KBRA Comments on Citizens & Northern Corporation's Proposed Acquisition of Susquehanna Community Financial, Inc.

On April 23, 2025, Wellsboro, PA-based Citizens & Northern Corporation (NASDAQ: CZNC) ("C&N"), parent company of Citizens & Northern Bank, and West Milton, PA-based Susquehanna Community Financial, Inc. (OTCPK: SQCF) ("Suequehanna Community"), parent company of Susquehanna Community Bank, jointly announced that they had entered into a definitive agreement pursuant to which Susquehanna Community Financial, Inc. would merge with and into Citizens & Northern Corporation, and Susquehanna Community Bank would merge with and into Citizens & Northern Bank. The transaction, valued at $44.3 million (P/TBV: 1.3x), is an all-stock deal expected to close in 4Q25 pending regulatory approval. Under the agreement, Chris Trate, current SQCF Board Chairman, would be appointed to C&N's board of directors. In addition, Dave Runk, SQCF's CEO, would become a member of the Citizens & Northern Bank executive team as EVP and Strategic Advisor, and Jeffrey Hollenbach, SQCF's President and COO, would lead the Susquehanna market as Region President.

In our view, the proposed acquisition is in line with C&N's overall growth efforts of expansion into contiguous and attractive markets through both acquisitive and organic means. The transaction allows CZNC to extend its legacy footprint while creating additional scale in central Pennsylvania, providing solid opportunities to further diversify its loan portfolio and funding base while remaining committed to its core community banking values. The acquisition is expected to add approximately $600 million in assets to CZNC's balance sheet at close, with proforma $3.2 billion in total assets, $2.3 billion in loans, and $2.6 billion in deposits, as well as adding 7 branch locations throughout Central Pennsylvania. The combined company’s proforma financial projections include strong profitability metrics following the close of the transaction, in part, due to expected cost savings of approximately 30% of SQCF's operating base, with the combined company estimating 100% of the savings to be recognized in 2026.

Regarding credit quality, both institutions have reflected solid asset quality performance over time, including nominal credit loss history, which is underpinned by disciplined underwriting and conservative management teams that have extensive knowledge of operating markets. The proforma loan portfolio is not expected to change materially as both institutions have complementary loan mixes, with residential loans remaining the largest component at 31% of total loans, investor CRE (including multifamily) loans at 30%, and C&I at 23%. Moreover, total CRE exposure is expected to remain below the regulatory guidance with a proforma CRE to total risk-based capital of 276%. CZNC conducted a review of the loan portfolio including all large relationships and classified loans focusing on underwriting standards and loan terms, structure, and the borrowers' ability to service the debt. As such, C&N expects to record a total gross pre-tax credit mark of $6.2 million (~1.5% ) and a total gross pre-tax interest rate mark of $14.6 million (3.6%) accreted over ~5 years. Moreover, additional pre-tax interest rate marks of $21.8 million and $0.2 million will be taken for AOCI related to AFS securities and time deposits, respectively. With respect to deposit mix, proforma deposits costs are expected to remain contained at 1.89% with NIB deposits representing ~20% of total deposits. Moreover, C&N has managed solid capital metrics with a CET1 ratio of 13.6% at 1Q25, though this ratio is expected to decline to 11.5% at closing. Nonetheless, the pro forma earnings profile should enable meaningful rebuild of capital following the acquisition. Overall, we believe that the proposed acquisition complements CZNC'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 previous M&A integration experience.

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