c279-20210630x10q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from____________to______________

Commission file number: 0-15536

CODORUS VALLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2428543

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405-2287

(Address of principal executive offices)(Zip code)

717-747-1519

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since the last report.)

_____________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $2.50 par value	CVLY	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☒	Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On July 23, 2021, 9,751,923 shares of common stock, par value $2.50, were outstanding.

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Codorus Valley Bancorp, Inc.

Form 10-Q Index


PART I – FINANCIAL INFORMATION		Page #

Item 1.	Financial statements (unaudited):
	Consolidated balance sheets	3
	Consolidated statements of income	4
	Consolidated statements of comprehensive income	5
	Consolidated statements of cash flows	6
	Consolidated statements of changes in shareholders’ equity	7
	Notes to consolidated financial statements	8

Item 2.	Management’s discussion and analysis of financial condition and results of operations	39

Item 3.	Quantitative and qualitative disclosures about market risk	56

Item 4.	Controls and procedures	57

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	57

Item 1A.	Risk factors	57

Item 2.	Unregistered sales of equity securities and use of proceeds	57

Item 3.	Defaults upon senior securities	58

Item 4.	Mine safety disclosures	58

Item 5.	Other information	58

Item 6.	Exhibits	59

SIGNATURES		60

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)




	June 30,		December 31,
(dollars in thousands, except per share data)	2021		2020
Assets
Interest bearing deposits with banks	$	377,588	$	313,469
Cash and due from banks		19,444		22,324
Total cash and cash equivalents		397,032		335,793
Securities, available-for-sale		208,611		185,002
Restricted investment in bank stocks, at cost		1,311		2,593
Loans held for sale		4,795		15,981
Loans (net of deferred fees of $6,785- 2021 and $6,134 - 2020)		1,543,812		1,544,589
Less-allowance for loan losses		(22,011)		(21,264)
Net loans		1,521,801		1,523,325
Premises and equipment, net		22,316		25,206
Operating leases right-of-use assets		2,063		2,386
Goodwill		2,301		2,301
Other assets		75,923		69,612
Total assets	$	2,236,153	$	2,162,199

Liabilities
Deposits
Noninterest bearing	$	472,154	$	396,947
Interest bearing		1,483,176		1,466,592
Total deposits		1,955,330		1,863,539
Short-term borrowings		13,393		8,540
Long-term debt		21,592		46,606
Subordinated debentures - face amount $31,000 (less unamortized discount and debt
issuance cost of $358 at June 30, 2021 and $398 at December 31, 2020)		30,642		30,602
Operating leases liabilities		2,185		2,515
Other liabilities		13,738		12,437
Total liabilities		2,036,880		1,964,239

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at June 30, 2021 and 0 at December 31, 2020		0		0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
shares issued: 9,883,187 at June 30, 2021 and 9,820,882 at December 31, 2020; and
shares outstanding: 9,750,555 at June 30, 2021 and 9,820,882 at December 31, 2020		24,708		24,552
Additional paid-in capital		141,940		141,461
Retained earnings		33,000		28,380
Accumulated other comprehensive income		2,114		3,567
Treasury stock, at cost; 132,632 shares at June 30, 2021		(2,489)		0
Total shareholders' equity		199,273		197,960
Total liabilities and shareholders' equity	$	2,236,153	$	2,162,199

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	Three months ended					Six months ended
	June 30,					June 30,
(dollars in thousands, except per share data)	2021		2020			2021			2020
Interest income
Loans, including fees	$	16,492		$	17,880		$	34,084		$	36,644
Investment securities:
Taxable		790			761			1,372			1,581
Tax-exempt		86			126			180			267
Dividends		23			23			49			95
Other		105			48			186			440
Total interest income		17,496			18,838			35,871			39,027

Interest expense
Deposits		1,949			3,501			4,169			7,777
Federal funds purchased and other short-term borrowings		10			11			18			20
Long-term debt		205			426			457			963
Subordinated debentures		418			0			836			0
Total interest expense		2,582			3,938			5,480			8,760
Net interest income		14,914			14,900			30,391			30,267
Provision for loan losses		352			2,550			1,583			11,985
Net interest income after provision for loan losses		14,562			12,350			28,808			18,282

Noninterest income
Trust and investment services fees		1,143			946			2,195			1,940
Income from mutual fund, annuity and insurance sales		344			249			644			510
Service charges on deposit accounts		1,319			975			2,540			2,105
Income from bank owned life insurance		427			279			697			565
Other income		359			482			922			921
Gain on sales of loans held for sale		933			554			1,983			852
Loss on write down of assets held for sale		(1,174)			0			(1,174)			0
Gain (loss) on sales of securities		0			50			(23)			65
Total noninterest income		3,351			3,535			7,784			6,958

Noninterest expense
Personnel		8,268			7,196			16,696			15,001
Occupancy of premises, net		856			865			1,829			1,791
Furniture and equipment		793			841			1,631			1,694
Professional and legal		253			245			604			450
Marketing		438			311			703			636
FDIC insurance		192			172			418			339
Debit card processing		397			284			677			673
Charitable donations		750			93			938			965
External data processing		858			704			1,678			1,408
Gain on foreclosed real estate, including recovery of losses		0			(193)			0			(173)
Impaired loan carrying costs		87			190			187			476
Other		888			1,422			2,125			2,189
Total noninterest expense		13,780			12,130			27,486			25,449
Income (loss) before income taxes		4,133			3,755			9,106			(209)
Provision (benefit) for income taxes		851			705			1,924			(270)
Net income	$	3,282		$	3,050		$	7,182		$	61
Net income per share, basic	$	0.33		$	0.31		$	0.73		$	0.01
Net income per share, diluted	$	0.33		$	0.31		$	0.73		$	0.01

See accompanying notes.
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Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three months ended
	June 30,
(dollars in thousands)	2021		2020
Net income	$	3,282	$	3,050
Other comprehensive income:
Securities available for sale:
Net unrealized holding gains arising during the period
(net of tax expense of $170 and $99, respectively)		640		373
Reclassification adjustment for gains included in net income
(net of tax expense of $0 and $11, respectively) (a) (b)		0		(39)
Net unrealized gains		640		334
Comprehensive income	$	3,922	$	3,384

	Six months ended
	June 30,
(dollars in thousands)	2021		2020
Net income	$	7,182	$	61
Other comprehensive income:
Securities available for sale:
Net unrealized holding (losses) gains arising during the period
(net of tax (benefit) expense of ($391) and $846, respectively)		(1,472)		3,183
Reclassification adjustment for losses (gains) included in net income
(net of tax (benefit) expense of ($5) and $14, respectively) (a) (b)		18		(51)
Net unrealized (losses) gains		(1,454)		3,132
Comprehensive income	$	5,728	$	3,193

(a)Amounts are included in net gain (loss) on sales of securities on the Consolidated Statements of Income within noninterest income.

(b)Income tax amounts are included in the provision (benefit) for income taxes on the Consolidated Statements of Income.

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Six months ended
	June 30,
(dollars in thousands)	2021		2020
Cash flows from operating activities
Net income	$	7,182	$	61
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/amortization		1,317		1,386
Net amortization of premiums on securities		524		390
Amortization of deferred loan origination fees and costs		(3,725)		(1,236)
Net amortization of operating lease right of use assets		299		336
Net amortization of finance lease right of use assets		24		24
Amortization of subordinated debentures issuance fees		41		0
Net change in operating lease liabilities		(307)		(345)
Provision for loan losses		1,583		11,985
Writedown of assets held for sale		1,174		0
Provision for losses on foreclosed real estate		0		18
Increase in bank owned life insurance		(697)		(565)
Originations of mortgage loans held for sale		(54,122)		(28,865)
Originations of SBA loans held for sale		(515)		(872)
Proceeds from sales of mortgage loans held for sale		60,170		24,663
Proceeds from sales of SBA loans held for sale		7,606		140
Gain on sales of mortgage loans held for sale		(1,769)		(843)
Gain on sales of SBA loans held for sale		(214)		(9)
Gain on disposal of premises and equipment		(25)		0
Loss (gain) on sales of securities, available-for-sale		23		(65)
Gain on sales of foreclosed real estate		0		(214)
Stock-based compensation		395		250
Decrease (increase) in interest receivable		3,058		(1,519)
Increase in other assets		(761)		(245)
Increase in interest payable		(203)		(225)
Decrease in other liabilities		1,503		98
Net cash provided by operating activities		22,561		4,348
Cash flows from investing activities
Purchases of securities, available-for-sale		(207,323)		(43,705)
Maturities, repayments and calls of securities, available-for-sale		177,523		21,679
Sales of securities, available-for-sale		3,803		26,288
Net decrease in restricted investment in bank stock		1,282		1,958
Net decrease (increase) in loans made to customers		3,667		(106,892)
Purchases of premises and equipment		(543)		(1,758)
Investment in bank owned life insurance		(7,000)		0
Proceeds from bank owned life insurance		450		0
Proceeds from sales of foreclosed real estate		0		1,011
Net cash used in investing activities		(28,141)		(101,419)
Cash flows from financing activities
Net increase in demand and savings deposits		114,372		211,867
Net (decrease) increase in time deposits		(22,581)		5,211
Net increase in short-term borrowings		4,853		1,551
Repayment of long-term debt		(25,000)		(35,000)
Net change in finance lease liabilities		(14)		(12)
Cash dividends paid to shareholders		(2,562)		(3,123)
Payment of taxes related to stock withheld		(5)		(2)
Treasury stock reissued		188		89
Treasury stock repurchased		(2,672)		(87)
Proceeds from issuance of stock		240		347
Net cash provided by financing activities		66,819		180,841
Net increase in cash and cash equivalents		61,239		83,770
Cash and cash equivalents at beginning of year		335,793		131,591
Cash and cash equivalents at end of period	$	397,032	$	215,361

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)


							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury
(dollars in thousands, except per share data)	Stock		Capital		Earnings		Income (Loss)		Stock		Total
Balance, January 1, 2021	$	24,552	$	141,461	$	28,380	$	3,567	$	0	$	197,960
Net income						3,900						3,900
Other comprehensive loss, net of tax								(2,093)				(2,093)
Cash dividends ($0.130 per share)						(1,278)						(1,278)
Stock-based compensation				101								101
Withheld stock - 279 shares										(5)		(5)
Issuance and reissuance of stock:
7,175 shares under the dividend reinvestment and stock purchase plan		18		98								116
5,702 shares under the employee stock option plan		14		31						5		50
43,212 shares of stock-based compensation awards		108		(108)								0
Balance, March 31, 2021	$	24,692	$	141,583	$	31,002	$	1,474	$	0	$	198,751
Balance, April 1, 2021	$	24,692	$	141,583	$	31,002	$	1,474	$	0	$	198,751
Net income						3,282						3,282
Other comprehensive income, net of tax								640				640
Cash dividends ($0.130 per share)						(1,284)						(1,284)
Stock-based compensation				294								294
Repurchased stock - 142,541 shares										(2,672)		(2,672)
Issuance and reissuance of stock:
6,495 shares under the dividend reinvestment and stock purchase plan		16		104								120
9,909 shares under employee stock purchase plan				(41)						183		142
Balance, June 30, 2021	$	24,708	$	141,940	$	33,000	$	2,114	$	(2,489)	$	199,273
Balance, January 1, 2020	$	24,390	$	140,450	$	25,019	$	1,309	$	0	$	191,168
Net loss						(2,989)						(2,989)
Other comprehensive income, net of tax								2,798				2,798
Cash dividends ($0.160 per share)						(1,561)						(1,561)
Stock-based compensation				120								120
Repurchased stock - 5,335 shares										(87)		(87)
Withheld stock - 102 shares										(2)		(2)
Issuance and reissuance of stock:
6,706 shares under the dividend reinvestment and stock purchase plan		17		132								149
6,468 shares of stock-based compensation awards		16		(16)								0
Balance, March 31, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Balance, April 1, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Net income						3,050						3,050
Other comprehensive income, net of tax								334				334
Cash dividends ($0.160 per share)						(1,562)						(1,562)
Stock-based compensation				130								130
Issuance and reissuance of stock:
12,536 shares under the dividend reinvestment and stock purchase plan		18		44						89		151
1,000 shares under the stock option plan		2		3								5
(767) shares of stock-based compensation awards		(2)		2								0
11,116 shares under employee stock purchase plan		28		103								131
Balance, June 30, 2020	$	24,469	$	140,968	$	21,957	$	4,441	$	0	$	191,835

See accompanying notes.

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Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2020 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of June 30, 2021, PeoplesBank operates one wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended June 30, 2021. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of June 30, 2021 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022.

On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was signed into law. Chief among the $1.9 trillion stimulus act is additional support for individuals, including $1,400 checks to many Americans, extended unemployment benefits, and expanded tax credits. In addition, ARP provides funding for state and local governments and support for businesses continuing to struggle as a result of the pandemic, including a modest increast to PPP, expanded eligibility to more non-profits, a grant program for restaurants that have suffered pandemic-related losses, and extended payroll support for the airline industry.

While the Corporation continues to evaluate the disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Corporation’s results of future operations, financial position, capital, and liquidity in fiscal year 2021. Further, a decrease in results of future operations may place a strain on the Corporation’s capital reserve ratios.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances less amounts charged off, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Generally, loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) over the contractual life of the loan. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following industry classes: builder & developer, commercial real estate investor, residential real estate investor, hotel/motel, wholesale & retail, agriculture, manufacturing, service and all other. Consumer loans consist of the following classes: residential mortgage, home equity and all other.

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Generally, for all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A past due loan may remain on accrual status if it is in the process of collection and well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed in the current year. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to the Corporation’s judgment as to the collectability of principal. Generally, nonaccrual loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Allowance for Loan Losses

The allowance for loan losses represents the Corporation’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. While the Corporation attributes a portion of the allowance to individual loans and groups of loans that it evaluates and determines to be impaired, the allowance is available to cover all charge-offs that arise from the loan portfolio.

