KBRA Comments on CNB Financial Corporation's Proposed Acquisition of ESSA Bancorp, Inc.

Rhea-AI Summary

CNB Financial (NASDAQ: CCNE) has announced a definitive agreement to acquire ESSA Bancorp in an all-stock transaction valued at $214 million. The merger, expected to close in 3Q25, will expand CNB's Pennsylvania footprint, particularly in the Greater Lehigh Valley and Scranton markets.

The acquisition will add approximately $2 billion in assets to CCNE's balance sheet, resulting in proforma $8 billion in total assets, $6 billion in loans, and $7 billion in deposits, along with 20 additional branch locations. The combined entity will become the seventh-largest Pennsylvania-headquartered bank by deposit market share.

The merger projects $20.5 million in pre-tax cost savings, with 50% realized in 2025. Additional earnings benefits include $94 million in loan portfolio interest rate marks and $14 million in investment portfolio marks. The proforma CET1 ratio is expected to decline from 11.6% to 10.7% at closing but should rebuild to peer group levels by YE26.

Positive

• All-stock acquisition valued at $214 million expands Pennsylvania market presence
• Expected $20.5 million in pre-tax cost savings
• Addition of $2 billion in assets, creating $8 billion total asset institution
• $94 million in loan portfolio interest rate marks to boost earnings
• Strong asset quality history with nominal credit losses

Negative

• CET1 ratio expected to decline from 11.6% to 10.7% at closing
• Higher proportion of CD deposits from ESSA (36% vs CNB's 13%)
• Increased CRE concentration to 262% of total risk-based capital

Insights

Banking M&A Analyst

The merger between CNB Financial and ESSA Bancorp represents a strategically compelling $214 million all-stock transaction that will significantly enhance CNB's market presence in Pennsylvania. The deal's price-to-tangible book value ratio of 0.99x suggests a fair valuation, particularly in the current banking environment. The projected $20.5 million in pre-tax cost savings and substantial interest rate marks ($94 million on loans and $14 million on investments) indicate strong potential for earnings accretion.

The combined entity's enhanced scale, reaching $8 billion in assets, positions it as a more formidable competitor in Pennsylvania's banking landscape. The transaction's structure maintains healthy capital levels, with the pro-forma CET1 ratio of 10.7% providing adequate cushion for growth. The complementary loan portfolio mix and manageable commercial real estate concentration at 262% (below the 300% regulatory guidance) suggest prudent risk management.

Risk Management Specialist

The integration risk assessment reveals several positive factors. The thorough due diligence process, including review of 45% of commercial loans, demonstrates prudent risk management. The $23.5 million credit mark and $15.3 million CECL adjustment appear adequate given both banks' historical credit performance. The projected deposit mix, while showing higher CD concentration from ESSA (36% vs CNB's 13%), maintains a reasonable 2.62% cost of deposits with 16% non-interest-bearing deposits providing stability. The planned $200 million balance sheet repositioning through lower-yielding loan sales should optimize the earning asset mix and improve long-term profitability.

NEW YORK--(BUSINESS WIRE)-- 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.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1007528

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Jason Szelc, Senior Director

+1 301-969-3174

jason.szelc@kbra.com

Hunter Chadwick, Senior Analyst

+1 301-960-7042

hunter.chadwick@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What is the value of CNB Financial's acquisition of ESSA Bancorp?

CNB Financial's acquisition of ESSA Bancorp is valued at $214 million in an all-stock transaction.

When is CCNE's acquisition of ESSA expected to close?

The acquisition is expected to close in the third quarter of 2025 (3Q25), pending regulatory approval.

How many assets will CCNE gain from the ESSA acquisition?

The acquisition will add approximately $2 billion in assets to CCNE's balance sheet, resulting in proforma $8 billion in total assets.

What are the projected cost savings from CCNE's merger with ESSA?

The merger projects $20.5 million in pre-tax cost savings, with 50% realized in 2025 and the remainder in the following year.

How will the ESSA acquisition affect CCNE's capital ratios?

CCNE's CET1 ratio is expected to decline from 11.6% to 10.7% at closing but should rebuild to peer group levels by year-end 2026.

What will be CCNE's deposit market share position after the ESSA merger?

The combined entity will have the seventh largest deposit market share in Pennsylvania among banks headquartered in the state, excluding banks over $100 billion in assets.