3. BUSINESS COMBINATION

On October 1, 2025, the Corporation completed its previously announced merger with Susquehanna Community Financial, Inc.  (“Susquehanna”). Susquehanna was the parent company of Susquehanna Community Bank, with seven banking offices located in Lycoming, Northumberland, Snyder and Union counties in Pennsylvania. Pursuant to the Agreement and Plan of Merger dated April 23, 2025 between the Corporation and Susquehanna, Susquehanna merged with and into the Corporation, with the Corporation as the surviving corporation in the Merger. Immediately following the completion of the Merger, Susquehanna Community Bank, the wholly owned subsidiary of Susquehanna, merged with and into C&N Bank, with C&N Bank surviving. Management believes the combination creates additional scale in central Pennsylvania and further diversifies its loan portfolio and funding base, thus increasing resiliency and efficiency.

The consolidated financial statements include the formerly separate Susquehanna operations from October 1, 2025 through December 31, 2025. Since the activities of the former Susquehanna operations have been combined with those of the Corporation, the Corporation’s ability to report on the former operations of Susquehanna is inherently limited. The Corporation estimates that included in the Consolidated Statement of Income for 2025 are total revenues of $6.3 million and net income of $2.4 million attributable to the former Susquehanna operations, excluding merger-related expenses.

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Upon completion of the merger, shareholders of Susquehanna became entitled to exchange each share of Susquehanna common stock owned for 0.80 shares of the Corporation’s common stock. Cash was issued in lieu of fractional shares resulting from the conversion of Susquehanna’s stock. In total, the Corporation issued 2,272,948 shares of common stock to the former Susquehanna stockholders resulting in total merger consideration valued at $44.6 million and an increase in stockholders’ equity of $44.4 million, net of equity issuance costs. The value of the stock consideration transferred at the close of the transaction was based on the average of the high and low trading price of the Corporation’s common stock of $19.64 per share on October 1, 2025.

The merger was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. The merger was also accounted for using Accounting Standards Update 2025-08, Financial Instruments – Credit Losses (Topic 326). The Corporation early adopted ASU 2025-08 which applies the gross-up method to acquired non-PCD assets that are purchased seasoned loans using a gross-up approach which records an initial allowance for credit losses through to the initial amortized cost basis.

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The following tables summarize the consideration paid for the Susquehanna acquisition and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. As reflected in the following tables, goodwill represents consideration transferred in the transaction in excess of the fair value of net assets acquired. The goodwill resulting from the transaction represents the value management expects the Corporation to realize from additional scale and diversification of the loan portfolio and funding base, and related increases in resiliency and efficiency. The goodwill recorded in the Susquehanna merger is attributable to the Corporation’s sole business segment, community banking, and is not deductible for income tax reporting purposes.

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The following is a description of the methodologies used to estimate the fair values of the significant assets acquired and liabilities assumed at the acquisition date:

Acquisition-date fair values for available-for-sale debt securities were determined using Level 1 inputs consistent with the methods described in Note 21. In October 2025, the Corporation sold most of the available-for-sale debt securities acquired from Susquehanna. Proceeds from the sales totaled $143.2 million with no realized gain or loss on the sales.

The Corporation decreased the fair value of premises and equipment by $3.2 million with a corresponding increase to goodwill. The adjustment is based primarily on a comparison of third-party appraisals for buildings, land and land improvements. The fair value adjustments will be depreciated over the estimated useful lives of the applicable assets, primarily 20 years.

The Corporation recognized a core deposit intangible of $10,690,000. The core deposit intangible represents the estimated value of lower-cost funding provided by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market. The core deposit intangible was valued based on discounted future cash flows expected to result from ownership including estimates of the timing and amount of cash flows as well as estimated discount rates. The core deposit intangible will be amortized over a weighted-average life of 4.2 years, subject to adjustment if the Corporation’s cash flow patterns vary significantly from the initial estimates.

Deposit liabilities assumed were segregated into two categories: (1) nonmaturity deposits (checking, savings and money market), and (2) time deposits (deposit accounts with a stated maturity). For nonmaturity deposits, the acquisition date outstanding balance of the assumed deposit accounts approximates fair value. In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. An adjustment of $451,000 was recorded to reflect the fair value of the time deposits assumed, which was determined using a discounted cash flow approach that utilized discount rates equal to current market interest rates for instruments with similar terms and maturities. The fair value adjustment for time deposits will be amortized over 1.25 years.

The short-term borrowing consisted of an overnight advance from the Federal Home Loan Bank of Pittsburgh at a market rate of interest with no fair value adjustment. This advance was paid off on October 1, 2025.

Loans: The fair values of loans were generally based on a discounted cashflow methodology that considered market interest rates, expected credit losses, prepayment assumptions and other market factors for loans with similar characteristics including loan type, collateral, fixed or variable interest rate and credit risk characteristics. Expected credit losses were determined based on credit characteristics and other factors such as default and recovery rates of similar products.

The Corporation evaluated and classified the acquired loans as non-PCD or PCD. The PCD loans include loans which experienced more-than-insignificant credit deterioration since origination. PCD loans included loans on nonaccrual status and loans with a risk rating of special mention or substandard based on the Corporation’s internal risk rating system. For PCD and non-PCD loans, an ACL is recorded on day 1 and added to the fair value of the loan to determine its amortized cost. The following table presents details related to the fair value of acquired PCD loans at the acquisition date:

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The allowance for credit losses at acquisition represents the amount of principal not expected to be collected.

The following table presents pro forma information as if the merger between the Corporation and Susquehanna had been completed on January 1, 2024. These results combine the historical results of Susquehanna into the Corporation’s Consolidated Statements of Income and, while adjustments were made for the estimated impact of certain fair value adjustments, the pro forma information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning of 2024. For example, merger-related expenses are included in the periods where such expenses were incurred. The pro forma information does not include the impact of expected expense efficiencies nor does it consider any potential impacts of current market conditions or other factors.

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The pro forma information for 2025 immediately above was adjusted to exclude the impact of merger-related expenses. Merger-related expenses include expenses related to conversion of Susquehanna’s core customer system data into the Corporation’s core system, severance and similar expenses, legal and other professional fees and various other costs. Total merger-related expenses incurred in 2025 and eliminated from the pro forma information was $9,400,000 (including $1,460,000 incurred by Susquehanna), or $7,652,000 net of tax (including $1,302,000 incurred by Susquehanna).