The allowance for loan losses is maintained at a level considered by management to be adequate to provide for probable incurred losses. The Corporation performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, generally nonaccrual loans and troubled debt restructurings. For loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools are shown below. Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation.

Changes in international, US and local economies and business conditions

Changes in the value of collateral for collateral dependent loans

Changes in the level of concentrations of credit

Changes in the volume and severity of classified and past due loans

Changes in the nature and volume of the portfolio

Changes in collection, charge-off, and recovery procedures

Changes in underwriting standards and loan terms

Changes in the quality of the loan review system

Changes in the experience/ability of lending management and key lending staff

Regulatory and legal regulations that could affect the level of credit losses

Other pertinent environmental factors

As disclosed in Note 4—Loans, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate. Within the broad commercial loan segment, the builder & developer and commercial real estate investor loan classes generally present a higher level of risk than other commercial loan classifications. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, unstable real estate prices and the dependency upon successful construction and sale or operation of the real estate project. As a result of the COVID-19 pandemic, the commercial loan segments of hotel/motel and the restaurant and recreation segments included under Other Commercial Loans currently present a higher level of risk than other

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commercial loan classifications. Within the consumer loan segment, junior (i.e., second) liens present a higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral, which could render the Corporation under-secured or unsecured. In addition, economic and housing market conditions can adversely affect the ability of some borrowers to service their debt.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Corporation determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Loans that are deemed impaired are evaluated for impairment loss based on the net realizable value of the collateral, as applicable. Loans that are not collateral dependent will rely on the present value of expected future cash flows discounted at the loan’s effective interest rate to determine impairment loss. Large groups of smaller balance homogeneous loans such as residential mortgage loans, home equity loans and other consumer loans are collectively evaluated for impairment, unless they are classified as impaired.

An allowance for loan losses is established for an impaired commercial loan if its carrying value exceeds its estimated fair value. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals of the underlying collateral. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the most recent appraisal and the condition of the property. Appraisals are generally discounted to provide for selling costs and other factors to determine an estimate of the net realizable value of the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. In instances when specific consumer related loans become impaired, they may be partially or fully charged off, which eliminates the need for a specific allowance.

Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted under a troubled debt restructuring may involve an interest rate that is below the market rate given the associated credit risk of the loan or an extension of a loan’s stated maturity date. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification and future payments are reasonably assured.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act provides the option to not apply ASC 310-40 (TDRs) to a loan modification, related specifically to COVID-19 hardships, when the loan was not past due greater than 30 days as of December 31, 2019. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of June 30, 2021, the Corporation has remaining loan modifications totaling approximately $69,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program (PPP), with outstanding PPP loans as of June 30, 2021 of approximately $99,000,000, which includes $66,500,000 of new PPP loans originated in 2021.

Loan-Level Interest Rate Swaps

Beginning during the second quarter of 2021, PeoplesBank entered into loan-level interest rate swaps (“swaps”) to facilitate certain customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. A loan-level interest rate swap is a contract in which the series of interest rate flows (fixed and variable) are exchanged over the term of a loan with certain qualifying commercial loan customers, and PeoplesBank simultaneously enters into an interest rate swap with a dealer counterparty with identical notional amounts and terms. The net result of these swaps is that the customer pays a fixed interest rate and PeoplesBank receives a floating interest rate. The swap positions with customers are equally offset with the dealer counterparties to minimize the potential impact on PeoplesBank’s financial statements.

Pursuant to agreements with the dealer counterparties, PeoplesBank may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon the current positions and related future collateral requirements relating to them, PeoplesBank believes any effect on its cash flow or liquidity position to be immaterial.

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Derivatives contain an element of credit risk, including the possibility that PeoplesBank will incur a loss because a party to the agreements, which may be a dealer counterparty or a customer, fails to meet its contractual obligations. Derivative contracts may only be executed with dealer counterparties as approved by the Board of Directors. Similarly, derivatives with customers may only be executed with customers within credit exposure limits as approved by the Board of Directors. Loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

Interest rate swaps, recorded at fair value, are included in other assets on the Consolidated Balance Sheets. Additional information is provided in Note 15 – Interest Rate Swaps.

Bank Premises and Equipment Held for Sale

Bank premises and equipment designated as held for sale are carried at the lower of cost or fair value, and, at June 30, 2021 consisted of a retail banking property scheduled to be closed in the fourth quarter 2021, totaling $945,000 and is included in other assets on the Consolidated Balance Sheets. An impairment charge of approximately $1,200,000 was recorded during the three months ended June 30, 2021. There were no bank premises and equipment designated as held for sale as of December 31, 2020.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At June 30, 2021 there was no foreclosed real estate. Included within loans receivable as of June 30, 2021 was a recorded investment of $105,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction, compared to $206,000 as of December 31, 2020.

Mortgage Servicing Rights

The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an estimate of future net servicing income of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At June 30, 2021, the balance of residential mortgage loans serviced for third parties was $73,927,000 compared to $87,142,000 at December 31, 2020.



		Three months ended				Six months ended
		June 30,				June 30,
(dollars in thousands)		2021		2020		2021		2020
Amortized cost:
Balance at beginning of period	$	524	$	739	$	511	$	965
Originations of mortgage servicing rights		15		42		31		55
Amortization expense		(83)		(122)		(174)		(188)
Valuation allowance		2		(10)		90		(183)
Balance at end of period	$	458	$	649	$	458	$	649

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test. This test consists of a qualitative analysis. If the Corporation determines events or circumstances indicate that it is more likely than not that goodwill is impaired, a quantitative analysis must be completed. Analyses may also be performed between annual tests. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The Corporation completes its annual goodwill impairment test on October 1st of each year. Based upon a qualitative and quantitative analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2020.

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Core deposit intangibles represent the value assigned to demand, interest checking, money market, and savings accounts acquired as part of an acquisition. The core deposit intangible value represents the future economic benefit of potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible asset resulting from the merger with Madison Bancorp, Inc. was determined to have a definite life and is being amortized using the sum of the years’ digits method over ten years. All intangible assets must be evaluated for impairment if certain events or changes in circumstances occur. Any impairment write-downs would be recognized as expense on the consolidated statements of income.

Revenue from Contracts with Customers

Revenue from contracts with customers that are required to be recognized under FASB ASC Topic 606 - Revenue from Contracts with Customers (ASC 606) is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Corporation recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

The majority of the Corporation’s revenue-generating transactions are not within the scope of ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other U.S. Generally Accepted Accounting Principles (GAAP) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of non-interest income are as follows:

Trust and investment service fees – The Corporation provides trust, investment management custody and irrevocable life insurance trust services to customers. Such services are rendered in accordance with the underlying contracts for which fees are earned. The Corporation’s performance obligations are generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for services rendered is primarily received in the following month.

Income from mutual fund, annuity and insurance sales – The Corporation sells mutual funds, annuity and insurance products to its customers. The Corporation’s performance obligation is met upon the signing of the product agreement and, in certain cases, a time component may exist when the customer has the right to rescind the agreement with or without penalty. The Corporation recognizes revenues upon delivery of the product or service unless there is a time component in which case revenues are recognized utilizing the expected value method. Payment for services rendered is primarily received in the following month.

Service charges on deposits accounts – These represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Other service charges include revenue from processing wire transfers, cashier’s checks and other services. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to the customers’ accounts.

Other noninterest income – The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa. Credit and gift card income is realized through a third party provider who issues cards as private label in the Corporation’s name. ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM. The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse. Merchant services income is realized through a third party service provider who is contracted by the Corporation under a referral arrangement. Such fees represent fees charged to merchants to process their debit card transactions. The Corporation’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received within a one to three day lag or in the following month.

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Per Share Data

The computation of net income per share is provided in the table below.



	Three months ended				Six months ended
	June 30,				June 30,
(in thousands, except per share data)	2021		2020		2021		2020
Net income	$	3,282	$	3,050	$	7,182	$	61

Weighted average shares outstanding (basic)		9,816		9,770		9,829		9,765
Effect of dilutive stock options		32		24		29		33
Weighted average shares outstanding (diluted)		9,848		9,794		9,858		9,798

Basic earnings per share	$	0.33	$	0.31	$	0.73	$	0.01
Diluted earnings per share	$	0.33	$	0.31	$	0.73	$	0.01

Comprehensive Income

Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Cash Flow Information

For purposes of the consolidated statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents.

Supplemental cash flow information is provided in the table below.



		Six months ended
		June 30,
(dollars in thousands)		2021		2020
Cash paid during the period for:
Income taxes	$	2,385	$	0
Interest	$	5,682	$	8,985

Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	0	$	121
Transfer of premises and equipment to assets held for sale	$	2,119	$	0
Initial recognition of operating lease right-of-use assets	$	18	$	186
Initial recognition of operating lease liabilities	$	18	$	186
Increase in other liabilities for purchase of securities settling after quarter end	$	0	$	663

Recent Accounting Pronouncements

Pronouncements Adopted in 2021

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for fiscal years ending after December 15, 2020. The adoption of this standard did not have a material impact on its consolidated financial statements.

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard was delayed and is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation expects the provisions of ASU No. 2016-13 to impact its consolidated

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financial statements, in particular, the level of the reserve for credit losses. The Corporation is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

Note 2 – Securities

A summary of securities available-for-sale at June 30, 2021 and December 31, 2020 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At June 30, 2021, 80.5 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania and 11.4 percent was concentrated in the state of Texas. The portfolio was intentionally distributed to limit exposure with the largest issuer at $2.6 million. At June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of shareholders’ equity.



	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
June 30, 2021
Debt securities:
U.S. agency	$	2,000	$	0	$	(38)	$	1,962
U.S. agency mortgage-backed, residential		152,302		3,242		(632)		154,912
State and municipal		32,314		288		(367)		32,235
Corporates		19,320		217		(35)		19,502
Total debt securities	$	205,936	$	3,747	$	(1,072)	$	208,611
December 31, 2020
Debt securities:
U.S. agency	$	40,000	$	0	$	0	$	40,000
U.S. agency mortgage-backed, residential		106,792		4,133		(29)		110,896
State and municipal		24,014		311		(25)		24,300
Corporates		9,681		139		(14)		9,806
Total debt securities	$	180,487	$	4,583	$	(68)	$	185,002

‎

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The proceeds from sales of securities and the associated gains and losses are listed below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement.



	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2021		2020		2021		2020
Proceeds	$	0	$	6,372	$	3,803	$	26,288
Gross gains		0		50		24		124
Gross losses		0		0		(47)		(59)
Tax (provision) benefit		0		(11)		5		(14)

The amortized cost and estimated fair value of debt securities at June 30, 2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.



	Available-for-sale
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	3,398	$	3,423
Due after one year through five years		97,040		99,389
Due after five years through ten years		65,165		65,331
Due after ten years		40,333		40,468
Total debt securities	$	205,936	$	208,611

Investment securities having a carrying value of $161,642,000 and $170,313,000 on June 30, 2021 and December 31, 2020, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at June 30, 2021 and December 31, 2020.


	Less than 12 months					12 months or more					Total
	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
June 30, 2021
Debt securities:
U.S. agency	1	$	1,962	$	(38)	0	$	0	$	0	1	$	1,962	$	(38)
U.S. agency mortgage-backed, residential	30		56,130		(632)	0		0		0	30		56,130		(632)
State and municipal	23		21,890		(367)	0		0		0	23		21,890		(367)
Corporates	7		7,515		(35)	0		0		0	7		7,515		(35)
Total temporarily impaired debt
securities, available-for-sale	61	$	87,497	$	(1,072)	0	$	0	$	0	61	$	87,497	$	(1,072)
December 31, 2020
Debt securities:
U.S. agency	2	$	40,000	$	0	0	$	0	$	0	2	$	40,000	$	0
U.S. agency mortgage-backed, residential	8		8,706		(29)	0		0		0	8		8,706		(29)
State and municipal	4		3,808		(25)	0		0		0	4		3,808		(25)
Corporates	3		4,075		(14)	0		0		0	3		4,075		(14)
Total temporarily impaired debt
securities, available-for-sale	17	$	56,589	$	(68)	0	$	0	$	0	17	$	56,589	$	(68)

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Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.

The Corporation believes that unrealized losses at June 30, 2021 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through June 30, 2021 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

Note 3—Restricted Investment in Bank Stocks

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of June 30, 2021 and December 31, 2020, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan member banks, including PeoplesBank, are required to maintain a minimum stock investment. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the periods ended June 30, 2021 and 2020. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no impairment charge was necessary related to the restricted stock during the periods ended June 30, 2021 and 2020.

Note 4—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at June 30, 2021 and December 31, 2020. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance.

‎

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Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations.



	June 30,		% Total		December 31,		% Total
(dollars in thousands)	2021		Loans		2020		Loans
Builder & developer	$	147,377		9.5	$	147,609		9.6
Commercial real estate investor		278,269		18.0		236,924		15.3
Residential real estate investor		232,352		15.1		238,458		15.4
Hotel/Motel		81,822		5.3		79,421		5.2
Wholesale & retail		86,405		5.6		108,425		7.0
Manufacturing		74,987		4.9		79,142		5.1
Agriculture		93,272		6.0		80,450		5.2
Service		78,597		5.1		76,838		5.0
Other		258,573		16.8		280,616		18.2
Total commercial related loans		1,331,654		86.3		1,327,883		86.0
Residential mortgages		99,558		6.4		95,751		6.2
Home equity		91,617		5.9		96,711		6.3
Other		20,983		1.4		24,244		1.5
Total consumer related loans		212,158		13.7		216,706		14.0
Total loans	$	1,543,812		100.0	$	1,544,589		100.0

Loan Risk Ratings

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 may be scored using a third-party credit scoring software model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Special Asset Committee, which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review officer to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to non-accrual status. Only the Committee, Executive Chairman or President/CEO may downgrade a loan to non-accrual status or upgrade a loan that is criticized or classified.

