% for CNB), the proforma cost of deposits is expected to remain manageable at 2.62%, with NIB deposits representing 16% of total deposits.

Regarding credit quality, both institutions have reflected solid asset quality performance over time, including a nominal credit loss history, which is underpinned by disciplined underwriting and conservative management teams that have extensive knowledge of their operating markets. CNB conducted a thorough review of the loan portfolio, inclusive of 45% of commercial loans, including all key large relationships, and expects to record a total gross pre-tax credit mark of $23.5 million, along with a Day 2 CECL adjustment of $15.3 million in relation to the transaction. Moreover, CNB has managed solid capital metrics with a CET1 ratio of 11.6% at 3Q24, though this ratio is expected to decline to 10.7% at closing. Nonetheless, the proforma earnings profile should enable the meaningful rebuild of capital following the acquisition, with ratios expected to track in line with the rated peer group by YE26. Overall, we believe that the proposed acquisition complements CNB’s growth strategy, and while there is an inherent level of integration risk involved with any bank M&A transaction, such risk is somewhat mitigated by management's M&A integration experience.

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