The Corporation uses ten risk ratings to grade commercial loans. The first seven ratings are considered “pass” ratings. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current sound worth or paying capacity of the obligor, or of the collateral pledged. A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to potential loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.

‎

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The table below presents a summary of loan risk ratings by loan class at June 30, 2021 and December 31, 2020.



			Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total
June 30, 2021
Builder & developer	$	136,225	$	7,177	$	3,152	$	823	$	147,377
Commercial real estate investor		271,441		5,592		1,050		186		278,269
Residential real estate investor		225,356		3,321		688		2,987		232,352
Hotel/Motel		50,126		531		18,377		12,788		81,822
Wholesale & retail		83,136		2,050		1,219		0		86,405
Manufacturing		67,173		0		55		7,759		74,987
Agriculture		85,554		2,276		394		5,048		93,272
Service		72,099		658		4,869		971		78,597
Other		235,133		1,458		13,274		8,708		258,573
Total commercial related loans		1,226,243		23,063		43,078		39,270		1,331,654
Residential mortgage		99,547		0		11		0		99,558
Home equity		91,023		48		0		546		91,617
Other		20,809		0		0		174		20,983
Total consumer related loans		211,379		48		11		720		212,158
Total loans	$	1,437,622	$	23,111	$	43,089	$	39,990	$	1,543,812

December 31, 2020
Builder & developer	$	133,804	$	11,305	$	2,121	$	379	$	147,609
Commercial real estate investor		230,113		6,379		231		201		236,924
Residential real estate investor		234,316		1,215		130		2,797		238,458
Hotel/Motel		48,264		542		18,143		12,472		79,421
Wholesale & retail		99,821		8,591		13		0		108,425
Manufacturing		67,968		0		3,610		7,564		79,142
Agriculture		72,829		416		3,776		3,429		80,450
Service		75,618		249		0		971		76,838
Other		256,040		1,481		13,804		9,291		280,616
Total commercial related loans		1,218,773		30,178		41,828		37,104		1,327,883
Residential mortgage		95,466		123		11		151		95,751
Home equity		96,026		55		0		630		96,711
Other		23,954		0		0		290		24,244
Total consumer related loans		215,446		178		11		1,071		216,706
Total loans	$	1,434,219	$	30,356	$	41,839	$	38,175	$	1,544,589

‎

- 18 -

Impaired Loans

The table below presents a summary of impaired loans at June 30, 2021 and December 31, 2020. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for those individual loans that are commercial related where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs.




	With No Allowance				With A Related Allowance						Total
	Recorded		Unpaid		Recorded		Unpaid		Related		Recorded		Unpaid
(dollars in thousands)	Investment		Principal		Investment		Principal		Allowance		Investment		Principal
June 30, 2021
Builder & developer	$	1,013	$	1,256	$	0	$	0	$	0	$	1,013	$	1,256
Commercial real estate investor		1,053		1,065		0		0		0		1,053		1,065
Residential real estate investor		2,590		2,745		397		397		210		2,987		3,142
Hotel/Motel		12,788		12,792		0		0		0		12,788		12,792
Wholesale & retail		0		0		0		0		0		0		0
Manufacturing		7,759		7,946		0		0		0		7,759		7,946
Agriculture		3,924		4,108		1,124		1,219		544		5,048		5,327
Service		971		1,061		0		0		0		971		1,061
Other commercial		4,278		4,483		4,431		4,884		3,090		8,709		9,367
Total impaired commercial related loans		34,376		35,456		5,952		6,500		3,844		40,328		41,956
Residential mortgage		0		0		0		0		0		0		0
Home equity		546		582		0		0		0		546		582
Other consumer		174		191		0		0		0		174		191
Total impaired consumer related loans		720		773		0		0		0		720		773
Total impaired loans	$	35,096	$	36,229	$	5,952	$	6,500	$	3,844	$	41,048	$	42,729



December 31, 2020
Builder & developer	$	575	$	790	$	0	$	0	$	0	$	575	$	790
Commercial real estate investor		1,163		1,170		0		0		0		1,163		1,170
Residential real estate investor		581		862		2,216		2,216		216		2,797		3,078
Hotel/Motel		12,472		12,472		0		0		0		12,472		12,472
Wholesale & retail		237		237		0		0		0		237		237
Manufacturing		7,564		7,564		0		0		0		7,564		7,564
Agriculture		2,270		2,382		1,159		1,217		615		3,429		3,599
Service		971		1,061		0		0		0		971		1,061
Other commercial		5,739		5,954		3,552		3,888		2,481		9,291		9,842
Total impaired commercial related loans		31,572		32,492		6,927		7,321		3,312		38,499		39,813
Residential mortgage		151		151		0		0		0		151		151
Home equity		630		653		0		0		0		630		653
Other consumer		290		301		0		0		0		290		301
Total impaired consumer related loans		1,071		1,105		0		0		0		1,071		1,105
Total impaired loans	$	32,643	$	33,597	$	6,927	$	7,321	$	3,312	$	39,570	$	40,918

‎

- 19 -

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and six months ended June 30, 2021 and 2020. Interest income on loans with no related allowance is the result of interest collected on a cash basis, except accruing TDRs.



	With No Related Allowance				With A Related Allowance				Total
	Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Three months ended June 30, 2021
Builder & developer	$	1,014	$	0	$	0	$	0	$	1,014	$	0
Commercial real estate investor		1,080		12		0		0		1,080		12
Residential real estate investor		1,623		58		1,306		0		2,929		58
Hotel/Motel		12,620		0		0		0		12,620		0
Wholesale & retail		118		13		0		0		118		13
Manufacturing		7,749		0		0		0		7,749		0
Agriculture		2,974		0		1,101		0		4,075		0
Service		971		0		0		0		971		0
Other commercial		4,914		16		4,291		0		9,205		16
Total impaired commercial related loans		33,063		99		6,698		0		39,761		99
Residential mortgage		0		0		0		0		0		0
Home equity		601		0		0		0		601		0
Other consumer		216		4		0		0		216		4
Total impaired consumer related loans		817		4		0		0		817		4
Total impaired loans	$	33,880	$	103	$	6,698	$	0	$	40,578	$	103

Three months ended June 30, 2020
Builder & developer	$	942	$	10	$	141	$	0	$	1,083	$	10
Commercial real estate investor		1,297		18		0		0		1,297		18
Residential real estate investor		929		16		4,984		0		5,913		16
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		256		1		3,535		0		3,791		1
Manufacturing		6		0		512		0		518		0
Agriculture		2,386		40		1,094		0		3,480		40
Service		1,302		1		0		0		1,302		1
Other commercial		3,074		20		3,629		0		6,703		20
Total impaired commercial related loans		10,192		106		13,895		0		24,087		106
Residential mortgage		153		0		0		0		153		0
Home equity		660		16		0		0		660		16
Other consumer		218		4		0		0		218		4
Total impaired consumer related loans		1,031		20		0		0		1,031		20
Total impaired loans	$	11,223	$	126	$	13,895	$	0	$	25,118	$	126

‎

- 20 -



	With No Related Allowance				With A Related Allowance				Total
	Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Six months ended June 30, 2021
Builder & developer	$	868	$	0		0	$	0	$	868	$	0
Commercial real estate investor		1,108		23		0		0		1,108		23
Residential real estate investor		1,275		58		1,610		0		2,885		58
Hotel/Motel		12,570		0		0		0		12,570		0
Wholesale & retail		158		14		0		0		158		14
Manufacturing		7,687		0		0		0		7,687		0
Agriculture		2,739		37		1,120		0		3,859		37
Service		971		0		0		0		971		0
Other commercial		5,513		26		4,045		0		9,558		26
Total impaired commercial related loans		32,889		158		6,775		0		39,664		158
Residential mortgage		51		0		0		0		51		0
Home equity		610		0		0		0		610		0
Other consumer		240		7		0		0		240		7
Total impaired consumer related loans		901		7		0		0		901		7
Total impaired loans	$	33,790	$	165		6,775	$	0	$	40,565	$	165

Six months ended June 30, 2020
Builder & developer	$	835	$	22	$	252	$	0	$	1,087	$	22
Commercial real estate investor		1,322		40		0		0		1,322		40
Residential real estate investor		864		22		5,002		0		5,866		22
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		261		3		4,751		0		5,012		3
Manufacturing		8		3		716		0		724		3
Agriculture		2,185		59		1,082		0		3,267		59
Service		900		3		0		0		900		3
Other commercial		2,639		49		3,631		0		6,270		49
Total impaired commercial related loans		9,014		201		15,434		0		24,448		201
Residential mortgage		194		3		0		0		194		3
Home equity		666		37		0		0		666		37
Other consumer		220		7		0		0		220		7
Total impaired consumer related loans		1,080		47		0		0		1,080		47
Total impaired loans	$	10,094	$	248	$	15,434	$	0	$	25,528	$	248

‎

- 21 -

Past Due and Nonaccrual

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at June 30, 2021 and December 31, 2020.



					≥ 90 Days
	30-59		60-89		Past Due				Total Past
	Days		Days		and				Due and				Total
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Loans
June 30, 2021
Builder & developer	$	0	$	0	$	0	$	823	$	823	$	146,554	$	147,377
Commercial real estate investor		82		0		0		186		268		278,001		278,269
Residential real estate investor		0		0		0		2,987		2,987		229,365		232,352
Hotel/Motel		0		0		0		12,788		12,788		69,034		81,822
Wholesale & retail		139		0		0		0		139		86,266		86,405
Manufacturing		0		0		0		7,759		7,759		67,228		74,987
Agriculture		0		0		0		5,048		5,048		88,224		93,272
Service		0		0		0		971		971		77,626		78,597
Other		0		0		0		8,708		8,708		249,865		258,573
Total commercial related loans		221		0		0		39,270		39,491		1,292,163		1,331,654
Residential mortgage		0		67		0		0		67		99,491		99,558
Home equity		0		130		0		546		676		90,941		91,617
Other		498		580		0		174		1,252		19,731		20,983
Total consumer related loans		498		777		0		720		1,995		210,163		212,158
Total loans	$	719	$	777	$	0	$	39,990	$	41,486	$	1,502,326	$	1,543,812

December 31, 2020
Builder & developer	$	427	$	489	$	322	$	379	$	1,617	$	145,992	$	147,609
Commercial real estate investor		0		0		0		201		201		236,723		236,924
Residential real estate investor		136		0		0		2,797		2,933		235,525		238,458
Hotel/Motel		0		0		0		12,472		12,472		66,949		79,421
Wholesale & retail		29		0		0		0		29		108,396		108,425
Manufacturing		0		0		0		7,564		7,564		71,578		79,142
Agriculture		0		0		0		3,429		3,429		77,021		80,450
Service		0		709		0		971		1,680		75,158		76,838
Other		679		887		0		9,291		10,857		269,759		280,616
Total commercial related loans		1,271		2,085		322		37,104		40,782		1,287,101		1,327,883
Residential mortgage		0		0		937		151		1,088		94,663		95,751
Home equity		206		177		36		630		1,049		95,662		96,711
Other		717		321		0		290		1,328		22,916		24,244
Total consumer related loans		923		498		973		1,071		3,465		213,241		216,706
Total loans	$	2,194	$	2,583	$	1,295	$	38,175	$	44,247	$	1,500,342	$	1,544,589

Troubled Debt Restructurings

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $1,058,000 at June 30, 2021 and $1,395,000 at December 31, 2020. There were no allowances allocated to any TDRs at June 30, 2021 or December 31, 2020. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if

- 22 -

principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms.

As of June 30, 2021, there are no modifications for consumer loans, four mortgage loans totaling approximately $1,422,000 and 16 commercial loans totaling approximately $67,734,000 under the CARES Act, which are not considered TDRs.

There were no loans whose terms have been modified under TDRs during the three and six months ended June 30, 2021 and 2020. There were no defaults for the three and six months ended June 30, 2021 and June 30, 2020 for TDRs entered into during the previous 12 month period.

NOTE 5 – Allowance for Loan Losses

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and six months ended June 30, 2021 and 2020.



	Allowance for Loan Losses
	April 1, 2021								June 30, 2021
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,066	$	0	$	0	$	152	$	2,218
Commercial real estate investor		3,410		0		0		82		3,492
Residential real estate investor		4,009		(166)		43		(58)		3,828
Hotel/Motel		1,648		0		0		(339)		1,309
Wholesale & retail		2,111		0		0		(96)		2,015
Manufacturing		775		0		0		15		790
Agriculture		1,451		0		0		(11)		1,440
Service		738		0		0		12		750
Other commercial		5,564		(648)		22		606		5,544
Total commercial related loans		21,772		(814)		65		363		21,386
Residential mortgage		256		0		0		9		265
Home equity		282		0		0		(9)		273
Other consumer		98		(7)		4		(8)		87
Total consumer related loans		636		(7)		4		(8)		625
Unallocated		3		0		0		(3)		0
Total	$	22,411	$	(821)	$	69	$	352	$	22,011

- 23 -



	Allowance for Loan Losses
	April 1, 2020								June 30, 2020
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,226	$	(674)	$	0	$	824	$	2,376
Commercial real estate investor		2,682		0		0		50		2,732
Residential real estate investor		4,759		0		3		5		4,767
Hotel/Motel		1,056		0		0		474		1,530
Wholesale & retail		4,558		(3,116)		0		956		2,398
Manufacturing		1,316		(392)		0		(23)		901
Agriculture		1,140		0		0		(28)		1,112
Service		373		(73)		0		103		403
Other commercial		4,092		(106)		0		221		4,207
Total commercial related loans		22,202		(4,361)		3		2,582		20,426
Residential mortgage		235		0		0		(6)		229
Home equity		304		0		0		(7)		297
Other consumer		97		(6)		14		(11)		94
Total consumer related loans		636		(6)		14		(24)		620
Unallocated		0		0		0		(8)		(8)
Total	$	22,838	$	(4,367)	$	17	$	2,550	$	21,038



	Allowance for Loan Losses
	January 1, 2021								June 30, 2021
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,034	$	0	$	0	$	184	$	2,218
Commercial real estate investor		3,177		0		0		315		3,492
Residential real estate investor		3,944		(216)		47		53		3,828
Hotel/Motel		1,440		0		0		(131)		1,309
Wholesale & retail		2,416		0		0		(401)		2,015
Manufacturing		840		0		0		(50)		790
Agriculture		1,288		0		0		152		1,440
Service		457		0		0		293		750
Other commercial		5,002		(690)		23		1,209		5,544
Total commercial related loans		20,598		(906)		70		1,624		21,386
Residential mortgage		256		0		0		9		265
Home equity		287		(5)		2		(11)		273
Other consumer		101		(14)		17		(17)		87
Total consumer related loans		644		(19)		19		(19)		625
Unallocated		22		0		0		(22)		0
Total	$	21,264	$	(925)	$	89	$	1,583	$	22,011

‎

- 24 -



	Allowance for Loan Losses
	January 1, 2020								June 30, 2020
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,263	$	(844)	$	0	$	957	$	2,376
Commercial real estate investor		2,565		0		0		167		2,732
Residential real estate investor		4,632		0		6		129		4,767
Hotel/Motel		742		0		0		788		1,530
Wholesale & retail		3,575		(3,116)		7		1,932		2,398
Manufacturing		1,252		(392)		0		41		901
Agriculture		1,304		0		0		(192)		1,112
Service		367		(73)		0		109		403
Other commercial		3,837		(7,617)		0		7,987		4,207
Total commercial related loans		20,537		(12,042)		13		11,918		20,426
Residential mortgage		158		0		0		71		229
Home equity		203		0		0		94		297
Other consumer		167		(11)		27		(89)		94
Total consumer related loans		528		(11)		27		76		620
Unallocated		1		0		0		(9)		(8)
Total	$	21,066	$	(12,053)	$	40	$	11,985	$	21,038

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for June 30, 2021 and December 31, 2020.



	Allowance for Loan Losses						Loans
	Individually		Collectively				Individually		Collectively
	Evaluated For		Evaluated For				Evaluated For		Evaluated For
(dollars in thousands)	Impairment		Impairment		Balance		Impairment		Impairment		Balance
June 30, 2021
Builder & developer	$	0	$	2,218	$	2,218	$	1,013	$	146,364	$	147,377
Commercial real estate investor		0		3,492		3,492		1,053		277,216		278,269
Residential real estate investor		210		3,618		3,828		2,987		229,365		232,352
Hotel/Motel		0		1,309		1,309		12,788		69,034		81,822
Wholesale & retail		0		2,015		2,015		0		86,405		86,405
Manufacturing		0		790		790		7,759		67,228		74,987
Agriculture		544		896		1,440		5,048		88,224		93,272
Service		0		750		750		971		77,626		78,597
Other commercial		3,090		2,454		5,544		8,709		249,864		258,573
Total commercial related		3,844		17,542		21,386		40,328		1,291,326		1,331,654
Residential mortgage		0		265		265		0		99,558		99,558
Home equity		0		273		273		546		91,071		91,617
Other consumer		0		87		87		174		20,809		20,983
Total consumer related		0		625		625		720		211,438		212,158
Unallocated		0		0		0		0		0		0
Total	$	3,844	$	18,167	$	22,011	$	41,048	$	1,502,764	$	1,543,812

- 25 -



December 31, 2020
Builder & developer	$	0	$	2,034	$	2,034	$	575	$	147,034	$	147,609
Commercial real estate investor		0		3,177		3,177		1,163		235,761		236,924
Residential real estate investor		216		3,728		3,944		2,797		235,661		238,458
Hotel/Motel		0		1,440		1,440		12,472		66,949		79,421
Wholesale & retail		0		2,416		2,416		237		108,188		108,425
Manufacturing		0		840		840		7,564		71,578		79,142
Agriculture		615		673		1,288		3,429		77,021		80,450
Service		0		457		457		971		75,867		76,838
Other commercial		2,481		2,521		5,002		9,291		271,325		280,616
Total commercial related		3,312		17,286		20,598		38,499		1,289,384		1,327,883
Residential mortgage		0		256		256		151		95,600		95,751
Home equity		0		287		287		630		96,081		96,711
Other consumer		0		101		101		290		23,954		24,244
Total consumer related		0		644		644		1,071		215,635		216,706
Unallocated		0		22		22		0		0		0
Total	$	3,312	$	17,952	$	21,264	$	39,570	$	1,505,019	$	1,544,589

Note 6—Deposits

The composition of deposits as of June 30, 2021 and December 31, 2020 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $46,000 at June 30, 2021, compared to $55,000 at December 31, 2020.



	June 30,		December 31,
(dollars in thousands)	2021		2020
Noninterest bearing demand	$	472,154	$	396,947
Interest bearing demand		247,301		224,764
Money market		591,794		598,398
Savings		134,374		111,143
Time deposits less than $100		272,613		283,910
Time deposits $100 to $250		168,693		180,674
Time deposits $250 or more		68,401		67,703
Total deposits	$	1,955,330	$	1,863,539

- 26 -

Note 7—Short-Term Borrowings and Long-Term Debt

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At June 30, 2021, the balance of securities sold under agreements to repurchase was $13,393,000 compared to $8,540,000 at December 31, 2020. At June 30, 2021 and December 31, 2020, there were no other short-term borrowings.

The following table presents a summary of long-term debt as of June 30, 2021 and December 31, 2020. PeoplesBank’s long-term debt obligations to the FHLBP are fixed rate instruments. Under terms of a blanket collateral agreement with the FHLBP, the obligations are secured by FHLBP stock and PeoplesBank qualifying loan receivables, principally real estate secured loans.



	June 30,		December 31,
(dollars in thousands)	2021		2020
PeoplesBank’s obligations:
Federal Home Loan Bank of Pittsburgh (FHLBP)
Due June 2021, 2.81%	$	0	$	10,000
Due June 2021, 2.14%		0		15,000
Due May 2022, 2.93%		10,000		10,000
Total FHLBP	$	10,000	$	35,000
Codorus Valley Bancorp, Inc. obligations:
Junior subordinated debt
Due 2034, 2.14%, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly		3,093		3,093
Due 2036, 1.72% floating rate based on 3 month
LIBOR plus 1.54%, callable quarterly		7,217		7,217
Due 2030, 4.50% fixed rate, callable on or after December 2025		30,642		30,602
Total junior subordinated debt	$	40,952	$	40,912
Lease obligations included in long-term debt:
Finance lease liabilities		1,282		1,296
Total long-term debt	$	52,234	$	77,208

At June 30, 2021 there were no municipal deposit letters of credit compared to $42,000,000 at December 31, 2020. These letters of credit are issued by the FHLBP on behalf of PeoplesBank naming applicable municipalities as beneficiaries. The letters of credit took the place of securities pledged to the municipalities for their deposits maintained at PeoplesBank.

In June 2006, Codorus Valley formed CVB Statutory Trust No. 2, a wholly-owned special purpose subsidiary whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7,217,000. In November 2004, Codorus Valley formed CVB Statutory Trust No. 1 to facilitate a pooled trust preferred debt issuance of $3,093,000. The Corporation owns all of the common stock of these nonbank subsidiaries, and the debentures are the sole assets of the Trusts. The accounts of both Trusts are not consolidated for financial reporting purposes in accordance with FASB ASC 810. For regulatory capital purposes, all of the Corporation’s trust preferred securities qualified as Tier 1 capital for all reported periods. Trust preferred securities are subject to capital limitations under the FDIC’s risk-based capital guidelines. The Corporation used the net proceeds from these offerings to fund its operations.

In December 2020, Codorus Valley issued subordinated notes in the amount of $31,000,000. The Corporation may redeem the subordinated notes, in whole or in part, in a principal amount with integral multiples of $10,000, on or after December 9, 2025 and prior to the maturity date at 100% of the principal amount, plus accrued and unpaid interest. The subordinated notes mature on December 9, 2030. The subordinated notes are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the Note Purchase Agreements. The subordinated notes may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated notes have a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the then current 90-Day Average SOFR (Secured Oversight Financing Rate) plus 404 basis points.

Note 8—Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Corporation adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 affected the accounting treatment for operating lease agreements in which the Corporation is the lessee.

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Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property, ATM locations, and office space. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Corporation has one finance lease for one financial center.

Leases with an initial term of 12 months or less are not recorded on the consolidated statement of condition. All other leases have remaining lease terms of 1 year to 25 years, some of which include options to extend. Upon opening a new financial center, we typically install brand-specific leasehold improvements which are depreciated over the shorter of the useful life or length of the lease. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and, taking into consideration the dollar amount of the improvements, we conclude that it is reasonably certain that a renewal option will be exercised, the renewal period is included in the lease term, and the related payments are reflected in the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on an amortizing and collateralized basis, over a similar term.

All of our leases include fixed rental payments. We commonly enter into leases under which the lease payments increase at pre-determined dates based on the change in the consumer price index. While the majority of our leases are gross leases, we also have a number of leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance cost and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and nonlease components for all of our building leases.

The components of lease expense were as follows:



	Three months ended
	June 30,
(dollars in thousands)	2021		2020
Operating lease cost	$	169	$	192

Finance lease cost:
Amortization of right-of-use assets	$	12	$	12
Interest on lease liability		12		12
Total finance lease cost	$	24	$	24

Total lease cost	$	193	$	216



	Six months ended
	June 30,
(dollars in thousands)	2021		2020
Operating lease cost	$	338	$	395

Finance lease cost:
Amortization of right-of-use assets	$	24	$	24
Interest on lease liability		24		24
Total finance lease cost	$	48	$	48

Total lease cost	$	386	$	443

- 28 -

Supplemental cash flow information related to leases was as follows:



	Six months ended
	June 30,
	2021		2020
Operating cash flows from operating leases	$	347	$	404
Operating cash flows from financing leases		24		24
Financing cash flows from financing leases		14		13

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		18		186
Finance leases		0		0

Amounts recognized as right-of-use assets related to finance leases are included in fixed assets in the accompanying statement of financial position, while related lease liabilities are included in long-term debt. Supplemental balance sheet information related to leases was as follows:



	June 30,		December 31,
	2021		2020
Assets:
Operating leases right-of-use assets	$	2,063	$	2,386
Finance leases assets		1,064		1,087
Total lease assets	$	3,127	$	3,473

Liabilities:
Operating	$	2,185	$	2,515
Financing		1,282		1,296
Total lease liabilities	$	3,467	$	3,811

Weighted Average Remaining Lease Term (years)
Operating leases		4.4		5.2
Finance leases		22.7		23.2

Weighted Average Discount Rate
Operating leases		2.61%		2.68%
Finance leases		3.69%		3.69%

Future minimum payments for financing leases and operating leases as of June 30, 2021 and December 31, 2020 were as follows:



(dollars in thousands:)	June 30, 2021
Year Ending December 31,	Operating Leases		Finance Leases
2021	$	330	$	38
2022		615		75
2023		487		75
2024		400		75
2025		179		79
Thereafter		307		1,588
Total lease payments		2,318		1,930
Less imputed interest		(133)		(648)
Total	$	2,185	$	1,282

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(dollars in thousands:)	December 31, 2020
Year Ending December 31,	Operating Leases		Finance Leases
2021	$	667	$	75
2022		604		75
2023		489		75
2024		413		75
2025		192		79
Thereafter		317		1,588
Total lease payments		2,682		1,967
Less imputed interest		(167)		(671)
Total	$	2,515	$	1,296

Note 9—Regulatory Matters

The Corporation is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988, as amended (“BCL”). The BCL prohibits dividend payments if such payment would render the Corporation insolvent or result in negative net worth. Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by PeoplesBank to the Corporation. The amount of total dividends, which may be paid at any date, is generally limited to the retained earnings of PeoplesBank. Furthermore, dividend payments would be prohibited if the effect thereof would cause PeoplesBank’s capital to be reduced below applicable minimum capital requirements as discussed below. Loans and advances by PeoplesBank to affiliates, including the Corporation, are limited to 10 percent of PeoplesBank’s capital stock and contributed capital on a secured basis.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2021, the Corporation and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

- 30 -

Actual and required capital amounts (in thousands) and ratios are presented below.



					Minimum for Basel III				Well Capitalized
	Actual (1)				Capital Adequacy				Minimum (2)
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at June 30, 2021
Capital ratios:
Common equity Tier 1	$	194,630	12.87	%	$	105,896	7.00	%		n/a	n/a
Tier 1 risk based		204,630	13.53			128,587	8.50			n/a	n/a
Total risk based		254,220	16.80			158,843	10.50			n/a	n/a
Leverage		204,630	9.11			89,893	4.00			n/a	n/a

at December 31, 2020
Capital ratios:
Common equity Tier 1	$	191,863	13.10	%	$	102,504	7.00	%		n/a	n/a
Tier 1 risk based		201,863	13.79			124,469	8.50			n/a	n/a
Total risk based		250,806	17.13			153,756	10.50			n/a	n/a
Leverage		201,863	9.58			84,250	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at June 30, 2021
Capital ratios:
Common equity Tier 1	$	223,871	14.83	%	$	105,656	7.00	%	$	98,109	6.50	%
Tier 1 risk based		223,871	14.83			128,296	8.50			120,749	8.00
Total risk based		242,777	16.08			158,483	10.50			150,937	10.00
Leverage		223,871	9.98			89,756	4.00			112,195	5.00

at December 31, 2020
Capital ratios:
Common equity Tier 1	$	198,184	13.56	%	$	102,274	7.00	%	$	94,968	6.50	%
Tier 1 risk based		198,184	13.56			124,190	8.50			116,884	8.00
Total risk based		216,484	14.82			153,411	10.50			146,105	10.00
Leverage		198,184	9.43			84,109	4.00			105,137	5.00

(1) Net unrealized gains and losses on securities available-for-sale, net of taxes, are disregarded for capital ratio computation purposes in accordance with federal regulatory banking guidelines.

(2) To be “well capitalized” under the prompt corrective action provisions in the Basel III framework. “Well capitalized” applies to PeoplesBank only.

Note 10—Shareholders’ Equity

Share Repurchase

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in March 2020. Under the Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37. Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program. That program expired by its own terms in October, 2020.

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in January 2021. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation progam. During the three and six months ended June 30, 2021, the Corporation purchased 142,541 shares at an average price of $18.75 for a total of $2,700,000.

- 31 -

Note 11—Contingent Liabilities

There are no legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation, other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.

Note 12—Guarantees

Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a client to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to clients. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $14,919,000 of standby letters of credit outstanding on June 30, 2021, compared to $15,206,000 on December 31, 2020. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The amount of the liability as of June 30, 2021 and December 31, 2020, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Note 13—Fair Value of Assets and Liabilities

The Corporation uses its best judgment in estimating the fair value of the Corporation’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.

Since management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications on a quarterly basis.

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, by relying on the securities’ relationship to other benchmark quoted prices.

- 32 -

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markes. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.



			Fair Value Measurements
(dollars in thousands)	Total		(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
June 30, 2021
Securities available-for-sale:
U.S. agency	$	1,962	$	0	$	1,962	$	0
U.S. agency mortgage-backed, residential		154,912		0		154,912		0
State and municipal		32,235		0		32,235		0
Corporates		19,502		0		19,502		0
Other assets:
Loan-level interest rate swaps		35		0		35		0

December 31, 2020
Securities available-for-sale:
U.S. agency	$	40,000	$	0	$	40,000	$	0
U.S. agency mortgage-backed, residential		110,896		0		110,896		0
State and municipal		24,300		0		24,300		0
Corporates		9,806		0		9,806		0

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are generally included as Level

3 fair values, based on the lowest level of input that is significant to the fair value measurements. At June 30, 2021, the fair value of impaired loans with a valuation allowance or partial charge-off was $2,421,000, net of valuation allowances of $3,844,000 and partial

charge-offs of $266,000. At December 31, 2020 the fair value of impaired loans with a valuation allowance or charge-off was $4,009,000, net of valuation allowances of $3,312,000 and charge-offs of $373,000.

Foreclosed Real Estate

Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based on an independent third-party appraisal of the property or occasionally on a recent

sales offer. At June 30, 2021 and December 31, 2020, there were no foreclosed real estate assets with a valuation allowance or write-down.

- 33 -

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. At June 30, 2021, the fair value of the mortgage servicing rights asset was $498,000. At December 31, 2020, the fair value of the mortgage servicing rights asset was $511,000.



			Fair Value Measurements
(dollars in thousands)		Total	(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
June 30, 2021
Impaired builder & developer loans	$	224	$	0	$	0	$	224
Impaired residential real estate investor loans		276		0		0		276
Impaired agriculture loans		580		0		0		580
Impaired other loans		1,341		0		0		1,341
Mortgage servicing rights		498		0		0		498

December 31, 2020
Impaired builder & developer loans	$	196	$	0	$	0	$	196
Impaired residential real estate investor loans		2,209		2,000		0		209
Impaired agriculture loans		544		0		0		544
Impaired other loans		1,071		0		0		1,071
Mortgage servicing rights		511		0		0		511

‎

- 34 -

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable		Weighted
(dollars in thousands)	Estimate		Techniques	Input	Range	Average
June 30, 2021
Impaired builder & developer loans	$	224	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% -15%	15%
Impaired residential real estate investor loans		276	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15%-25%	15%
Impaired agriculture loans		580	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	22% -25%	23%
Impaired other loans		1,341	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 25%	20%
Mortgage Servicing Rights		498	Multiple of annual service fee	Estimated prepayment speed based on rate and term	16.2% - 16.2%	16.2%

December 31, 2020
Impaired builder & developer loans	$	196	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired residential real estate investor loans		209	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired agriculture loans		544	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	25% - 25%	25%
Impaired other loans		89	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired other loans		982	Business asset valuation ⁽³⁾	Business asset valuation adjustments ⁽⁴⁾	40% - 50%	44%
Mortgage servicing rights		511	Multiple of annual service fee	Estimated prepayment speed based on rate and term	18.5% - 18.5%	18.5%

(1)Fair value is generally determined through independent appraisals, which generally include various level 3 inputs that are not identifiable.

(2)Appraisal amounts may be adjusted downward by the Corporation's management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expense adjustments are presented as a percent of the appraisal.

(3)Fair value is generally determined through customer-provided financial statements and bankruptcy court documents.

(4)Business asset valuation may be adjusted downward by the corporation's management qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses adjustments are presented as a percent of the financial statement book value.

- 35 -

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of June 30, 2021 and December 31, 2020.



						Fair Value Estimates
					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices		Significant		Significant
					in Active		Other		Other
	Carrying		Estimated		Markets for		Observable		Unobservable
(dollars in thousands)	Amount		Fair Value		Identical Assets		Inputs		Inputs
June 30, 2021
Financial assets
Cash and cash equivalents	$	397,032	$	397,032	$	397,032	$	0	$	0
Securities available-for-sale		208,611		208,611		0		208,611		0
Restricted investment in bank stocks		1,311		N/A		N/A		N/A		N/A
Loans held for sale		4,795		5,143		0		5,143		0
Loans, net		1,521,801		1,517,262		0		0		1,517,262
Interest receivable		5,293		5,293		0		5,293		0

Financial liabilities
Deposits	$	1,955,330	$	1,957,587	$	0	$	1,957,587	$	0
Short-term borrowings		13,393		13,393		0		13,393		0
Long-term debt (1)		20,310		18,762		0		10,242		8,520
Subordinated debentures		30,642		32,515		0		32,515		0
Interest payable		329		329		0		329		0
Off-balance sheet instruments		0		0		0		0		0

December 31, 2020
Financial assets
Cash and cash equivalents	$	335,793	$	335,793	$	335,793	$	0	$	0
Securities available-for-sale		185,002		185,002		0		185,002		0
Restricted investment in bank stocks		2,593		N/A		N/A		N/A		N/A
Loans held for sale		15,981		17,228		0		17,228		0
Loans, net		1,523,325		1,527,295		0		0		1,527,295
Interest receivable		8,352		8,352		0		8,352		0

Financial liabilities
Deposits	$	1,863,539	$	1,868,203	$	0	$	1,868,203	$	0
Short-term borrowings		8,540		8,540		0		8,540		0
Long-term debt (1)		45,310		43,005		0		35,571		7,434
Subordinated debentures		30,602		31,159		0		31,159		0
Interest payable		532		532		0		532		0
Off-balance sheet instruments		0		0		0		0		0

(1) Exclude leases included in Long-term debt

- 36 -

Note 14—Assets and Liabilities Subject to Offsetting

Securities Sold Under Agreements to Repurchase

PeoplesBank enters into agreements with clients in which it sells securities subject to an obligation to repurchase the same securities (“repurchase agreements”). The contractual maturity of the repurchase agreement is overnight and continues until either party terminates the agreement. These repurchase agreements are accounted for as a collateralized financing arrangement (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability (short-term borrowings) in the Corporation’s consolidated financial statements of condition, while the securities underlying the repurchase agreements are appropriately segregated for safekeeping purposes and remain in the respective securities asset accounts. Thus, there is no offsetting or netting of the securities with the repurchase agreement liabilities.



							Gross amounts Not Offset in
							the Statements of Condition
							Financial Instruments
(dollars in thousands)	Gross ‎Amounts of ‎Recognized ‎Liabilities		Gross ‎Amounts ‎Offset in the ‎Statements ‎of Condition		Net Amounts ‎of Liabilities ‎Presented in ‎the Statements ‎of Condition		U.S. agency ‎mortgage-backed, ‎residential		U.S. agency		Cash ‎Collateral ‎Pledged		Net ‎Amount
June 30, 2021
Repurchase Agreements	$	13,393	$	0	$	13,393	$	(13,197)	$	0	$	0	$	196

December 31, 2020
Repurchase Agreements	$	8,540	$	0	$	8,540	$	(10,255)	$	0	$	0	$	(1,715)

Note 15 – Interest Rate Swaps

Loan Level Interest Rate Swaps

PeoplesBank enters into loan-level interest rate swaps with certain qualifying, creditworthy commercial loan customers to provide a loan pricing structure that meets the interest rate risk management needs of both PeoplesBank as well as the customer. PeoplesBank simultaneously enters into parallel interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net results of the offsetting customer and deal counterparty swap agreements is that the customer pays a fixed rate of interest and PeoplesBank receives a floating rate. PeoplesBank’s loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

The fair value, notational amount, and collateral posted related to loan-level interest rate swaps are presented below:





(dollars in thousands)		June 30, 2021		December 31, 2020
Interest Rate Swap Contracts - Commercial Loans:
Fair Value (a)	$	35	$	0
Notional Amount		3,750		0
Cash Collateral Posted (b)		0		0

(a)Included in other assets and other non-interest income as of June 30, 2021 on the Consolidated Balance Sheets and Consolidated Statements of Income, respective. There were no interest rate swaps as of December 31, 2020.

(b)No cash collateral was posted as of June 30, 2021. There were no interest rate swaps as of December 31, 2020.

- 37 -

The gross amounts of loan-level interest rate swaps, the amounts offset and the carrying values in the Consolidated Balance Sheets, and the collateral pledged to support such agreements are presented below.





(dollars in thousands)		June 30, 2021		December 31, 2020
Interest Rate Swap Contracts - Commercial Loans:
Gross amounts recognized	$	35	$	0
Gross amounts offset		35		0
Net amounts preseneted in the Consolidated Balance Sheets	$	0	$	0

Gross amounts not offset:
Financial instruments	$	0	$	0
Cash Collateral		0		0
Net amounts	$	0	$	0

‎

- 38 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for Codorus Valley Bancorp, Inc. (“Codorus Valley” or “the Corporation”), a bank holding company, and its wholly-owned subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank”), are provided below. Codorus Valley’s consolidated financial condition and results of operations consist almost entirely of PeoplesBank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

Forward-looking Statements

Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When words such as “believes,” “expects,” “anticipates” or similar expressions occur in the Form 10-Q, management is making forward-looking statements.

Note that many factors, some of which are discussed elsewhere in this report and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and its subsidiaries, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include, but are not limited to, the following:

Operating, legal and regulatory risks;

Credit risk, including an increase in nonperforming assets requiring loss provisions and the incurrence of carrying costs related to nonperforming assets;

Interest rate fluctuations which could increase our cost of funds or decrease our yield on earning assets and therefore reduce our net interest income;

Declines in the market value of investment securities considered to be other-than-temporary;

Unavailability of capital when needed, or availability at less than favorable terms;

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, which may adversely affect the Corporation’s operations, net income or reputation;

Inability to achieve merger-related synergies, and difficulties in integrating the business and operations of acquired institutions;

A prolonged economic downturn or excessive inflation;

Political and competitive forces affecting banking, securities, asset management and credit services businesses;

Occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, or pandemics;

The effects of and changes in the rate of FDIC premiums, including special assessments;

Future legislative or administrative changes to U.S. governmental capital programs;

Future changes in federal or state tax laws or tax rates;

Enacted financial reform legislation, e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act, may have a significant impact on the Corporation’s business and results of operations;

The risk that management’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful; and

Impact of COVID-19 pandemic.

COVID-19

Higher vaccination rates and a continued decline in COVID-19 cases in Pennsylvania and Maryland have resulted in lifting many state restrictions related to mask requirements, limited occupancy levels and social distancing. This has resulted in an increase in branch transactions and in-person deposit account openings compared to the first quarter.

- 39 -

Associates

The first group of associates working remotely returned to the office on a full or part-time basis in June 2021. The process of associates returning to the office will continue in a phased approach through August. A long-term remote work policy was recently adopted allowing a portion of positions to work remotely on an ad hoc, part-time or full-time basis. This new employment strategy provides more work flexibility, broadens the employment geographic market, allows for the redeployment of office space, and ensures that PeoplesBank remains competitive in a tightening labor market.

Re-Opening

At the time of this filing, all Financial Centers are operating with regular lobby and drive thru hours. All Retirement Community Office lobbies are open. Three Loan Production Offices (Hanover, Centerville, and Bel Air) remain closed.

Client Hardship

PeoplesBank continues to responsibly and prudently extend credit to qualified borrowers. PeoplesBank has processed approximately 822 second round Paycheck Protection Program (PPP) loans totaling $77 million. These PPP loans support 9,800 jobs. The majority of these loans (87 percent) support small businesses with loan amounts below $150,000.

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.

Critical Accounting Policies

The Corporation’s critical accounting policies, as summarized in Note 1—Summary of Significant Accounting Policies, include those related to the allowance for loan losses and the fair value of its available-for-sale securities portfolio, which require management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of the respective assets and liabilities. For this Form 10-Q, there were no material changes made to the Corporation’s critical accounting policies, which are more fully disclosed in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2020.

‎

- 40 -

Three Months Ended June 30, 2021 vs. Three Months Ended June 30, 2020

The schedule below presents selected performance metrics for the second quarter of both 2021 and 2020.



	Three months ended
	June 30,
	2021			2020
Basic earnings per share	$	0.33		$	0.31
Diluted earnings per share	$	0.33		$	0.31
Cash dividend payout ratio		39.12	%		51.22	%
Return on average assets		0.58	%		0.59	%
Return on average equity		6.56	%		6.37	%
Net interest margin (tax equivalent basis)		2.80	%		3.07	%
Net overhead ratio		1.85	%		1.68	%
Efficiency ratio		74.81	%		65.52	%
Average equity to average assets		8.88	%		9.30	%

The Corporation’s net income (earnings) was $3,282,000 for the quarter ended June 30, 2021, as compared to $3,050,000 for the quarter ended June 30, 2020, an increase of $232,000 or 8 percent.

A more detailed analysis of the factors and trends affecting the Corporation’s earnings and financial position follows.

INCOME STATEMENT ANALYSIS

Net Interest Income

Unless otherwise noted, this section discusses interest income and interest expense amounts as reported in the Consolidated Statements of Income, which are not presented on a tax equivalent basis.

Net interest income for the quarter ended June 30, 2021 was $14,914,000, an increase of $14,000 or less than 1 percent compared to net interest income of $14,900,000 for the second quarter 2020.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 2.80 percent for the second quarter 2021 compared to the 3.07 percent for the second quarter 2020. The net interest margin contraction was a result of lower interest rates on loans and higher volume and rate on long-term debt, partially offset by lower rates on interest bearing demand and time deposits.

Total interest income for the second quarter 2021 totaled $17,496,000, a decrease of $1,342,000 or 7 percent below the amount of total interest income for the second quarter 2020. The change was primarily a result of lower rates on commercial loans.

Interest and dividend income on investments decreased $11,000 or 1 percent in the second quarter 2021 compared to the same period in 2020. The average balance of the investment securities portfolio increased $23,940,000 or 14 percent when comparing the second quarter 2021 to the same period in 2020. The tax-equivalent yield on investments for the second quarter 2021 was 1.95 percent or 34 basis points lower than the 2.29 percent experienced in the second quarter 2020.

Interest income on loans decreased $1,388,000 or 8 percent in the second quarter 2021 compared to the same period in 2020. The average balance of outstanding loans, primarily commercial loans, decreased approximately $26,597,000 or 2 percent comparing the second quarter 2021 to the same period in 2020. Lower rates on the loan portfolio were the primary driver of the decrease in interest income on loans. The tax-equivalent yield on loans for the second quarter 2021 was 4.21 percent or 29 basis points less than the 4.50 percent experienced in the second quarter 2020.

Total interest expense for the second quarter 2021 was $2,582,000, a decrease of $1,356,000 or 34 percent as compared to total interest expense of $3,938,000 for the second quarter 2020. The change was primarily the result of a decrease in the cost of interest bearing demand and time deposits.

Interest expense on deposits decreased $1,552,000 or 44 percent in the second quarter 2021 compared to the same period in 2020. The average rate paid on interest bearing deposits was 0.53 percent in the second quarter 2021 or 48 basis points lower than the average rate paid of 1.01 percent in the second quarter 2020. The average balance of interest bearing deposits for the second quarter 2021 increased by $85,125,000 or 6 percent compared to the second quarter 2020. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the second quarter 2021 increasing 24 percent to $470,530,000 as compared to $378,549,000 for the second quarter 2020. The increase was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans and consumer stimulus payments.

- 41 -

For the second quarter 2021 interest expense on borrowings (long-term debt and subordinated debentures) increased $197,000 or 46 percent compared to the second quarter 2020. Short-term borrowings consisting of repurchase agreements and other short-term borrowings averaged $10,617,000 for the second quarter 2021, compared to an average balance of $8,234,000 for the second quarter 2020. The rate on average short-term borrowings for the second quarter 2021 was 0.38 percent, a decrease as compared to a rate of 0.54 percent for the second quarter 2020. Long-term debt, which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP) and subordinated debentures issued in December 2020 by the Corporation, averaged $71,249,000 for the second quarter 2021 and $66,406,000 for the second quarter 2020. For the second quarter 2021, the rate on average long-term borrowings was 3.51 percent, an increase of 93 basis points as compared to a rate of 2.58 percent for the second quarter 2020.



Table 1-Average Balances and Interest Rates (tax equivalent basis)

	Three months ended June 30,
	2021							2020
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	383,440	$	105		0.11	%	$	194,820	$	48		0.10	%
Investment securities:
Taxable		170,961		813		1.91			143,861		784		2.19
Tax-exempt		20,600		108		2.10			21,304		157		2.96
Total investment securities		191,561		921		1.93			165,165		941		2.29

Loans:
Taxable (1)		1,564,672		16,419		4.21			1,590,244		17,800		4.50
Tax-exempt		9,078		91		4.02			10,103		100		3.98
Total loans		1,573,750		16,510		4.21			1,600,347		17,900		4.50
Total earning assets		2,148,751		17,536		3.27			1,960,332		18,889		3.88
Other assets (2)		103,034							97,777
Total assets	$	2,251,785						$	2,058,109
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	836,011	$	426		0.20	%	$	747,550	$	654		0.35	%
Savings		131,528		17		0.05			97,506		15		0.06
Time		518,325		1,506		1.17			555,683		2,832		2.05
Total interest bearing deposits		1,485,864		1,949		0.53			1,400,739		3,501		1.01
Short-term borrowings		10,617		10		0.38			8,234		11		0.54
Long-term debt		71,249		623		3.51			66,406		426		2.58
Total interest bearing liabilities		1,567,730		2,582		0.66			1,475,379		3,938		1.07


Noninterest bearing deposits		470,530							378,549
Other liabilities		13,529							12,684
Shareholders' equity		199,996							191,497

Total liabilities and
shareholders' equity	$	2,251,785						$	2,058,109
Net interest income (tax equivalent basis)			$	14,954						$	14,951
Net interest margin (3)						2.80	%						3.07	%
Tax equivalent adjustment				(40)							(51)
Net interest income			$	14,914						$	14,900

(1)Average balance includes average nonaccrual loans of $38,801,000 for 2021 and $25,749,000 for 2020.

Interest includes net loan fees of $1,956,000 for 2021 and $1,190,000 for 2020.

(2)Average balance includes average bank owned life insurance and foreclosed real estate.

(3)Net interest income (tax equivalent basis) annualized as a percentage of average earning assets.

- 42 -



Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)

	Three months ended
	June 30,
	2021 vs. 2020
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate			Net

Interest Income
Interest bearing deposits with banks	$	47	$	10	$	57
Investment securities:
Taxable		247		(218)		29
Tax-exempt		(4)		(45)		(49)
Loans:
Taxable		345		(1,726)		(1,381)
Tax-exempt		(10)		1		(9)
Total interest income		625		(1,978)		(1,353)
Interest Expense
Deposits:
Interest bearing demand		79		(307)		(228)
Savings		5		(3)		2
Time		(190)		(1,136)		(1,326)
Short-term borrowings		3		(4)		(1)
Long-term debt		52		145		197
Total interest expense		(51)		(1,305)		(1,356)
Net interest income (tax equivalent basis)	$	676	$	(673)	$	3

*Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.

Provision for Loan Losses

The provision for loan losses is an expense charged to earnings to cover the estimated losses attributable to uncollected loans. The provision reflects management’s judgment of an appropriate level for the allowance for loan losses. Provision for loan losses for the second quarter 2021 was $352,000, a $2,198,000 decrease as compared to $2,550,000 provision for the second quarter 2020. The decreased provision expense in the second quarter 2021 was attributed primarily to a partial charge off arising from a single commercial lending relationship and the impacts of COVID-19 in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.43 percent at June 30, 2021, as compared to 1.38 percent at December 31, 2020 and 1.31 percent at June 30, 2020.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 54.

- 43 -

Noninterest Income

The following table presents the components of total noninterest income for the second quarter 2021, compared to the second quarter 2020.



Table 3 - Noninterest income

		Three months ended				Change
		June 30,				Increase (Decrease)
(dollars in thousands)	2021		2020		$		%

Trust and investment services fees	$	1,143	$	946	$	197	21	%
Income from mutual fund, annuity and insurance sales		344		249		95	38
Service charges on deposit accounts		1,319		975		344	35
Income from bank owned life insurance		427		279		148	53
Other income		359		482		(123)	(26)
Gain on sales of loans held for sale		933		554		379	68
Loss on write down of assets held for sale		(1,174)		0		(1,174)	*nm
Gain on sales of securities		0		50		(50)	(100)
Total noninterest income	$	3,351	$	3,535	$	(184)	(5)	%

*nm – not meaningful

The discussion that follows addresses changes in selected categories of noninterest income.

Trust and investment services fees—The $197,000 or 21 percent increase in trust and investment services fees is due to an increase in the client base during the second quarter 2021 compared to the second quarter 2020.

Income from mutual fund, annuity and insurance sales—The $95,000 or 38 percent increase in income from mutual fund, annuity and insurance sales is due to an increase in the client base during the second quarter 2021 compared to the second quarter 2020.

Service charges on deposit accounts—The $344,000 or 35 percent increase in service charges on deposit accounts is due to the waiver of overdraft and foreign ATM fees associated with the COVID-19 pandemic in the prior period.

Income from bank owned life insurance—The $148,000 or 53 percent increase in income from bank owned life insurance is due to the purchase of new insurance policies during the second quarter 2021.

Other income—The $123,000 or 26 percent decrease in other income is due to lower swap referral fees during the second quarter 2021 compared to the second quarter 2020.

Gain on sales of loans held for sale—The $379,000 or 68 percent increase in gain on sales of loans was due to the sale of a larger volume of the mortgage loans to the secondary market during the second quarter 2021 compared to the second quarter 2020.

Loss on write down of assets held for sale—The $1,174,000 increase in loss on write down of assets held for sale was due to the recognition of impairment expected on the sale of the Dover Financial Center during the second quarter 2021. The financial center is expected to close in the third quarter 2021 and the actual sale is expected to occur in the fourth quarter 2021.

- 44 -

Noninterest Expense

The following table presents the components of total noninterest expense for the second quarter 2021, compared to the second quarter 2020.



Table 4 - Noninterest expense

		Three months ended						Change
		June 30,						Increase (Decrease)
(dollars in thousands)	2021		2020			$			%

Personnel	$	8,268		$	7,196		$	1,072		15	%
Occupancy of premises, net		856			865			(9)		(1)
Furniture and equipment		793			841			(48)		(6)
Professional and legal		253			245			8		3
Marketing		438			311			127		41
FDIC insurance		192			172			20		12
Debit card processing		397			284			113		40
Charitable donations		750			93			657		706
External data processing		858			704			154		22
Gain on foreclosed real estate, including recovery of losses		0			(193)			193		100
Impaired loan carrying costs		87			190			(103)		(54)
Other		888			1,422			(534)		(38)
Total noninterest expense	$	13,780		$	12,130		$	1,650		14	%

The discussion that follows addresses changes in selected categories of noninterest expense.

Personnel—The $1,072,000 or 15 percent increase in personnel expense is primarily the result of higher variable compensation accruals and actual medical claims expense in 2021 compared to the prior period.

Marketing—The $127,000 or 41 percent increase in marketing expense is attributed to marketing campaigns previously delayed due to the COVID-19 pandemic resuming in the second quarter 2021.

Debit card processing—The $113,000 or 40 percent increase in debit card processing expense is attributed to the growth of retail clients and increased usage of electronic methods to access deposits.

Charitable donations—The $657,000 or 706 percent increase in charitable donations expense is attributed to timing of charitable donations in 2021 compared to the prior period.

External data processing—The $154,000 or 22 percent increase in external data processing expense is attributed to increased reliance on technology.

Gain on foreclosed real estate, including recovery of losses—The $193,000 change in gain on foreclosed real estate expense is primarily attributed to the recovery for losses on foreclosed real estate that was sold during the second quarter 2020.

Impaired loan carrying costs—The $103,000 or 54 percent decrease in impaired loan carrying costs expense is primarily attributed to a decrease in expenses associated with impaired loans compared to the prior period.

Other—The $534,000 or 38 percent decrease in other expense is primarily attributed to tax benefits associated with charitable donations in the current period.

Provision for Income Taxes

The provision for income taxes for the second quarter 2021 was $851,000, an increase of $146,000 or 21 percent as compared to the second quarter 2020. The increase was attributed to higher pre-tax net income for the second quarter 2021 compared to the second quarter 2020. The effective tax rate for the three months ended June 30, 2021 was 20.6 percent. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.

- 45 -

Six Months Ended June 30, 2021 vs. Six Months Ended June 30, 2020

The Corporation’s net income (earnings) was $7,182,000 for the first six months of 2021 compared to $61,000 for the first six months of 2020, an increase of $7,121,000.

The schedule below presents selected performance metrics for the first six months of both 2021 and 2020.



	Six months ended
	June 30,
	2021			2020
Basic earnings per share	$	0.73		$	0.01
Diluted earnings per share	$	0.73		$	0.01
Cash dividend payout ratio		35.67	%		5,119.67	%
Return on average assets		0.65	%		0.01	%
Return on average equity		7.25	%		0.06	%
Net interest margin (tax equivalent basis)		2.91	%		3.25	%
Net overhead ratio		1.77	%		1.88	%
Efficiency ratio		71.45	%		68.00	%
Average equity to average assets		8.93	%		9.75	%

A more detailed analysis of the factors and trends affecting the Corporation’s earnings and financial position follows.

INCOME STATEMENT ANALYSIS

Net Interest Income

Net interest income for the six months ended June 30, 2021 was $30,391,000, an increase of $124,000 or less than 1 percent compared to net interest income of $30,267,000 for the first six months of 2020. Although the total volume of loans originated positively impacted net interest income primarily due to PPP loans and related fees that were recognized, PPP loans were originated at a rate of 1.00 percent and therefore had a larger negative net interest margin impact. Interest rates on deposits decreased between the periods, offsetting the net change in interest income between volume and rate.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 2.91 percent for the first six months of 2021, representing a decrease compared to the 3.25 percent net interest margin for the first six months of 2020. The net interest margin contraction was a result of lower interest rates on loans and higher volume and rate on long-term debt, partially offset by lower rates on interest bearing demand and time deposits and volume of commercial loans.

Total interest income for the first six months of 2021 totaled $35,871,000, a decrease of $3,156,000 or 8 percent below the amount of total interest income for the first six months of 2020. The change was primarily a result of a decrease in loan interest income due to lower rates on commercial loans and lower rates on interest bearing deposits with banks, partially offset by a higher volume of commercial loans.

Interest income on loans decreased $2,560,000 or 7 percent in the first six months of 2021 compared to the same period in 2020. The average balance of outstanding loans increased approximately $22,881,000 or 2 percent in the first six months of 2021 compared to the first six months of 2020, reflecting commercial loan growth, primarily related to SBA PPP loans, between the two periods.

Investment income for the first six months of 2021 decreased $296,000 or 16 percent compared to the first six months of 2020. The tax-equivalent yield on investments for the first six months of 2021 was 1.84 percent or 62 basis points lower than the 2.46 percent experienced during the first six months of 2020.

Total interest expense for the first six months of 2021 was $5,480,000, a decrease of $3,280,000 or 37 percent as compared to total interest expense of $8,760,000 for the first six months of 2020. The change in interest expense was primarily a result of a decrease in the cost of interest bearing demand and time deposits.

Interest expense on deposits decreased $3,608,000 or 46 percent in the first six months of 2021 compared to the same period in 2020. The change was due primarily to a decrease in the cost of interest bearing demand and time deposits. The average balance of interest-bearing deposits for the first six months of 2021, primarily in lower cost core deposits, increased by $106,971,000 or 8 percent compared to the average for the first six months of 2020. The average rate paid on interest-bearing deposits in the first six months of

- 46 -

2021 was 0.57 percent, a decrease from the average rate of 1.14 percent paid on interest-bearing deposits during the first six months of 2020. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the first six months of 2021 increasing to $447,259,000, as compared to $322,962,000 for the first six months of 2020. The increase was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans.

Interest expense on borrowings for the first six months of 2021 increased 33 percent compared to the first six months of 2020, due to the issuance of subordinated debt in December 2020, offset by a lower volume of existing long-term debt. Outstanding long-term debt, consisting primarily of subordinated debentures and Federal Home Loan Bank of Pittsburgh (FHLBP) advances, averaged $75,430,000 for the first six months of 2021, compared to an average balance of approximately $75,538,000 for the same period of 2020. The rate on average long-term debt for the first six months of 2021 was 3.46 percent, an increase as compared to the rate of 2.56 percent for the same period of 2020.



Table 5-Average Balances and Interest Rates (tax equivalent basis)

	Six months ended June 30,
	2021							2020
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	354,477	$	186		0.11	%	$	163,666	$	440		0.54	%
Investment securities:
Taxable		163,224		1,421		1.76			141,878		1,676		2.38
Tax-exempt		20,014		226		2.28			22,442		332		2.97
Total investment securities		183,238		1,647		1.81			164,320		2,008		2.46

Loans:
Taxable (1)		1,566,236		33,934		4.37			1,541,876		36,468		4.76
Tax-exempt		9,486		188		4.00			10,965		221		4.05
Total loans		1,575,722		34,122		4.37			1,552,841		36,689		4.75
Total earning assets		2,113,437		35,955		3.43			1,880,827		39,137		4.18
Other assets (2)		105,481							97,972
Total assets	$	2,218,918						$	1,978,799
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	825,096	$	856		0.21	%	$	721,070	$	1,951		0.54	%
Savings		124,616		31		0.05			92,527		35		0.08
Time		523,865		3,282		1.26			553,009		5,791		2.11
Total interest bearing deposits		1,473,577		4,169		0.57			1,366,606		7,777		1.14
Short-term borrowings		9,184		18		0.40			7,637		20		0.53
Long-term debt		75,430		1,293		3.46			75,538		963		2.56
Total interest bearing liabilities		1,558,191		5,480		0.71			1,449,781		8,760		1.22

Noninterest bearing deposits		447,259							322,962
Other liabilities		15,427							13,172
Shareholders' equity		198,041							192,884

Total liabilities and
shareholders' equity	$	2,218,918						$	1,978,799
Net interest income (tax equivalent basis)			$	30,475						$	30,377
Net interest margin (3)						2.91	%						3.25	%
Tax equivalent adjustment				(84)							(110)
Net interest income			$	30,391						$	30,267

(1)Average balance includes average nonaccrual loans of $38,259,000 for 2021 and $26,148,000 for 2020.

Interest includes net loan fees of $4,660,000 for 2021 and $2,009,000 for 2020.

(2)Average balance includes average bank owned life insurance and foreclosed real estate.

(3)Net interest income (tax equivalent basis) annualized as a percentage of average interest earning assets.

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Table 6-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)

	Six months ended
	June 30,
	2021 vs. 2020
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate		Net

Interest Income
Interest bearing deposits with banks	$	513	$	(767)	$	(254)
Investment securities:
Taxable		356		(611)		(255)
Tax-exempt		(35)		(71)		(106)
Loans:
Taxable		2,950		(5,484)		(2,534)
Tax-exempt		(30)		(3)		(33)
Total interest income		3,754		(6,936)		(3,182)
Interest Expense
Deposits:
Interest bearing demand		240		(1,335)		(1,095)
Savings		12		(16)		(4)
Time		(305)		(2,204)		(2,509)
Short-term borrowings		4		(6)		(2)
Long-term debt		(377)		707		330
Total interest expense		(426)		(2,854)		(3,280)
Net interest income (tax equivalent basis)	$	4,180	$	(4,082)	$	98

*Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.

Provision for Loan Losses

For the first six months of 2021, the provision for loan losses was $1,583,000, as compared to a provision of $11,985,000 for the first six months of 2020, a decrease of $10,402,000. The decreased provision expense in the first six months of 2021 was attributed primarily to a partial charge off arising from several large commercial lending relationships in the prior period and the impacts of COVID-19 in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.43 percent at June 30, 2021, as compared to 1.38 percent at December 31, 2020 and 1.31 percent at June 30, 2020.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 54.

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Noninterest Income

The following table presents the components of total noninterest income for the first six months of 2021, compared to the first six months of 2020.



Table 7 - Noninterest income

	Six months ended				Change
	June 30,				Increase (Decrease)
(dollars in thousands)	2021		2020		$		%

Trust and investment services fees	$	2,195	$	1,940	$	255		13	%
Income from mutual fund, annuity and insurance sales		644		510		134		26
Service charges on deposit accounts		2,540		2,105		435		21
Income from bank owned life insurance		697		565		132		23
Other income		922		921		1		0
Gain on sales of loans held for sale		1,983		852		1,131		133
Loss on write down of assets held for sale		(1,174)		0		(1,174)		*nm
(Loss) gain on sales of securities		(23)		65		(88)		(135)
Total noninterest income	$	7,784	$	6,958	$	826		12	%

*nm – not meaningful

The discussion that follows addresses changes in selected categories of noninterest income.

Income from mutual fund, annuity and insurance sales—The $134,000 or 26 percent increase in income from mutual fund, annuity and insurance sales is due to an increase in the client base during the first half of 2021 compared to the first half of 2020.

Service charges on deposit accounts—The $435,000 or 21 percent increase in service charges on deposit accounts is due to the waiver of overdraft and foreign ATM fees associated with the COVID-19 pandemic in the prior period.

Income from bank owned life insurance—The $132,000 or 23 percent increase in income from bank owned life insurance is due to the purchase of new insurance policies during the second quarter 2021.

Gain on sales of loans held for sale—The $1,131,000 or 133 percent increase in gain on sales of loans is due to the sale of a larger volume of mortgage loans to the secondary market.

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Noninterest Expense

The following table presents the components of total noninterest expense for the first six months of 2021, compared to the first six months of 2020.



Table 8 - Noninterest expense

	Six months ended				Change
	June 30,				Increase (Decrease)
(dollars in thousands)	2021			2020		$	%

Personnel	$	16,696	$	15,001	$	1,695		11	%
Occupancy of premises, net		1,829		1,791		38		2
Furniture and equipment		1,631		1,694		(63)		(4)
Professional and legal		604		450		154		34
Marketing		703		636		67		11
FDIC insurance		418		339		79		23
Debit card processing		677		673		4		1
Charitable donations		938		965		(27)		(3)
External data processing		1,678		1,408		270		19
Gain on foreclosed real estate, including recovery of losses		0		(173)		173		100
Impaired loan carrying costs		187		476		(289)		(61)
Other		2,125		2,189		(64)		(3)
Total noninterest expense	$	27,486	$	25,449	$	2,037		8	%

The discussion that follows addresses changes in selected categories of noninterest expense.

Personnel—The $1,695,000 or 11 percent increase in personnel is primarily the result of higher variable compensation accruals and higher actual medical claims expense in 2021 compared to the prior period.

Professional and legal—The $154,000 or 34 percent increase in professional and legal is primarily due to an increase in CPA fees.

FDIC insurance—The $79,000 or 23 percent increase in FDIC insurance is due to asset growth which results in a higher assessment.

External data processing—The $270,000 or 19 percent increase in external data processing is attributed to increased reliance on technology.

Gain on foreclosed real estate, including recovery of losses—The $173,000 change in foreclosed real estate including recovery for losses is attributed to the recovery for losses on foreclosed real estate that was sold during the second quarter 2020.

Impaired loan carrying costs—The $289,000 or 61 percent decrease in impaired loan carrying costs is attributed to fewer costs associated with impaired loans incurred during the current period.

Provision for Income Taxes

The income tax expense for the first six months of 2021 was $1,924,000, an increase of $2,194,000 or 812 percent as compared to the first six months of 2020, during which time a tax benefit of $270,000 was realized. The effective tax benefit for the six months ended June 30, 2021 was 21.1 percent. The Company realized a tax benefit for the six months ended June 30, 2020.

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BALANCE SHEET REVIEW

Interest Bearing Deposits with Banks

On June 30, 2021, interest bearing deposits with banks totaled $377,588,000, an increase of $64,119,000 or 20 percent, compared to the level at year-end 2020. The increase is primarily the result of the growth in client deposits related to PPP loan proceeds deposited, receipt of stimulus payments and organic growth, offset by purchases of investment securities.

Investment Securities (Available-for-Sale)

The Corporation’s entire investment securities portfolio is classified available-for-sale, and is comprised of interest-earning debt securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 2—Securities. On June 30, 2021, the fair value of investment securities available-for-sale totaled $208,611,000, which represented an increase of $23,609,000 as compared to the fair value of investment securities at year-end 2020. Purchases of securities exceeded the cash flows from principal reductions, sales and maturities during the first six months of 2021.

Loans

On June 30, 2021, total loans, net of deferred fees, were $1.52 billion, which was $1,524,000 or less than one percent lower than the level at year-end 2020. The change in volume was due primarily to a decrease in PPP loans, which totaled approximately $99,000,000 at June 30, 2021, compared to $143,000,000 at December 31, 2020. Commercial loans within the commercial real estate investor and residential real estate investor sectors each represented more than 10 percent of the total portfolio. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans.

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On June 30, 2021, deposits totaled $1.96 billion, which reflected a $91,791,000 or 5 percent increase compared to the level at year-end 2020. Of the increase in total deposits, $75,207,000 is attributable to noninterest bearing deposits and $16,584,000 is related to growth in interest bearing deposits. The composition of the Corporation’s total deposit portfolio is provided in Note 6—Deposits.

Short-term Borrowings

Short-term borrowings, which consist of securities sold under agreements to repurchase (repurchase agreements), federal funds purchased, and other short-term borrowings, totaled $13,393,000 at June 30, 2021, which reflected a $4,853,000 or 57 percent increase compared to the level at year-end 2020.

Long-term Debt

The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On June 30, 2021, long-term debt, including subordinated debentures totaled $52,234,000 compared to $77,208,000 at year-end 2020. The $24,974,000 or 32 percent decrease in long-term debt resulted from the maturity of two FHLB advances totaling $25,000,000. A listing of outstanding long-term debt obligations is provided in Note 7—Short-Term Borrowings and Long-Term Debt. The composition of the Corporation’s leases is provided in Note 8—Leases.

Other Liabilities

Other liabilities totaled $13,738,000 at June 30, 2021, which reflected a $1,301,000 or 10 percent increase compared to the level at year-end 2020, primarily due to increased liabilities related to escrow for taxes and hazard insurance on mortgage loans.

Shareholders’ Equity and Capital Adequacy

Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Capital adequacy can be affected by a multitude of factors, including profitability, new stock issuances, corporate expansion and acquisitions, dividend policy and distributions, and regulatory mandates. The Corporation’s total shareholders’ equity was approximately $199,273,000 on June 30, 2021, an increase of approximately $1,313,000 or 1 percent compared to the level at year-end 2020.

Cash Dividends on Stock

The Corporation has historically paid cash dividends on its stock on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation's capital requirements, current and projected net income, and other relevant factors. As recently announced, the Board of Directors declared a quarterly cash dividend of $0.11 per share and a special cash dividend of $0.02 per share on July 13, 2021, payable on August 10, 2021, to shareholders of record at the close of business on July 27, 2021. These cash

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dividends follow a quarterly cash dividend of $0.11 per share and a special cash dividend of $0.02 per share distributed in February 2021 and May 2021.

Capital Adequacy

The Corporation and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators that involve quantitative guidelines and qualitative judgments. The regulatory capital measures for the Corporation and PeoplesBank as of June 30, 2021 and the minimum capital ratios established by regulators are set forth in Note 9—Regulatory Matters to the financial statements. We believe that PeoplesBank is well capitalized on June 30, 2021 and had no regulatory dividend restrictions (see Note 9—Regulatory Matters to the financial statements).

RISK MANAGEMENT

Credit Risk Management

Credit risk represents the possibility that a loan client, counterparty or issuer may not perform in accordance with contractual terms, posing one of the most significant risks of loss to the Corporation. Accordingly, the Corporation emphasizes the management of credit risk, and has established a lending policy which management believes is sound given the nature and scope of our operations. The Credit Risk Management section included in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2020, provides a more detailed overview of the Corporation’s credit risk management process.

Nonperforming Assets

Nonperforming assets, as shown in the table below, are asset categories that pose the greatest risk of loss. The level of nonperforming assets at June 30, 2021 has increased by $520,000 or 1 percent when compared to year-end 2020.

The Corporation regularly monitors large and criticized assets in its commercial loan portfolio recognizing that prolonged low economic growth, or a weakening economy, could have negative effects on these commercial borrowers. Nonperforming assets are monitored and managed for collection of these accounts. Collection efforts, including modification of contractual terms for individual accounts based on prevailing market conditions and liquidation of collateral assets, are employed to maximize recovery. A special assets committee meets regularly, at a minimum quarterly, to review nonperforming assets. We generally rely on appraisals performed by independent licensed appraisers to determine the value of real estate collateral for impaired collateral-dependent loans. Generally, an appraisal is performed when: an account reaches 90 days past due, unless a certified appraisal was completed within the past twelve months; market values have changed significantly; the condition of the property has changed significantly; or the existing appraisal is outdated based upon regulatory or policy requirements. In instances where the value of the collateral, net of costs to sell, is less than the net carrying amount for impaired commercial related loans, a specific loss allowance is established for the difference. Further provisions for loan losses may be required for nonaccrual loans as additional information becomes available or conditions change. When it is probable that some portion or an entire loan balance will not be collected, that amount is charged off as loss against the allowance.

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The paragraphs and table below address significant changes in the nonperforming asset categories as of June 30, 2021 compared to December 31, 2020.



Table 9 - Nonperforming Assets

	June 30,			December 31,
(dollars in thousands)	2021			2020

Nonaccrual loans	$	39,990		$	38,175
Accruing loans 90 days or more past due		0			1,295
Total nonperforming loans		39,990			39,470
Total nonperforming assets	$	39,990		$	39,470
Accruing troubled debt restructurings	$	1,058		$	1,395

Total period-end loans, net of deferred fees	$	1,543,812		$	1,544,589
Allowance for loan losses (ALL)	$	22,011		$	21,264
ALL as a % of total period-end loans		1.43	%		1.38	%
Net charge-offs year-to-date, annualized as a % of average total loans		0.11	%		0.93	%
ALL as a % of nonperforming loans		55.04	%		53.87	%
Nonperforming loans as a % of total period-end loans		2.59	%		2.56	%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate		2.59	%		2.56	%
Nonperforming assets as a % of total period-end assets		1.79	%		1.83	%
Nonperforming assets as a % of total period-end
shareholders' equity		20.07	%		19.94	%

Nonperforming loans

Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due. We generally place a loan on nonaccrual status and cease accruing interest income (i.e., recognize interest income on a cash basis, as long as the loan is sufficiently collateralized) when loan payment performance is unsatisfactory and the loan is past due 90 days or more. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all of the principal and interest amounts contractually due are current for at least six consecutive payments and future payments are reasonably assured. Loans past due 90 days or more and still accruing interest represent loans that are contractually past due, but are well collateralized and in the process of collection. As of June 30, 2021, the nonperforming loan portfolio balance totaled $39,990,000, compared to $39,470,000 at year-end 2020. During the first six months of 2021, loans totaling $7,214,000 were transferred to nonaccrual status, offset by the transfer of loans out of nonaccrual status and payments to loans in nonaccrual status totaling approximately $5,399,000. In addition, accruing loans 90 days or more past due decreased $1,295,000 in the first six months of 2021. For both periods, the nonperforming portfolio balance was comprised primarily of collateralized commercial loans.

Foreclosed Real Estate

Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank and is included in the Other Assets category on the Corporation’s balance sheet. As of June 30, 2021 and December 31, 2020 there was no foreclosed real estate.

Troubled Debt Restructurings

Troubled debt restructurings pertain to loans whose terms have been modified to include a concession that we would not ordinarily consider due to the debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a reduction of interest rate lower than the current market rate for new debt with similar risk, the deferral of payments or extension of the stated maturity date. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. As of June 30, 2021, the accruing troubled debt restructuring portfolio balance totaled $1,058,000, compared to $1,395,000 at year-end 2020. The $337,000 decrease was the result of principal repayments and the payoff of one relationship.

As of June 30, 2021, there are no modifications remaining for consumer loans, four mortgage loans totaling approximately $1,422,000 and 16 commercial loans totaling approximately $67,734,000 under the CARES Act, which are not considered TDRs.

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Allowance for Loan Losses

Although the Corporation believes that it maintains sound credit policies, certain loans deteriorate and must be charged off as losses. The allowance for loan losses is maintained to absorb losses inherent in the portfolio. The allowance is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. The allowance is based upon management’s continuous evaluation of the loan portfolio coupled with a formal review of adequacy on a quarterly basis, which is subject to review and approval by the Board.

The allowance for loan losses consists primarily of two components: specific allowances for individually impaired commercial loans and allowances calculated for pools of loans. The Corporation uses an internal risk rating system to evaluate individual loans. Loans are segmented into industry groups or pools with similar characteristics, and an allowance for loan losses is allocated to each segment based on quantitative factors such as recent loss history (two-year rolling average of net charge-offs) and qualitative factors, such as the results of internal and external credit reviews, changes in the size and composition of the loan portfolio, adequacy of collateral, and general economic conditions. Determining the level of the allowance for probable loan losses at any given period is subjective, particularly during deteriorating or uncertain economic periods, and requires that we make estimates using assumptions. There is also the potential for adjustment to the allowance as a result of regulatory examinations.

The following tables presents an analysis of the activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020:



Table 10 - Analysis of Allowance for Loan Losses

(dollars in thousands)	2021			2020
Balance-April 1,	$	22,411		$	22,838

Provision charged to operating expense		352			2,550

Loans charged off:
Commercial, financial and agricultural		814			4,360
Real estate - construction and land development		0			0
Consumer and home equity		7			7
Total loans charged off		821			4,367
Recoveries:
Commercial, financial and agricultural		65			3
Consumer and home equity		4			14
Total recoveries		69			17
Net charge-offs		752			4,350
Balance-June 30,	$	22,011		$	21,038

Ratios:
Annualized net charge-offs as a % of average total loans		0.11	%		1.55	%
Allowance for loan losses as a % of total period-end loans		1.43	%		1.31	%
Allowance for loan losses as a % of nonperforming loans		55.04	%		100.62	%

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Table 11 - Analysis of Allowance for Loan Losses

(dollars in thousands)	2021			2020
Balance-January 1,	$	21,264		$	22,838

Provision charged to operating expense		1,583			2,550

Loans charged off:
Commercial, financial and agricultural		906			4,361
Real estate - construction and land development		0			0
Consumer and home equity		19			6
Total loans charged off		925			4,367
Recoveries:
Commercial, financial and agricultural		70			3
Consumer and home equity		19			14
Total recoveries		89			17
Net charge-offs		836			4,350
Balance-June 30,	$	22,011		$	21,038

Ratios:
Annualized net charge-offs as a % of average total loans		0.11	%		1.55	%
Allowance for loan losses as a % of total period-end loans		1.43	%		1.31	%
Allowance for loan losses as a % of nonperforming loans		55.04	%		100.62	%

The provision for loan losses decreased $10,402,000 from June 30, 2020 to June 30, 2021. The decreased provision expense in the first six months of 2021 was attributed primarily to a partial charge off arising from several large commercial lending relationships in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis, but to a lesser extent than the prior period. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments.

Net charge-offs for the first six months of 2021 were $836,000 compared to $12,013,000 for the same period in 2020. During the first six months of 2021, there were $925,000 of charge-offs as compared to $12,053,000 during the same period in 2020. The risks and uncertainties associated with the COVID-19 pandemic, weak economic and business conditions, or the erosion of real estate values may adversely affect our borrowers’ ability to service their loans, causing significant fluctuations in the level of charge-offs and provision expense from one period to another. The allowance as a percentage of total loans was 1.43 percent at June 30, 2021, as compared to 1.38 percent at December 31, 2020 and 1.31 percent at June 30, 2020.

Liquidity Risk Management

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan clients, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, adequate liquidity provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation's assets and liabilities. The primary sources of asset liquidity are funds received from client loan payments, investment maturities and cash inflows from mortgage-backed securities, and the net proceeds of asset sales. The primary sources of liability liquidity are deposit growth, and funds obtained from short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At June 30, 2021, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately $46,969,000 and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately $543,800,000. The Corporation’s loan-to-deposit ratio was 78.7 percent as of June 30, 2021, 82.9 percent as of December 31, 2020 and 88.7 percent as of June 30, 2020.

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments on June 30, 2021, totaled $608,965,000 and consisted of $505,154,000 in unfunded commitments under existing loan facilities, $88,892,000 to grant new loans and $14,919,000 in letters of credit. Generally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

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Recent Legislative Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19, provided the loan was not past due as of December 31, 2019. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of June 30, 2021, the Corporation has remaining loan modifications totaling approximately $69,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program, with outstanding PPP loans as of June 30, 2021 of approximately $99,000,000.

At its October 16, 2019 meeting, the FASB approved a deferral of the effective date for several of its recent standards. The proposal creates two new “buckets”: (1) SEC filers other than smaller reporting companies (SRCs, as defined by the SEC) and (2) all other entities. For the Corporation, this would apply to ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”), which has not yet been adopted by the Corporation. The effective date of the CECL standard would be for fiscal years beginning after December 15, 2022. The Corporation will continue to move forward with the project.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The most significant market risk to which the Corporation is exposed is interest rate risk. The primary business of the Corporation and the composition of its balance sheet consist of investments in interest earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings), all of which have varying levels of sensitivity to changes in market interest rates. Changes in rates also have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow.

The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset Liability Management Committee, consisting of key financial and senior management personnel, meets on a regular basis. The Committee is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, reviewing projected sources and uses of funds, approving asset and liability management policies, monitoring economic conditions, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in client behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward 12-month period. The Corporation applies these interest rate “shocks” to its financial instruments up and down 100, 200, 300, and 400 basis points. A 300 and 400 basis point decrease in interest rates cannot be simulated at this time due to the historically low interest rate environment.

The following table summarizes the expected impact of interest rate shocks on net interest income as well as the Corporation’s policy limits at each level. All scenarios were within policy limits at June 30, 2021.



Change in Interest Rates	Annual Change in Net		% Change in Net		% Change
(basis points)	Interest Income (in thousands)		Interest Income		Policy Limit
+100	$	5,796	9.26	%	(5.00)	%
-100	$	(3,102)	(4.96)	%	(5.00)	%

+200	$	12,706	20.30	%	(15.00)	%
-200	$	(6,098)	(9.74)	%	(15.00)	%

+300	$	19,460	31.09	%	(25.00)	%

+400	$	26,240	41.93	%	(35.00)	%

‎

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Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Treasurer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive and Chief Financial Officers concluded that, as of June 30, 2021, the Corporation’s disclosure controls and procedures were effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in the Corporation’s internal control over financial reporting that occurred during the three and six months ended June 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and PeoplesBank are involved in routine litigation incidental to their business. In the opinion of management, there are no legal proceedings pending against the Corporation or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation. Management is not aware of any adverse proceedings known or contemplated by government authorities.

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed in Item 1A – Risk Factors – in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation relies on its subsidiary PeoplesBank, A Codorus Valley Company, for dividend distributions, which are subject to restrictions as reported in Note 9—Regulatory Matters of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.



				Total Number of		Approximate Dollar
				Shares Purchased as		Value of Shares that
	Total Number			Part of Publicly		May Yet Be Purchased
	of Shares	Average Price		Announced Plans		Under the Plans or
Period	Purchased	Paid per Share		or Programs		Programs
January 1 - 31, 2021	0	$	0		0	$	5,000,000
February 1 - 28, 2021	0	$	0		0	$	5,000,000
March 1 - 31, 2021	0	$	0		0	$	5,000,000
April 1 - 30, 2021	0	$	0		0	$	5,000,000
May 1 - 31, 2021	142,541	$	18.75		142,541	$	2,327,900
June 1 - 30, 2021	0	$	0		0	$	2,327,900

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

Item 5. Other Information

None

‎

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Item 6. Exhibits


Exhibit Number		Description of Exhibit
3.1		Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for June 30, 2018, filed with the Commission on August 6, 2018)
3.2		Amended By-laws (Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q/A for March 31, 2020, filed with the Commission on May 15, 2020)
4.1		Form of 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 of Codorus Valley Bancorp, Inc. (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Commission on December 10, 2020)
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
32		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
101		Financial statements from the Quarterly Report on Form 10-Q of Codorus Valley Bancorp, Inc. for the quarter ended June 30, 2021, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholder’s Equity, and (vi) the Notes to Consolidated Financial Statements – filed herewith.
104		Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)

‎

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Codorus Valley Bancorp, Inc. (Registrant)


August 2, 2021		/s/ Larry J. Miller
Date		Larry J. Miller,
		Chairman,President
		and Chief Executive Officer (Principal Executive Officer)


August 2, 2021		/s/ Larry D. Pickett
Date		Larry D. Pickett, CPA
		Treasurer
		(Principal Financial and Accounting Officer)

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CODORUS VALLEY BANCORP INC - Quarter Report: 2021 June (Form 10-Q)

Form 10-Q Index

Loans

Note 3—Restricted Investment in Bank Stocks

Note 6—Deposits

Note 7—Short-Term Borrowings and Long-Term Debt

Note 9—Regulatory Matters

Note 10—Shareholders’ Equity

Note 11—Contingent Liabilities